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

In the morning sessions and yesterday's sessions, we had several interesting conversations, both myself and my colleagues hosted. Now we're excited to welcome Super Micro Computer to our session this afternoon. From Super Micro, we have Founder and CEO, Charles Liang; we have CFO, David Weigand; and Patrick Wang, who is President and SVP of East Coast as well as Corp Dev. So well, thank you all for joining us. Let me pass it on to David to make some introductory remarks.

Thank you, Wamsi. I wanted to say that certain information in this presentation contains forward-looking information, including future-oriented financial information and financial outlook. These statements are not guarantees of future performance, and such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections or future performance or results expressed or implied by such forward-looking statements. The company undertakes no obligation to update forward-looking statements if circumstances or management estimates or opinions should change, except as required by applicable securities laws. Thank you.

Thank you so much. Well, to kick it off, maybe Charles, good to see you. I know it's been a few years, but you look great.

I wanted to maybe first ask how Super Micro is different from a few years ago. Maybe you can help the investor base, first ground them with what's been happening.

Okay. Thank you, Wamsi. And thank you all the investor and potential investor. I'm very happy to join this conference. So first, what's the difference with Super Micro today and versus 3 years ago or 5 years ago? Now major difference are number one, our scale, business scale is much bigger now. I mean before, we are kind of $2 billion, $3 billion company in terms of revenue. Now our run rate is close to $4 billion. And then we have capacity to support $6 billion to $7 billion at a time, capacity ready. And second, before, we are Silicon Valley based-company. And now we are still a Silicon Valley-based company, but also an Asian-based company because we have big campus in Asia now. Our capacity in Asia now is bigger than our capacity in USA. And also have a capacity in Netherland, right? And in Netherland, we continue to grow as well. So the scale is much bigger. And then we have a Taiwan campus now which can produce our USA technology in Taiwan with lower cost, higher kind of volume and slightly better cost for our large-scale customer. And the other difference is software and firmware before we say we are a hardware company. Now I would like to say we are a total solution company that based hardware, and then a very fancy, reliable, powerful firmware and software for VMC, for system management and for other operating systems, some application as well. And then also service. Again, before we are manufacturer, engineering company and manufacturing company. Now we are a service company as well. So Super Micro have a global service function now, so we are able to help customer, from concept discussion, brainstorm, design, manufacture and service, including deployment and other service. So Super Micro today is a total solution company. Instead of 5 years ago, a hardware company.

Wow, that's a lot of changes that you have brought about. Congratulations on achieving such larger revenue scale from a few years ago. Charles, can you discuss sort of Super Micro's Building Block Solution? Why is this important?

Okay. Thank you. Building Block Solution has a very unique design methodology we have. With Building Block Solution, we are able to design product faster than our competitor. Because we leverage all our existing subsystem. So when customers discuss with us for a certain application, application optimized. We select pretty much most of our subsystem from our existing on-shelf subsystem. And then in some cases, we do redesign some module, further optimal for customers that exactly they demand. But in other case, we don't have to. Just select a different module, and then we can make application truly optimized complete solution, including rack-scale plug and play, right? And all existing subsystem, and we make rack-level plug and play. We ship to customer. And customer just power on and then connect to our networking and then it work. One example, for example, recently, we work with Osaka University in Japan. It's kind of a complete HPC -- data completed HPC, and including that liquid cooling, including also of GPU, for example. And so with optimize liquid cooling the PoE at 1.06. And then we ship the complete rack to them, it's ready to power on and ready to run. So with Building Block Solution, it helps us offer a solution to customer much quicker, and then specifically customer workload and application optimize. And it's kind of -- including service. So Building Block Solutions help us a lot and also help us lower our inventory. Because across our product line, even generation of product, we are able to share the same subsystem. So in reality, that help us lower our inventory, and also make our spare parts, customer on-site spare parts, much easier. So Building Block Solution is to really help us a lot.

Yes, that's great. Can you, maybe, Charles, just talk about a little bit about the customer base, how that has changed? And how much of your revenues now are these custom boxes -- the custom servers that you are making for maybe hyperscalers versus x-hyperscalers? Or any sense of like how much is going towards satisfying cloud-based demand versus not?

Yes, very good question. We have some large customers since long time ago. But because before our Silicon Valley operation base, too expensive. So we are able to support Tier 2, Tier 3 enterprise and channel, but not really Tier 1 customer because Silicon Valley-based operations cost too much. And that's why we spend 5 to 7 years to develop our Taiwan campus. And now the campus is fully ready. We have about 3 million square feet facility there in the same campus. So we are able to efficiently service Tier 2, Tier 3 and Tier 1 as well now. So it's our choice, it depends on our resource, Tier 2, Tier 3 is still pretty full. Enterprise channels, they are our focus, but we start to support some Tier 1 because our capacity is much bigger now. And in terms of application or vertical, AI, 5G, telco embedded appliance or just a regular data center, we support all of them.

That's great. So with this expansion that you're talking about in Taiwan, would you say that your cost basis and cost structure can match some of what the Taiwanese ODMs are doing?

Yes. Because we design in USA. And now indeed, we have a big design team in Taiwan as well. I take the background, the foundation we have here, developed in Silicon Valley, we extend the design team to Taiwan as well. And then manufacture in Taiwan. So our cost is equal to our other competitors. Especially our scale have been moving very smoothly, very well now. We now -- we sell $3 billion per year and $6 billion per year, that cost will be different. And our operation in Taiwan, we have been -- indeed quite lower than the Silicon Valley. So we take both advantage, Silicon Valley-based economics, quality, service, but Taiwan's manufacture cost.

No, that's fantastic. I remember that you always had a very strong, both technological focus and focus on green computing. How is that differentiated versus competition? And it's funny, as I was thinking about this, I remember that there was a green tie that I still have from Super Micro from 50 years ago.

I like green simply because I was -- I grew away from a country surrounded by forest. So I like green. And most important is the green computing helps customer to save energy cost. From our calculation in detail, if global IT all go for green solutions deeply, together, we can see about $7 billion yearly of our energy cost. So that's a big saving for customer. And second, because we have been focused on green computing for almost 15 years now. So we have a very solid foundation, very optimized, very cost-optimized green solution. So indeed, the green solution won't cost the customer too much. We're talking about ROI. If customers go for deeper green computing solution, how much they have to pay for extra and how long they can return? Indeed, that return time can be very, very fast now. Before, people say 2 years, 1 year. Recently my announcement in [indiscernible]. I said ROI, it can be almost real-time, kind of immediately. Once you decide to go for green, the return already happened. Because when we approach green computing, when we offer really go green solution, we save customer, for example, their data center air condition capacity from, for example, 500 tons to 100 ton, they save 80% of air condition capacity. And shrink their data center size, right? Because the higher computing AC. And kind of also kind of save their UPS capacity. So lot of saving and be realized from the beginning. And also because we have been focused on green computing for so long, our green computing design, and the cost, even material cost, the delta is very, very minimal. So customers don't pay extra, but they have an energy-saving advantage and they reduce the carbon footprint. And then they feel happier because they contribute to a more beautiful, less polluted planet. So without green computing, indeed, I don't know how can I find so much energy every day.

No, that's great. I want to ask you guys about supply chain shortages. I mean, it feels as though we hear this from every company on their earnings calls, that they're dealing with supply chain shortages as it pertains to many different components. And so how is Super Micro navigating these shortages?

David, you want to start, or Patrick?

Certainly. So Wamsi, we have good relationships with all of our suppliers. And those relationships don't just span 1 or 2 years, they go back in many cases over 28 years. And so therefore, we rely on our suppliers as partners during this process. And so therefore, having good relationships helps. We also have maintained a really high level of inventory to service our customers. So are we facing shortage situations? Absolutely. But we're navigating through those. And we had a midpoint last year -- last quarter, in Q3 of $830 million, and our final revenues were $896 million. So we're managing through.

What components would you say, from both an inventory perspective and from a procurement perspective, are somewhat challenging?

I would have to say IC and the chip because global semiconductor capacity limitation, right? And now with COVID-19 in Taiwan, become very serious as well. So we are very carefully watch all of those. But I believe with our long-term partnership and everything plan in long term, our impact is some, but hopefully, will be contained under control.

So when you say ICs, are you talking about processors? Memory? Are you talking about anything more specific that you can share, Charles?

Yes. In a system, on the board, back plan and other control circuit, right? So we use a lots of -- every company use lots of different kind of IC, from CPU, memory and TPLs, small controller you name it. I mean, each system included more than 100 even IC or components, right? So it's complicated matrix that we manage, I would have to say, pretty well.

Okay. Can you maybe talk a little bit about -- you mentioned sort of some of the impact that you to be very careful now, even in Taiwan, from a COVID perspective. Are you seeing -- like we've heard from a lot of companies, not only just escalated cost because of freight and other logistics reasons. But what are -- what are you seeing real time? Are you seeing things improving? Are you seeing things deteriorating? And just from a supply chain and component availability perspective and also from a cost freight and like shipping and logistics cost perspective. Can you give us some sense on what's actually happening on the ground?

Yes, it's really complicated now, and it's dynamic, change every day. Including recently, we heard a couple of manufacturers, I mean, IC packaging manufacturer have some COVID-19 case happening every day now. So we are very carefully watching that. And for ourselves, in our campus, in our office, we have very strict control. And so far, this year we still have a 0 infection in our Taiwan campus. And even in USA, in our campus, in the last 15 months, we control 0 infection from our campus in the USA. So far, we are very lucky, and we will continue to control [indiscernible].

Can you talk about a little bit -- Charles, you alluded to how you've seen so much growth over the last few years and your capacity is there for supporting even more expansion. How would you characterize your market share today? And how would you say that, that is likely to change in the next few years? I don't know if you want to take it, Charles or David?

Yes. Maybe I can start a little bit. I mean, as you know, we have been suffering a lot because of Silicon Valley-based, high on cost. And our revenue was small, $2 billion, $3 billion before. And that's why in the last 5 years, we spent a lot of effort to grow our capacity, including extend our capacity to Taiwan and including kind of develop customer base to support our scale. And we have been achieved in this area very well. So last quarter, I mentioned about our $10 billion plan. And now we are executing that plan very smoothly. I would have to say, we still have a chance to pro in the schedule a day out last quarter. We wish to be able to reach $10 billion faster than what I promised last quarter in the other one. Last time, I said 5 to 6 years, now I believe we can do it much quicker.

That's pretty impressive. When you think about your competitive landscape, how would you say that has changed over the last few years? Clearly, you're talking about your own cost structure improvements that probably put you much better cost structure wise with some of the Taiwanese ODMs. So would you say that is maybe the main competitors that you think about? Or who are you thinking about as your key competitors here?

Cost phase, that's one factor, indeed to myself. I truly believe our really advantage is still technology, better business design, better application optimize and also stronger software and firmware team. We are able to work with Tier 2, Tier 3 or even Tier 1 to improve their data center, to improve their infrastructure and make sure their data center able to outperform their competitors. So that's the major advantage we have, doesn't matter AI, GPU or HPC or kind of hybrid cloud. We invest a lot in the last 5 years. Just software engineer alone, last 2 years, we doubled our software headcount. So this is kind of a very important resource. Now we are ready to work with customers for optimized total solution.

Okay. That's helpful. So I remember in the past, you used to work extremely closely with Intel primarily. And you were able to sort of give them the initial awards to test out their chips. Can you talk about your -- now you're offering, obviously, AMD, Nvidia. How is your sort of, I guess, partnerships evolved? What sort of mix are you seeing across these customers? And do you think that there is also room for ARM-based servers in the future? And any thoughts on that?

Yes. Very good question. We work with Intel very close since 27 years ago. And in the last few years, we also work with the AMD very closely. So we develop a strong product line with them as well. And Nvidia now, we have a very high GPU, AI architecture market share. And we continue to improve our relationship because we are very close to them, all of 3. And that's why we prepared for a $10 billion scale vision. And as to ARM. We -- well, whenever our customer needs, we will be ready to -- for them, especially with our Building Block Solutions. The same Building Block Solution, I feel we are very lucky. The Building Block Solution we develop is good for all different solution. Whether it for computing, with storage, for AI or telco. By the way, telco recently, we just gained some very good territory. Some really strong player. And the relationship we're building up are very solid now.

No, that's great. When you think about this just goal to get to $10 billion, I mean, where do you think that, that growth is going to come from? Like can you talk about what is that plan where you get to that sort of revenue scale? And what is going to be driving that?

Okay. There are a couple of area. I mean, we can grow. One is continuing growth today's customer base in this same segment, right? Even enterprise, there are still lots of new enterprise customer, like to work with us, and we are happy to embrace them even in -- especially Tier 2, Tier 3, there's be a lot of opportunity for us. And then we also started to work with telco 5G partner. And we found -- it's really good vertical for us. And Tier 1 data center and OEM, yes, with our Taiwan capacity now lots of -- at least some of the Tier 1, before we had to say no. Now we like to embrace them as well. So the only limitation is our capacity still, although we have a much bigger capacity, but here we support Tier 1 aggressively against the capacity we have use of recent.

Okay. That's helpful. And then maybe one for David. David, can you talk about sort of your overall balance sheet, what your cash position looks like? What are your expectations around growth of free cash flow?

Certainly. So we ended last quarter with about $180 million of cash. And our business has no problems generating cash. In fact, in the last 3 quarters, we returned to shareholders $118 million through share repurchases. We took 4 million shares off the market. So in addition to that, we also increased our inventory levels, and we did that in response to the supply shortages as well as to increasing demand. So when you look at our balance sheet, we've grown up to a $2 billion balance sheet, not through debt, not through merger, but just through organic growth. So that's been our legacy. So our balance sheet has very little debt. We use -- in fact, we use debt just for working capital requirements. And so we think we have a very strong and healthy balance sheet.

Would you say that, in some ways, right? I mean, when I hear Charles talk about the aspirations here to grow the business as much as he's talking about. I mean, from that perspective, it looks like the equity is quite cheap. So is there any interest in levering up the balance sheet to buy more stock?

Well, that's a question for the -- that's a good question, Wamsi. I think that the Board has considered that and they -- in fact, they authorized a $200 million share buyback. And so we initiated the first tranche of that in January and took -- it was $50 million. So that's a -- that's certainly something that the Board has looked at closely.

Also for the level of investment, maybe Charles, just you said you're investing quite heavily into hiring software engineers, and that's been a big focus. But can you maybe expand a little bit on that? Like what specifically are you hiring these software engineers for from a solution perspective? What are your customers asking for? What is the capability that Super Micro is going to have in the future because of these software professionals that your hiring?

Yes. Because of support Tier 2, Tier 3, enterprise, telco, still our main focus, right? Why are Tier 1 data center -- once we have capacity, we can grow in that area. So to support those enterprise Tier 2, Tier 1 and telco company, they really need our total solution in terms of firmware, kind of like a VMC kind of security, supply chain security, for example, and also some application patch, right? They are however, operating system or application. We work with them closely to make sure we provide them a plug and play solution. So customer don't have to invest their own firmware engineer, software engineer who study the interface between their own environment and our machine. So that's really a good value for our customers. And as what I say, we still have a lot of room to grow enterprise, Tier 2, Tier 1, Tier 3, Tier 2, including Tier 1 also. So those are software and firmware team which we invested in the last 5 years, is very helpful. And that grows our value a lot.

Okay. I have a question from an investor here who's tuned in. His question is, really, what steps are being taken to ensure that there is support and the right level of corporate infrastructure to achieve these growth targets. So in terms of systems, customer service support, FP&A compliance, all these things? What steps are you taking to ensure that all of these are in place to support the level of growth that you're targeting?

Patrick, you want to start?

Sure. So we -- Wamsi, we've invested over the last 3 years, it -- you saw our revenues kind of level off. But actually, in the background, we were making a lot of investments. 2 years ago, around about this time in May, I was over in Taiwan for groundbreaking on the new campus, which is just being completed now in first part of July. So we were building up for the future. And in the same way over the last 3 years, we've added about 100 people to general and administrative functions. And so we've added an internal audit department. We've added a compliance department. We've added more people to our finance department. And so really across the board, we've added additional software and systems and procedures in order to really get us ready for the next stages of growth. And remember, we grew between 2010 and 2018, we grew at a 21% compound annual growth rate. So we know that we have to keep making investments in infrastructure to facilitate our growth. And that's exactly what we're doing and what we've done.

Let me add a little bit, indeed, in the last 5 years, especially last 2 years. We invest a lot on SAP, right? SAP, accounting, our operation software. And then, especially kind of operation automation. including B2B, B2C auto configurator and also customer order online. So the system has been greatly improved and about ready to open to more and more customers. We'll be very soon open to every customer. The other one is service, kind of global service network, global service talent, training including on-site material kind of have. So all of those have been well established.

Okay. No, that's great. I appreciate that perspective. Maybe just to talk a little bit about when you think about your footprint out in Asia and that you're expanding. Are you worried about that last administration, we saw some tariffs being put in place and other structures like that, that pose challenges. So when you think about your footprint in Asia, how concerned are you that you might be subject to some of these various things, like tariffs or other issues, particularly when the U.S. seems to be very focused on driving manufacturing and everything here in the U.S.? And now you're talking about sort of this administration now maybe, especially in semiconductor manufacturing anyway, continuing to want to invest in the future quite aggressively. So do you see a path where this footprint is not just sort of Taiwan-centric. But if needed, you expand here in the U.S.? Or do you think that the Taiwan capacity is really the place to be to sort of support this future demand?

Very big question. I mean, for sure, we have a very aggressive expansion plan I share with our senior management, hey, we guys are green passion, the passion for green. I like to grow company bigger, quicker. And however, in next few years, I believe it's time for Super Micro to grow our value, grow our value for shareholders, for employee as well. So we will continue to invest everywhere. But at the same time, we will focus more on kind of grow company value for shareholders and employee as well. So talking about other territory. Taiwan, we start to focus on Taiwan kind of seriously about 5 years ago. And now we have a very good market share in Taiwan. Japan, Korea, are same thing. We're getting ever more people hired and trained there, and in Europe and East Coast, especially. Now Patrick was assigned as Super Micro East Coast President. So we already to service our potential customer in East Coast. And I like East Coast, the people company and territory, right? So we have a very aggressive plan. Patrick may add a little bit.

Sure. Sure, Charles. Back to your original question on capacity. Not only are we adding a building in Taiwan right now, we have 1 coming online right here in San Jose. right? So we're continuing to invest capacity, resources right here in the Silicon Valley. We have capacity out in the Netherlands as well. And that's an area that we can flex up if we need to. So The way that we see it it's a global network of capacity. We are positioned to serve our global customers wherever they need to ship, where the data centers, wherever the towers and 5G deployments they need. And we've got an opportunity there. And just to add on to what Charles was saying earlier about East Coast, it's a tremendous opportunity for the company. It's an area that I just see blue skies there. And really, what we want to do is replicate the success that we've seen in California over on the other side of the country. So it'll be an exciting couple of years going forward.

Yes. No, thank you, Patrick. We wish you luck with that. Unfortunately, we're just about out of time. So maybe just for closing, Charles, maybe you want to address the investors who are tuned in and talk to them about why they should be excited about an investment in Super Micro?

Thank you. Thank you, Wamsi, and thank you all our investment and potential investors. I'm very excited after our 10-K program, finally, 100% fix; and then COVID-19 in the U.S.A. is kind of much better, under control now, I'm very excited to grow our business. Now we have capacity And we have infrastructure, including SAP, operation and business automation and service network already. We are USA company. We have a lot of important man in USA. I have to say we have highest percentage of server storage product made in USA compared with any of our competitors. So we are very excited to grow in USA, and ready to grow in Asia with big scale, Europe, East Coast. So I feel very excited. And green 9 years -- green completing 9 years of happy customers, save energy costs might indeed kind of make our Earth more beautiful and more green, simply, right? So I'm very excited. I sleep less hour every day now. Other than getting old, maybe don't need as much sleep. But very, very excited every day. So thank you for the opportunity. Thank you, everyone. So have a good day, everyone.

Thank you so much. Thank you, Charles. Thank you, Patrick and David. Thank you so much.

Thank you.

Thank you.

Thanks, Wamsi.

Thank you.