Will SMCI's operating leverage continue improving?

**Super Micro Computer's (SMCI) operating leverage is not expected to continue improving in the near term.** Here's why:

1. **Current Operating Leverage**: SMCI is operating at a median degree of operating leverage (DOL) of 3.43 from fiscal years ending June 2020 to 2024. This indicates that for every dollar of investment in operations, SMCI is generating a return of $3.43 in earnings.

|code|Ticker|Name|Date|ROA|ROE(Average)|market_code|
|---|---|---|---|---|---|---|
|SMCI|SMCI.O|Super Micro Computer|2024 Q3|14.8897|24.2123|185|
|SMCI|SMCI.O|Super Micro Computer|2024 Q4|18.2998|31.1986|185|
|SMCI|SMCI.O|Super Micro Computer|2025 Q1|4.9949|7.5142|185|
|SMCI|SMCI.O|Super Micro Computer|2025 Q2|9.2103|12.7823|185|

2. **Recent Performance**: SMCI's gross margins have experienced a significant decline, reaching a multi-year low in the fourth quarter of fiscal year 2024. This decline is attributed to supply chain constraints and pricing pressures, which have negatively impacted profitability.
3. **Limited Margin Improvement Guidance**: Management has guided for only marginal improvements in gross margins for the first quarter of fiscal year 2025, while maintaining a long-term goal of 14-17% gross margins. This suggests that while there may be some slight improvements in operating leverage, they are not expected to be significant.
4. **Challenges in Maintaining Gross Margins**: SMCI's focus on liquid cooling solutions, although a key differentiator, has been challenged by supply chain constraints, particularly in liquid cooling components. This indicates that operational inefficiencies could persist unless addressed.
5. **Market Position and Growth Prospects**: Despite these challenges, SMCI has demonstrated strong revenue growth, with a revenue CAGR of 200.01% over the past three years. However, this growth has not yet translated into proportional improvements in operating leverage.

In conclusion, while SMCI has shown strong revenue growth, the company's operating leverage is currently under pressure due to supply chain constraints, pricing pressures, and margin challenges. Without a significant improvement in these areas, it is unlikely that SMCI's operating leverage will continue to improve in the near term.