Coinbase reported a soft Q1, with revenue missing estimates by 3.1% as trading volumes declined (13%) sequentially. Subscription revenue also came in at the low end of guidance in the quarter, with Coinbase forecasting subscription revenue to fall sequentially in Q2.  

Where Coinbase stands apart is its cash of $8.05B, which allows the company to execute on an aggressive M&A strategy. Earlier in the day, Coinbase announced the largest crypto acquisition in history of $2.9 billion for Deribit, a Bitcoin and Ethereum options platform. This move expands Coinbase’s derivatives presence, as Deribit’s 2024 trading volumes nearly doubled YoY to $1.2 trillion. For comparison, Coinbase drove more than $800 billion in derivates trading volume in Q1. The deal was also at a large discount from previous reports in January, where it was expected to command a $4-5 billion price tag. 

Adjusted EBITDA margin was 45.7% with $930 million in adjusted EBITDA profits and $527 million in adjusted net profit, which helps to illustrate the rare, quality fundamentals that Coinbase offers in the crypto sector.  

Looking forward, April is tracking lower than expected with transaction revenue of $240 million, down 12% month-over-month in April compared to global spot transactions down 13% MoM. 

As we’ve pointed out in the past, Coinbase is largely dependent on volatility and asset prices, and is not tied as much to the results of an earnings report. 

Revenue 

Coinbase reported 24.2% growth in revenue to $2.03 billion in Q1, missing estimates by 3.1%. Despite increased crypto volatility and Bitcoin’s new all-time high in January, crypto market cap declined (19%) QoQ and industry trading volumes dropped (13%) QoQ, weighing on growth. Coinbase outperformed the broader industry as its spot trading volume declined just over (10%) QoQ to $393.1 billion. Derivatives trading volume was $803.6 billion in Q1.  

Q1’s revenue growth slowed dramatically from Q4’2 138% rate, though this type of volatility is not unusual for the crypto industry. Q2 is currently expected to see revenue rebound slightly to 29.6% YoY.

Key Metrics 

Trading Volume 

Trading volume rose 26% YoY but declined (10%) QoQ to $393.1 billion, with institutional trading volume remaining steadier in the quarter.  

Institutional trading volume declined just (9%) QoQ but remained 23% higher YoY at $315 billion. Consumer trading volume declined (17%) QoQ but was 37% higher YoY at $78 billion. According to Coin Gecko, spot trading volume on centralized exchanges was down (16.3%) QoQ which is aligned with what CB saw on the consumer side, mainly driven by Ethereum and Solana, which saw steeper losses than Bitcoin in Q1. 

Transaction Revenue 

Transaction revenues declined more than trading volumes in the quarter, with Coinbase pointing out a few factors impacting growth on the institutional side. Coinbase’s global transaction revenue rose 17% YoY but declined (19%) QoQ to $1.26 billion. 

Consumer transaction revenue matched corporate growth rates at 17% YoY and (19%) QoQ, with revenue of $1.10 billion in Q1. Institutional transaction revenue grew slower, at 16% YoY and (30%) QoQ to $99 million.  

Coinbase said that trading volumes in the quarter were “more concentrated among market makers and liquidity providers which tend to have lower fee rates,” while derivatives also weighed on growth. Coinbase is prioritizing building its derivatives business via trading rebates and incentives to boost liquidity, thereby offsetting fees from trading.  

Regarding the disconnect between institutional volume down (9%) and institutional revenue down (30%) QoQ, the CFO stated: “There are 2 factors which drove the discrepancy between the revenue decline and the volume decline. The first is the growth in our derivatives trading business. As we build this business, we are offering trading rebates and incentives to build liquidity and acquire customers. Our focus on growth is causing a decline in the transaction revenue that we get from derivatives trading as these are contra revenue and recorded in the institutional transaction revenue line item.” 

Other transaction revenue was flat QoQ at $68 million in Q1. Transactions on Base rose 16% QoQ, though the average revenue per transaction decreased 21% QoQ. 

Subscription and Services Revenue 

Subscription and Services revenue came in at the lower end of Coinbase’s guided range in the quarter, with management saying lower blockchain rewards revenue partially offset stablecoin and Coinbase One revenue.  

Revenue was $698.1 million, versus its guide for $685-765 million. Growth was 36.6% YoY, decelerating from 70.8% YoY in Q4, yet is forecasting to decelerate to the mid-single digits in Q2. 

For Q2, Coinbase projected Subscription and Services revenue between $600 and $680 million, for YoY growth of just 6.8% at midpoint, a 30 point sequential deceleration. Even at the upper end of Coinbase’s guide, revenue growth would be just 13.5% YoY. Coinbase said the forecast anticipates blockchain rewards revenue to more than offset stablecoin revenue growth. 

Within Subscription and Services revenue: 

• Stablecoin revenue rose 50.8% YoY and 32% QoQ to $297.5 million. Coinbase said that average USDC held across Coinbase products increased 49% QoQ to $12.3 billion on better USDC integration on its platform.  
• Blockchain rewards revenue increased 30.3% YoY but decreased (9%) QoQ to $196.6 million, weighed down by lower average crypto prices in Q1, primarily Ethereum and Solana. 
• Interest and finance fee income decreased (5.4%) YoY and (4%) QoQ to $63.1 million, as higher balances were partially offset by lower rates. Coinbase added that  Prime Financing revenue declined as loan balances declined with customers deleveraging due to volatility, though onboarded clients rose double-digits QoQ. 
• Other subscription and services revenue rose 5% QoQ to $141 million. Coinbase announced that it has now grouped Custodial Fee revenue in this sub-segment.  

Margins 

Operating margin shrunk more than 10 points on a YoY and QoQ basis, while net margin fell to the low single-digits as Coinbase recorded nearly $600 million in losses on crypto investments. 

Operating margin was 34.7% in Q1, down from 45.5% in Q4 and 46.4% in the year ago quarter, as operating expenses rose more than 51% YoY in the quarter. According to the CFO on the call: “Our total operating expenses were $1.3 billion, up 7%, primarily driven by higher variable expenses resulting from elevated market maker activity earlier in the quarter, as well as losses on our crypto assets for operations.” 

Net margin was 3.2%, down from 56.8% in Q4 and 71.9% in the year ago quarter, primarily due to the crypto investment losses, the majority of which were unrealized. 

The company is introducing a new metric called adjusted net margin which excludes the tax adjusted impact of crypto investment portfolio gains or losses. The CFO stated the adjusted net income was $527 million this quarter.  

Stock-based compensation was $191 million, or just over 9% of revenue in Q1. For Q2, Coinbase guided for SBC of ~$195 million. 

EPS and Adjusted EBITDA 

Coinbase places an emphasis on adjusted EBITDA due to fluctuations that can arise from its crypto asset holdings, such as what it witnessed in Q1. Adjusted EBITDA was $930 million for a 45.7% margin, down from a 56.8% margin in Q4 and a 61.9% margin a year ago. 

Due to impact from its crypto holdings, Coinbase’s GAAP EPS was $0.24, well below the $1.91 estimate for the quarter. Adjusted EPS was $1.94, slightly below estimates for $1.98. 

Cash and Balance Sheet 

Operating cash flow was weak in Q2, though Coinbase’s liquidity profile remained strong. 

• Operating cash flow was ($187.3) million for a (9%) margin, its first cash outflow in five quarters. This is also a stark contrast to the 21.5% OCF margin from a year ago and a 42.5% margin in Q4. 
• Cash and equivalents totaled $8.05 billion, with Coinbase noting it had a total liquidity profile of $9.9 billion when including its net USDC balance of $1.86 billion. Debt remained steady at $4.24 billion. 

Q2 Outlook 

Coinbase said that April transaction revenue was ~$240 million, while spot transaction volume was down (12%) MoM, slightly outperforming the broader industry at (13%) MoM. According to the CFO this is aligned with global spot trading trends: “Our spot transaction volume declined approximately 12% month-over-month in April, and this was similar to global spot volume, which was down approximately 13% over that same time period.” Our checks show that Binance declined 18.8% MoM yet popular/rising platform Gate.io increased about 14% MoM. 

Subscription and Services revenue was guided at $600-680 million, with Coinbase expecting QoQ growth in stablecoin revenue “to be more than offset by a decline in blockchain revenue due to lower crypto asset prices.” Coinbase added that to-date in Q2, Solana and Ethereum have already declined (25%) and (36%) compared to their Q1 averages. 

Earnings Q&A: 

Deribit Acquisition: 

The Deribit acquisition for $2.9 billion will be a mix of $700M in cash and 11 million shares. According to the CFO, the acquisition will be adjusted EBITDA accretive.  

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 aligns with Coinbase’s global strategy as the company also shared (separately) they are growing rapidly in Argentina and India. According to the opening remarks: “This makes Coinbase the #1 crypto derivative platform globally by open interest. And it's our biggest move yet to accelerate our international road map and build out this comprehensive trading platform.” 

It’s also a strategy to pull together spot, future and options trading onto one global platform. According to the CEO, there is strong cross-selling opportunity: 

“Brian Armstrong CEO: 

Yes. And Ken, I'll just add real quick on your cross-selling point. I think this is really important. So a trader can actually go in and hedge futures position with options without having to switch platforms. So that's why we think that there is a cross-selling opportunity. And this is — improves the efficiency but also improves trading volume if they can do that all in 1 platform.” 

However, as of now, the United States is a restricted jurisdiction for options trading unless on a CFTC-regulated platform or a SEC-regulated platform, but the CEO foresees approval coming soon for Coinbase: “We've been working very closely with the CFTC to turn and get perpetual futures live in the U.S. That's going to take a little bit longer, but we are — we have 1 step in the right direction.” 

USDC Sees Market Cap of $60B 

Circle is a fintech company known for creating USDC with Coinbase sharing revenue of USDC as a backer of Circle. In the most recent quarter, the stablecoin USDC hit a market cap all-time high of $60 billion with USDC held on the Coinbase platform increasing 49% QoQ to $12 billion. It was also stated that the number of monthly users holding USDC has doubled and the average USDC balance has tripled. 

Although stablecoins contribute low revenue right now of $297.5 million, it helps to diversify Coinbase’s revenue during periods of volatility since USDC remains at $1 and is used across payment platforms.  

According to the opening remarks: “In Q2, we'll be onboarding the first businesses to our pilot, enabling them to make stablecoin pay-ins and payouts. Given Coinbase's long history building crypto infrastructure, custody trading and our network of bank partners around the world, we think we're well positioned to power stablecoin payments for many businesses.” 

Binance recently joined the partnership with the CFO stating adding a large distribution partner will result in more liquidity and global adoption: “The rationale for adding distribution partners is we believe that we mean it drives liquidity, it drives global adoption. There are more and more places for customers to onboard and offboard USDC and to engage in products and services. These network effects, larger market cap, deeper liquidity, more places for customers to exchange, we think, is going to drive overall growth and opportunity for USDC.” 

Conclusion: 

Coinbase did not offer the most exciting earnings report this quarter, but it also does not matter much given Coinbase’s stock moves intraquarter as its tied closely to crypto trading volumes and asset prices. 

It does not take a stretch of the imagination to see the crypto empire this company is building. Coinbase acts as a leveraged bet on Bitcoin yet is also diversifying beyond spot trading to include subscription services, stablecoins, derivatives and now options trading. As digital assets gain broader adoption, Coinbase is positioned to participate across every major touchpoint: from trading and custody to staking, payments, and Layer 2 scaling with Base. We've covered Coinbase’s more durable business model in the past here. 

Notably, it’s rare to see an opportunity in the crypto sector offer quality fundamentals. Not only does this help the stock to withstand volatility when other crypto assets are being slammed, but its large cash reserves can be leveraged to grow the empire. This piece – the cash – should not be overlooked when evaluating the strength of the stock and the company’s long-term prospects. 

What’s Next on our New Discovery Tier … 

Next week on our new Discovery tier, we’ll spotlight some of the strongest Q1 earnings reports from companies not currently in our portfolio. If you’ve seen a stock surge after hours and are wondering how it stacks up — or whether it has real long-term potential — our Discovery tier is built just for that: surfacing compelling new opportunities.

To upgrade or join the Discovery tier, email us at Premium@io-fund.com or click here to get started. Current Pro and Advanced Members can subscribe with 40% off by mentioning code DISCOVERY40 when you email us or by clicking here to email directly.

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.

Recommended Reading:

• Coherent FQ3: Positioned to Supply NVIDIA as GPU Clusters Scale with 800G and 1.6T Transceivers
• Astera Labs: Product Differentiation is Set to Soar in H2 and Beyond
• AMD Beats in Q1 Yet Q2 Data Center to Decline due to Export Controls
• Q2 2025 Quarterly Kickoff Webinar

Core Scientific laid the footprint for strong growth in HPC (colocation) revenue by the end of the year as it begins to bring online billable capacity for CoreWeave and subsequently rapidly ramp capacity of 250MW. This is the riskiest stock in our portfolio when you consider the current fundamentals are (at face value) of poor quality with revenue declining (55%) YoY and (16%) QoQ to $79.5 million this quarter compared to $179.3 million in the year ago quarter. The company reported an operating loss of $42.6 million and negative adjusted EBITDA of ($6.1) million.  

We’ve covered Core Scientific transitioning from Bitcoin mining operations to data centers in more detail here. The company noted that it remains on track to deliver 250MW of billable capacity to CoreWeave by the end of 2025, with the first 8MW tranche to be delivered by the end of May, expanding 5x to 40MW by the end of Q2. According to the earnings call, the Denton facility is a site CoreWeave is working on with Open AI with a recent $12 billion investment. 

On the call the company stated: “At full scale, the site will represent around 260 megawatts of billable capacity. To put that in perspective, we broke ground in January, and in just roughly four months, we've achieved meaningful progress. It's a powerful demonstration of our ability to execute quickly and at scale, with before-and-after pictures included in our updated investor presentation.” 

Refresher on Core Scientific's Business Model 

Before we go into the earnings report, I think it’s appropriate to pause and review Core Scientific's business model given it’s quite unique, and to also help translate what the company is setting up to do in terms of future revenue. 

Core Scientific was a major Bitcoin miner that is transitioning to power AI data centers with their primary customer being CoreWeave worth about $10.2 billion when fully realized over a 12-year period for 590 MW of HPC infrastructure. Roth MKM sees CORZ having about $1.6B in revenue by 2027, up from $473M expected today.  

CoreWeave, the primary customer, fronts the capex which allows Core Scientific to grow capacity, without which, the business model would not work as CORZ would struggle to raise the level of capital required to acquire more sites and modify the existing infrastructure. 

Here is what was shared regarding CoreWeave putting up the capex costs in the most recent earnings call: “From a capital perspective, CoreWeave is funding virtually all of the CapEx associated with these deployments. Our only direct capital outlay on the contract is the $104 million associated with the 70-megawatt expansion we announced during our last earnings call. That structure significantly reduces our capital burden, keeps our balance sheet leverage like compared to peers and gives us the flexibility to use debt more strategically for future growth. We believe this approach sets us apart and creates a clear path to long-term value creation.” 

Revenue 

Revenue continued to be impacted by Bitcoin’s halving and Core Scientific’s operational shift from Bitcoin to HPC. While the ramp in AI/HPC revenue approaches, crypto self-mining remained the primary driver of the YoY decline in Q1 as it contributed nearly 85% of revenue. Q1 revenue declined (55.6%) YoY, missing estimates by nearly 7%. 

• Crypto self-mining revenue declined (55.2%) YoY to $67.2 million, impacted by a (75%) decline in Bitcoin mined and shift to HPC 
• Crypto hosted mining revenue declined (87%) YoY to $3.8 million, again impacted by the HPC shift. 
• Colocation (HPC) revenue was approximately flat QoQ at $8.6 million.  

Here is what was stated on the call about the revenue decline: “The sequential revenue decline was primarily driven by mining disconnections and relocations as we continue converting sites to support high-density colocation. More specifically, we earned 719 Bitcoin in the first quarter compared to 974 in the fourth quarter.” 

Quickly ramping capacity for CoreWeave in Q2 through year-end is expected to drive significant growth in Colocation revenue. Management says they expect the 250MW will allow them to enter 2026 with annualized colocation revenue of ~$360 million ($90 million per quarter), up more than 10x from its $8.6 million ($34.4 million annualized) in Q1.  

This ramp is expected to drive a significant rebound in Core Scientific’s revenue growth, with analysts currently expecting the company to exit 2025 at ~$160 million in revenue, approximately double Q1’s level. This would correspond to growth of 68.3% YoY, a more than 120 point acceleration as the year progresses. 

However, it’s important to note that estimates have come down sharply over the past three months: 

• Q2 revenue was estimated to decline just (10%) to $126.6 million at the end of February, but is now seen declining (34%) to $93.1 million. 
• Q3 revenue was estimated to rise 84.4% to $175.8 million, but is now expected to rise 27.5% to $121.2 million.  
• Q4 revenue was estimated to rise 110.5% to almost $200 million, but is now expected to rise 68.3% to $159.8 million. 

Despite these changes in estimates, management reiterated they are on track to reach their capacity goals: “Looking ahead, I'm even more confident than I was just two months ago in our ability to hit our milestones, 250 megawatts by the end of this year, inclusive of Austin and 590 megawatts by early 2027.” 

The company pointed toward growth potential as well, stating there are additional opportunities to add the following capacity: “On the organic side, we remain confident in our ability to add approximately 300 megawatts of billable capacity across our existing sites by the end of 2027. Looking ahead, we also continue to believe there are significant opportunities to grow into new geographies, and we're targeting an additional 400 megawatts of billable capacity through new site development over the next three years.” 

Margins 

Gross margin expanded sequentially, but operating margin widened to more than (50%) as rising costs bit into weaker revenue. While Colocation promises to bring substantial revenue streams and strong tailwinds to growth through year-end, margins at the moment are minimal, even with power costs being passed through to CoreWeave. 

• Gross margin was 10.3% in Q1, expanding from 5% last quarter but well below the 43.3% margin from the year-ago quarter due to the Bitcoin halving and operational shift.  
• Operating margin was (53.6%), widening from (41.9%) last quarter and a stark contrast to the 30.3% margin from a year ago. The significant YoY difference was primarily caused by a more than (89%) YoY decline in gross profit and a 137% increase in SG&A expenses. 

By segment: 

• Crypto self-mining gross profit margin was 9%, down from 49% a year ago, impacted by the shift to HPC and a (75%) decline in BTC mined, partially offset by a 74% increase in the average price of BTC and a 33% decrease in power costs.  
• Crypto hosting gross profit margin was 46%, up from 32% a year ago, primarily due to lower power costs. 
• Colocation gross profit margin was 5%.  

EPS 

Core Scientific benefited significantly from a $621.5 million mark-to-market adjustment on its warrants, and as a result, it reported $580.7 million in net income. This represented $1.25 in EPS, which is not comparable to the ($0.12) estimate due to the warrant impact. Stripping out this impact, net income would be ($40.8) million. 

Core Scientific is currently expected to record losses through the rest of the year, shrinking each quarter from ($0.11) in Q2 to ($0.03) by Q4.  

Cash and Balance Sheet 

Core Scientific burned through a substantial chunk of cash in the quarter as it continues on its operational shift.  

• Operating cash flow was ($40.6) million for a (51.1%) margin.  
• Free cash flow was ($129.0) million for a (162.3%) margin, as Core Scientific’s capex rose 177% YoY to $88.4 million. 
• Cash and equivalents totaled $697.9 million, with Core Scientific burning through $138 million in cash in the quarter. 
• Debt totaled $1.12 billion. Management also shared long-term debt leverage targets on the call — per the CFO: “And over time, we believe our net debt to adjusted EBITDA leverage can and should trend toward approximately 4 times, consistent with peers in the space.” 
• Adjusted EBITDA was ($6.0) million for an (8%) margin, down from $88 million or a 49.1% margin in the year ago quarter. 
• Core Scientific also recognized $42 million in prepaid colocation license fees as deferred revenue in the quarter. 

Earnings Call Q&A: 

No New Customers Yet; but Enterprise Customers on the Horizon

The market will reward Core Scientific if the company can add more customers. In our previous write-up we stated the company’s goal is to have CoreWeave customer concentration to be 50% or less by 2028. This remains the goal with no updates on customer concentration improving: 

“Now, to be clear, we haven't signed a new customer yet, but our sales pipeline is expanding. It includes a healthy mix of hyperscale and large enterprise customers, and we are actively negotiating with multiple customers today […] We currently have several non-hyperscale deals in our pipeline, ranging from 50 megawatt to 100 megawatt customers. These are substantial deployments, and they come with a return profile that's attractive […] I'm more confident than ever in our ability to build a customer base that is more diverse, more balanced, and more strategically aligned with our long-term vision. Our target remains the same, to have Core represent less than 50% of our billable capacity by the end of 2028.” 

The advantages of enterprise customers were discussed further in the call, with Core Scientific likely needing to first prove it’s been able to stand up Blackwell systems before demand increases from a broader set of customers. 

“Adam Sullivan 

Yeah, it's a great question. Thanks Darren. Large enterprises, the timeline to get into final contract details are definitely faster than on the hyperscale side. There's a natural inclination to move towards hyperscale from the broader perspective of their creditworthiness. But the large enterprises that we're looking at today are I think $75 billion market cap plus and represent a creditworthiness that we find very acceptable in the return profile of these are higher than hyperscale deals as well. So, as we evaluate potential multitenant build-outs going forward, large enterprises could represent significant anchor tenants for those new sites to allow us to begin development in new geographies and start building out new sites” 

The CEO reiterated again they are getting close to signing more enterprise customers: 

“And so, we're currently evaluating a number of different deal structures that we're in discussions with clients. And I would say we're excited about the return profiles the large enterprises represent because they do have the capability, based on their scale and their size, that they're demanding today to represent an acre tenant for us to open up a new site location. And so, we will continue to evaluate deals going forward, and we're excited about the continuously growing pipeline in large enterprise channel.” 

In time, however, Core Scientific believes it will prove itself to other hyperscalers, stating: “I think our delivery and execution is only going to breed confidence kind of as this year goes on. And again, we're probably one of the only data center providers right now that's going to launch 250 megawatts in a single calendar year of what essentially is going to be more than 100,000 of GB200.” 

Tariffs 

It wouldn’t be a Q1 earnings report if I did not address tariff commentary from the call. Core Scientific stated they have procured components to deliver on time this year and into the first part of 2026, although there seemed to be some hesitation when looking further out. Although management put a positive spin on it, there’s a scenario that should be monitored which is that data center builds become more expensive as we approach 2026, and thus, budgets could tighten. 

Paul Golding: 

Thanks so much. Just quickly a housekeeping question I wanted to ask regarding digital asset mining. I think previously you'd mentioned that the digital asset mining hosting the capacity was you were going to exit that by year end. Just wanted to confirm that that was still the plan since we saw some revenue come through this quarter for that.  

And then, my main question is around long lead time items. Just referencing your commentary around 2025 goals, the equipment being acquired to meet those goals. Wanted to ask about ’26 hearing about long lead times for step down infrastructure and other components, particularly around electrical equipment, and so just wanted to see how that was progressing as well? Thank you.  

Matt Brown: 

Yeah. I think the way to look at this is 2025, we've already secured all that equipment and most of it is already sitting in the ground either in warehouses adjacent to the projects that are ongoing or at the project site themselves. So, 2025 is locked in from an equipment standpoint. 

2026, we have a good read-through on both the availability and cost for all that equipment. A lot of that through the first half of ’26 has already been procured, and a few portions of that will start taking delivery towards the second half of this year for projects that are going to extend that are going to start launching in 2026.  

With that said, I think this part of this touches on tariffs and equipment availability. With our strong relationships with our suppliers that I would say we have really, really good insights in the availability and that we're not really too concerned right now about not being able to take receipt of equipment and meeting our dates or any buy dates to meet our delivery goals.” 

Conclusion: 

Core Scientific is the highest risk stock in our portfolio as it takes a leap of faith that the partnership with CoreWeave is setting a standard in terms of standing up and powering up data centers very quickly. This quarter the company is starting to transition toward AI revenue rather than bitcoin revenue (i.e., primarily Bitcoin losses). According to analyst estimates, CORZ looks to be returning to revenue growth by Q3 which gives you a good idea as to when AI should be leading the market again as CoreWeave is a strong proxy for when Nvidia will resume its product cadence.  

We feel confident taking on the challenge of owning CORZ although it will require an active stance with risk management controls in place. 

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.

Recommended Reading:

• Bloom Energy: Strong Q1, FY Revenue Guide Maintained with Confidence
• Lumentum at Inflection Point with 20% QoQ Growth in AI-Related Segment
• Coherent FQ3: Positioned to Supply NVIDIA as GPU Clusters Scale with 800G and 1.6T Transceivers
• Astera Labs: Product Differentiation is Set to Soar in H2 and Beyond

Coherent reported a double beat in Q3 with revenue growth of 24% and EPS growth of 141% YoY. The top line beat was driven by Data Center and Communications revenue growing 46% YoY. While this growth moderated slightly from the prior quarter, Nvidia suppliers should see a meaningful acceleration in the second half of the year. 

Analysts have yet to fully factor in this acceleration, but as NVIDIA ramps Blackwell-based systems and scales out its Spectrum-X Ethernet and Quantum-X Infiniband platforms, suppliers of high-speed optical interconnects are likely to see an increase in demand. Coherent, as a key ecosystem partner to NVIDIA in silicon photonics and co-packaged optics (CPO), is well positioned to benefit as hyperscalers upgrade to 800G, 1.6T, and eventually 3.2T.  

To refresh your memory, Coherent has many products that participate in the AI-driven datacom transceiver and optical interconnects market. Primarily, the growth story centers around supplying Nvidia with pluggable optical transceivers (400G, 800G, 1.6T) including EML lasers, VSCEL lasers and CW lasers, and emerging CPO technologies for next-generation switches and interconnects.  

Coherent is certainly not without competitors, and this is the main risk the company faces. Management is tasked with executing flawlessly in an environment where components may see supply disruptions and must also move quickly to make sure they are first to market to support higher bandwidths. Optical transceivers are at risk of being commoditized as reflected in Coherent’s low margins. 

Revenue 

Coherent delivered another quarter of record revenue driven by strong AI data center demand, with revenue rising 4.4% QoQ and 23.9% YoY to $1.50 billion. This beat the consensus estimate for $1.44 billion by more than 4%, and marks a third straight quarter of >20% revenue growth.  

For Q4, management guided a wide range for revenue, forecasting $1.425 to $1.575 billion. At the $1.5 billion midpoint, this represents flat QoQ and 14.5% YoY growth, slightly ahead of estimates for 12.1% growth. Revenue growth estimates for the next two quarters have moved higher since our last Q2 report, from the mid-9% range to double-digit growth through FQ1 2026. 

Industrial is weighing on the growth while Datacom is expected to grow: “Yes, if you look at the midpoint of the guidance that Sherri provided on revenue, roughly flat at the midpoint sequentially. But within that, what I would say is we're expecting data center and communications to be sequentially up in the current quarter and then our industrial-related end markets to be sequentially down.” 

Key Segments & End Markets 

Networking remains the primary driver of Coherent’s growth as the company continues to release new optical networking solutions, including the industry’s first 400G electro-modulated laser (EML) to pave the way for 3.2T optical transceivers, as well as VCSEL-based CPO solutions.  

Networking revenue increased 46% YoY and 10% QoQ to $897 million, or ~60% of revenue. Though growth continues to decelerate from Q1’s 61% print, the segment’s growth is much stronger this year compared to last. For the first nine months, networking revenue was $2.48 billion, up 53% YoY.  

Lasers revenue softened, rising 4% YoY but dipping (3%) QoQ to $363.9M. This compares to 6% YoY and 8% QoQ growth last quarter to $375.3 million. Lasers accounted for 24% of revenue, down from 26% in the prior quarter as networking gained share.  

Materials revenue remained soft, recording a YoY decline for the third consecutive quarter in Q3, though it lessened to just (1%) to $236.7 million. Of Coherent’s three revenue segments, Materials is the only to see a YoY decline for the first nine months of the year. Materials accounted for 16% of revenue.  

By end markets, data center and communications continues to expand its revenue share, now accounting for 60% of revenue in Q3, up from 57% in Q2, helping offset softer growth in Industrial, Implementation and Electronics.  

Data Center and Communications revenue increased 46% YoY and 9% QoQ to $897 million, slowing from 58% growth last quarter.  

Within Communications, Telecom grew 2% QoQ and 21% YoY driven by data center interconnects. We’ve covered the DCI opportunity previously here, which could evolve to become a significant opportunity. 

Industrial revenue increased 5% YoY and 1% QoQ to $440 million, accounting for just over 29% of revenue. 

Implementation revenue was down (2%) YoY but flat QoQ to $96 million, accounting for over 6% of revenue. Electronics revenue declined (11%) YoY and (15%) QoQ to $66 million, accounting for less than 5% of revenue. 

Margins  

Coherent’s gross margin was at the higher end of management’s forecasted range and operating margin was more than 1 point ahead of its guide. Margins are expected to expand in Q4, although overall, margins are lower than a stock like Astera for example – which affects valuation.  

The company recently restructured the business to divest the silicon carbide portion, which is also contributing to better margins for next quarter: “So I think you're referring to some of the restructuring that we've taken and the portfolio actions associated with it. And so what I would say is that the actions that were taken in terms of an underutilized assets or underutilized businesses, that benefit is — certainly will contribute to our financials from a gross margin and OpEx perspective, depending on the nature of the actual divestiture.” 

• Q3 GAAP gross margin was 35.2%, expanding nearly 5 points YoY. Adjusted gross margin was 38.5%, at the higher end of the 37-39% guided range, expanding nearly 5 points YoY and slightly sequentially.  
• GAAP operating margin was 4.8%, up 3 points YoY. Adjusted operating margin was 18.6%, up 6 points YoY and well ahead of the 17.4% guided figure. This highlighted some improvement in operating leverage for Coherent, expanding faster than adjusted gross margins.  

For Q4, management is holding adjusted gross margin guidance steady at 37-39%, while guiding for an 18% adjusted operating margin. Coherent is beginning to close in on its long-term gross margin targets of 40% over the last two quarters, though it still needs to make some considerable progress or drive faster growth in higher-margin products to reach this threshold in fiscal 2026.  

EPS 

Coherent reported a 5.8% EPS beat in Q3 as it benefited from strong margins down the line, reporting $0.91 in EPS. This represented growth of 141% YoY, decelerating from 256% YoY growth in Q1.  

For Q4, management offered a wide range for $0.81 to $1.01 in adjusted EPS, with the $0.91 midpoint in-line with estimates. For FY25, Coherent is currently expected to record more than 107% YoY growth to $3.46, though growth is expected to slow to 26.2% YoY to $4.37 in FY26. While the dollar figure for FY26’s EPS has not changed over the past three months, the growth figure is technically 17 points slower due to the higher base it’s growing from in FY25, at $3.46 estimated versus $3.02 three months ago. 

Cash Flows and Balance Sheet 

Cash flow margins expanded slightly YoY, with operating cash flow margin remaining in the double-digits, though just barely. Inventories ticked slightly higher, and accounts receivable rose rather quickly sequentially in Q3, with Coherent likely preparing for AI data center products such as Nvidia’s Blackwell to ramp in the back half of the year.  

• Operating cash flow was $162.9 million for a 10.9% margin, expanding from a 9.7% margin a year ago. This was the fourth consecutive quarter of a double-digit OCF margin. 
• Free cash flow was $51.1 million for a  3.4% margin, expanding from a 2% margin a year ago. 
• Inventories ticked nearly 4% higher QoQ to $1.39 billion, though accounts receivable showed a much larger jump at more than 13% QoQ to $1.01 billion.  
• Cash and equivalents totaled $890.3 million, while debt decreased slightly to $3.73 billion as Coherent paid down $136 million of debt in the quarter.  

According to the CFO, the company has paid down $386M total for 2.1X debt leverage: “We paid down $136 million in debt during the quarter using cash from operations. This brings our fiscal year-to-date total debt payments to $386 million, reducing our debt leverage to 2.1x as defined in the credit agreement.” 

When asked about inventory building, management stated they would not guide beyond one quarter yet see Datacom segment growing: “Yes. We don't guide beyond the current quarter, but what I would say is in datacom, we continue to see strong demand signals from our customers, both kind of shorter-term demand signals, which would be purchase orders and backlog, but also longer-term demand signals like the forecast that they'll give us a 12- or 18-month forecast. And so we continue to see strong demand from the data center customers. So we're expecting that business to continue to grow.” 

Earnings Call Q&A 

Upcoming 1.6T Shipments are a Major Catalyst

As discussed in our previous writeup on Coherent, the company supplies EML Lasers, VSCEL Lasers and CW Lasers for silicon photonics. While 100G per lane for 400G and 800G optical transceivers is what is supporting the growth now, it’s expected that 200G per lane and even 400G per lane for 1.6T optical transceivers is what will drive growth in H2 of this year.  

Per the earnings call: 

“So obviously, for the industry, the next — for the data center, the next big transition in terms of data rate is 1.6T, and we showed 3 different versions, one that was based on our 200G EML technology, one that was based on our 200G VCSEL and then another one based on our silicon photonics […] and then timing of impact would be on 1.6T, we continue to view the 1.6T ramp as we've said in past quarters. We expect 1.6T revenue to start in this current calendar year.” 

The CEO also called out the importance of being early (and perhaps first) to release 400G per lane 3.2T in the future: “And then my other one that I really liked was we demonstrated 400G differential EML. And the reason that one is important is because that's really the foundation laser technology for 3.2T transceivers. So we're deep into the development of our portfolio of 3.2T transceivers and demonstrating that key laser capability of 400G is a really important milestone.” 

According to a press release in March, Coherent was the first to release a 400G per lane EML for 1.6T, showing Coherent is working hard to remain a supplier of choice in a highly competitive market. According to Cignal AI, 400G and 800G modules grew 4X in 2023 and were expected to continue growing significantly in 2024 with Coherent noted as one of the leaders in the space.  

To some extent, indium phosphide capacity is the limiting factor for these technologies, with Coherent stating they expanded capacity rapidly in the current quarter: “In Q3, we once again expanded our capacity both sequentially and year-over-year with year-over-year capacity growing by over 3x.” You can read more about InP here. 

Coherent stated half of their revenue comes from EMLs, which is the main growth story right now: “As I mentioned in the prepared remarks, if we look at our transceiver revenue, actually over half the revenue is based on EML. So over half of our transceiver revenue comes from EML-based transceivers.” 

Co-Packaged Optics and Optical Circuit Switches (OCSs):

Co-packaged optics also represents a significant opportunity for Coherent with an announcement in March that the company is collaborating with Nvidia on co-packaged optics at the time of the GTC conference. We prepared our Members for this announcement last quarter by stating in our post-earnings write-up, which was focused on CPOs:  

“Looking beyond traditional pluggable optics, there is an increasing amount of discussion around co-packaged optics (CPOs), which places the optical transceivers directly on the chip package, rather than using separate optical modules. This results in faster data transmission, reduced latency and higher bandwidth. This may be the best of both worlds: the performance of optical yet with reduced power consumption. Tracking this is especially important as since we last covered copper/Semtech, there have been reports that copper is “causing concurrent issues with overheating and glitching” with rumors Nvidia will launch a CPO switch at the upcoming GTC. That could mean Coherent will be a lead supplier for the anticipated CPO switch – we will be monitoring this closely.”That could mean Coherent will be a lead supplier for the anticipated CPO switch – we will be monitoring this closely.” 

CPOs will be a strong growth story for Coherent as we move into 2026, and we will be tracking this closely as we go along. 

Another growth story for 2026 is optical circuit switches, which were covered in our original Coherent write-up. On the call, it was implied that COHR believes it can outmatch Lumentum on OCS technology (LITE is MEMS-based): “We also continue to make good progress with our new data center optical circuit switch or OCS platform, which drives a significant expansion in our data center addressable market opportunity. The underlying technology in our OCS switch is based on field-proven digital liquid crystal technology that has been deployed for many years in demanding telecom applications. Our technology has tremendous benefits versus the mechanical MEMS-based solutions offered by others, and our customer engagement and enthusiasm around our OCS platform continues to grow.” 

We will also keep an eye on this and let you know when timing approaches for OCS to become a growth driver. 

China Manufacturing is Minimal:

China was bound to come up and Coherent communicated their rather insulated from China comparatively speaking: 

“Christopher Rolland   Susquehanna Financial Group: 

So perhaps first, a follow-up on your manufacturing footprint, specifically for transceivers. I guess I think you're in China and Malaysia with that manufacturing. Do you have the capacity to serve American customers via Malaysia? Or how is China involved in that?  

And then perhaps if you could give us some color as to what percent of your business might actually end up in America. So yes, can you fully serve America out of Malaysia? And what percent goes to the U.S. 

James Anderson   CEO, President & Employee Director: 

Yes. On the first part of the question, the answer is yes. In fact, today, if you look at our U.S.-based, for instance, customers like hyperscaler customers, those transceivers come from Malaysia. So yes, we're — today, we're supporting our U.S. customers almost entirely from Malaysia.  

And then on the second part of the question, I think you were asking about like total revenue by geography, how much is North America based. I don't know.” 

Conclusion:

NVIDIA’s Spectrum-X and its Quantum-X Infiniband systems require ultra-high bandwidth and low-latency optics, both of which align with Coherent’s product roadmap. Nvidia’s NVLink speeds are expected to double from the fourth generation to the fifth generation as Blackwell is released to support the high-speed data transmission from AI workloads. This is expected to drive outsized demand for the 800G and 1.6T laser designs that Coherent specializes in. 

Coherent is a company with a vanilla management team that tends to keep mum about anything progressing in the pipeline; likely to avoid stepping on any toes with Nvidia. Although Coherent faces competitive risks with gross margins that reveal commoditized pricing pressure, this next year is likely the most important year in Coherent’s history as their positioning in the optical module market will be tested.  

There are no major flags in this report and no major catalysts in this quarter. Due to the competitive risks, we are watching Lumentum quite closely as well as both are strong players with EML lasers going into the highly anticipated NVL systems launch in the second half of the year.

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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AMD reported a double beat in Q1 with revenue of 36% and data center growth of 57%, with the beat filtering down to the bottom line with EPS growth of 55% — ahead of revenue. 

However, the excitement from the beat soon faded after hours as the earnings call Q&A was decisively about the impacts of China export controls. AMD is the first to report among the larger AI accelerator design companies this quarter, and the information shared offers a glimpse at the harsh reality that AI semiconductors face as these companies adjust to global tensions.   

For AMD, the impact of the MI308 being banned from China will be $700 million in Q2 and $1.5 billion in fiscal year 2025. This impact seems significant given AMD is $5B-ish in AI revenue, yet AMD assured analysts on the call their data center revenue would see “strong double-digit growth” this year despite declining sequentially in Q2.  

On the Client side, analysts were also concerned that perhaps AMD saw a pull-in ahead of tariffs as PCs (Client) reported 68% YoY growth, to which management assured analysts many times on the call that it was due to higher average sales prices. However, keep in mind, the chances AMD remains completely unscathed from a weaker consumer due to the cumulative effects of tariffs is unlikely. 

AMD’s Revenue Increases 36% YoY  

AMD reported Q1 revenue of $7.44 billion, solidly ahead of the $7.12 billion estimate and above the upper range of its guidance for $7.1 billion, +/- $300 million. Revenue growth accelerated to 35.9% YoY, led by data center and client, though this is expected to be the peak growth quarter for the year.  

For Q2, AMD guided revenue to be approximately flat QoQ at $7.4 billion, +/- $300 million. This represents YoY growth of 26.7% at midpoint, a more than 9 point sequential deceleration. Revenue growth is currently expected to decelerate further in 2H, with analysts estimating that AMD will exit 2025 with growth of just 12.3% YoY. 

What’s important to note is that estimates for the back half of the year have been revised quite a bit lower over the past three months as tariffs and export controls have set in. In February, Q3 and Q4 revenue growth was estimated to be 6-7 points higher at 23.2% YoY and 19.2% YoY.   

Export Controls Result in $700M Revenue Loss for Q2, $1.5B for FY2025 

It was welcomed that management quantified the export control impact to understand better how the company can weather the loss of revenue.  

Here is what the CFO stated in her opening remarks: 

“As a reminder, in April, a new export license requirement was put in place for MI308 shipments to China, the impact of which is included in our guidance. We expect revenue to be approximately $7.4 billion plus or minus $300 million. This includes an estimated $700 million revenue reduction as a result of the new export license requirement. Despite this headwind, the midpoint of our guidance represents 27% year-over-year revenue growth. 

For the full year 2025, we estimate the revenue impact due to the export license requirement to be approximately $1.5 billion.” 

On one hand, it is quite impressive AMD can overcome this impact and meet consensus for next quarter. On the other hand, analysts have been lowering estimates as AMD was supposed to see revenue of $7.77 billion for growth of 33% as of last October rather than the 26.7% in the current quarter.  

There were a few questions from analysts about the export license requirements, which are detailed below under the Q&A section.  

Key Segments 

Data Center to Decline Next Quarter 

Data Center revenue grew 57% YoY but declined (5%) QoQ to $3.67 billion, driven by sales of EPYC CPUs and Instinct GPUs, and accounting for over 49% of AMD’s revenue in the quarter. While growth decelerated from 69% in Q4, it’s coming against a much tougher comp at 80% YoY whereas Q4 of last year offered a lower comp of 38% in Q4 2023.  

AMD stated they gained market share again this quarter helped by EPYC 5th Gen Turin processors, which recently launched in October. EPYC-powered cloud instances doubled YoY among Forbes 2000 enterprises with on-prem growing by a “large double-digit percentage.” According to the opening remarks, there is “a clear path to continued share gains as customers ramp their 5th Gen EPYC offerings.” 

Regarding GPUs, management stated their AI revenue increased by a “significant double-digit percentage year-over-year.” The MI325X is shipping in volume while the next-gen Instinct MI350-series chips are on track for “accelerated production by mid-2025.” We discussed last quarter that AMD was pushing up their delivery on the MI350s to mid-year for relative competitiveness. That’s a nice way of saying while Blackwell is delayed, AMD will attempt to nibble at their market share with a more aggressive timeline on their next generation. In the slide presentation, AMD stated they are partnering with Oracle to deploy a large cluster of MI355X GPUs and 5th Gen EPYC CPUs.  

Data Center operating income was $932 million for a 25% margin, up from a 23% margin in the year ago quarter. However, it was 5 points lower sequentially and the lowest operating margin for the segment since last Q1. 

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.” 

Client & Gaming 

Client and Gaming revenue rose 28% YoY, driven by 68% YoY growth in client revenue to $2.29 billion as gaming revenue declined (30%) YoY to $647 million. Sequentially, Client revenue was down less than (1%) from Q4 while Gaming revenue rebounded 15% QoQ. AMD said the segment’s growth was driven by strong demand for Zen 5 Ryzen processors.  

Client revenue stood out in Q1, outpacing Data Center growth by more than 10 points YoY against its toughest comp in recent quarters at 85% YoY in Q1 2024. 

Analysts poked around quite a bit on whether the high growth rate from the Client segment was a pull-in to get ahead of tariffs. Management pushed back on it being from tariffs and stated it was due to average sales prices: “And in particular, on your question of Client performance, we've certainly looked very carefully at the ordering patterns and what customers are telling us. We have not seen a lot of tariff-related activity in that business. I would say, though, what we have seen is a real stronger mix and strength in our overall ASPs. So the desktop channel, which is an area where we have a very strong gaming products right now, actually performed well above seasonality in Q1, and that is really the strength of the ASPs there. So that's what we saw in Q1.”

Combined operating income for the two was $496 million for a 17% margin, up from a 10% margin in the year ago quarter. However, operating income was flat QoQ. 

Embedded  

Embedded revenue declined (3%) YoY and (11%) QoQ to $823 million. While in line with guidance for a modest decline, AMD noted that the YoY decline was due to mixed end market demand.  

Embedded operating income was $328 million for a 40% margin. 

Margins Steady, but Q2 to See Sharp Decline Due to China Export Controls 

While adjusted margins remained steady sequentially, AMD is taking a rather large hit in Q2 to their margins due to the MI308s. In mid-April, AMD flagged an $800 million hit from charges related to inventory, purchase commitments and related reserves, and as a result, guided adjusted gross margin to contract rather sharply. This will weigh heavily on adjusted operating margin in Q2. 

• Q1 GAAP gross margin was 50%, up 3 points YoY, while adjusted gross margin was 54%, up 2 points YoY. 
• GAAP operating margin was 11%, a strong expansion of 10 points YoY, and adjusted operating margin was 24%, up 3 points YoY.  
• GAAP net margin as 9%, up 7 points YoY, and adjusted net margin was 21%, up 2 points YoY. 

For Q2, including the $800 million impact, AMD guided for a 43% adjusted gross margin (or 54% excluding it). With management forecasting operating expenses of ~$2.3 billion in Q2, adjusted operating income including the charge would be projected at $882 million for a 12% margin.  

Excluding the impact (at that 54% adjusted gross margin), AMD’s expense guide would see adjusted operating margin at 23%, down 1 point QoQ.  

EPS Posts Slight Beat in Q1

AMD reported adjusted EPS of $0.96 in Q1, slightly ahead of estimates for $0.93. This represented YoY growth of 54.8%, accelerating from nearly 42% growth last quarter.  

Similar to revenue, Q1 is currently expected to be peak growth for EPS, with Q2 estimated to record 27.8% growth before slowing to the low 20% level by Q4. However, management commented that EPS growth is expected to grow much faster than revenue in Q2: “Looking at Q2, at the middle point of our guidance, revenue will be increasing 27%, and we do expect the earnings per share growing much faster than the top line revenue growth.” 

Cash and Balance Sheet 

AMD closed its acquisition of ZT Systems in Q1, which added more than $2 billion to both its cash and debt. Cash flow margins also expanded YoY with margins remaining in the double digits. 

• Operating cash flow was $939 million for a 13% margin, expanding from a 10% margin in the year ago quarter.  
• Free cash flow was $727 million for a 10% margin, expanding from a 7% margin a year ago. 
• Cash and short-term investments increased nearly $2.2 billion to $7.31 billion, while debt rose more than $2.4 billion to $4.16 billion. 
• Adjusted EBITDA was $1.95 billion for a 26% margin. 
• Inventories were $6.42 billion, up from $5.74 billion last quarter. 

When asked about inventory, AMD stated it was due to preparing for the H2 ramp: “Well, on the inventory side, we built some inventory primarily to support very strong client and server ramp and also the second half Data Center GPU ramp. As you probably know, the lead time is really long to build. For the Q3, Q4 ramp, we really need to start the wafers right now. That's why the inventory has increased.” 

Earnings Call Q&A: 

MI350s and MI400s: 

AMD is poised to become a stronger contender in the next two generations of Instinct GPUs.  The MI350s will launch this quarter and the MI400s will launch in 2026. The MI350s feature the CDNA 4 architecture and will increase memory capacity and bandwidth by 1.5X with 288GB of HBM3e, and support for 35X higher throughput for better inference performance than the previous generation MI300Xs. Built on TSMC’s 3nm node, the MI350s also offer better efficiency and a 7X increase in AI compute capabilities.  

The MI400s will offer a rack-scale architecture, assisted by AMD's acquisition of ZT Systems, a company that specializes in complex server designs. The MI400 will feature CDNA Next architecture with multiple chiplets and separate active interposers, with rumors the MI400s will be designed to increase data flow efficiency.  

With the MI400s, AMD will be tasked with launching rack scale systems more smoothly than what we’ve seen from Nvidia these past two quarters. Here is what was said on the call in terms of the MI400 potentially closing the gap competitively with Nvidia – notably, AMD and all AI accelerators will remain in second place into the foreseeable future, yet the MI400 could be the moment when AMD becomes a firm second place winner. 

“I think, look, we're excited about the MI350 Series launch that's coming up, but we are extremely excited as well about the MI400 Series and the road map there. I think we've been very active with customers on our road map. As you know, this is one of those areas where you absolutely have to be planning many quarters in advance for that. One of the primary reasons we acquired ZT Systems was exactly to address this rack-scale architecture.”

Export Controls and AI Diffusion Rules: 

There was a question about the overall TAM of the AI market given China will no longer be a customer, and about the AI diffusion rules that have a deadline of May 15th to establish new rules. Lisa Su does not think China affects the $500B TAM she originally stated a few quarters ago, stating: “I think we always expected that there would be some amount of, let's call it, limitation on sort of leading-edge GPUs going into China. So that was factored in to our TAM expectation when we talked about $500 billion. So I don't think that dramatically changes the TAM.” 

However, when it comes to AI diffusion rules, she was not as definitive as to the impact: “At the end of the day, when we look at sort of the U.S. AI companies, we have leading-edge technology. We want to ensure that the rest of the world can really use us as the primary platform. So I think it will be important to work through the AI diffusion rules and all of that as we think about longer-term TAM.” 

Management Adamant Client Revenue is from Higher ASPs: 

There were a few opportunities where management declined to connect higher Client growth to tariffs, and rather was adamant it’s from the strength of their product portfolio. AMD is being quite bold to state they are not seeing an impact from tariffs and do not expect to see a meaningful impact. Here is one of the exchanges in the Q&A: 

CJ Muse: 

I wanted to revisit your assumptions around Client. If you were to just flatline the Q1 actual, you would grow the business about 30%. You're obviously very bullish on taking share. You talked about huge tailwinds from ASPs. But curious, when you put it all together, how should we think about traditional seasonality into the second half, particularly with the potential of some pull-ins here in the first half? 

Lisa Su: 

Sure, C.J. It's a fair question. Look, we want to be very clear that our Client business performance is primarily driven by the strength of the product portfolio. And it's driven by some of the desktop channel products that traditionally are not so well tracked if you look at sort of the IDCs of the world. We are planning for, let's call it, second half sub-seasonal given that we're off to such a strong start in the first half of the year. And that is what we're putting into our sort of internal planning number. So you wouldn't see necessarily typical seasonality since the first half is better than seasonal. 

That being the case, I think we feel strongly that, from a consumption basis standpoint, we see the data. So when we look at the Q1 performance, it was a very, very strong Q1 in terms of sell-out and consumption for our desktop business. And as we start Q2, we're now 4 weeks into it, we see those patterns continuing. So we're in an upgrade cycle right now. Gaming CPUs are usually repurchased when there are gaming GPUs that come out in new cycles. And I think we're benefiting from that on both the CPU and the GPU side, which is great. I mean, we're very happy with that, and we're ramping up production to ensure that we keep the channel full. 

Conclusion: 

AMD put up a solid report for Q1 on all accounts, yet the industry-wide headwinds that will take effect in Q2 introduce uncertainty for the semiconductor sector as a whole. Of the companies that will be affected, AMD is communicating they are ready to weather the storm. In data center CPUs, they have one of the most underrated products of all time – EPYC CPUs which continue to take substantial market share. In AI, they have a solid line up with the MI350s expected to launch this quarter to help offset the weight of losing China – in fact, by Q4, AMD is forecasting the loss of China revenue will be fully absorbed and there will be no impact by the time year closes out. In Client, they have some of the strongest AI PCs on the market and are confident average sales prices will remain above industry average for 2025. 

However, AMD is a semiconductor stock in the center of a massive shift to supply chains and is in the crosshairs of a geopolitical war that will be defined by policies surrounding AI. It’s not a matter of if there will be rules that change how AI chips/components are exported, rather how severe those rules will be. Investors should be prepared for volatility as AI Diffusion rules will be set on or around May 15th.  

I believe we will see near-term volatility but that ultimately AI companies in the United States will emerge stronger than they are today as we are all finally acknowledging that AI is not a fad, or a buzzword. Rather, the future of the country’s dominance relies on this technology succeeding, and conversely, relies on United States AI companies strategically denying AI systems to other countries. As an investor, you will never get a clearer signal as to the importance of a technology. 

Overall, given volatility could be in our future as AI investors, this is a stock to watch closely should we get an even lower valuation, especially given where it's trading today is already quite cheap.

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 AMD at the time of writing and may own stocks pictured in the charts.

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Astera Labs reported an impressive beat and raise in Q1, with GAAP margins strengthening as revenue continues to grow at a triple-digit rate. On top of this impressive beat, the growth story for Astera Labs is only beginning. The commentary regarding their product diversification and higher dollar content going into the second half of the year was quite clear as to the growing opportunity this company is poised to capture. 

Primarily, Astera offers unique positioning that allows them to capture both the merchant GPU market and custom silicon market across its three products lines Astera, Taurus and Scorpio. This widens the TAM and allows for steady revenue growth despite hiccups or delays from a single AI system (which we’ve seen plenty of disruption recently across those with high customer concentration with Nvidia).  

In addition to being a strong custom silicon vendor for hyperscalers, Astera will participate in Blackwell once it (finally) ships in volume as the company offers PCIe scale-out and Ethernet scale-up. Their new products Scorpio P-Series and Scorpio X-Series are fabric switches that are particularly well-suited for the immense demand that is expected for customization of racks as architectures scale-up in the second half of the year and beyond. 

Notably, Aries PCIe retimers and Taurus Ethernet smart cable modules are driving the revenue today with the Scorpio P-Series beginning to ramp. However, there are many catalysts on the horizon for Astera which adds to the trifecta of a strong growth story: 

• Serving both ASICs and GPUs greatly increases TAM and diversifies revenue; rare in the AI systems ecosystem 
• Preparing to serve the scale-out demand with increasing higher dollar content; specifically on Scorpio but also on Aries 
• Offering strong cross-sell opportunities as it aims to be the first to solve unique challenges for both GPU and custom silicon utilization – and is solving these issues in a way that avoids vendor lock-in for the large hyperscalers who want a mix of both custom silicon and merchant GPUs (Nvidia or AMD). 

Below, we look at Astera’s exceptional earnings report and provide notable commentary as to why Astera’s streak is likely to continue for some time. 

Revenue Grows 144% in Q1 

Astera Labs reported a blazing 144.3% YoY revenue growth in Q1 to $159.4 million, topping analyst estimates for $151.5 million in the quarter. Management said they witnessed strong demand for PCIe scale-up and Ethernet scale-out solutions for custom ASIC platforms, with initial shipments starting for its Scorpio P-Series and Aries 6 retimers in merchant GPUs. 

For Q2, Astera delivered a solid raise at $170 to $175 million, more than 7% ahead of the $160 million estimate. This points to YoY growth of 124.5% at midpoint, ahead of estimates for just 108% YoY.  

Astera has seen revenue growth decelerate over the past few quarters, with growth expected to continue decelerating as Astera laps its rapid ramp quarters. What’s impressive about this ramp is that Astera is guiding to deliver this 125% growth in Q2 against its 619% YoY comp (against a small base), for its seventh-straight triple-digit growth quarter.  

For the full-year, Astera did not provide a guide, though estimates heading into Q1’s report were pointing to 70.4% YoY growth to $675.2 million in revenue. However, given that Q1 and Q2 have combined for a $20 million beat compared to current estimates, it’s likely that full-year revenue estimates will likely move closer to (or above) $700 million in the coming days. This would correspond to YoY growth of nearly 77%. 

According to discussions on the call, management is being conservative in their guidance, stating they have more visibility than most as they are closer to their lead GPU customer (Nvidia) with hints that the larger systems will start shipping preproduction volumes at the end of this quarter.  “I think the — so we will always continue to be conservative, just to underline what Jitendra said. But having said that, the revenue models and the guidance that we are providing or the outlook that we're sharing comprehends all this because we are so close to this customer that we see a lot of stuff, and we're able to consider and contemplate that when we provide guidance.” 

Margins: Astera Becomes GAAP Profitable 

Astera is making considerable progress on strengthening its GAAP operating margin, having guided for a (0.2%) margin in Q1 but reporting a 7.1% margin. This also marks a strong 15 point expansion in just 2 quarters. Elevated SBC at nearly 28% of revenue in Q1 is behind the wide disconnect between GAAP and adjusted margins, though it signals strong GAAP profitability potential in the coming quarters/years as revenue continues to scale. 

• Q1 gross margin was 74.9%, ahead of guidance for 74%. 
• GAAP operating margin was 7.1%, well ahead of guidance for (0.2%) and up from 0.1% in the prior quarter. Adjusted operating margin was 33.7%, up more than 14 points from 24.3% in the year ago quarter but down from 34.3% last quarter. 
• GAAP net margin was 20%, expanding nearly 30 points in three quarters. Adjusted net margin was 37.4%, up more than 15 points from 22% in the year ago quarter but down nearly 10 points sequentially. 

Astera is guiding for margins to remain strong in Q2, with GAAP operating margin expanding. Gross margin was guided at 74% once again, while GAAP operating margin is forecast at 7.9%, up 0.8 points sequentially. Adjusted operating margin is forecast to contract 2.6 points QoQ to 31.1%.  

The company foresees gross margin being stronger in the second half, yet was careful to temper the market expectations by stating gross margin goal is to remain above 70%. “So with that wider range of margins, we still expect our longer-term gross margin targets of 70% to be the direction we're heading, not this year, but over time. So I would still encourage people to think about the margins as we grow the company to trend towards 70%.” 

EPS

Astera delivered an impressive 350% beat to GAAP EPS estimates in Q1, driven by its operating margin expansion, while forecasting EPS above estimates for Q2. 

• Adjusted EPS of $0.33 beat estimates by $0.05, representing YoY growth of 230%. 
• GAAP EPS of $0.18 beat estimates by $0.14, improving from $0.14 in Q4 and marking its second straight quarter of GAAP profitability on the bottom line. 

For Q3, Astera guided for adjusted EPS between $0.32 and $0.33, approximately flat QoQ but up 150% YoY at midpoint. GAAP EPS was guided at $0.10 to $0.11, what would be a third consecutive quarter of GAAP profitability albeit down (42%) QoQ.  

For the full-year, analysts currently expect Astera to report 50% YoY growth to $1.26 in adjusted EPS, with FY26 EPS growing 36% to $1.72. Heading into Q1’s report, GAAP EPS was expected to be $0.29 for the full-year, but considering Astera is guiding to deliver that figure in 1H, estimates are likely to move substantially higher.  

Cash Flows and Balance Sheet 

Cash flow margins expanded slightly YoY, though inventories rose and accounts receivable doubled sequentially. 

• Operating cash flow was $10.5 million for a 6.6% margin, expanding slightly from a 5.6% margin in the year ago quarter. 
• Free cash flow was $6.0 million, for a 3.7% margin, improving from a 0.3% margin in the year ago quarter. 
• Cash and equivalents increased $11.1 million QoQ to $925.4 million, while debt remained zero. 
• Inventories rose 18.2% QoQ to $51.1 million, likely driven by the ramp of Astera’s Aries 6 and Scorpio P-series products. 
• Accounts receivable surged 100.5% QoQ to $69.8 million, driven by Astera’s largest customers. Astera’s receivable balance from its top customer in the quarter rose 363% QoQ to $20.9 million, while its balances from its second and third largest customers rose 75% and 90% QoQ to $14.7 million each. Days sales outstanding also increased from 20-ish days in the past to 40 days this quarter. This is likely foreshadowing Astera is preparing for larger shipments in the next 1-2 quarters. 

Customer Concentration and China Revenue  

Astera is diversifying its customer base beyond its two largest customers, though it remains quite concentrated with its top four customers accounting for 80% of its Q1 revenue and its top two customers accounting for 49% of revenue. Although Astera does not disclose the exact customers, at one point, their largest customerwas AWS. 

SEC filings show that China revenue has been growing as a percentage of revenue from under 15% in Q3, then surged to 35% in Q4, and remaining elevated at 28% in Q1. FY24 exposure was 18.3%, up from <5% in FY23 

However, on the call, management stated it was less than 10% of revenue. Perhaps the difference being end market customer is less than 10% yet manufacturing in China represents a larger portion. Addressing this difference in the SEC filing on the call would have been ideal.  

Thomas O'Malley   Barclays Bank 

First one is for you, Mike. You mentioned that there was a China impact on your sales. It's never been a significant portion of your model. But could you give us a feeling just how large that impact was and what that impact will be over the next couple of quarters? 

Michael Tate   CFO 

Yes. So we ship into China with our retimers predominantly right now and they were attached to third-party merchant GPU systems, both were restricted hard stop during the quarter. So there was a modest impact that we have to overcome. 

China revenues, when you look at end customer demand, is less than 10% of our revenues. So it's been manageable enough and given the strength of our business and other product lines to continue to grow through this challenge. 

Earnings Call Q&A: 

Higher Dollar Content from Scorpio-X and Aries PCIe6 Retimers 

As growth investors, we are always looking for a catalyst that can sustain growth, or ideally, accelerate growth. For semiconductors and hardware components, there is no better catalyst than incoming higher dollar content for hardware companies. 

Therefore, Astera Labs used these words many times on their call. Diving into the details of this, it’s primarily two products where they are forecasting higher dollar content and average sales prices (ASPs): 

Aries PCIe6 retimers:  

The transition from PCIe5 to PCIe6 will result in higher unit growth and higher ASPs including a gearbox that improves signal quality. PCIe 6 doubles the bandwidth from the 5th generation, with up to 256 GB/s of bandwidth per lane, which will require faster supporting components, such as the retimers that Astera Labs offers. 

Here is what was stated on the call: “In fact, we have already started shipping preproduction volume for supporting some of the opportunities. And this would, again, not create an additional TAM to our Aries business because it's adding to the retimer TAM, but essentially bringing in a higher level of ASP simply because you're able to not only do retiming, but also do some of the speed matching that I noted.” 

Scorpio X-Series:  

The Scorpio P-Series is shipping this quarter and are qualified for Nvidia systems, yet the X-Series will ship in H2 with a bigger opportunity for custom silicon clusters. The Scorpio P-Series is a small chip that connects the CPU, GPU, NIC and NVMe storage. Rather than building a large switch, the company built a smaller device that is more efficient for high-speed signals to help feed GPUs with data. The fewer ports and smaller switch decrease complexity in a bid to compete against Broadcom with twice the lane count. 

The X-Series is for back-end networking in GPU-to-GPU configurations (and custom silicon configurations), and will offer a higher port count. Astera is essentially building something similar to Nvidia’s NVSwitch with the X-Series, but for PCIe-enabled GPUs and ASICs. Per the last earnings call: “And this one, like Mike noted, it's a greenfield use case, meaning if you keep Nvidia and NV Switch aside, everyone else is starting to build configurations that are obviously going to need some kind of a switching functionality, which is what we are addressing with our X Series device.”  

The X-Series improves efficiency for ever-increasing AI cluster sizes. The majority of AI clusters are in the tens of thousands GPUs, but are expected to go to the hundreds of thousands (already has with X and some other Big Tech companies), and will see AI clusters with millions of GPUs over the next couple of years. 

In an effort to identify a catalyst that can sustain Astera’s exceptional growth, it would be this product that does so. The X-series is used to interconnect GPUs for higher GPU utilization, resulting in higher ASPs. Per the call: “So to that standpoint, X-Series does bring in a lot more value, and therefore, you can assume that the ASPs tend to be significantly higher. And that's — again, there are different — the X-Series is not one device, to be very clear, there are multiple part numbers. So there would be situations where maybe one part number is not at the same level as P-Series. But in general, you can just look at it from a per lane standpoint or per port standpoint, and look at the value delivered.  And on that basis, the X-Series will always be a much more valuable, much more higher ASP product than a P-Series. 

Notably, Astera maintains their largest opportunity for the X-Series is on the custom silicon side although they foresee hyperscalers wanting to customize their racks in a way that prevents vendor lock-in from both Nvidia and Broadcom.  

“So these are fabric switches that are used to interconnect multiple accelerators together. So to that standpoint, a, it's not only a significant dollar opportunity because the ASP of this product tends to be high. But these are also products that are turning out to be anchor sockets for us. If you think of an AI rack being built, you have the accelerators and then you have the fabric that interconnects the accelerators.   

So what we are transitioning and what we're excited about is that the Scorpio X device is now translating to be an anchor socket. Think of it as like a mothership around which we are able to now add a lot more products that go along with it, whether it's the silicon level products or module or other form factors that we're considering.   

So overall, I want to say that from an opportunity space standpoint, for Astera, the custom ASIC-based implementation tends to offer a lot more opportunities.” 

We’ve covered Astera’s products more in-depth in previous analysis here and here.here and here. 

Scale-Up will Drive More Revenue 

As we’ve discussed in great detail in previous analysis on Blackwell, scale-up architectures combine many GPUs or custom chips into one system with dozens of AI accelerators and soon hundreds of AI accelerators communicating in one cluster.  

In line with Scorpio-X being a strong catalyst for the company, management double-downed on why scale-up is a massive opportunity for their products specifically, stating it will result in “hundreds of dollars per accelerator and serve as an anchor socket for integrating additional Astera Labs solutions.” They also stated “increasing accelerator cluster sizes, faster interconnect requirements and overall system complexity challenges are creating substantial dollar content opportunities.” 

Given they provided an idea as to the dollar amount per accelerator, there was a question on the call relating to this. Again, I’m pulling out this exchange because a hypergrowth stock like Astera certainly needs additional forward-looking growth opportunities to justify it being in our portfolio – of which I believe scale-up opportunities satisfies this requirement.  

Blayne Curtis   Jefferies 

I wanted to talk about scale up. You mentioned it several times. I think you even said a couple of hundred dollars per accelerator. Today, I think you're selling some retimers and then some PCIe cabling. Can you walk us through the progression of scale up in your participation and kind of can you maybe set some timing? Because I know UAL is probably later next year. So what's the scale-up opportunity for you in between now and then? 

Jitendra Mohan   Co-Founder, CEO & Executive Director 

Blayne, this is Jitendra. Scale up presents a very good opportunity for us. As you know, so far, our revenues have been driven primarily by scale-out opportunities. But for the first half, as Sanjay laid out, we have a significant contribution from scale-up.  

And the reason that's so important for us is scale up is really a very rich opportunity of high-speed interconnects that need to deliver low latency and high throughput. And that's where we play today with our Aries retimer products and starting shipments of Scorpio X family.  

And we do expect this opportunity to continue to grow as cluster sizes grow and the data rates increase. So we have significant opportunities that we are working on for PCI Express based scale-up networks based on our current Scorpio X family.  

But then it also dovetails very nicely into UAL, and we expect this to be a multibillion-dollar opportunity as we provide a full holistic portfolio of devices to address UAL infrastructure.  

And as far as the UAL itself is concerned, the spec is not final. It's been released as the 1.0 spec. And so you can imagine that the products will start to be worked on now and start to see first samples in 2026 with the revenue contribution the following year. So that is a very big opportunity that we are very well positioned to take advantage of. 

Commentary on Blackwell Delay 

I’m certainly liking Astera’s commentary a lot better this quarter than last quarter in terms of us-Nvidia bulls being closer to the bigger Blackwell moment – although I will say it’s unclear right now if Nvidia will go more directly to Blackwell Ultra and skip the more problematic Blackwell NVL system SKUs (I will cover the scenarios as to how we get to H2 pre-earnings). To provide a preview, I have zero expectations that Nvidia’s Q1 will be a good report, instead, we are looking toward the August call and the October call as the stronger moments for AI this year.  

Regardless, Astera is one to watch in terms of getting commentary on when we can expect Nvidia’s next catalyst – and we are getting a yellow light improved from a red light last quarter. I believe next quarter will be the green light: all systems go. But this requires patience as this puts us into late summer/early Fall but should be fully resolved by the Q4 time frame. 

As noted in the past, the PCIe6 retimers are especially indicative of when Nvidia’s Blackwell systems are shipping. Per our previous analysis “PCIe 6.0 was expected to ramp with support initially offered in the GB200s. Back in March, Astera demo’ed PCIe 6.0 for a wide range of Blackwell products. 

There was also indication back in the August call that Gen 6 was confirmed to be used in Blackwell’s GB200, and there were initial shipments: “We have started shipping initial quantities of preproduction orders of our PCIe Gen 6 solution, Aries 6. We ship and support our hyperscaler customers initial program developments that are based on Nvidia's Blackwell platform, including GB200.” 

The Scorpio P-Series is also integrated into Nvidia’s Blackwell MGX systems per a recent announcement. Perhaps the strongest comment on the call regarding Nvidia timing was this: “Looking ahead to Q2, we anticipate accelerated shipments of Scorpio P-Series switches and Aries 6 retimers on customized rack scale AI platform based on market-leading GPUs. Additionally, we continue to identify further opportunities for Scorpio P-Series outside of rack scale systems with multiple engagements on modular topologies that support enhanced customization.” 

In the opening remarks, it was also stated: “I'm excited to share that we will begin shipping preproduction volumes for Scorpio X-Series starting late this quarter” and later it was expanded on: 

Sanjay Gajendra   Co-Founder, President, COO & Director 

“And then on the — Yes. On the customer on the business side, just to touch on that question that you asked. The great thing about our overall revenue profile is that there are multiple ways in which we are approaching the market, the diversity across both custom ASIC-based platforms versus merchant GPU-based platforms, scale up versus scale out and the multiple product lines that we have enables us to approach the market in many different ways.  

And to that standpoint, for us, for first half, what we are expecting is that our revenue would be driven largely by the PCIe scale-up and the Ethernet scale-out opportunities along with the initial shipment of Scorpio P-Series and Aries 6 going into the customized rack.  

And second half, of course, lays nicely on top with some of the production ramps that we're expecting with the customized racks, which again, for us, is the Scorpio switches, along with the PCIe 6 retimers.  

These are now qualified. So we are starting to see that shipments start becoming significant. So that's part of the second half, and second half, of course, we have CXL initial shipments that we're expecting for production volumes and the Scorpio X switches for the scale up going into the custom ASICs.  

Those are also expected to start hitting production — initial production volumes in the second half of this year, which essentially gives us multiple ways, if you will, and sets us up nicely for future revenue growth even beyond '25.” 

Conclusion: 

The market reaction on Astera may be muted, but I’m liking this report much better than last quarter. The commentary around H2 is becoming clearer and in terms of a holding period, 6-9 months is a brief period of time to wait if the stars are aligning across the suppliers.  

I do not have high expectations (at all) for Nvidia’s Q1 but Astera is one piece of the puzzle pointing toward our AI portfolio leading again come August, and then October, and perhaps it’s a big enough splash that the streak continues into January and beyond as well. We will take this one quarter at a time, but I’m hearing what I want to hear, and that’s a sigh of relief. Keep in mind, the I/O Fund strives to be early so do not expect the market to agree with me immediately. 

Of course, the path to Q2 earnings calls in July/August and then Q3 calls in Oct/Nov will be incredibly tricky as semiconductors are in the hot seat for global tensions. I’d expect near-term volatility in AI hardware stocks that eventually resolves in our favor. While many are likely nervous about how semiconductors fare, I’m excited as we are quite clear on what to buy and I will be happy to get these stocks on discount if the market is foolish enough to give it to us. 

p.s. excuse the typos as our team is in a fast sprint covering many earnings reports this week 

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.

Recommended Reading:

• AMD Beats in Q1 Yet Q2 Data Center to Decline due to Export Controls
• Meta Q1: Bottom Line Shines While Top Line Growth is Decelerating
• Lumentum at Inflection Point with 20% QoQ Growth in AI-Related Segment

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The webinars are not an earnings call or prediction, as anything can happen during an earnings season. It’s an opportunity for us to go over our fundamental research with our members.

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Nvidia’s Blackwell and Taiwan Semiconductor

Kindig covers what supply chain signals are telling investors about Nvidia’s Blackwell GPU shipments and delay, positive news for H2, and why TSM may be resilient due to its pricing power.  

Energy & AI

Kindig discusses the massive projected increase in AI energy demand, why the US will prioritize energy, and how time to power is what matters most for the data center industry.

Bitcoin

Knox Ridley covers the outlook for Bitcoin, and signs that crypto demand is growing.

Bull & Bear Case

Knox Ridley recaps how the indexes have played out since the Q1 webinar, and discusses the I/O Fund’s bull and bear cases for the broader indices through the rest of 2025.

2025 Game Plan

Ridley discusses the I/O Fund’s game plan, how it is managing heightened volatility with hedges and deploying cash when the time is right.

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Bloom Energy reported a solid Q1 beat, with revenue rising 39% YoY and Q1 positive adjusted EPS for the first time ever. Margins expanded strongly YoY, across all reportable segments, and management maintained its guide for a ~29% adjusted gross margin, implying more potential margin growth ahead. 

The company reiterated their full year guidance, with many comments in the Q&A that showed a level of confidence that will be rare this earnings season. Management stated their sourcing is not dependent on China, their demand is expected to be unwavering in the face of tariffs, and their competitive positioning is second to none for on-site power as data centers continue to face a dire power situation that must be augmented with systems that avoid a “monolithic failure of one unit.” 

Overall, Q1’s growth and FY25’s guide reflects improving fundamentals for Bloom, though they are still far from GAAP profitability. 

Revenue Growth Exceeds Estimates at 39% YoY 

Bloom delivered a record Q1 with 38.6% YoY revenue growth to $326.02 million, more than 11% ahead of the $293.35 million consensus estimate for 24.7% YoY growth. Revenue growth historically has been lumpy, but the 39% growth was a solid improvement from last year’s (-14.5%) YoY decline, benefiting from project timing.  

Management stated that they expect revenue to be weighted in the back half of the year, with approximately 40% in 1H and 60% in 2H. This is currently reflected in quarterly revenue estimates, with Bloom expected to see sequential growth each quarter to exit the year at $621 million in Q4. 

For FY25, management maintained its revenue guidance between $1.65 to $1.85 billion, for YoY growth of 19.1% at midpoint. According to the opening remarks, management is expecting a 40/60 split on revenue with slightly more revenue recognized in the second half.  

The CEO used the word “confident” in many instances when discussing the full year guidance, such as this: " So, we stand by those numbers. We wouldn't likely reiterate that guidance if we didn't have strength in our conviction. So, it's a strong conviction that we can represent it. So, how we do it is internal to us, but the what we will deliver is what I can state with conviction to you. So, that's the key part that I want you to understand in terms of where our guidance is.” 

Key Segments

When discussing end markets, Bloom Energy went into detail in the opening remarks to state they foresee no changes to AI data center demand. For example, even if capex were to slow, Bloom foresees AI data centers continuing to increase spend on power: “Even down the road, should there be a slowdown in the pace of investing, the total gigawatt gap is so large that it will not have a meaningful impact on Bloom's growth in this market.” They also detailed that Commercial and Industrial end markets would also have to continue spending on power. The pocket of weakness that BE foresees would be in the retail space, such as a “stretch out of decision-making cycles.” Ultimately it was stated that, “Based on the bottoms-up customer-by-customer forecast in these three segments, we remain confident in our previously provided 2025 revenue guidance.” The translation is that AI data centers can absorb any slowdown from the retail end market. 

• Product revenue, from fuel cell systems sales, rose 38.1% YoY to $211.8 million, compared to a (21%) YoY decline in the year ago quarter. 
• Installation revenue, when Bloom is ready for startup and commissioning new systems, surged 194% YoY to $33.7 million, supporting commentary that project timing aided the quarter’s performance. 
• Service revenue declined (5.2%) YoY to $53.6 million. 
• Electricity revenue rose 92% YoY to $27.0 million. 

Gross Margins Show Strong YoY Expansion 

Notably, gross margin has expanded more than 1,000 basis points from 17.5% last year to 28.7% this year. All four of Bloom’s segments reported positive GAAP and adjusted gross margins: 

• Product adjusted gross margin of 35.0%, up 930 basis points YoY.  
• Installation adjusted gross margin of 3.8%, up more than 3,300 basis points YoY. 
• Service adjusted gross margin of 4.8%, up 340 basis points YoY.  
• Electricity adjusted gross margin of 57.1%, up more than 2,500 basis points YoY.  

For the full year, management held its 29% adjusted gross margin guide, implying some further strengthening though the remainder as the year as seasonal revenue strength begins to kick in. 

Adjusted operating income posted a turnaround at $13.2 million compared to losses of ($30.7 million) last year. Adjusted operating margin was 4.0%, versus (13.1%) in the year ago quarter. Full year adjusted operating income is expected to be between $135 million and $165 million, for ~39% YoY growth at midpoint. EBITDA was $25.2 million compared to losses of ($18.2 million) last year.  

While Bloom’s manufacturing is primarily US-based, management acknowledged that they import some materials and components, although not from China. Given the more geographically diverse 10% tariff in place, management expects up to a 100 bp impact to full-year gross margins if the current tariff structure persists throughout the year.  

With that said, Bloom Energy is maintaining their gross margin guidance this year with management stating they will find ways to absorb this from cost cutting: “So, we are going to take this externality and make it a challenge to find that 100 basis points and other activities we do and speed it up and not use tariff as an excuse to not meet our guidance.” 

Bloom Energy is not GAAP profitable yet, with a (5.8%) GAAP operating margin and a (7.3%) GAAP net margin, but this is certainly a strong beginning to what may be an important turnaround for the company. 

First Ever Positive Q1 Adjusted EPS 

Bloom reported its first ever Q1 positive adjusted EPS, earning a thin $0.03 this quarter. While Bloom is still expected to see positive adjusted EPS in each quarter of this year, estimates have been coming lower, especially for Q2.  

At the end of January, Q2’s adjusted EPS estimate sat at $0.05, before getting revised lower to $0.04 in February. Now, the estimate next quarter stands at just $0.01, with the low end of analysts at a ($0.12) loss, which would likely reflect broader macro-related weakness and margin softness as Bloom is not expecting a high degree of impact from tariffs.  

Cash and Balance Sheet 

Given revenue is lumpy and typically seasonally strong in Q4, Bloom’s negative cash flows are to be expected in the first quarter. However, cash flows did improve on a YoY basis. 

• Operating cash flow was ($110.8) million in Q1, for a (34.0%) margin. This improved from a cash flow of ($147.3) million last year at a (62.6%) margin. For the full year, management is expecting operating cash flow to remain similar to 2024’s level at $92 million. 
• Free cash flow was ($124.9) million in Q1, for a (38.3%) margin, improving from ($168.7) million last year at a (71.7%) margin. 
• Unrestricted cash and equivalents totaled $794.8 million, while debt remained steady at $1.13 billion. 

Earnings Q&A: 

Confidence in Meeting FY Guidance: 

What stood out on the call was management’s willingness to discuss their high level of confidence in meeting fiscal year guidance. Not only did they go into detail as to how they will absorb any economic impact, but they also made it crystal clear they are not dependent on China. At one point, management even used the words “extreme confidence” stating: 

“So, we're super excited about this cycle. Extreme confidence in being able to meet those demands. And will certain projects shift in the short term? Maybe they will, but the amount of projects that get executed is plenty and enough given where we are for us to be able to meet the guidance. That's how we see it.” 

Given so few companies will be able to illustrate confidence in a fiscal year guide, I’d like to share one more quote from the call: 

“We have to book, build, ship and recognize revenue for a portion of our second half revenue in order to meet the guidance. Now, if we didn't have confidence in that entire process, including the bookings, and also timing, because timing means revenue recognition, we wouldn't be making this. So, very strong confidence based on everything that we see.” 

In terms of demand dynamics, they also shared that it’s no longer a question as to whether data centers need on-site power – this helps management to reiterate their guidance. 

“And let me explain a couple things here. The big shift, Andrew, that's happened in our business and I think it's worth taking the two extra minutes to explain this to you. It is — no longer do we see our customers, whether it is data centers or large factories, asking if on-site power is needed. That debate is over. The grid can only do so much in the short term, and without on-site power, people are not going to have power. That is no longer a question to us.” 

In terms of competition, BE pointed toward 30MW and 50MW microturbines as the primary competitor, yet also stated these are not ideal compared to hydrogen backup power. 

“There are many, many reasons why CCGT will not be a good choice for situations like this if they are not connected to the grid for them to load follow. And then, if they're not connected to the grid, remember, they have to be maintained, they have to be shut down, you cannot have a monolithic failure of one unit. So, if you build two of those to back it up, all those become super expensive.” 

Not Dependent on China: 

Part of the reason that Bloom can reiterate guidance is because the company has no reliance on China. After quite a bit of digging by analysts, it appears they literally have zero direct sourcing out of China that cannot be immediately sourced elsewhere.  

“We have two manufacturing and assembly facilities and they are both located in the United States. Our products are proudly made in America. Yes, we do import materials and components from abroad, but not from China. The majority of our material spend is in custom-made components unique to us, which give us control over pricing and sourcing. We have excellent long-standing partners and are jointly invested in each other's success. If the current tariff structure continues throughout the year, we expect to see up to 100 basis point impact on our gross margin for the year.” 

As discussed above, Bloom Energy plans to cut costs in order to aborb the 100 basis points, thus is not changing gross margin guidance this year. 

One analyst pushed about a disclosure in their SEC filings on the use of “scandium in your fuel cell ink coatings” yet management stated they will instead source this elsewhere. 

“So, the first thing for you to know is, like, number one, we are not dependent on China for scandium. I can state that very clearly. Okay. Number one. Number two, we get this from multiple geographies and multiple continents.” 

Taiwan is a Growth Market 

In the noisy backdrop about imports and tariff structures, it was interesting to hear a discussion from a United States company on how they will become an important exporter in the near term. In particular, Bloom pointed to Taiwan as a strong growth market as well as Europe. 

“And if you look at Asia, we are really targeting Taiwan in a major way because the entire AI supply chain, the amount of growth that's happening in Taiwan in the face of them — in the face of their grid not being able to grow fast enough and deliver power and rising costs of power out there and then — and them depending quite significantly on natural gas as their source of, like, energy, all that fits very well for us.” 

Additional Commentary on Deal Cycles 

There were two notable conversations about deal cycles on the call. The first is that for larger utility deals such as the AEP deal it takes about nine months for the Public Utilities Commission (PUC) approval process. The second comment was that Bloom expects implementation cycles to “shrink” the more that utility backup power becomes exhausted from the sheer number of AI data center buildouts. 

Conclusion: 

Bloom Energy had an excellent earnings report – the best I’ve seen yet, which is saying a lot as Big Tech earnings were exceptionally strong last night. The market reaction may not be aligned with this takeaway as there was a minimal response, yet if Bloom Energy continues on this trajectory, that is sure to change.  

The company reiterated its full year guidance while volunteering visibility into how they will achieve this, on top of a material turnaround in their fundamentals. They also offered commentary that matches what we presented in our Q2 webinar, which is that BE looks to be a rare yet important pocket of resilience in the tech sector.  

We will, of course, be monitoring for any changes. Ideally, the company would be GAAP profitable and lower debt, but this is not a quality (or value) stock – it's a momentum stock with the goal of capturing the strong and sudden trajectory of AI data center power consumption the I/O Fund is expecting to see over the next 1-2 years. In that regard, last night’s report was nearly a perfect 10.

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.

Resources:

• Bloom Energy Fuel Ceels for the Booming AI Data Center Trend 
• Q2 2025 Webinar with Discussions around Pockets of Resilience