Applovin reported revenue of $1.26 billion compared to consensus of $1.28 billion according to some sources yet others reflect the consensus we had of $1.22 billion, thereby it’s debatable if the top line beat. Our notes show App beat, although narrowly.  

Management had guided last quarter for revenue of $1.195B to $1.215B, representing YoY growth of 69.5% at the midpoint. By this standard, as well, Applovin beat with growth of 77%.  

On the bottom line, the company had a large beat with EPS of $2.39 compared to $1.99 EPS expected, representing growth of 169%. This was a 45 point beat on growth rate for the bottom line. Adjusted EBITDA doubled to $1.02 billion, up from $943 million last quarter. This represents an adjusted EBITDA margin of 81%.  

As management alluded to on the earnings call, the company “prints cash” with a 61.3% operating cash flow margin and a 61% free cash flow margin.  

The Q&A was primarily focused on when Applovin plans to launch its self-serve ad platform, as this should create a boost for growth. Management was encouraging saying “as soon as possible” yet the tone on the earnings call was particularly optimistic about Q4 being a bigger quarter for the company. Details on why management had the confidence to call out Q4 specifically are noted below. 

Revenue  

Regardless of a nominal decimal point that caused a beat (or miss), the quants may have quickly sold the report after hours from mistakenly pricing Applovin for a deceleration from the March quarter to the June quarter.  

• Overall revenue last quarter was $1.48B versus this quarter at $1.26B. As we covered in the past, this is due to Applovin divesting its mobile gaming “Apps” business, with the sale completed on June 30th. Therefore, if you adjust for this sale, revenue for the ads business in Q1 was $1.15B for QoQ growth of 8.7%. 
• The current quarter marks an acceleration from 71% YoY growth yet QoQ growth is slowing.  
• For next quarter, Applovin expects to see $1.33 billion in revenue, slightly above estimates for $1.31 billion. This represents 59% YoY growth and QoQ growth of 5.5%.  

As stated, Applovin divested its Apps business, which was weighing on both growth and margins. For example, Applovin had been reporting low growth in this segment of (13%) growth in the March quarter leading up to the sale.  

Margins and EPS: Operating margin doubled to 76% … what?! 

Applovin’s revenue growth is only part of the story, whereas the bottom line is what sets Applovin apart. I can count on one hand (or maybe even one finger) the number of tech companies that have reported a 76% GAAP operating margin.  

It may be common for tech companies to be in hypergrowth stage at times, yet very few ever reach the quality margins that App is reporting quite early in its company history.  

The bottom line presented below is a thing of beauty. The margins have clearly benefited from divesting the Apps business, which had been weighing on the margins.  

• Gross margin of 88% compares to last quarter at 81.7% and the year ago quarter at 73.85.  
• Operating margin of 76% expanded from 44.7% last quarter and more than doubled from the year ago quarter at 36.2%. Wow!! 
• Net margin of 65% expanded from 38.8% last quarter and doubled from 28.7% in the year ago quarter. Wow!! 

Earnings per share of $2.39 beat estimates for EPS of $1.99, representing growth of 169%. This was a large beat as growth was expected to be 123.5% on the bottom line.  

Cash Flow Margin of 61% 

In yet another impressive bottom-line number, Applovin reported a 61% free cash flow margin for free cash flow of $768 million. The company has been strong on cash for sometime, yet this still represents a 540 bps expansion QoQ and 20-point expansion YoY.  

The operating cash flow margin of 61.3% is up from 56% last quarter for operating cash of $772M. The company has $1.2 billion in cash on the balance sheet including $425M from the sale of the Apps business. The company has $3.7B in debt.  

Applovin does share buybacks with 900,000 shares repurchased in the last quarter for a total of $341 million funded through free cash flow. This lowered share count form 346M to 342M last quarter.  

Earnings Q&A: 

Self-Serve platform set to launch October 1st 

Management has repeatedly stated that gaming alone can sustain growth of 20% to 30% YoY. Therefore, the catalyst for the next few years is securing additional supply, such as e-commerce, as well as opening up the AXON ad platform to more advertisers.  

The AXON ads manager recently became self-service, which means it can scale at levels not previously seen by offering self-service interface for Applovin’s 1 billion reach. As of now, Applovin is limited in the number of advertisers it can manually on board. According to the opening remarks: “With the rollout going smoothly, we are ready to widen access. On October 1, 2025, we plan to open the AXON ads manager on a referral basis, perfectly timed for the holiday season. Feedback from these partners will guide our global public launch in the first half of 2026. To date, web advertising campaigns have been limited to the United States. On October 1, we plan to open our platform to most major international markets.” 

When it comes to e-commerce, Applovin explained they limited the number of advertisers initially in order to make sure the tools were working properly, and they are now satisfied with the results and ready to launch self-serve on an invite basis to start. 

Per the Q&A: 

“And then the last point to remember is another one of my prepared remarks highlighted the fact that we have constrained the advertisers we even have live today by not allowing them to buy our audience that's international. The vast majority of our user audience is outside the U.S. We will be releasing almost all markets once we go into this October 1 release.” 

Looking longer-term, by matching categories such as e-commerce with a self-serve platform, Applovin discussed a flywheel effect: “So in terms of opportunity for us, not only does opening up the platform get us more demand, which is going to be massively accretive and incremental to our business. It gets us more data. And so every single quarter, you're going to have that flywheel effect that, that then paired with our engineers' ability to take added data and improve the technology and its interpretation of that data creates a real strong foundation for growth for a long time to come.” 

Commentary that Q4 will be strong: 

During the Q&A, there were a few mentions that Q4 should be strong along with mention of upside to the numbers come 2026.  

I want to make money in 2026 about as much as I want to make money in 2025, so this kind of discussion is my favorite moment during an earnings call (…and is the reason I take the time to listen to these calls and not run the transcript through Chat-GPT, like many, many research sites do these days!)  

Here’s one example: 

“We expect that will increase the advertiser count quite quickly and also allow us to go through live examples of advertisers coming in self-service all the way to scale on our product. Assuming all that goes well, then we talked about opening up the platform entirely to the world in first half of next year. We think as advertiser count grows on our business, especially in categories outside of gaming, you're going to see a lot of upside in the numbers that we're able to report.” 

Here was a more specific mention to Q4: 

“As we go into Q4, that's a huge holiday shopping season. So not only are you going to see the cohort that we have live spend a lot more. You're also going to have new onboarding happening for the first time in our history at a rate that's much higher than we will have ever seen before. So we fully expect that e-commerce will see a pretty substantial ramp-up through that, what you can call a soft launch period and then, obviously, as we go into a broader global release, the impact from that.” 

It was repeated again with more details around the compounding effect of onboarding the many new advertisers for existing gaming inventory and also new categories: 

“Now it's not necessarily true that we're going to take our queue that's built over the last year and just say, everyone you're in. They're still going to have to get invited to get into the platform. So it will be still curated onboarding. The reality is like Q4 is going to end up being a fun quarter. You've got the advertiser cohort that we didn't have last Q4 that was growing in the quarter to the point where we reported huge numbers and then had huge numbers in Q1. But we're going to have those advertisers primed and ready to go for the full Q4. We're going to have advertisers inviting their friends onto our platform in Q4, and we're going to be opening up international all at the same time. 

So there's going to be a lot of fun moment — moments for us and our customers in this e-commerce or web-based category that will set sort of a new baseline for that business. And then obviously, then we will go through hopefully another inflection when we really truly open up the platform and try to get into a state where we're more stable long term.” 

Quick Note on 2026-2027: 

Although further out, there was talk that lower fees on the App Store should become a tailwind for Applovin 4-8 quarters out: “So no impact yet. And I would guess it will probably take 2 to 4 quarters from some impact. And by 4 to 8 quarters, you're going to get pretty material impact in pricing on our platform.” 

Conclusion: 

I’ve never been one that needs the market to agree with me, and I am afraid on this one the market and I will have to agree to disagree as the price is down after hours. This was a stellar report with all fundamental boxes ticked, a team that has proven to execute, and incoming catalysts that are quite well-timed to where the market is selling the stock while we maybe have two quarters (or less) to wait for an inflection. 

Of course, this requires some speculation as consensus will not reflect management commentary until there are material results. But after all, that’s where the real money is made. Let's hope the formula of "believe what you see" works for us again as the growth, historic margins and the ability to print cash all point toward a solid stock while management hints they have more in store for shareholders around year-end.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in APP at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

• Supermicro Fails to impress; Volatility is here to stay
• Bloom Energy: First Direct Hyperscaler with Oracle; More are Likely to Follow
• Positions Report – July 2025
• AMD Reports in Line while AI Story to Improve from Here

Applovin reported revenue of $1.26 billion compared to consensus of $1.28 billion according to some sources yet others reflect the consensus we had of $1.22 billion, thereby it’s debatable if the top line beat. Our notes show App beat, although narrowly.  

Management had guided last quarter for revenue of $1.195B to $1.215B, representing YoY growth of 69.5% at the midpoint. By this standard, as well, Applovin beat with growth of 77%.  

On the bottom line, the company had a large beat with EPS of $2.39 compared to $1.99 EPS expected, representing growth of 169%. This was a 45 point beat on growth rate for the bottom line. Adjusted EBITDA doubled to $1.02 billion, up from $943 million last quarter. This represents an adjusted EBITDA margin of 81%.  

As management alluded to on the earnings call, the company “prints cash” with a 61.3% operating cash flow margin and a 61% free cash flow margin.  

The Q&A was primarily focused on when Applovin plans to launch its self-serve ad platform, as this should create a boost for growth. Management was encouraging saying “as soon as possible” yet the tone on the earnings call was particularly optimistic about Q4 being a bigger quarter for the company. Details on why management had the confidence to call out Q4 specifically are noted below. 

Revenue  

Regardless of a nominal decimal point that caused a beat (or miss), the quants may have quickly sold the report after hours from mistakenly pricing Applovin for a deceleration from the March quarter to the June quarter.  

• Overall revenue last quarter was $1.48B versus this quarter at $1.26B. As we covered in the past, this is due to Applovin divesting its mobile gaming “Apps” business, with the sale completed on June 30th. Therefore, if you adjust for this sale, revenue for the ads business in Q1 was $1.15B for QoQ growth of 8.7%. 
• The current quarter marks an acceleration from 71% YoY growth yet QoQ growth is slowing.  
• For next quarter, Applovin expects to see $1.33 billion in revenue, slightly above estimates for $1.31 billion. This represents 59% YoY growth and QoQ growth of 5.5%.  

As stated, Applovin divested its Apps business, which was weighing on both growth and margins. For example, Applovin had been reporting low growth in this segment of (13%) growth in the March quarter leading up to the sale.  

Margins and EPS: Operating margin doubled to 76% … what?! 

Applovin’s revenue growth is only part of the story, whereas the bottom line is what sets Applovin apart. I can count on one hand (or maybe even one finger) the number of tech companies that have reported a 76% GAAP operating margin.  

It may be common for tech companies to be in hypergrowth stage at times, yet very few ever reach the quality margins that App is reporting quite early in its company history.  

The bottom line presented below is a thing of beauty. The margins have clearly benefited from divesting the Apps business, which had been weighing on the margins.  

• Gross margin of 88% compares to last quarter at 81.7% and the year ago quarter at 73.85.  
• Operating margin of 76% expanded from 44.7% last quarter and more than doubled from the year ago quarter at 36.2%. Wow!! 
• Net margin of 65% expanded from 38.8% last quarter and doubled from 28.7% in the year ago quarter. Wow!! 

Earnings per share of $2.39 beat estimates for EPS of $1.99, representing growth of 169%. This was a large beat as growth was expected to be 123.5% on the bottom line.  

Cash Flow Margin of 61% 

In yet another impressive bottom-line number, Applovin reported a 61% free cash flow margin for free cash flow of $768 million. The company has been strong on cash for sometime, yet this still represents a 540 bps expansion QoQ and 20-point expansion YoY.  

The operating cash flow margin of 61.3% is up from 56% last quarter for operating cash of $772M. The company has $1.2 billion in cash on the balance sheet including $425M from the sale of the Apps business. The company has $3.7B in debt.  

Applovin does share buybacks with 900,000 shares repurchased in the last quarter for a total of $341 million funded through free cash flow. This lowered share count form 346M to 342M last quarter.  

Earnings Q&A: 

Self-Serve platform set to launch October 1st 

Management has repeatedly stated that gaming alone can sustain growth of 20% to 30% YoY. Therefore, the catalyst for the next few years is securing additional supply, such as e-commerce, as well as opening up the AXON ad platform to more advertisers.  

The AXON ads manager recently became self-service, which means it can scale at levels not previously seen by offering self-service interface for Applovin’s 1 billion reach. As of now, Applovin is limited in the number of advertisers it can manually on board. According to the opening remarks: “With the rollout going smoothly, we are ready to widen access. On October 1, 2025, we plan to open the AXON ads manager on a referral basis, perfectly timed for the holiday season. Feedback from these partners will guide our global public launch in the first half of 2026. To date, web advertising campaigns have been limited to the United States. On October 1, we plan to open our platform to most major international markets.” 

When it comes to e-commerce, Applovin explained they limited the number of advertisers initially in order to make sure the tools were working properly, and they are now satisfied with the results and ready to launch self-serve on an invite basis to start. 

Per the Q&A: 

“And then the last point to remember is another one of my prepared remarks highlighted the fact that we have constrained the advertisers we even have live today by not allowing them to buy our audience that's international. The vast majority of our user audience is outside the U.S. We will be releasing almost all markets once we go into this October 1 release.” 

Looking longer-term, by matching categories such as e-commerce with a self-serve platform, Applovin discussed a flywheel effect: “So in terms of opportunity for us, not only does opening up the platform get us more demand, which is going to be massively accretive and incremental to our business. It gets us more data. And so every single quarter, you're going to have that flywheel effect that, that then paired with our engineers' ability to take added data and improve the technology and its interpretation of that data creates a real strong foundation for growth for a long time to come.” 

Commentary that Q4 will be strong: 

During the Q&A, there were a few mentions that Q4 should be strong along with mention of upside to the numbers come 2026.  

I want to make money in 2026 about as much as I want to make money in 2025, so this kind of discussion is my favorite moment during an earnings call (…and is the reason I take the time to listen to these calls and not run the transcript through Chat-GPT, like many, many research sites do these days!)  

Here’s one example: 

“We expect that will increase the advertiser count quite quickly and also allow us to go through live examples of advertisers coming in self-service all the way to scale on our product. Assuming all that goes well, then we talked about opening up the platform entirely to the world in first half of next year. We think as advertiser count grows on our business, especially in categories outside of gaming, you're going to see a lot of upside in the numbers that we're able to report.” 

Here was a more specific mention to Q4: 

“As we go into Q4, that's a huge holiday shopping season. So not only are you going to see the cohort that we have live spend a lot more. You're also going to have new onboarding happening for the first time in our history at a rate that's much higher than we will have ever seen before. So we fully expect that e-commerce will see a pretty substantial ramp-up through that, what you can call a soft launch period and then, obviously, as we go into a broader global release, the impact from that.” 

It was repeated again with more details around the compounding effect of onboarding the many new advertisers for existing gaming inventory and also new categories: 

“Now it's not necessarily true that we're going to take our queue that's built over the last year and just say, everyone you're in. They're still going to have to get invited to get into the platform. So it will be still curated onboarding. The reality is like Q4 is going to end up being a fun quarter. You've got the advertiser cohort that we didn't have last Q4 that was growing in the quarter to the point where we reported huge numbers and then had huge numbers in Q1. But we're going to have those advertisers primed and ready to go for the full Q4. We're going to have advertisers inviting their friends onto our platform in Q4, and we're going to be opening up international all at the same time. 

So there's going to be a lot of fun moment — moments for us and our customers in this e-commerce or web-based category that will set sort of a new baseline for that business. And then obviously, then we will go through hopefully another inflection when we really truly open up the platform and try to get into a state where we're more stable long term.” 

Quick Note on 2026-2027: 

Although further out, there was talk that lower fees on the App Store should become a tailwind for Applovin 4-8 quarters out: “So no impact yet. And I would guess it will probably take 2 to 4 quarters from some impact. And by 4 to 8 quarters, you're going to get pretty material impact in pricing on our platform.” 

Conclusion: 

I’ve never been one that needs the market to agree with me, and I am afraid on this one the market and I will have to agree to disagree as the price is down after hours. This was a stellar report with all fundamental boxes ticked, a team that has proven to execute, and incoming catalysts that are quite well-timed to where the market is selling the stock while we maybe have two quarters (or less) to wait for an inflection. 

Of course, this requires some speculation as consensus will not reflect management commentary until there are material results. But after all, that’s where the real money is made. Let's hope the formula of "believe what you see" works for us again as the growth, historic margins and the ability to print cash all point toward a solid stock while management hints they have more in store for shareholders around year-end.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in APP at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

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• Broadcom Hints of AI Revenue Growth Accelerating in FY26; Backlog of $110B
• Credo’s Hypergrowth Intact as 274% YoY Growth Leads to Massive Bottom Line Expansion
• Nvidia Q2: Guidance for Q3 Saved the Day; $10T Market Cap Prediction Revisited

Just when you think the controversy around Supermicro has cleared, the company offers a fiscal year guidance of $33 billion that beats consensus by 10.8% at $29.8 billion, and yet a  statement in the February call has been misconstrued to lead to what the market is calling a significant miss.

The comment in the February call was the following: “With that, I am confident we will finish this fiscal year strongly with revenue in the range of $23.5 billion to $25 billion and I believe we have potential to reach $40 billion for fiscal year 2026.” 

Therefore, instead of going off analyst consensus, there are reports that Supermicro missed based off that comment about six months ago. This will mark the first time in my memory that a comment two quarters prior is how the market is measuring current fiscal year guide instead of going by analyst consensus.  

In addition, a report came out after hours that Supermicro servers may have been smuggled into China through Singapore and Japan. Notably, Dell serversand others have been implicated in the past as it goes without saying that if Nvidia GPUs were known to be smuggled, then servers from Nvidia’s well-known suppliers were smuggled.  

Those items are less of a concern, whereas margins and cash remain the predominant concern for Supermicro. However, I suspect this time next year the troubles SMCI faces will be a distant memory as even the way the company is raising cash hints toward an underlying strength the current price action (and valuation) does not reflect.  

Notably, this stock does not offer quality fundamentals, and thus it’s reserved for our Advanced tiers and we will adhere to all technical stops. 

Revenue Slightly Misses: 

Looking beyond the controversies, what is on deck for this quarter is that Supermicro has slightly missed on key headline numbers. 

• Q4 FY2025 was expected to be $6 billion at the midpoint yet came in at $5.8 billion for growth of 8% YoY and 25% QoQ. 
• Q1 guide of $6.5B missed consensus of $6.55B 
• Q1 guide for $0.46 EPS missed consensus of $0.59 EPS 

If we look a bit closer, we see that technically Supermicro is guiding to grow at a larger percentage this year than they did last year at 50% for the current fiscal year compared to 47% last fiscal year.  

According to management, the current quarter missed for the following reasons that are now cleared: “Shortfall stem from 2 key factors: a capital constraint that limited our ability to rapidly scale production and specification changes from a major new customer that delay revenue recognition because of new ad of some new ad features. The capital constraints will no longer an issue after we filed the fiscal year '24 10-K and large customer orders are now slated for recognition in September and December quarters. Following close collaboration to align with the customers' update future requirements.” 

Segments & Geos: USA % Declines Significantly  

• AI platforms represented over 70% of Q4 revenues across both enterprise and cloud service provider markets. This number has not changed on a QoQ basis or YoY basis, rather has been consistently at 70%. 
• Enterprise reported $2.1 billion up 7% YoY and up 6% QoQ. Growth was higher on a QoQ basis last quarter up 38% QoQ. For the fiscal year, enterprise grew 38%. 
• OEM appliance and large data center segment revenues were $3.7 billion, representing up 2% year-over-year and up 40% quarter-over-quarter. For the fiscal year, OEM and Large DC grew 50% YoY. 

Asia saw a large increase YoY at 91% compared to the United States declining 33%. Per the CFO remarks: “By geography, the U.S. represented 38% of Q4 revenues, Asia, 42%; Europe, 15%; and the rest of the world, 5%. On a year-over-year basis, U.S. revenues decreased 33%, Asia increased 91%, Europe increased 66% and Rest of World decreased 3%.” 

The United States also decreased on a QoQ basis by 21% compared to APAC increasing 78%, Europe increasing 196% and ROW increasing 53%. 

This may reflect orders getting pushed out as the GB200s were absent from the earnings call with a stronger focus on B200s, B300s and GB300s. The decline in the USA revenue is substantial as this geo represented the bulk of SMCI’s revenue at 61% last year compared to 38% this quarter. 

Margins are Weak: 

• Non-GAAP gross margin of 9.6% was down 10 basis points from last quarter at 9.7% but losing any ground on gross margin for Supermicro is often penalized given how thin the margins are. The margin miss and EPS miss was from “tariff impact” according to the opening remarks. 
• This led to a slight EPS miss with $0.41 reported versus consensus of $0.44 EPS. 
• Gross margin is expected to be similar to current quarter of 9.7%. According to the CEO, their long-term gross margin is goal is 15%. 

SMCI is an outlier for our portfolio as we rarely allow such thin margins to take up allocation. The Q4 adjusted operating margin was 5.3% compared to 5% last quarter. The GAAP operating margin was 4% with $228M in operating profits.  

Cash and Debt: 

This is the most troublesome area for Supermicro as the company must raise cash to fund operations. We closed our position at the highs last year based on this issue, given the valuation was quite high at the time (and now it’s quite low) stating cash is the Achilles heel.  

This past quarter, the company completed a convertible bond offering, raising $2.3 billion in gross proceeds. This could dilute the stock by up to 7%. There is a covered call spread to the convertible bond offering, which means effective dilution may be lower than 7% if the stock goes up. On one hand, that’s nice the management team foresees the stock price going up. On the other hand, you can see they are resorting to many measures to raise cash and hedge the impact of the dilution to shareholders, meaning, this could become a vicious cycle to where Supermicro must always raise cash to fund its operations.  

To further the creative financing, Supermicro also executed a $1.8M facility which allows SMCI to sell qualified accounts receivable. Again, it is interesting to see a third party has enough faith in Supermicro’s billing structure to take on the nonrecourse sale of accounts receivable, yet serves to illustrate SMCI must continuously raise cash to increase its capacity.  

The company has cash of $5.2B with debt of $4.8B, for a net cash position of $412M, up from a net cash position of $44M last quarter.  

GB200 NVL72s Absent from Conversation 

Analysts asked about the GB200s in as many ways they could think of, and the reply was always the same … that Supermicro is not shipping these rather are preparing to ship the GB300s. Here’s one of many responses like this one: 

“Nehal Sushil Chokshi 

I have 2 questions. First one is, what is going to be the driver of the projected Q2 uptick to the September quarter revenue? And maybe that can also help us understand why you're guiding to no operating leverage, I believe, effectively the guidance implies about a flat operating margin from the June quarter, September quarter. 

David E. Weigand 

So the — in terms of the customers, we have a lot of customers that are building out a really good deployments. And so that's what gives us a guide to the first quarter. So we've been shipping AMI 355X and GB300. And so we expect that to ramp in Q1. And that's really what's giving us our guide.” 

In the opening remarks, the GB200s were left out: “Notably, we were able to deliver our B200 systems with an industry-leading time to market to our customers. We are confident our B300 and GB300 solutions will deliver a similar, if not even better time to market and time to online advantages for customers, helping them accelerate their AI deployments faster than others.”

Data Center Building Block Solution  

Supermicro highlighted their data center building block solution, stating it reduces time to convert data centers for high-density direct liquid cooling from 12-18 months down to 3-6 months. According to the opening remarks: “Several DCBBS components are now shipping or entering production, supporting a growing demand for high-performance, energy-efficient data center infrastructure. equally important, DCBBS meets the growing demand for a comprehensive one-stop shop solution, including software-defined infrastructure, system management, AI workload optimization networking deployment and all different levels of services.” 

Management specifically called out Europe and Asia as strong demand for this product: “There are so many contracts, especially in Europe — in Europe, in East, in Asia. So they're all really a great — their AI infrastructure for their country. for their company. And we are working very closely with you there.” 

Management stated that they expect DCBBS to represent 20% to 30% of revenue by this time next year: 

“Q: But did you say that the data center building block solutions will be around 20% to 30% of total revenue in the September quarter? 

Charles Liang 

No. I mean I will be maybe next year summer. So it will ramp gradually not immediately.” 

Conclusion: 

If we read between the lines, Supermicro is cautioning that Nvidia’s highly anticipated Blackwell arrival is either not on time for this quarter or will not going to directly benefit SMCI until Blackwell Ultra ships in Q3. Meanwhile, Astera Labs is giving the green light on PCIe6, which indicates Nvidia’s larger systems are moving somewhere along the supply chain.  

We have a setup for Supermicro that we are tracking and a stop we will follow should the stock break that stop. Until then, it’s just another wild ride with Supermicro – one that we feel is worth taking until technicals signal otherwise.  

Please join Knox this Thursday at 4:30 p.m. ET to discuss entries, exits and more regarding Supermicro, AMD, Astera Labs and the upcoming Applovin report.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in “SMCI” at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

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Astera Labs reported a blowout quarter with beat/raise that is impressive even for ALAB’s standards. Not only did Astera Labs beat by nearly $20M or 11.3% but the guide exceeded this and beat by 14.35%. 

To sweeten the deal, the roughly $20M beat flowed through to profits for a company that is comfortably GAAP profitable despite a fairly recent IPO in 2024 with elevated stock-based compensation at 20% of revenue.  

The fundamental profile of Astera Labs could not be cleaner, and when it comes to its products, the company said all the magic words such as ramping in volume, new design wins with ten customers including merchant GPUs and ASICs, plus a line of sight to further sales growth from their many product lines in H2 2025 and 2026, and the upcoming UALink consortium in 2027. 

To illustrate, in the opening remarks, the company pointed toward the drive for low latency PCIe as the primary contributor to the beat/raise across both the Aries and Scorpio products. Launched only this year, Scorpio now exceeds 10% of total revenue “making it the fastest-ramping product line in Astera Labs’ history.”  

Management also stated there were new design wins across multiple customers this quarter with PCIe6 solutions beginning “volume ramp during the quarter within rack-scale merchant GPU-based systems.” This is music to our ears as it indicates ALAB is a direct beneficiary to the highly anticipated Blackwell systems. More specifically, it was stated the Scorpio smart fabric switches transitioned to volume production in Q2 for PCIe6 scale-up applications “deployed within GPU customized rack scale solutions.” 

UALink was also discussed at length, which is the open source alternative to proprietary interconnect protocols such as Nvidia’s NVLink. The data rate specifications of up to 200G per lane combined with the low latency of PCIe6 puts Astera in an “excellent position.” Per management: “As a leading promoter of UA Link, Astera Labs is committed to developing and commercializing a broad portfolio of UA linked connectivity solutions ranging from AI fabrics to signal conditioning solutions and other I/O components. Proliferation of UA Link in 2027 and beyond will represent a long-term growth vector for Astera Labs.” 

In terms of quantifying where this could lead, management stated: “scale up connectivity for rack-scale AI infrastructure alone will add close to $5 billion of market opportunity for us by 2030” although truly the opportunity could be higher given it was also stated: “our silicon dollar content opportunity has expanded into the range of multiple hundreds of dollars per AI accelerator which has effectively established a new revenue baseline for the company.” From there, it was further stated that Scorpio-X will cause the dollar content opportunity to increase even further: “Given the extreme importance of scale-up connectivity to overall AI infrastructure performance and productivity, we see Scorpio X Series solutions as the anchor socket with the next-generation AI ranks. We are engaged with over 10 unique AI platform and cloud infrastructure providers who are looking to utilize our fabric solutions for their scale-up networking requirements. We look for Scorpio series to begin shipping for customized scale-up architectures in late 2025, with a shift to high-volume production over the course of 2026.  

With the ramp of Scorpio X Series for scale-up connectivity topologies next year, we expect our overall silicon dollar content opportunity per AI accelerator to significantly increase. Overall, we expect this to be another step-up from a baseline revenue standpoint. Also, given the sale of the scale up connectivity opportunity, we expect our Scorpio X Series revenue to quickly outgrow Scorpio P-Series revenue. In 2026 and beyond, cloud platform providers and hyperscalers will begin to deploy next-generation platforms as the industry transitions to AI infrastructure 2.0.” 

Usually, I put these bigger quotes at the bottom under the Q&A yet I didn’t want our Members to miss the emphasis the earnings call had on future growth. But be sure to not miss the additional strong commentary regarding H2 2025, 2026 and 2027 noted below.  

We’ve covered more on Astera’s products and positioning in this analysis here and here.analysis here and here. 

Revenue Beats by 25 Points, Guide Beats by 22.8 Points (wow!) 

Astera Labs reported revenue of $191.9 million, beating consensus of $172.5 million for growth of 150% YoY and 20% QoQ. About eight months ago in November, analyst consensus for the June quarter was for 85% growth — thus the company has nearly doubled these expectations in less than a year. Going into the print, analysts had been steadily raising consensus for growth expectations of 124.4% and Astera beat these estimates by 25 points. This technically marks accelerating growth from last quarter, which reported growth of 144.3%. 

For the September quarter, the beat is also pronounced on a YoY basis although less so on a QoQ basis given the strong beat this quarter. Management guided for revenue of $206.5 million at the midpoint for growth of 82.6% YoY and 7.6% QoQ. Going into this print, analysts were expecting 59.8% growth, with Astera beating by 22.8 points.  

For perspective, about eight months ago, Astera was expected to report $157.5 million for 39.3% growth in the upcoming September quarter. Today, Astera is guiding for more than double growth expectations from less than a year ago. I’m presenting these historical estimates to help illustrate just how quickly Astera has skyrocketed from ideal positioning in the AI networking stack. We’ve covered more on Astera’s products and positioning in this analysis here and here. 

Margins and EPS: The $20M beat flows directly to profits 

The only thing that can sweeten the deal of a 25-point top line beat is a similarly strong bottom line beat. Astera delivered in that regard with a GAAP operating margin of 20.7% compared to 7.9% expected. This led to GAAP profits of $39.8M compared to $13.7M expected, helping to see the operating leverage as the $19.4M beat flowed nicely down the income statement (plus some).

Here’s a visual on how the GAAP profile of ALAB has rapidly improved: 

• Gross margin of 75.8% was up 90 bps from last quarter yet was down 210 bps from the year ago quarter. This led to gross profits of $145.6M, beating the guide for $127.7M. Adjusted gross margin was similar at 76%. 
• GAAP operating margin of 20.7% is a major win for ALAB investors as the company is now comfortably GAAP profitable despite stock based compensation being around 20% of revenue. 
• Adjusted operating margin of 39.2% compares to the guide for 31.1% leading to adjusted operating profits of $75.3 million. This is significantly higher than the adjusted operating profits of $18.7 million in the year ago quarter.  
• The GAAP net margin of 26.7% for net income of $51.2M is significantly higher than the (9.8%) net margin from a year ago and represents a 670 bps improvement QoQ.  
• The adjusted net margin of 40.7% is up from 28.9% last year and 330 bps improvement QoQ.

Cash: 

Astera’s cash from operations increased significantly with an operating cash flow margin of 70.5% up from 38.7% last year. This totaled operating cash of $135.4M with $1.07B in cash on the balance sheet and no debt. 

The company provided a 6 month statement for its cash flows rather than a quarterly statement, but it’s easy enough to deduce that the majority of operating cash flow went to the cash reserves as free cash flow. On a six month basis, the company had free cash flow of $139M with $6M last quarter, leaving about $133M in free cash flow this quarter for a FCF margin of 69.3%.

Earnings Q&A: 

More commentary regarding future growth: 

To say you have 10 customers (who we can infer are at massive scale) is a strong statement for a company like Astera Labs sitting at a run rate of roughly $800M. Buried in the call, management clarified these customers are “nearer-term opportunities that we are tracking based on PCIe.” 

What Astera is referring to is that PCIe 6.0 doubles the bandwidth of PCIe 5.0, reaching up to 256 GB/s. This is crucial for Blackwell GPUs, as the increased bandwidth translates into faster data transfers for quicker processing and reduced latency when training an AI model training and for inference. 

At the end of the call, it was also clarified the way these customers will ramp should help growth into the foreseeable future: 

Sujeeva De Silva   ROTH Capital Partners 

Helpful. And then my follow-up on Scorpio X, you talked about 10 customer engagements. I'm wondering if that implies multiple programs per customer, if they're going to think about using you standard in their platforms? Any color on how those are kind of shaping up would be helpful in programs versus customers. 

Sanjay Gajendra   Co-Founder, President, COO & Director 

Yes. So 10 plus we noted are unique customers now within each customer, there are multiple opportunities that we're tracking. Some of them are design wins, and some of them are ramping to production. Some of them are design ins going through qualification. Some of those are early engagement. So in general, we are very pleased with the amount of traction that we're seeing for our Scorpio family.”

There was additional commentary offered in terms of how they plan to retain these customers and perhaps even increase their sales during the transition to UALink open standards: 

“And we do have, like I noted, several customers, we are counting 10 plus right now that are looking at leveraging some of these open standards, whether it's PCIe in the short term, combination of PCIe and UA Link in the midterm and transitioning perhaps to a broader UA Link deployment in 2027 and later. So overall, I think the momentum is shifting positively, and we are excited to be in the middle of it and driving the adoption of open and scalable supply chain in the market.” 

Later, it was clarified the ten customers are primarily for Scorpio X-Series – which has not even ramped yet – spelling good things for future growth. 

“This, we see, like you noted, as an anchor socket because that is truly the socket that holds all the GPUs together, and today, like we noted, we have 10 plus customers that we are engaging when it comes to scale up networking using Scorpio X-Series.”  

It was later stated the X-Series will grow beyond Scorpio P-Series which is what is driving the growth right now: “For the X Series, we do have preproduction volumes here, but really, that starts to go into high volume production during the course of 2026 and layering even more growth. Ultimately, what we called out is the X Series is going to grow to be bigger than P-Series" 

There were a few additional comments pointing toward strong growth in 2026: 

“The scale up this year is predominantly preproduction volumes. And these systems are pretty complex that they're shipping into. So we like to try to be conservative on how we telegraph those going forward. But the volume opportunities scale up connectivity for switching is a much bigger dollar opportunity for us as we look forward. But those designs really will start to enter into full volume production during the course of 2026. So not a driver in the next couple of quarters.” 

Conclusion: 

Astera is a strong contender for best earnings report of the quarter – not only in I/O Fund’s portfolio but broadly speaking across the tech sector (the other contender across the tech sector is Reddit).  

This company is firing on all cylinders with unique positioning in the AI economy as they serve both merchant GPUs and custom silicon – which is what makes 10 customers a possibility.  

What I liked most about this call was management clearly outlining how they plan to drive future growth across its product lines, plus across a diverse set of customers throughout 2026 – and they furthered the discussion on how ALAB will strategically continue to drive growth during the anticipated transition to UALink in 2027.  

The note from our last portfolio meeting following my Top 15 Stocks report was “is 20% allocation too high for Astera Labs?” Apparently not. It’s at 16% now, and by default, will open at a higher allocation tomorrow.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in “ALAB” at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

• The I/O Fund’s Top 15 Stocks for Q3 2025
• Coinbase Underperforms in Q2; Near-term Volatility Likely
• Meta Reports Large Q2 Beat, Ad Impressions Growth Rebounds
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AMD reported in line, yet the market’s short attention span has likely forgotten the QoQ decline in the data center was expected. Per our last earnings report writeup: 

“For Q2, data center will decline due to the MI308 revenue being excluded. When asked about future quarters, the CEO Lisa Su stated the DC segment would resume growth after Q2: “in Q2, it's not going to grow year-over-year just given what we've said about the $700 million coming out of Q2 and how we had previously talked about the evolution. But we do believe that we'll grow year-over-year going forward, in Q3 and Q4 certainly, for us to do the full year with strong double-digit growth.” 

Therefore, what matters for the purpose of our position is if AMD can execute and drive much better data center segment results in Q3 and Q4. For example, in the opening remarks, it was stated while citing the Oracle deal which includes 130,000 MI355s: 

“We began volume production of the MI350 series ahead of schedule in June and expect a steep production ramp in the second half of the year to support large-scale production deployments with multiple customers.” 

We go through the obligatory financials below while noting from the earnings call additional comments about the one thing that really matters – that AMD executes in H2 and further executes in 2026.  

Revenue beat driven by Client and Gaming segments: 

AMD reported a slight beat on the top line at $7.685B in revenue compared to estimates of $7.43B. This represents growth of 31.6% compared to growth of 27.4% expected. Where the beat is somewhat problematic is that it was driven by Client and Gaming, rather than the data center. 

However, in terms of a bright spot in the report and a data center inflection point, Q3 estimates were at $8.3B going into the print and management is guiding for $8.7B at the midpoint for growth of 28% YoY and 13% growth QoQ. This will be driven by data center, as was alluded to on the earnings call: “Sequentially, we expect revenue to grow by approximately 13%, driven by strong double-digit growth in the Data Center segment with the ramp of our AMD Instinct MI350 series GPU products […]” with Client expecting to see only modest growth. 

In addition, AMD estimates have been steadily rising after a trough of sorts earlier this year. For example, the September quarter was expected to see as low as 17% growth per consensus in May, yet is now at 28% per management guidance.  

Revenue Segments: Data Center declines QoQ from China Loss 

Last quarter, management had stated, “we expect data center segment to decrease due to the exclusion of MI308 revenue.” Therefore, it was not a surprise when data center was down (11.8%) QoQ yet was up 14% YoY for revenue of $3.24B. This compares to DC revenue of $3.67B last quarter and $2.84B last year.  

Here is what it looks like on a YoY basis: 

Gaming and Client exceptionally strong in Q2 

While many consumer device companies are struggling right now, AMD is breezing past consumer demand concerns with incredibly strong Client and Gaming revenue. Whether this can sustain or if it was a pull forward remains to be seen, with management guiding for Q4 to be seasonally weaker than usual. 

• Client revenue of $2.5B up 9% QoQ and up 68% YoY 
• Gaming revenue of $1.1B up 73.4% QoQ and up 73% YoY 
• Embedded revenue of $824M, flat QoQ and down 4.5% YoY 

According to the opening remarks, it was not a pull forward rather the popularity of its Ryzen processors and Radeon 9000 GPUs that drove the strong performance.  

Regarding Client CPUs, it was stated: 

“We delivered record desktop channel CPU sales as Ryzen processors consistently topped the best-selling CPU lists at major global e-tailers throughout the quarter [..] In mobile, demand for AMD-powered notebooks was strong with sellout growing by a large double-digit percentage year-over-year. We drove a richer mix of higher ASP mobile parts year-over-year as we expanded our share in the premium notebook segment where our Ryzen AI 300 CPUs deliver leadership performance and value for both general purpose and AI workloads. In commercial PCs, Ryzen adoption accelerated as OEM consumption increased more than 25% year-over-year.” 

Regarding the Radeon series which drove 74% QoQ growth in Gaming, there were partnerships with Microsoft/Xbox and Sony. The following was also stated: “In PC gaming, demand for our latest-generation Radeon 9000 series GPUs was very strong, with desktop GPU sell-through accelerating in the quarter as demand outpaced supply.” 

Despite Client being strong this quarter, management cautioned this is inventory building for the holiday season and this segment will be down in the fourth quarter “strong double digits.” 

Margins down due to China; Expected to rebound quickly  

EPS was in line with expectations at $0.48 yet was down (30%) from $0.69 in the year ago quarter. The company is expected to rebound quickly with EPS of $1.15 next quarter.  

Gross margin of 40% is significantly lower than previous quarters in the 50% range. This represents profit of $3.1B due to $800M in inventory changes from expert controls. Management pointed out that minus the $800M, gross margin would have been 54%: “Excluding the $800 million inventory write-down related to data center AI export controls, gross margin was 54%, marking our sixth consecutive quarter of year-over-year margin expansion led by a richer product mix.” 

 Adjusted gross margin of 43% represents adjusted gross profit of $3.33B. Notably, the margins were guided correctly and in line with expectations following the loss of China revenue discussed in the previous quarter.  

Operating margin of (2%) for operating profits of ($134M) also included the $800M in inventory changes. Adjusted operating margin of 12% was guided correctly and was in line with expectations. Adjusted operating profits of $897M beat expectations for $882M.  

Net margin of 11.3% was 600 bps higher than the previous year and 230 bps higher than last quarter. However, adjusted net margin was down significantly by 10 points to 10.2%.  

Cash Flow margins Improve QoQ, Debt profile improves 

AMD’s cash flow margins sustained well at 20% operating cash flow margin compared to 13% last quarter and 10% OCF margin last year. Free cash flow margin of 15% also expanded from a year ago at 8% margin and up from 10% FCF margin last quarter.  

AMD has cash of $5.9B on the balance sheet and debt of $3.2B, down from $4.2B last quarter.

Earnings Call Q&A: 

Key points on how AMD plans to execute from here: 

Sovereign AI to pick up in 2026: 

In the opening remarks, management discussed its “multibillion-dollar collaboration with HUMAIN to build AI infrastructure powered entirely on AMD CPUs, GPUs and software.” The HUMAIN deal refers to a $10 billion joint venture between Saudi Arabia and AMD to create an AI hyperscaler for the country’s sovereign AI initiatives.  

According to Lisa Su during the Q&A: “So look, we're really excited about the overall AI opportunity for us with MI355 and the MI400 series as we go through the back half of this year and into 2026 […] I think you heard from Tareq that was — he was at our event saying that, that would start with MI355, that we would expect that, that would continue on. I think what's attractive about our offering is our open ecosystem, and I think that really resonates with the sovereign community. But to your original question, I think it's an additive opportunity, and it's one that we believe will continue to be very important for us going forward with both MI355 as well as the MI400 series.” 

MI350s starting to ramp: 

When asked about the size of opportunity from the MI300s and MI350 Series this year (mainly the MI350s) and if this can get to $7B, management declined to be specific yet stated: “I think what we said in the prepared remarks is that we are seeing a strong ramp from Q2 into Q3. MI355, we actually started production in June. So we had some shipments sort of in the month of June, but it really is ramping as we go through this quarter and the third quarter. So in terms of guideposts, we said it would grow year-on-year from last year. And that, I think, is a strong ramp, and then we would expect it to grow into the fourth quarter as well.”

MI400s to ramp next year including Helios: 

The MI400 series will be the start of rack-scale systems for AMD, starting with Helios, which will connect up to 72 GPUs similar to Nvidia’s NVL72 systems. According to AMD, Helios will “deliver up to a 10x generational performance increase for the most advanced Frontier models, and we believe it will be the highest-performance AI system in the world when it launches.” The last part is doubtful yet the effort to close the gap with Nvidia will likely go a long way when coupled with lower pricing.  

AMD’s goal of reaching tens of billions in MI400 sales was also elaborated on: 

“Joseph Moore   Morgan Stanley: 

You used this language before, the kind of tens of billions opportunity around MI400. Can you talk about the time frame when that might occur and not to pin you down too much, but — and what would help you get to that level sooner rather than later? Should we think of that as a 2027 realistic outcome that you could be looking at $20 billion-plus? Just a little bit more color on that tens of billions comment. 

Lisa Su   Chair, President & CEO: 

Yes. I mean, maybe without being specific, Joe, I can give you sort of the way I look at it and back to this notion of are we incrementally more confident. I think we're seeing a lot of positive signs in our AI customer adoption, I think the strength of the MI350 series, the very positive feedback that we're getting on MI400 from customers, the work that we're doing in terms of ensuring that we are fully ready for large-scale deployments of not just inference but training. 

I think when we get to tens of billions of dollars, we're talking about significant gigawatt-scale type deployments. And those would be important for us to get there. And we're certainly, I think, engaged with all of the right customers that can enable that type of ramp. But I won't necessarily speculate on the exact time other than to say, certainly, that would be our set of aspirations.” 

It was later stated: “We would expect significant revenue contribution from Helios in 2026.” 

Conclusion: 

In my Top 15 stocks report the conclusion was the following: The risk to AMD is primarily in Q2’s data center growth decline, and how quickly can the company ramp its MI355s and subsequent MI400s while in the midst of Nvidia’s large shadow – will we see a solid surprise arrive in Q3, Q4 or even into next year? My best guess is the most meaningful AMD moment is not likely to occur during Blackwell’s NVL72s release – I think 2025 belongs to Nvidia and somewhere between 2026-2027 we switch it up. 

AMD has required some patience, but 40% returns YTD are not bad. We weren’t expecting much from this report given the concise management commentary from last quarter. However, we do foresee watching this stock very closely come 2026 with a placeholder in the portfolio should AMD surprise before then.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in “AMD” at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

• Astera Labs Q2: Blowout with double digit Beat/Raise; Emphasis on future growth
• Microsoft FYQ4: One of the Strongest Earnings Reports in Multi-Decade History
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• Can AMD’s MI350X and MI355X GPUs Close the Gap with Nvidia?

Bloom Energy is retracing the 10% pop it saw yesterday from the news Bloom has agreed to supply Oracle with solid oxide fuel cell (SOFC) servers. Despite Bloom Energy being in direct contact with its first hyperscaler customer with Oracle, the drawback is that BE had already baked this into fiscal year guidance. Thus, the company was only able to reiterate fiscal year guidance of $1.65 to $1.85 billion, corresponding to YoY growth of 19.1%.  

Despite the weak price action from inflated expectations around the Oracle deal, there were many bright spots in the report. Bloom reported its third consecutive quarter of record revenue and profits and reported six consecutive quarters of profitability in the Services segment.  

Bloom also outlined a plan to double its factory footprint from 1 GW to 2 GW by the end of 2026 to meet growing demand, with this expected to cost in the “ballpark of $100 million,” funded through a recent refinance of debt notes for $113 million.  

To help compare, Data Center Frontier estimates that BE has deployed 400 MW of capacity to data centers this year,  and has delivered 1.5GW of power in total across 1,200+ global installations. Therefore, 2GW exceeds Bloom’s total history of installations and is about 5X its 2025 data center business.  

Details around its new partnership with Oracle were the main focus on the call, plus how quickly Bloom can scale capacity and how the company plans to fund any future expansion.  

Although we expect Bloom to be very volatile, the fact is that very few alternative energy companies can move as quickly as BE in what our firm has dubbed an energy crisis in getting power to data centers.  

As the CEO stated on the call, to wait 5-7 years is “untenable.”  To compare, Bloom will power Oracle with on-site power solutions in as soon as 90 days. Additional key customers for BE include American Electric Power (AEP), Quanta and Equinix. Notably, Amazon and Cologix are customers of Bloom through AEP in Ohio.  

Perhaps the most important statement on the call was when the CEO stated: “We expect new orders from other AI hardware ecosystem players soon, complementing demand we see from our more traditional commercial and industrial customers.” 

Revenue Beats by 6%, Yet FY25 Guide Maintained 

Bloom reported a nearly 6% beat to estimates in Q2, reporting $401.2 million in revenue versus estimates for $378.9 million. Revenue grew 19.5% YoY, slowing from 38.6% growth in Q1.  

According to management, this represents the highest revenue and most profitable Q2 yet: “Bloom had an excellent quarter, the highest revenue and most profitable second quarter in our 24-year history […] Over the last couple of calls, I've told you that our business is at an inflection point as demand for clean, reliable and rapidly deployable power is surging. Now there is tangible evidence.” 

Growth is expected to rebound to the high-20% level in Q3 to $424.9 million, though notably this comes against a substantially weaker comp in Q3 2024’s (17.5%) decline. On the other hand, Q4 faces a difficult 60% comp, and as a result, growth is estimated to be <7% YoY to $610.5 million. 

Despite the beat in Q2 and recent deal with Oracle to deliver fuel cells to AI data centers within 90 days, Bloom maintained its full-year revenue guidance at $1.65 to $1.85 billion. This corresponds to YoY growth of 19.1%.   

Key Segments 

Product revenue growth moderated slightly in Q2 but remained in the 30% range, while Installation and Electricity both declined YoY, reversing from strong growth last quarter.  

• Product revenue increased 31.1% YoY to $296.6 million, slowing from 38% growth in Q1.  
• Installation revenue declined (12.5%) YoY to $37.4 million, reversing sharply from 194% growth last quarter.  
• Service revenue increased 3.7% YoY to $54.4 million, rebounding from a (5%) decline in Q1. 
• Electricity revenue declined (9.8%) YoY to $12.8 million, reversing from 92% growth in Q1. 

Operating Margins Expand  

On a YoY basis, margins have improved quite substantially. Bloom is transforming into a stronger company fundamentally when considering its GAAP operating margins were previously deep in the red double-digits. 

Gross margins dipped sequentially, yet operating margins expanded on a GAAP and adjusted basis. Notably, Bloom believes their operating margins will continue to expand: “Between that combination and our cost reduction continuing, you should absolutely expect our operating income to keep getting better as we go forward.” 

• GAAP gross margin was 26.7%, down 0.5 points QoQ but up more than 6 points YoY. Adjusted gross margin was 28.2%, also down 0.5 points QoQ and up more than 6 points YoY.  
• GAAP operating margin is approaching positive territory at (0.9%) in Q2, up nearly 5 points QoQ and 6 points YoY.  
• Adjusted operating margin was 7.1%, up more than 3 points QoQ and 8 points YoY. Adjusted EBITDA was $41.2 million. 
• GAAP net margin was (10.6%), down 3.3 points QoQ and up nearly 8 points YoY. Adjusted net margin was 5.5%, up 3.5 points QoQ and 9.7 points YoY.  

EPS 

Bloom beat EPS estimates on an adjusted basis as adjusted margins expanded down the line, though GAAP EPS fell short.  

• Adjusted EPS of $0.10 beat estimates for $0.02, and represented a notable $0.16 improvement YoY.  
• GAAP EPS was ($0.18), missing estimates for ($0.10) as GAAP net margin declined sequentially. 

Looking ahead, Bloom is expected to see profits at least at this level through the end of the year, generating the bulk of its earnings in Q4 at $0.31.  

Cash and Balance Sheet 

Cash flows worsened sequentially, with operating cash flow falling by more than ($100 million) versus Q1. This weighed on unrestricted cash and equivalents, while debt was unchanged. 

• Operating cash flow was ($213.1 million) in Q2 for a (53.1%) margin, nearly double Q1’s ($110.8 million) outflow. For the first half of 2025, operating cash flow was ($323.9 million), approximately flat YoY. 
• Bloom guided for FY25 operating cash flow to be approximately flat to FY24 at $92 million, suggesting 2H operating cash flow in the range of $410 million, likely concentrated heavily in Q4. 
• Free cash flow was ($220.4 million) in Q2 for a (54.9%) margin. For the first half, FCF was ($345.3 million), just over a 1% improvement YoY. 
• Unrestricted cash and equivalents totaled $574.8 million, down from $794.8 million in Q1. This raises the risk that Bloom will turn to financing methods as Bloom likely awaits cash flows meaningfully improving in Q4.  
• Debt remained steady at $1.13 billion.. According to the opening remarks: “Finally, during the second quarter, we refinanced $113 million of our convertible note that was due in August 2025 to provide more optionality to fund future growth. It was exchanged into our existing 2029 convertible notes.” 
• Inventories were $690 million, up 12.7% QoQ from $612.5 million in Q1, supporting some near-term deployment growth for the Oracle partnership.  

Earnings Q&A: 

Bloom becoming more attractive to hyperscalers: 

When asked about the Oracle deal, the CEO stated that it was “islanded power” to where Bloom is the first source and the second source (rather than being backup power to the grid) and that “it will be one single data center that the first project will power and we are working with them on many of the projects” — hinting the partnership is expected to expand over time and is “extremely significant” for Bloom Energy. 

“So we see this as extremely significant, and we are the primary source, and it is load following. So it will prove that we can load follow at large scale. It will prove that we can operate at large scale and most importantly, AI speed. It will prove that we can install stamp sizes at that level within the 90 days that we have told you we would do in our opening remarks.” 

There was also discussions that Bloom may have an important cross-sell opportunity beyond time to power, which is a combined heat power solution that helps to increase efficiency through thermal management. It was briefly mentioned it could save up to 20% of power costs: “And you are correct to point out from a value proposition wise, right, it is the equivalent of not needing 20% of your power in a data center, right? It is the equivalent of not paying for it when you have taken care of your cooling with our waste — with the waste heat as opposed to putting more electricity. That's a big deal.” 

Overall, Bloom is quite confident their solution drives down costs compared to other solutions. When asked how they compare to natural gas turbines, the CEO stated: “On the other hand, those turbines have at least 15 to 20 percentages — like percentage points more fuel that they will consume compared to us. So on the OpEx, there's a significant win. And on top of that, we have no air pollution, whereas getting an air permit to put a lot of turbines if you live in a populated area is very difficult. You're probably reading in the press. 

So you combine all those things, A, because we are easier to permit, we remove the friction to permitting, so we are faster. Time to power is everything in this business. Secondly, operating cost is lower. CapEx is at parity. You put them all together, I think we compare more than favorably to any other alternative way of producing electricity.” 

2GW on the Way to Multi-GW 

According to management, it will cost $100 million to grow from 1GW to 2GW capacity: “So we are funded for what we — we are well funded for what we need to do in terms of going to 2 gigawatts. Round ballpark numbers, think about $100 million is how you should be thinking about this. And it will come spread over quarters. And we have enough.” 

An analyst asked what gives management the confidence to double capacity – (which is more than just doubling capacity as it also represents more capacity than the company has installed in its lifetime at 1.5GW).  

The CEO pointed toward the visibility in backlog and also the large capex spend and what that essentially means for power capital equipment: 

“So we have told you in the past that in the last 2 quarters, we have seen strong commercial activity. We have told you that it is very diverse, and it is high quality. At this point in time, when we look at that pipeline, it has gotten us to a level of confidence where we absolutely feel like this is the right thing to do. That's why we are expanding the capacity, number one, right? 

Number two, this should be fairly simple, and it should be mind-boggling for all of us, and we shouldn't get numb to this fact. The large hyperscalers put together are going to spend more than $1 billion a day on CapEx, weekday and weekend. It's more than $500 billion are going to be spent just in this calendar year by those people. So you take that number of $500 billion and you say, an order of magnitude down, at least $50 billion of power capital equipment needs to be spent to electrify that additional demand that's going to come on.” 

Tax Credit Benefits: 

Lastly, tax credits are a tailwind for Bloom Energy as there are tax credit benefits to companies who use their energy solutions. According to the CEO during the Q&A session, it’s about a 30% incentive: 

K. Sridhar   Co-Founder, CEO & Chairman 

[..]  So it is a flat 30%, okay? Whereas in the previous version of the bill that ended last year, but safe harbored now, our customers can avail of either 40% or 50%, depending on whether they are not in an energy community or in an energy community. If they're not in an energy community, it's 40%. If they're in an energy community, it's 50%. So from that perspective, yes, their subsidies go down a little bit. But given how high the price of electricity has gone up, at 30%, our attractiveness will be extremely high.” 

Conclusion: 

Bloom Energy is reserved for Advanced members because it does not have a quality fundamental profile, mainly seen in its need to raise cash to build capacity. However, there is a hypergrowth story here for many years to come. Bloom provides immediate time to power within 90 days compared to nuclear in 5-7 years’ time. The company articulates why they can compete with natural gas turbines with roughly 20% better energy costs albeit Bloom is an alternative energy source and many data center operators have less experience with hydrogen fuel cells. That is why Bloom will become more of a snowball effect, to where each deal (Oracle, AWS via AEP, and Quanta) will build on itself to prove to future hyperscalers that Bloom is not only a viable choice but a preferred method to quickly get power to data centers.  

What I’m saying — perhaps in a long-winded way — is that it’s the intraquarter deal announcements that will move this stock. I anticipate the I/O Fund will actively trade Bloom over the next few GPU generations as they push forward power requirements that only a handful of companies can (quickly) meet. Bloom is one of those companies.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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Coinbase posted a double miss in Q2 with revenue growth of just 3.3% YoY, with both transaction revenue and trading volumes both underperforming the spot market in the quarter. 

Despite the soft growth, especially in transaction revenues, Coinbase made significant progress on multiple fronts in the crypto world. This included bringing USDC on Base Chain live in Shopify Payments, launching the Coinbase One Card, reaching all-time high average market share of assets on its custody platform, and significantly expanding its derivatives presence. In addition, Coinbase will be positioned at the center of bringing equities on-chain. There were many interesting discussions about the vision for the company in the earnings call, as noted below. 

Coinbase continues to stand out for its large cash reserves of $9.3 billion in total USD resources of which $1.8 billion is in a crypto investment portfolio. It’s also important to zoom-out and look at the bigger picture as Assets Under Custody (AUC) share reached an all-time high of total crypto asset market cap at $245.7 billion AUC due to strong inflows from ETFs and Corporate purchases. Coinbase also shared they are the custodian for over 80% of U.S. BTC and ETH ETF assets as of the end of Q2 

As we’ve discussed in the past, earnings reports matter very little for this company compared to technicals. With crypto, our style is to have predefined price targets given this asset class is sentiment driven.  

Revenue Growth Flatlines in Q2 

Coinbase reported 3.3% YoY revenue growth to $1.49 billion in Q2, missing estimates for 9.9% growth to $1.59 billion. Q2 saw a more challenging crypto market backdrop, with spot volumes down (31%) QoQ globally and (32%) QoQ in the US, while volatility declined (16%) QoQ. 

While this a sharp deceleration from Q4 and even Q1, this type of volatility is not out of the ordinary for the crypto industry. For example, Q3 revenue growth is currently expected to rebound to 40.2% YoY, with the spot market rebounding substantially MoM in July. 

Key Metrics 

Trading Volume 

Coinbase’s trading volume underperformed the spot market by more than 8 points, declining (40%) QoQ to $237 billion; however, trading volumes were still up 5% YoY. Coinbase said that its QoQ underperformance was primarily driven by “lower stablecoin pair Trading Volume driven by an intentional pricing change we made in March as we evolved our stablecoin strategy.”  

Consumer trading volume increased 17% YoY but declined (45%) QoQ to $43 billion, while Institutional trading volume increased 3% YoY but declined (38%) QoQ to $194 billion.  

Coinbase noted that Bitcoin accounted for 30% of trading volume in the quarter, up from 27% in Q1, though growth in trading volume was most notable in altcoin/other assets, which rose from 38% in Q1 to 55% in Q2. 

Transaction Revenue 

Transaction revenue matched the decline in trading volumes, down (39%) QoQ to $764.3 million; however, revenues were down (2%) YoY, weighed down by the Institutional side. 

Consumer transaction revenue decreased (41%) QoQ and (2%) YoY to $649.9 million, as the stablecoin pricing change “disproportionately affected Advanced platform volumes where most of that activity was taking place.” Institutional transaction revenue declined (35%) QoQ and (4%) YoY to $60.8 million. Bitcoin accounted for 34% of transaction revenue, up from 26% in Q1, while altcoins/other crypto accounted for 41%, an interesting disparity to their volume share indicating lower fee rates. 

Other transaction revenue declined (21%) QoQ but rose 2% YoY to $53.5 million, although average revenue per transactions on Base Chain “decreased meaningfully.” 

Subscription and Services Revenue 

Subscription and services revenue was $655.8 million, up just 9.5% YoY but above the $640 million midpoint of its guidance. Coinbase said this was driven by “continued growth in average USDC balances, native units staked, and all-time high average Prime Financing balances.” 

For Q3, Coinbase is projecting Subscription and services revenue between $665 to $745 million, or rebounding to 26.8% YoY at midpoint. This is expected to be driven by higher average crypto prices, such as ETH being up 45% quarter-to-date and SOL being up 14%, as well as growth in stablecoin revenue from USDC market cap reaching an all-time high in July. 

Within Subscription and services revenue: 

• Stablecoin revenue rose 38% YoY and 12% QoQ to $338.5 million, driven by a 13% QoQ increases in USDC balances held in Coinbase products to $13.8 billion and off-platform USDC balances to $47.4 billion. 
• Blockchain rewards revenue declined (22%) YoY and (26%) QoQ to $144.5 million, as staking inflows were more than offset by lower average prices of both ETH and SOL and lower protocol rewards rates. 
• Interest and finance fee income declined (15%) YoY and (6%) QoQ to $59.3 million, as lower interest income on custodial fiat more than offset a QoQ increase in Prime financing 
• Other subscription and services revenue rose 15% YoY but declined (15%) QoQ, as lower blended fee rates driven by customer mix and lower non-BTC asset prices offset custodial fee revenue. 

Margins 

Operating margin dipped into the negatives this quarter, while GAAP net margin was >95% as Coinbase benefited from a significant $1.5 billion gain on strategic investments and a $362 million gain on crypto investments. Adjusted net margin, which was initiated last quarter and excludes those impacts, was razor thin at just 2.2%. 

• GAAP operating margin was (1.6%), down from a 34.7% margin in Q1. This was the first quarter with a negative operating margin since Q3 2023. 
• GAAP net margin was 95.5%, due to the aforementioned gains on investments. 
• Adjusted net margin was 2.2%, down from a 25.9% margin in Q1. 

EPS and Adjusted EBITDA 

Due to these wild disparities in GAAP and adjusted net margin, Coinbase’s GAAP and adjusted EPS figures are on the opposite end of the spectrum. GAAP EPS was $5.14, beating estimates for $1.51 by more than 240%. However, adjusted EPS was $0.12, missing the $1.49 estimate by (92%). 

Adjusted EBITDA was $512.1 million for a 34.2% margin, down from a 45.7% margin in Q1 and a 41.1% margin in the year ago quarter. 

Cash and Balance Sheet 

Cash flows rebounded to positive territory this quarter, while Coinbase’s liquidity profile remains strong. 

• Operating cash flow was $328.5 million for a 21.9% margin, rebounding from a (9%) margin in Q1. However, this remained lower than the 33.4% margin from Q2 2024. 
• Cash and equivalents totaled $7.54 billion, with Coinbase noting it had a total liquidity profile of $9.32 billion when including its net USDC balance of $1.78 billion. Debt remained steady at $4.24 billion. 

Q3 Outlook 

Coinbase said that it anticipates July transaction revenue to be approximately $360 million, with data from The Block showing spot market volumes rebounding more than 55% MoM. 

Coinbase guided for $665 to $745 million in subscription and services revenue, up 26.8% YoY at midpoint. Transaction expenses are expected to be mid-teens percentage of net revenue, while tech, development and G&A expenses are expected to be $800 to $850 million. Sales and marketing expenses were guided at $190 to $290 million, though Coinbase noted that it sees opportunities to continue investing in marketing in Q3.  

Earnings Q&A: 

Expanding the Crypto Empire 

Of the many ways that Coinbase expanded its empire recently, two areas stand out the most – the Everything Exchange and perpetual futures and options.  

Everything Exchange & Base App – – Favorable Legislation Announced Today 

In the earnings call, Coinbase management announced their new everything exchange, which will effectively expand their trading platform to also include tokenized stocks and real-world assets. We recently covered Robinhood’s similar efforts to expand to include equity tokens and perpetual crypto futures. 

Regarding tokenized equities, Coinbase stated the “total addressable market for this is massive” and that capturing just 3% of equities would double the current crypto market.  

Coinbase's announcement of its everything exchange followed the SECs announcement today of “Project Crypto” which aims to bring the financial markets on-chain. This paves the way for companies like Coinbase to have a single license rather than a conflicting mess of licensing across states. Prior to Project Crypto, Coinbase and others were not able to launch super apps like WeChat and AliPay. 

In anticipation of this announcement, Coinbase launched its super app called Base app. Base app aims to combine a wallet, trading and payment features, plus social media and messaging features into one app. The app rolled out with an identity verification system and a one-click checkout feature for USDC with partners such as Shopify. 

Here is what was stated in the call in terms of the super app’s current user base: 

“We now have a scalable blockchain with Base. There's decentralized messaging protocols, ways for people to build applications, and decentralized social media protocols. 

So this is kind of a super app that we've put out there. It's in beta. There's actually 700,000 people on the wait list already. And so there's been a ton of demand for it and excitement about it.” 

In addition to the Base app, Coinbase also announced this quarter a credit card that will earn between 2% to 4% back in Bitcoin for every purchase.  

Perpetual Futures and Options: 

Last quarter, we covered the acquisition of Deribit which was a major piece to Coinbase’s strategy to pull together spot, future and options trading onto one global platform. Deribit saw over $30 billion in open interest last year and $1 trillion in trading volume outside the of the United States, representing 75% market share. This acquisition makes Coinbase the #1 crypto derivative platform globally by open interest.  

This quarter, Coinbase launched 24/7 trading of Bitcoin and Ethereum contracts, with management stating: “we launched perpetual style futures in the United States, which hit an all-time high in trading volume this week.” 

Double-clicking on Stablecoins and the Shopify Announcement: 

Despite there being many new announcements this quarter, stablecoins remains the largest opportunity for Coinbase in the near-term. Last year, stablecoins processed $30 trillion in settlements last year for 300% growth with management stating on the call its now a $40 trillion opportunity. 

To participate, Coinbase launched a full-stack stablecoin payment solution for commerce platforms. The out-of-the-box infrastructure allows merchants to accept USDC payments even with little to no experience in developing crypto solutions. When compared to credit cards, USDC offers similarly fast settlement but with lower fees and is global.  

Shopify was a launch partner as USDC is pegged 1:1 to the dollar which removes the unpredictable nature of other cryptocurrencies for merchants who want to accept crypto. As stated, the global transaction can settle quickly and for less cost than credit cards. For example, the Base Layer 2 can settle in 1 second for $0.01. 

Interesting enough, Coinbase stated the much larger opportunity is B2B payments, representing 75% of cross-border payments – so something more along the lines of wire transfers and ACH payments : “One of the biggest areas that we're focused on first is really around B2B payments. A lot of this is cross-border. We think that actually cross-border payments is about a $40 trillion opportunity. B2B is 75% of that.” 

Back-end infrastructure for Crypto: 

Just as Amazon Web Services (AWS) offers backend infrastructure for the internet economy, Coinbase CaaS provides backend crypto infrastructure for banks, fintechs, and enterprises. The company has 240 institutions including newly announced PNC, JP Morgan, eToro, Revolut and Webull. Coinbase infrastructur or “rails” can be used for can be used for settlement, tokenization, on-chain payments and other crypto infrastructure needs where developing your own blockchain would not make sense (which is most of the time).

Conclusion: 

The market will find reasons to sell Coinbase from time to time, yet it’s not too hard to envision Coinbase as the largest disruptor to traditional finance globally. Nearly every outdated facet of the financial sector is set to transform and Coinbase is positioned to play a central role. Although it would be easy to categorize Coinbase as a crypto exchange, it is transforming into something much more meaningful.  

Near-term volatility is showing up in the technicals. We will alert you when risk favors accumulating again. Please join Knox every Thursday in his 4:30 p.m. EST webinar where he reviews buy/sell plans for crypto positions including Coinbase. To subscribe to Advanced with $100 off, please click here to email us or email premium@io-fund.com and mention code ADVANCED100.click here to email us or email premium@io-fund.com and mention code ADVANCED100.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in “COIN” at the time of writing and may own stocks pictured in the charts.

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Recently, in the Top 15 AI Stocks analysis it was stated “If Nvidia holds the crown in the AI hardware arena, then Microsoft holds the crown in the AI enterprise arena.” Tonight, Microsoft proved why the AI Enterprise crown is rightfully theirs. 

Management came out swinging this evening on multiple fronts. First off, the acceleration in Azure and Other Services to 39% up from 35% last quarter was significantly higher than expected, with the Street calling for growth of 33.7%. To grow nearly 40% at this scale is impressive.  

Microsoft also revealed its Azure revenue number for the first time of $75 billion for FY2025 (although not entirely surprising as we were modeling for Azure to be hitting $80 billion very soon). From there, the CFO guided for 37% growth in Azure for next quarter – indicating continuing a high growth rate at scale will not be a problem in the near-term (note, H2 is expected to see lower growth than H1). 

However, if we look at Commercial RPO, it’s clear something big is going on. Last quarter, we pointed out that Commercial RPO was the one key metric we were watching, stating: “Commercial RPO growth above 30% suggests that Microsoft’s stock could (finally) resume strength again.” At the time, RPO was at $315 billion, up 34% and 33% on a constant currency (CC) basis.  

This quarter, Commercial RPO has accelerated to $368 billion, up 37% and 35% on CC basis. Microsoft’s Commercial RPO was in the mid-$100 range in 2022-2023 period to help illustrate how quickly contracted revenue has grown. Wow. We do not typically see such large growth rates on such a large RPO base. It’s almost inconceivable.  

A few years back, I described in detail why AI is first and foremost an enterprise technology, specifically calling out Microsoft’s path to $100 billion in AI revenue by 2027. We are seeing this materialize now. Microsoft is putting formidable distance between itself and best-of-breed cloud players. To illustrate, stocks like Confluent are down 27% after hours following the loss of a large customer.  

In addition to the key metrics stated above, management carries a sense of confidence  when analysts question the ROI on capex. And when Mark Zuckerburg boasted about building a gigawatt-plus cluster called Prometheus next year, Satya made sure to lead his introduction by saying “We stood up more than 2 gigawatts of new capacity over the past 12 months alone.” You’ll find more commentary on this below. 

Revenue – Azure reported as standalone segment for first time 

Revenue was up $76.4 billion for growth of 18% or 17% in constant currency. This is up from last quarter with growth of 13% or 15% in constant currency and beat consensus of $73.83 billion. For the fiscal year ending in June, the company reported revenue of $281.7 billion, up 15%.  

Azure revenue was reported as a standalone metric for the first time, being stripped out of “Azure and Other Services.” The company stated Azure saw $75 billion in revenue or growth of 34%. For comp purposes, the original segment grew 39% up from 33% / 35% on CC basis last quarter.  

Below, you can see the visible acceleration in overall revenue 

Below you can see that 39% is the highest growth rate we’ve seen in some time for Azure and Other Services: 

Looking forward, management guided for revenue of $75.25B at the midpoint, beating consensus of $74.15B. This would represent growth of 14.7%. 

According to the CEO, Microsoft is ahead of other hyperscalers in speed of data center buildouts: “We continue to lead the AI infrastructure wave and took share every quarter this year. We opened new DCs across 6 continents and now have over 400 data centers across 70 regions, more than any other cloud provider. There is a lot of talk in the industry about building the first gigawatt and multi-gigawatt data centers. We stood up more than 2 gigawatts of new capacity over the past 12 months alone. And we continue to scale our own data center capacity faster than any other competitor.” 

Revenue segments – Cloud has highest growth rates since 2022 

Cloud reported some of its highest growth in three years. The CEO stated: “Through software optimizations alone, we are delivering 90% more tokens for the same GPU compared to a year ago” as well as “ 

• Microsoft Cloud was up 27% and up 25% on CC basis for revenue of $46.7B. This marks the highest quarterly growth rate since CY2022 
• Gross margin was 70% up 100 basis points from 69% last quarter 
• Productivity and other Businesses was $33.1 billion, up 16% and 14% on CC basis.  
• Intelligent Cloud was up 26% and up 25% on CC basis for revenue of $29.9 billion. This was the highest growth rate since CY2022 
• More Personal Computing was up $13.5B for growth of 9% 

Commercial Bookings Surpasses $100 Billion for the first time 

To help support the case for future growth, both commercial bookings and commercial RPO came in surprisingly strong.  

The CFO stated that for the first time commercial bookings surpassed the $100 billion mark, increasing 30% on CC basis. Commercial RPO increased to $368 billion, up 35% on CC basis with 35% recognized in revenue in the next 12 months. 

Additional key metrics: 500 trillion tokens processed last year; 800M AI Product Users 

Azure is always the main metric looked at, yet we should pause and share a few more important key metrics in this banner report. 

• Copilot apps have surpassed 100 million monthly active users across commercial and consumer.  
• Across broader AI features, there are over 800 million monthly active users. 
• Foundry Agent Service is now being used by 14,000 customers to build agents.  
• 80% of Fortune 500 use Foundry, processing 500 trillion tokens, up 7X YoY.  
• Microsoft Fabric is a data and analytics platform for AI workloads, with revenue up 55% year-over-year and over 25,000 customers. According to management: “It's the fastest-growing database product in our history.” 
• There are 20 million GitHub Copilot users. GitHub Copilot enterprise customers increased 75% quarter-over-quarter and 90% of the Fortune 100 use GitHub Copilot.

Margins & Earnings 

EPS of $3.65 beat consensus estimates of $3.38.  

• Gross margin was 68.5% up from 68.1% last quarter for gross profit of $52.4B. 
• Operating margin of 44.9% was up from 44% for operating profits of $34.3B. 
• Net margin was 35.6% up from 34.9% last quarter for net profits of $27.2B. 

Cash flows & capex raised to eye-watering $30B per quarter  

• Operating cash flow of $42.6B was up 15% YoY 
• Free cash flow of $25.6B was up 10% YoY 
• Capex of $24.2 billion was up 27% YoY with management guiding for capex of $30 billion next quarter.

Earnings Call Q&A: 

Capex Spend Correlates to $368B in RPO: 

Every Big Tech company will be asked about ROI on capex spending, and the CFO handled the question quite well, stating: “when you think about the full year comments I've made on CapEx as well as the Q1 guidance of over $30 billion, you first have to ground yourself in the fact that we have $368 billion of contracted backlog we need to deliver, not just across Azure but across the breadth of the Microsoft Cloud. 

So in terms of feeling good about the ROI and the growth rates and the correlation, I feel very good that the spend that we're making is correlated to basically contracted on the books business that we need to deliver and we need the teams to execute at their very best to get the capacity in place as quickly and effectively as they can. 

And so when you look, and we've talked about the growth rate [of capex] will decline year-over-year, but at its core, our investments, particularly in short-lived assets like servers, GPUs, CPUs, networking storage, is just really correlated to the backlog we see and the curve of demand. And I talked about, my gosh, in January and said I thought we'd be in better supply demand shape by June. And now I'm saying I hope I'm in better shape by December.”

Conclusion: 

This was an earnings report for the ages – simply because the Commercial RPO is massive, and Microsoft is proving they can grow at a scale we haven't seen yet in AI software. Earlier today, I had stated on Bloomberg that Microsoft could see $40 billion in AI revenuesometime in 2026 – which is a massive number, but what's most important is the rapid ascent in reaching that number.  

If you zoom-out, a few years back I've made the case that Microsoft could see as much as $100 billion in AI revenue by 2027 and then I upped it to $200 billion by 2028.  Should we see this ballpark figure, it would mark a rapid ascent hard to fathom a few years back. This earnings report is a step in the right direction to meet that mark.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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