Super Micro Computer, Inc. (SMCI) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to the Super Micro investor update call. I'm James Kisner, Vice President of Investor Relations for Super Micro. I have with me today, Charles Liang, CEO and Chairman of Super Micro; and David Weigand, Chief Financial Officer. There's going to be a time for Q&A and the end, so please pay attention and note any questions you may have. More details on that will be forthcoming. Please advance to the disclaimer slide. I'm going to read a short safe harbor before we begin. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation and future business outlook. There are a number of risk factors that could cause Super Micro's future results to differ materially from our expectations. You can learn more about these risks in our most recent 10-K filing for fiscal year 2020 and our other SEC filings. All of these documents are available on the Investor Relations page of Super Micro's website. We assume no obligation to update any forward-looking statements. Today's presentation will refer to non-GAAP financial results and business outlook. A reconciliation of historical GAAP to non-GAAP results is contained in today's presentation. This presentation and recording will be made available in the IR section of our company's website shortly after this video conference. Now I'll turn the call over to Charles Liang, Chairman and Chief Executive Officer. Charles, you are on mute.

James, can you hear me?

Yes. I think we're good now. Thanks, everyone. We worked out the kinks. Go ahead and -- let's go ahead and restart, please, Charles.

Okay. Thank you, James, and good day, everyone. I'm so glad, so excited to meet you over June, and we have been suffering so much from a [indiscernible] today on the COVID-19. Now finally, we are fully recovered. And that's why I want to take this chance to share with you what Super Micro's position today, what's our plan in the next coming few years. So I mean, I appreciate for this chance. Again, my name is Charles Liang, I'm the President and CEO. As you know, Super Micro's DNA is innovation. As a Silicon Valley-based company since 27 years ago, our cost is higher in Silicon Valley. Cost is higher, how can we compete with the market? We have better product. We have better DNA. We have more efficient business. And today, I'm very happy to share with you about all of those. First, Building Block Solutions. Since I founded Super Micro 27 years ago, I adopt Building Box Solutions as our design main storage for all our product, for all our solutions. And I feel so lucky that Building Block Solutions has bring so much advantage to us. For example, new technology. With new technology available from our partner, we are able to build complete server, complete total solution for the market quicker than others, because we share our product, we share our subsystem. New feature. When customers want to add a new feature, we can quickly add a module so that we provide a new feature right away. System of foundation. For different customer application, they won't work alone. We are able to configure the system in a way that fully optimize for customers' demands. Inventory reduction, because across different product line, across different generation of products, we are able to share lots of same product, same subsystem, and that's why we don't want to keep really huge inventory. Today, for example, most of the time, we keep about $1 billion inventory. Without this Building Block Solutions, I would say, we should keep $2 billion to offer same level of support to customers, to shrink the lead time because we prepare safety inventory. Service cost. As you know, when we ship a server, our storage, IoT to customers, we offer on-site service. And for on-site service, we need the on-site spare parts. With Building Block Solutions, again, we are able to share components, share subsystem across the end product line, the end generation of product. And that's why that's safe, our on-site spare parts as well. So that indeed dramatically lower our service cost and time to market I just mentioned for design, for change or migration, or workload, we are able to respond much quicker. Indeed, it's pretty much like a kid play Legos. Lego carefully design, fantastically design their block, so kids, or we, can build a beautiful castle, beautiful tower, or a house immediately because thank you to Lego, they design such a fancy block. Super Micro here is that we design a block for server, for storage, for IoT. So as a Silicon Valley-based company, for sure, a Silicon Valley-based company have its advantage, closer to a technology leader, kind of like Intel, Microsoft, Broadcom, for example, in media, you name it. Because of our closer relationship, that's why we are able to co-develop product solution with them. And that's why we have come to market advantage. We have a better performance advantage. However, in Silicon Valley, as you know, also have some piece advantage, the cost is higher. Especially last 5 years, Bay Area, housing price grow a lot. Overall, even cost grow a lot, so that has been a big challenge, especially COVID-19 last year, another big challenge in U.S.A. Our competitors from Asia, they have a much less COVID-19 impact. So in Bay Area, unfortunately, we faced a lot of challenge, in last 5 years, for example. But this year, we are able to take action quickly, grow the Taiwan operation and also make automation system, automatic software to help our operation, to help our customers. So we invest a lot in the last few years, especially last year. And now we are ready to take advantage for U.S.A company and being a Taiwan company as well. I mean, headquartered in Taiwan. We have most operations, if not all, most operations under the same roof, from marketing innovation, design, production and service, all under the same campus. U.S.A. campus in Silicon Valley, Taipei, Taiwan and then NASA. So with 3 headquarters, we are able to support our customer in 3 territory much more efficiently, much better customer satisfaction and quickly responds to whatever customers demand. And it also help us deliver more secure solution, not just better quality, but more secure total solution for our customer. Optimize the total solution, we design multiple power supply chassis and thermal solution, you name it, including firmware, software and service model, all designed by ourselves and produced by ourselves. That's why all the subsystems have been so well-designed across the end product line, across the end generation of products. And because we also work with partner, work with customer closely, that's why we are able to exactly optimize the combination with customer workload for their application. And it's turned out also greener. We are very lucky, since 15 years ago, I made a strong decision, design the environmental-friendly solution. And in last 15 years, we have been growing very well every year in terms of in terms of green technology. So today, I would like to say we pretty much deliver the most green server story to the market. So they have customer save total cost of ownership, TCO and TCE, total cost to our environment. From our calculation and some of our key partners' calculation, together, the worldwide data center IT user, all use the same concept [indiscernible], winning computing, energy saving, data center structure, total solution. We together can save about 30 [indiscernible] power play. That saves lots of power. You can calculate economic value, it will be about $7 billion per year. So we save a lot of money for our customers through energy cost and through some resource saving. And only seeing customer had to spend -- have to invest in what? Spend the time, think about how can they go with the right partner for greener solution? How can they work together with us, for example, to build their data center architecture to take the product advantage that we offer. Our product optimized for free air cooling, our product optimized for liquid cooling, optimized for liquid [indiscernible] computing. So overall, those, we are very aggressively, very efficiently working with customers to realize their power saving, resource savings. So let me compare Super Micro's growth rate -- yearly growth rate with the industry standard. Since 2001 to 2016, Super Micro year-over-year growth rate, always about 2x to 4x faster than the industry average, and because of our better product, because our Building Block Solutions and also because of our company philosophy, again, passionate, aggressive, working together with customers. Maybe unfortunate after 2017, we have a [ 10-K ] delay, and that slowed down company's growth totally. So 2017, '18, our bolus we kind start to be behind the industry. And then out the [ 10-K ] delay, [ 10-K ] delay started this period end about last year. Very unfortunately, COVID-19 attacking us. So when COVID-19 attacked U.S.A. so badly, our headquarter here, for sure, suffered the most. And that's why we migrate -- extend our operation business to Taiwan very aggressively, and also take action to make our business automation and to train our people. So this is a slide I want to share with you. Super Micro, indeed, in last almost 20 years, almost the only faster-growing U.S.A.-based hardware company, especially from 2000 to 2016. No any other hardware companies in the United States or Europe are able to grow as fast as Super Micro, even half the growth rate of ours. And the reason why, again, because our Building Block Solutions company philosophy. So here is [ 3 to 5 phases ]. The first phase before IPO. 40 years of consistent growth, 90% of our operation, including engineering, all folks on U.S.A. And in 2007, although we wait for IPO, we start to grow faster because the company have started with more resource. But very unfortunately, we did not have enough supply, did not have enough capacity. So the company although grew fast, but not superfast. [indiscernible] today, that for sure, kind of slow down our kind of growth and then COVID-19. But now the good thing is we are well prepared during the last few years, especially during the COVID-19, many in work-from-home. And then we have to figure out a way to help them work efficiently with customers, especially when lots of customers also work from home. For Building Block Solutions, application optimize, especially, we've got a really bad hit. And that's why we have a configurator, auto-configuration system to help sales customer for better communication, to optimize their system through system help. So the system have been enhanced speed since 12 months ago, right after COVID-19 start to attack us. And then in the last 12 months, the system have been well developed. So we already have [indiscernible] with more than 20 customers. And the good news is all our 20 customer feedback, always very happy experience. So we are further fine-tune some of the system and believe before this summer, we will be offer the tool to all our customers, to all our sales. And after that, our customer service, our system configuration efficiency will be almost doubled compared with before. That means we see same sales FAE headcount, we can support double the customer account. So also, we aggressively invested in Taiwan, especially during COVID-19, so improving the schedule, and that's why we have a 1 million square feet for the new facility. We have been waiting to move in, in next 3 months. So with that kind of engineering team, manufacturing and operation in Taiwan are all we are trained. So that's why last 12 months have been a big challenge to us because we had to face COVID-19 challenge. At the same time, we had to invest in Taiwan very aggressively and train our people in Taiwan, hire people and train. Now this year, it's pretty much all achieved very well. Now also, we start to invest more software, especially software automation and system management software, open source for buyouts, for BMC, and we build a command center-based auto configurator. Again, lit's to support our B2B, B2C automation, especially auto configuration for application-optimized solution. So we are back to be a faster-growing company again in 1993 to 2016. And maybe we can even grow faster than '93 to '16 nicely. So when and how we can start to grow very fast, I will share with you later. So this slide show you our new and [indiscernible] product. The first one to you to know, there's plenty of design. About 3 months ago, there is a top 50 company around the world that goes, say, "Hey, your solution is not good enough. Cost too high." And anyway, kind of you have to lower price. Otherwise, we won't make a deal. But we cannot lower our price as a U.S.A. company, our cost is not the lowest. So we take a chance and redesign a system and then we did feel out, we proposed to our partners, said, hey, about this new idea. Within 2 days or 3 days, customers say, great, this is exactly what we want. So we own [indiscernible]. Indeed, we own about 4 big projects in the last 2 months. Even before the product is working, customer trust us, say, hey, we believe your Building Block Solutions. And this is exactly the -- this is why we won. Two outstanding performance. One is power consumption, much better than any of our competitors. Second, the cost is as low as what customers want. So it's easy for maintenance because the system is specifically designed for the data center, and specifically optimized for video streaming, optimal for gaming, optimal for kind of AI application, including autonomous driving. So 3 months of products since we kick off. And now the system is working, and we have been production in next 6 weeks, I believe. And we already have couple of big orders. I mean, 3 to 4 very large BOE. And I believe we will win another 5 or another 20 very soon. Again, because of outperform our industry. Second product I want to introduce to you is our SuperBlade and MicroBlade product line. So this is a product line that really save cable because our blade server, almost 0 cable needed, save 95% on a cable, right? High density and easy for maintenance, over advantaged blade. But this blade here over some other feature, the feature, for example, able to work at a high temperature, 100-degree F or 106-degree F. And that allow customers to run their data center at a very high temperature. For example, 100-degree F or 95-degree F. Data center can run at a high temperature to save their cooling energy. And also, because it's software designed, indeed, this customer, indeed, many customers, they don't even need air condition, just use free air cooling. Our depends on a location. Some city customers need free air condition -- free air cooling plus some water vapor cooling. So lots of our customers don't use air conditioning at home. And the same system also [indiscernible] for deep submerged cooling, or kind of water cooling. So kind of help customer save their energy cost and allow their POE to run at 1.1 or even 1.05. Commission, Ice Lake product line. As you know, Intel, we are official high-volume, particularly their Ice Lake. And we have the largest product line, voltage product line rating for Intel Ice Lake. Our B2B, B2C solution and automation, again, like I just emphasized, Super Micro solution application optimized. Workload optimal. And with software automation head is very important. Before we comment on sales, FAE, PN engineer, top 2 customer. And that take a lot of time and take a lot of time to train sales and take a lot of time for our people to go with customer. Now with automation tool, everything will become quicker, easier, and we can scale up to support many more customers. So I mean, the solution, again, we have been ready for -- open to everyone by this summer. And it's, again, command center-based software. So whenever a customer want a question, whenever our engineer have another idea, we can talk to customer kind of immediate interactive. So I'm very excited to wait for this data center -- I mean, command center-based B2B, B2C automation. Our main growth driver, our traditional organic enterprise, including channel [indiscernible] and SI, including AI and machinery. This market kept today about $35 billion. And we have about 7% market share today. And I foresee, we should be able to grow about 13% year-over-year in the next 3 to 5 years. And the reason why because of the software automation, auto-com related help. And also, we start to grow our sales team, not just in U.S.A., but in Asia, in Europe and in East Coast of U.S.A. Second driver, 5G telco and IoT. IoT is not new to us, but 5G Telco, we improved a lot. Indeed, we started about 2 years ago, started work with a handful of top 10 telco company around the world. And things have been going on very well. We already have a handful customers, again, top 20 in the world, come in. So I expect we will grow very quickly in this segment, hopefully, 30% to 40% a year. Large data center and OEM. We have some customers before. And in the last 5 years, because capacity was limited, U.S.A. cost were kind of higher. So we did not focus there a lot. But now with Taiwan facility, Taiwan capacity, we are ready to grow quickly. So the way our cloud composer service and switch, multiple new category. We have a team have been developing those technologies for a while. And we have been ready to service the world state by state. So talking about our headquarter in Taiwan, right? U.S.A. headquarter, we have been expanding. Taiwan headquarter now will be very soon. Again, by summer, new building, 1 million square feet will be perfectly ready. So our capacity from Taiwan will be ready for our growth. And kind of less COVID-19 impact in Taiwan, and lower cost in Taiwan, so that will help us a lot. Customer focus, right, kind of traditional organic customer, mid-sized, small-sized enterprise with our software automation configurator that will help us to grow quicker. 5G telco, private cloud, top 300 accounts, we are growing quickly now, especially last year. After we start to focus on those telco 5G and top 300 account, we started getting many new accounts here. Large data center and OEM. Again, we are ready to grow to service them. As CEO, $1 per work as a salary, right? No [indiscernible], no RSU. It's kind of a performance-based, performance option. Again, my stock option price will be $45, about 35% higher than today's price. And then only when company hit a $45, $60, $75, $120, hit those revenue, I will have a stock option. So it's really performance-based. And this sounds good, sounds exciting, but I hope we have a second one, if we surpass $120 per share in 3 years, for example, [indiscernible] years. So we are back and for $10 billion per year revenue. Again, [indiscernible] have been fast-growing [indiscernible] and 10-K [indiscernible] and then COVID-19. But now we are ready. We are ready in a couple of areas. Number one, capacity ready from Taiwan; and number two, our culture. Now company after COVID-19, we are able to build a much more passionate, much more dedicated team. I share with our people not working [indiscernible], not just me, that are energy standard. Again, efficient management, return to our strong leadership, recent LSP of [indiscernible] in state of standard industry pace. Passionate and happy mind for green computing and technology leadership and another [indiscernible] TCO, TC optimization and kind of automation tool for B2B, B2C and SAP have been a very mature sort of way toward here. Taiwan headquarter with facility, about half the price, half the cost compared with our U.S.A. headquarter cost. Operation cost in Taiwan, about half or less than half. Engineering cost, about half or less. Even sales and marketing is about half the cost compared with U.S.A. So with this much better cost advantage, we are ready to grow quickly. And once we hit economic of scale, our cost will be further lower and the company will be more energetic, more capable to compete. With this -- time is limited. With this, let me pass to our new CFO, David Weigand, for our financial number. Thank you. David?

Thank you, Charles. I'm David Weigand, Super Micro's Chief Financial Officer. And I'm going to go over quickly Super Micro's legacy, the investments that we've made as well as the current investment view. So I joined Super Micro in 2018 as a Chief Compliance Officer. And I first met Charles back in 2015, when I was looking for another server solutions company here in Silicon Valley. And I -- every day, when I used to drive home, I would pass Super Micro offices. And I noticed that the parking lot was always full, and no matter what time I left. And I later came to understand why the parking lot was full. It was because Super Micro had a very passionate and hardworking workforce. And that workforce was led by Charles Liang, who's the visionary and genius behind it. And so I joined Super Micro at an important time in 2018. It was really an inflection point because from 2010 to 2018, Super Micro had a compound annual growth rate of 21%. They doubled their revenues twice, once from 2010 to '14, and again from '14 to '18. They have a 27-year history of profitability. So all the time that they were growing through the IPO and afterwards, it's always been done responsibly, and costs have been managed. The growth was driven by skillfully designed service solutions to marquee customers using really solid products based on our unique product architecture and that Building Block Solutions gives us the ability to create efficient server solutions that always exceed our customers' price and performance expectations. This is one of the facts that differentiates us from our competitors. 2018 was also when we began to invest and lay the foundation for the future. And we built that foundation by groundbreaking over in Taiwan a new building, which was going to double our capacity for production. We also added salespeople; we added R&D, especially over in Taiwan; and we added departments to build infrastructure, such as internal control, compliance, financial planning and analysis. And so we really laid a great foundation for the future. We used to have, in our legacy, the advantage of being a U.S. manufacturer as we sold to U.S. companies. But now with the completion of the additional capacity in Taiwan, we have the ability to be -- to offer lower cost solutions and at very high efficiency because there's a good availability in Taiwan of hardware and software engineers. So I want to talk about now about the current investment outlook. So as you may know, we recently finished a second -- back in January, we finished a second share repurchase plan that -- for $50 million. That was completed, I think, January 4. That made $80 million of repurchases that we had completed. The Board also approved a $200 million share repurchase plan that will last 18 months. Now we've completed -- we've made the investment. We've completed nearly, supposed to go on online in June, completed the expansion in Taiwan. And we are ready for the growth that we've built the foundation for. And not only that, but we have a culture of growth that we've utilized and leveraged over the last 27 years. So let's go ahead and go to the next slide, which is just a historic perspective of our GAAP numbers. And these are numbers that are published in our forms 10-K. So let's go ahead and click one more slide and get to our model. And by the way, concurrently, with this conference, there is an 8-K, which is being filed with a copy of this presentation as well as a copy of the stock award plan that Charles previously mentioned. So let's talk about our target model. We're targeting an annual growth rate of between 17% and 23%. There's 3 things supporting this. Number one is that we have built the infrastructure to allow for growth, both in terms of capacity as well as efficiency. Number two, we have a culture of growth that's been proven over the last 27 years. And number three, we have markets that we are selling into in the 5G telco space as well as the OEM and data center space, which help us in our target for growth. We have gross margins, which we are targeting 14% to 17%. We expect those margins to increase not just by sales leverage, but additionally because of the efficiencies of having already built out the infrastructure to support our growth. So we expect to be able to control costs going forward. R&D, we expect to go 4% to 5%. We are going to continue to invest heavily in R&D, but we're going to do so disproportionately in Taiwan because we want to have our engineers close to the production area in Taiwan to support that effort. The cost is -- it's a lot more favorable, and it's most efficient from manufacturing or production point of view. SG&A, we believe that we can manage our SG&A costs to target between 3.5% and 5%. This will drive an operating margin of between 5% and 8%. The tax rate is currently 16%, but we are forecasting to go up to 21%. If the President's plans for an increase in U.S. dollar rates at the end of this year are enacted. With that, I'll turn it back to James.

All right. Thanks very much, Dave and Charles, for your presentation. Very brief summary. We're ready to resume growth. We have an ambitious $10 billion target. We're further aligning CEO compensation with shareholder interest with the new plan. David presented the first 3-year target operating model for the company in its history. And our plan is to drive towards operating leverage and earnings growth.

So next, we're going to enter a -- the rest of this time, we're going to allocate to questions and answers. Next slide, please. You can ask questions 2 ways. The first is to raise your hand, and we love it if you turn your video on. And you can also, if you're too shy, you can go ahead and submit a question via Q&A. There's a little button at the bottom of your screen. So we'll just pause for a second to gather questions. So I'm going to be grabbing our first -- we have several hands raised. The first question is going to come from Nehal Chokshi of Northland.

There we go. Great. Let me -- here we go. All right. Great. So great that you guys are -- did this, provide the vision and the 3-year out model, this is awesome. And yes, the -- I guess the first question is that, Charles, do you view this $10 billion target 3 to 6 years out as the ambitious or as something that you expect to be able to achieve?

Yes. Thank you for the question. If we are able to grow in 3 areas very aggressively. One is our organic business, enterprise, midsized to small-sized customer, we are able to grow with our B2B, B2C auto configurator. So with that, we are able to service our customer much, much more efficiently. With the same sales headcount, we pretty much can support 50% or even 100% more customer because of the tool we have. And 2 or 9 does help ourselves, also help our customers to approach their customers. So indeed, the market they have. Also with our Taiwan expansion, right? So our economic scale will grow, hopefully double very soon, and that will lower our cost. With lower costs, we can support the customer even stronger. And the second category is kind of like a private cloud, top 300 customers, including telco. Again, in the last 2 years, we already engaged handful of customers around the top 20 around the world. And more than that is the top 50 or top of the 300. So we feel very comfortable, very confident, we are able to grow for those Tier 2, Tier 3 data center, especially private cloud, including kind of private 5G. And then that account, including a larger ASP, right? So those are data center. Now with our Taiwan facility, our Taiwan cost, Taiwan manpower, we are ready to support them. And we always have some demand from them. But before, we have not been able to support because of costs. Now our costs become better, and our capacity is higher. So we are very comfortable to grow our revenue.

Dave, can you care to chime in on your thoughts as to the $10 billion target aggressive? Or that's exactly what you expect?

Well, I think if you model out our historic growth rates, I think that the targets are achievable. And not only that, but we have a very inspired workforce, which has been dedicated for the last 27 years. So I describe it as these are very achievable things.

Great. Okay. So prior to the 10-K filing delay, one of your first slides, Charles, implies that you were supply constrained. And if you had greater supply, you could have grown faster. I guess, first, that supply is supply of engineers that can help the customers take the Building Block Solutions and actually customize it. Is that correct?

Indeed, during the time frame, mostly constrained our production capacity because at that time, most of our production are building in San Jose. And our San Jose facility was limited at that about 5 to -- about 5-year time frame. So very pitiful 5 year. So that's why we start to grow in Taiwan aggressively after that. And now we have enough the capacity already by now.

So Aaron Rakers submitted a question from Wells Fargo. This question may be perhaps more for David. Can you talk a bit about how Super Micro has changed their ability to have increased visibility in forward demand?

So I think that we've entered -- we've built a lot of relationships with -- as Charles mentioned, with really good customers. And I think that a lot of times in our product development, the participation by customers is very deep. And so this gives us a chance to see which direction they're going. And that's what really drives a lot of both OEM sales as well as data center sales, as Charles mentioned, where customers are telling us where they would like to go. That's what gives us visibility.

Yes. The good thing is that, I mean, in last 5 years, we enhanced our FAE team. I believe we at least tripled our FAE, field application engineering team, about triple the size. And last 3 years, we add more core solution team. So far, we have about 30 to 40 solution managers. So this FAE team and solution team working with customers deeply. So they know customers demand in advance, not like just from sales top.

All right. Next question, I'm going to turn to Mehdi Hosseini of Susquehanna.

Thanks, Jim. I have a couple of follow-ups. First, on the operation, it's great to see revenue and operating margin target. But can you also have any metric or goal for free cash flow margin? And I have 2 other follow-ups.

Okay. So a fair question. So today, we are not targeting to forecast free cash flows, and so I will work on that going forward. But today, we're just working on margins.

But in terms of cash flow, indeed, we have been very strong. We have enough cash, basically. And also now with our business extended to Taiwan, we have been building a very good credit line with the partner in Taiwan, including the bank, and especially use their low interest rate. So cash flow basically won't be any concern.

Okay. Great. And I have 2 follow-ups with Charles. First, how do you see the CPU upgrade helping you, especially as you look in the back half of the calendar year? For the first time, we have back-to-back CPU upgrade, Ice Lake, and later in the year, Sapphire Rapid. In that context, do you expect next fiscal year to have a much higher growth rate? And then the second question has more to do with the Board. It was good to see some diversification when you were addressing the filing. But can you also help us how you see if the Board diversification is going to continue looking to the future?

Yes. Very good question. Yes, Ice Lake and Sapphire Rapid, 2 product lines, 1 for the PCI Gen 4, 1 is for Gen 5. Both product line are very good. And both are -- Ice Lake will be available almost right away. And we have a complete product line, total solution ready. For Sapphire Rapid, we also have a design going on. The progress have been very convincible. And again, with our Building Block Solutions, we have a solution ready for Sapphire Rapid almost ahead of Intel. So for both products, we are very excited. Just waiting with CPU to be available both in production, and then we can support the customer around the world.

And then on the Board topic for directors?

More directors -- okay. So thank you. More directors, yes, I mean, last few years, because of the 10-K delay, so we have a lot of kind of expertise in legality, in financing. And we are looking for some other Board who are really good in business technology. So we are always ready to make some adjustment.

Next, I'm going to go to Jon Lopez of Vertical Group.

Hey, can you hear me okay?

Yes, we can.

Fantastic. How are you?

Great.

Good. Good. I have a couple of questions, guys. So the first one is, do you guys -- just near term, can you offer us any calendar '21 guidance in the context of this new target framework?

I believe this quarter end, by early May, we should be able to update for the short term financial and business outlook.

Got you. Okay. That helps. My second one, if we kind of -- I want to sort of take these by buckets. So if we look at where third parties pretty uniformly forecast the enterprise portion of the server market, it's generally flat, best case. If we think about your historical growth rates, that kind of 1993 to 2016 period, the enterprise market was growing. So that's kind of no longer the case. So in the context of your target for that particular segment, you're embedding a lot of share gains. So the question I guess I have is you've talked a bit about products but I'm wondering either at the customer level or perhaps geographically, is there anything else you can offer us detail-wise that sort of gives you comfort in the ability to pretty comfortably outgrow that enterprise bucket?

Yes. Thank you for the question. Very good question. Yes, I mean, enterprise is basically flat. I fortunately believe so. And however, we are able to grow in a couple of areas. One is you just mentioned, geography. Before, we focus on U.S.A. West Coast. And now we have been extend our sales service arm to East Coast. So now we are getting very strong team in the East Coast. And same thing in Asia. Before, we did not focus much on Asia. But in the last 2 years, we start to set up the office there to hire people, to train people there. And [indiscernible] same thing. For European market, we suppose -- I believe we will grow very significantly in East Coast of U.S.A., in Asia, especially Japan, Korea, and also in Europe. That's geography. In terms of product line, yes, our product line is much stronger than before ever. Again, because of Building Block Solutions, we are able to accumulate our history, design assets very efficiently, and plus a new design, especially software and firmware. Last 2 years, we added more than double our software and firmware headcount. So now we have a much stronger BMC open -- open BMC especially, and bios and kind of other management software and some applications, including cloud composer, for example. So with those software value and kind of really strong thermal total solution to support liquid cooling, liquid submerged kind of free air cooling. So we are able to gain market share from our competition, I believe.

Really helpful. Really helpful. Okay. My third one here, if we look at this OEM large data center bucket, I'm assuming that's where we're capturing hyperscale opportunities at this point. And if I'm right about that, if I kind of look back not that long ago, maybe 3, 4 years ago, what you used to call Internet data center was like over 20% of revenue. If we look at the disclosure you're giving us today, it was like 12%, right? So $400 million. So I guess my first question is, why has the relative exposure in that segment declined over the last couple of years? Again, assuming I've got this right apples-to-apples. And then I guess kind of the same question, like within that bucket, where there is more customer concentration, obviously, than sort of the enterprise level, what are the mechanics for driving share gain there?

Okay. Very good. I mean, the reason why we declined a large data center and OEM support in last few years because, number one is cost. Because the last few years, Bay Area costs really grew a lot, and it's really hard to compete. Almost no way to compete for those large CSB, which are based in Silicon Valley. And that's why we aggressively grow our capacity in Taiwan. And second is the 10-K disruption to be very early study during that 3 years, really too much interrupt, so we are kind of a little bit of focusing in that period of time. And this year is now 10-K today, the delisting program is 100% behind us. And even COVID-19 program is getting behind us, for 2 reasons. U.S.A. COVID-19 condition is improving. Second reason, our Taiwan team now have been getting very strong. So we can leverage strong talent in engineering, in operation, in production and even sales and marketing. So that's a big change for us. And also long term, we have been suffering. We have been suffering a lot because of small volume, higher cost. So it will be a big help when we can double or triple our revenue, so that we have lower our overall cost.

Okay. So I'm going to take the next question from Jon Tanwanteng at CJS Securities.

Thank you for doing this, Charles and David and James, it's great to see all your enthusiasm. One thing I think that investors want to hear about is how you've incentivized the company and the management and all your employees, not to let that growth mantra that maybe got you a little bit in trouble with the 10-K and the delisting and controls. Can you just tell us what you've done to promote the controls and compliance culture and the systems that are associated with that while you resume your growth track?

Okay. Very good question and very important. So number one, people work for good [indiscernible] and especially for economical reward. So in that few years during the 10-K delay during COVID-19, for sure, our stock price performance was not good. And now we are ready to take off. And so most of our engineer, most of our senior management, all have a RSC and stock option. So now when they see companies start growing very fast, they are all very excited, much more excited than before. That's number one. Number two, it's also important. I would like to say almost equal important is green computing. I keeping communicate to our engineer, our staff, say, hey, we develop green computing, not just help customers save money, but also help our next generation -- our future generation for a more healthy environment. We have only one Mother Earth. So indeed, a lot of our people, especially engineer and senior management, they really care green computing really have a good way to help future generation. And at the same time, green computing and resource saving help customers save money. I just mentioned about global, if we all use the green solution we proposed, every year, can save the industry up to $7 billion per year. So that's a big help to customer. And when we deliver those messages to our customers, our people feel great honor as well. But I would have to say, most important still, stock price. And also, when company make more [ coffee ], we are able to pay our employee better package, for sure.

All right. Next, I'll move to Ananda Baruah of Loop Capital.

A second. I don't know -- hold on, let me get the video on here. All right. It says the video's on.

It is. We can see you.

Cool. Cool. Awesome. I cannot see myself. Yes, listen, guys. Awesome. Thanks for doing this. This is great. Just kind of getting the state of the union out there. I'm like really happy to see the forecast, too. So that's great as well. David, and welcome. And so 2 questions, if I could. Charles and David, you could just chime in on these. For the key market segments, end market segments that you guys have spoken to, how should we think about the growth in each of those market segments beginning to lift up over the next couple of years? I mean, listen, you've talked in the past to some extent about this, but given that the 3-year forecast is out there now, which one should we start really this year to start to meaningfully contribute, which one should we start next year? I think that would be helpful context. And then I have a quick follow-up.

Okay. Your question is big. So 3 areas, for example, our organic business, enterprise, distribution, we expect to grow maybe 10% to 15% year, especially with our B2B and B2C automation help, and also better product. And in kind of private cloud, 5G telco, top 300 account. Again, last 12 months, we gained a lot of account in this segment, and we will continue to get account in this area. So those customers like green, they like our Building Block Solutions. And I believe in top 300 accounts, we should be able to grow maybe 30% yearly, especially kind of private cloud telco. And in large account, large CSP and OEM, it depends on our capacity and also depends on our profit margin. So basically, our room in this area is much bigger. I expect to grow maybe 30% yearly or even 60% yearly, depends on our capacity and also our resource.

And Charles, when do you believe the growth in those segments begins in earnest?

It's from our contact with customers. And I periodically work with sales with our FAE and solution manager and talk to customers, say, "Hey, what do they want?" And compare with the competition. I believe that demand is there.

I think he was asking you when. He said when, did you say, Ananda?

Yes.

It's happening now. It's happening now. That's why we pull in our Taiwan 1 million square feet of building to be available by June. So for sure, COVID-19 is not fully end yet. I believe maybe after summer, the growth will be faster. And also depending on Intel Ice Lake.

Okay. That's great context. And then...

Sorry, Ananda. I'm going to go to -- we only got a couple minutes left here. I'm going to try to squeeze in a couple more. Sorry. I'm going to go next to Dan Abrams on the buy side. Let's see here.

I think I'm on.

And you can turn your video, if you like. I'm going to go a couple of minutes over. By the way, everybody, you're welcome to stay. I'll go like 5 minutes over. So we have a couple more questions in the queue we'd like to address.

So some of your competitors have been quite vocal about their as a service offering, does Super Micro need a comparable as a service offering?

At this moment, we do not have a specific one, but we work with bankers, with customers. So if a customer need a financial help, we can help them. And at this moment, we focus on our volume growth because if we had to -- we can grow 20% to 30% yearly. I guess we had to focus on this territory first. As to the fancy cloud or other ramping program subscriber, is we have planned but not in short term.

And then a quick follow-up on balance sheet. Does the company have a balance sheet or a finance strategy to accompany the operating model? Is there a target leverage ratio that we should look at over time?

David, do you want to answer that question? The answer is yes. David?

David, you're muted. You're muted, David.

Yes. Indeed, during the 10-K delay time frame, our financial team spend a lot of effort to improve those foundation. Those are basically financial tool. And today, our position has been much, much better than before ever. And David can answer you in more detail maybe, David?

Yes. I was on mute somehow. But the answer is that, yes, we have modeled out our balance sheet going forward. And we will -- we already are using leverage. We've -- in our Taiwan building. We've got actually, I think, $45 million that we've borrowed to build that building. So we definitely have a plan going forward.

Basically, we are very safe in those concerns.

Yes. The company has a very good history of cash flow generation. And so we -- that's done by -- both by careful expense management as well as a rationalization of all our programs. So we expect that to go forward.

Okay. I'm going to go next to [ Ravi Pat of Hawk Ridge ].

Just a quick question on the disclosure. Are you able to define what the differences are between OEM, large data center and this new industry vertical of cloud software?

Yes. I mean, large OEM and large cloud usually not the CSP. I mean usually, they have some special customer space. They have special demand. So we start to work with them in the last few years. And the model has been very productive to them and to us. Especially, we are able to leverage our Building Block Solutions. See, our Building Block Solutions and the whole system was carefully designed. So those Building Block Solutions, not just good for our regular business, but also good for our OEM and customer mind's design. So we have been working with some of them, and feedback has been very positive. And that's why we prepare to do some business with some of them.

Okay. And if I may just one more. In terms of some of the near-term growth that you're projecting here, just based on your commentary. And I think one of the slides shows sort of like a hockey stick in terms of 2022 growth. How much of that is contingent on Ice Lake and/or Sapphire Rapids? Or -- and how much is already maybe spoken for by some of the new customers in the pipeline that you've recently engaged?

Good question. I mean, our business has been 27 years. So we have a very close, very tight relationship with our current customer. And at the same time, we also reached to new customer, especially the top 300 private cloud, public cloud and some OEM. So we have a [indiscernible] codesign, some of it Ice Like, and some of were Sapphire Rapid, for sure. So things have been pretty under plan.

Great. our final question will come from George Needham. I'm going to go ahead and allow you to talk. George? George, maybe you're muted? Maybe you didn't intend to raise your hand. Okay. Well, I guess I'll go ahead and go to one more. Nehal Chokshi for a follow-up question. That will be our last question for the day.

James, are you able to cycle back to the early part of the presentation where Charles was talking about the 2U, 2N product innovation?

2U 2 now. Yes. A marvelous design. Yes.

Okay. Great. Charles, can you just run through again what is the key innovations that you guys have brought to this particular market that is enabling these wins? And it sounds like this is a very significant opportunity that you guys are now hitting it very soon. That would be the latter question if that's...

Yes. As you know, the GPU market, video streaming particularly, the demand growing very fast. And what people need is try to save energy cost, energy budget as much as they can. And this machine is very high-efficiency design, especially the cooling. And this is air cooling design. Air cooling design, we are able to share all the device efficiently with 4 large cooling fans. And also the maintenance, right, kind of it's core swappable. So customers really happy for easy for maintenance. And also the whole design was designed for high-volume [indiscernible]. So the system design was very simple, very cost efficient. So overall, in today's market like this, customer really care about 3% or 5% better cost, or 3% to 5% or 10% power savings. So this are machine specifically optimal for those demand. And that's why, I mean, even before the product ready for production, we already have some big order waiting there. And we continue to see more and more customer ready to order the product line here.

Great. James, my last question. Can you go to the CEO compensation slide?

Okay. These slides, by the way, you can see now for reference.

Yes. Yes, I know. I don't think it's up yet, though. So that's what I'm asking it. So I guess, how does this actually work here, the stock price and the revenue both have to be hit in order for the stock to be issued?

Yes, of course, it has to be hit.

Okay. And who decided that -- how these tranches are set up? Was that the Board without any of your input? Can you just go through that?

First, I ask, I'll go say, hey, a company are getting [indiscernible] phase, [indiscernible] stage, and the company really like to grow really fast. And as a CEO, I want to have a leadership to show by good example, say, "Hey, I believe the company will have strong growth. So my income will be 100% kind of depends on the company performance." And I'll go, feel very good idea, so they countered back right away. So I just give them an idea. And then they gave me a proposal. And indeed, we settled down very fast. And indeed, the Board asked me, Charles, why you are so easy to deal? Why you say yes right away? I say my goal is to grow the company. And especially green computing, I personally really dream to make a green computing everywhere around the world. And also, this goal is reachable. And it's exactly what we plan in last many years. We extend our U.S.A. capacity, especially triple our capacity in Taiwan. Indeed, we already tripled our capacity in Taiwan by this summer. So I mean capacity need on aggressive growth, and we are able to grow aggressively because good products and good cost structure, especially when we leverage the Taiwan facility. And indeed, last 2 years, we already hired lots of engineer, supporting staff, sales and marketing guy and operation guy in Taiwan. So those persons have been well trained. So we had to grow anyway. And the good thing is we are able to grow, I believe.

All right. Thanks so much, Nehal. We're going to go and wrap this up. We're a little bit over on the time. But thanks, everyone, for your attention and time. And we'll be in, I think, some investor events next week, including some meetings hosted by Nehal. But hopefully, we'll see some of you there. And we can see the rest of you in our next earnings call. Thanks so much.

Thank you so much.

Thank you.

Thank you. I appreciate for the chance.

Thank you, Charles. Thank you, David.

Thank you.