Cerebras revenue hits record high, but hardware revenue drops nearly 30%

On November 12, Eastern Time, AI chip and cloud service provider Cerebras Systems (Nasdaq: CBRS) released its third-quarter financial results, reporting a record quarterly revenue high and raising its full-year guidance. According to The Wall Street Journal, following the earnings release, the company's stock price rose by about 15% in after-hours trading.

Breaking down the revenue in the financial report, the hardware line is actually declining. Cerebras made its name with wafer-scale chips, but what pushed total revenue to a new high this quarter was cloud computing power and related services purchased by customers. The report simultaneously shows two seemingly contradictory sets of numbers: revenue went up, but gross profit calculated under US Generally Accepted Accounting Principles (GAAP) went down. The company's adjusted fourth-quarter guidance has already reached near the operating break-even line.

Where did the extra revenue come from?

Cloud services accounted for all net incremental revenue

Under GAAP, Cerebras' quarterly revenue increased by approximately $75.1 million year-over-year. The "cloud and other services" line alone increased by approximately $103 million compared to the same period last year. This means the incremental revenue created by the cloud business was larger than the net incremental revenue retained by the entire company.

The difference came from hardware. According to the company's financial report, hardware revenue declined by nearly 30% year-over-year, offsetting about one-quarter of the cloud business increment. In the same period last year, out of every $10 in revenue, about $3 came from cloud and other services. By this quarter, cloud and other services already contributed about two-thirds of revenue.

Customers directly purchasing systems means buying the machines to use themselves. Purchasing cloud services means obtaining the computing power delivered by the machines. Cerebras listed another channel in its announcement: integrating inference capabilities into Oracle's cloud platform. Customers can use Cerebras' inference services through their existing cloud platform, giving Cerebras an additional entry point to reach enterprise customers. The company expects this service to be available on Oracle Cloud Infrastructure in 2027.

Cloud revenue growth already has specific customers that can be tracked. According to the company's 10-Q quarterly report, the OpenAI agreement recognized $72.4 million in revenue for the quarter. Placing this figure back into the "cloud and other services" line, it accounts for about half. New channels can expand customer coverage, while existing major customers have already left a visible mark on the books.

This also changes the delivery milestones readers should watch. Selling a hardware system means tracking when the equipment reaches the customer. Selling cloud inference services means tracking when the data center can be powered up, when the machines are installed, and when customers start using the service. Even if the underlying chips are still from the same company, the delivery chain and the timing of revenue recognition will change with the sales method.

Why is operating loss still larger than revenue despite record revenue?

Stock-based compensation explains most of the loss gap

First, look at the top-line changes in the income statement. On a GAAP basis, gross profit for the quarter fell from about $55.1 million in the same period last year to about $42.1 million. The company sold more products and services in total, but after deducting direct costs, the money available to cover R&D, sales, and administrative expenses was actually less. Especially in hardware, the gross margin left from each system sold narrowed significantly compared with the same period last year.

Further down, the company reported a GAAP operating loss of $224 million and a Core operating loss of $33.11 million. In the reconciliation table in the financial report, the largest single item is stock-based compensation. It is distributed across cost of revenue and various operating expenses, accounting for about 80% of the difference between the two loss measures. Share-based compensation is recorded as an accounting expense and may not correspond to an equal cash outlay in the period, but it affects the distribution of equity held by shareholders.

Core also includes a treatment that affects revenue. The company granted warrants to some customers, and the related amortization reduces revenue recognized under GAAP; when calculating Core metrics, the company adds this back while excluding certain data center pass-through revenue and costs. This explains why Core revenue in the same quarter was higher than GAAP revenue and why gross margin was also higher by a notable margin. The gap between the two sets of accounts itself bears the marks left by customer agreements and employee compensation arrangements.

The operating loss under the two measures, calculated against their respective revenue, also shows the difference. For every $100 of revenue recorded on the GAAP books, there was about $106 of operating loss. The adjusted figure was still a loss, meaning that after excluding the items specified by the company, gross profit for the quarter still could not cover operating expenses. Looking only at cloud business growth makes it easy to miss this portion of expenses.

After the full-year guidance is raised, what does Q4 need to deliver?

Midpoint of full-year revenue guidance raised by $65 million

The company's full-year Core revenue guidance given in the summer was still less than $900 million. After the Q3 results came out, the lower end of the new range was already above the upper end of the old range. Based on the midpoint of the ranges in the two announcements, the company moved its full-year revenue expectation up by $65 million.

The raise also lifted the delivery requirements for the final quarter of the year. The midpoint of fourth-quarter Core revenue guidance is $320 million, roughly 39% above actual third-quarter revenue. The company also expects fourth-quarter Core operating margin to range from negative 1% to positive 1%. The breakeven line here follows the company's adjusted metric and comes from a different accounting calculation than the GAAP operating loss in the previous section.

The longer delivery cycle is written in the notes. At quarter-end, the revenue allocated to Cerebras's remaining performance obligations was $26.1 billion, a substantial portion of which comes from the OpenAI agreement. This figure includes revenue already deferred as well as amounts expected to be invoiced in the future and recognized as performance is fulfilled. The company separately disclosed that total contracted data center power capacity is 700 megawatts, expected to be delivered by the end of 2027. Customer agreements, data center capacity, and quarterly revenue each have their own timelines.

Narrowing back to the fourth quarter, another requirement beyond revenue comes into view. The company's Core gross margin guidance is 47% to 49%, up from 41% in the third quarter. So this guidance bets on two things at once: delivering more revenue, and retaining more gross profit per dollar of revenue. How far it is from operating breakeven will only become clear if both are delivered.

The amounts on the contracts will only appear on the income statement piece by piece once computing power is delivered as agreed.

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