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

Okay. Thanks, everybody. My name is George Wang. I'm the SMID analyst for IT hardware at the Barclays. It's my pleasure today to welcome Super Micro management, CFO, David. So before I start, I just want to read this safe harbor statement. We request investors to visit Super Micro IR web page for the safe harbor and the cautionary statements regarding financial history and the projections and the reconciliation of GAAP to non-GAAP measures. So with this out of the way, maybe just to get started, kind of David, can you kind of run through quickly kind of high level the Super Micro story really quickly? And kind of what you bring to the table kind of differentiated versus other OEMs?

Sure. So Super Micro started out as a motherboard company 30 years ago. And a lot of people might ask, well, why -- how does that help you today? And the answer is that with the new technologies coming out, the demands on the motherboard are greater than ever. And so Super Micro is in a unique position to be able to quickly redesign the very best motherboards. We started by selling motherboards to Citibank for use in their ATMs. And so this helped us. Later, we started to develop our own chassis and our own power supplies, our own backplanes. And we eventually developed our own servers, server solutions. That was actually Super Micro -- we call it Super Micro 2.0. That was when we did an IPO back in 2007. We continue to add storage, and eventually, now, Super Micro 3.0, which is racks. And so racks really embody the ability to control the customer experience with plug-and-play. This gives us a chance to sell a complete system with all of our technology and all of the technology of the component, obviously, the components that we use inside to control the experience.

Got you. That's very helpful. So maybe you can kind of run through the key nuances with the server market. I think some of the investors may -- misunderstood the story, kind of used to be a lower-margin business. Now, you have more complexity, kind of the faster delivery to the market. So maybe you can talk about kind of key differentiation and kind of key moats for Super Micro.

Okay. So Super Micro's strength, its moat is the fact that we are approximately 50% engineers. So at heart, we are an engineering company, and we're led actually by one of the best engineers, we believe, in the world in Charles Liang. And so that fact is helping us now because as technology development has sped up with that because now -- previously, you had mostly one platform to use. But now you have multiple platforms with -- you can offer with NVIDIA, AMD, and Intel Arm solutions as well as others. I'm talking about DDR5, PCIe Gen 5, CXL. So there's a lot of emerging technologies, and this is really playing into Super Micro's model, which is our Building Block Solutions, and our building -- what we call, Building Block Solutions is that we architected the server technology from the ground up, and that is we designed our own chassis, we designed our own motherboards. So we built all of the pieces of the server, designed those in-house. And that gives us the ability to quickly incorporate new technologies. It also gives us the ability to customize solutions, which is our -- really our forte, customizing solutions for a company's specific applications. And this differentiates us from both the ODMs as well as the other Tier 1 server manufacturers who try to offer a select number of SKUs to address all of -- a broader part of the market, whereas we go in and we design something unique for a customer that not only gives them the very best -- cost performance metric, but it also gives them the lowest total cost of ownership because we have designed our servers to be low power consumption and to manage heat. And this also helps us now because now with the GPUs going past -- generating past 1,000 watts and dissipating 1,000 watts of heat and CPUs dissipating in excess of 500 watts of heat, heat is becoming more important. And so this -- our ability to provide liquid-cooled solutions and what we call green computing or the lowest amount of heat dissipation allows us to have a competitive edge.

Yes, that's a good segue way to kind of double-click on the liquid cooling. We still think it's sort of underappreciated. So they along with sort of you guys being a pioneer in the Rack Scale Plug and Play, but also kind of the first mover in the liquid cooling as sort of increase the penetration into the modern data center. So can you kind of elaborate on the penetration -- you guys kind of still use throughout, kind of, 20% data center usage for liquid cooling, especially with more constraints on the power and heat going forward? So maybe I think that should continue to contribute to share gains for Super Micro.

Yes. So we try to promote and -- trying to promote green computing. We've tried to promote liquid cooling because we believe that a customer can save up to 40% of their operating costs by utilizing liquid cooling. They can also save on CapEx because if you have a data center -- if you're building a data center, you're going to need a lower powered chiller in order to reduce temperatures, and you're also going to save -- so that will save you CapEx. You can also save on OpEx by not having to run the chiller as often if you're using a liquid-cooled -- direct-to-chip liquid cooling solution, so -- or other besides direct-to-chip, we actually have 3 or more types of solutions. So we think that liquid cooling is the future. And we think that as the new GPUs go up over 1,000 watts, we think that liquid cooling will start to resonate with more customers, and we've estimated that up to the next couple of years, 20% of data centers will employ liquid cooling. You might ask me why isn't everybody using liquid cooling right now. Well, number one, it's more expensive. And so some companies just decide, okay, we'll just run our electricity bill a little higher, it's okay. And I'll have a lower CapEx to take to my approval committee. Number two, some customers believe it will take longer to build, which, in some cases, is true. You have one more -- you have a couple of more steps in order to add to liquid cooling, so -- features. So it is going to take a little bit longer. So those are kind of impediments to adoption, but we believe that that's where the market will have to go. And we even wonder if warranties will start to come into play by now -- we don't know that at all. But that's one possibility that has been speculated that warranties will start to come into play as the heat becomes a more important part of server technology.

That makes sense. So as we take a step back, what are the top pillars of your strategy so they -- over the medium and long-term, investors should care about? And as the calendar flipped into 2024, what are the top 3 or 4 initiatives you guys are working on right now?

Okay. So in terms of the top pillars, we -- first of all, we believe in what AI is going to be able to provide. AI doesn't -- it doesn't help every workload, okay? So we still have customers that have very compute-intensive application workload that don't need AI. And for instance, we sell to a large semiconductor company which isn't using GPUs in their compute because they're doing EDA. And, however, we also have companies that are like -- that are using autonomous driving solutions. We have customers that are streaming videos. We have companies that are doing online gaming. They're doing different graphics-intensive applications. They're going to be the users of AI-based solutions. And right now, I think it's Accenture that has stated if a company hasn't defined its AI solution, if they are not defining what their AI platform solution is going to be, they risk going out of business. So a lot of companies are right now taking a look at what they need to do with their AI strategy. And that's -- we think that's going to be a predominant theme in the next couple of years.

Got you. Yes, just to stay topical kind of talk about next-generation platforms, kind of aside from the traditional kind of NVIDIA H100, you have AMD, you have Intel, you have other kind of -- the hyperscale kind of in-house ASICs ramping up. And obviously, AMD had a bigger event yesterday, kind of MI300 and throughout the bigger 10 number, much higher than people expected. So maybe you can double-click on sort of -- kind of newer most of a chip supply into next year as you guys work with all those guys?

Yes. So on the supply side, the supply is improving. So there's -- it's going to take time because they're still besides the GPUs and the CPUs. There's also other silicon-based components, add-on cards, and network interface cards that rely on silicon. And as we all know, there's additional fabs that are being built in Arizona, Ohio, New York, in -- over in Europe as well by TSMC and Intel and Micron. And so these are going to bring new silicon to market, and that's going to alleviate some of the long lead times that we currently -- we face. However, what we've seen is supply getting better. And so we're encouraged by that. And we think that we've had -- we believe -- what we know our revenues have been constrained by supply, and it's kind of a funny -- interesting thing. We were constrained during the pandemic by supply for different reasons. Those were logistics-based, the ability to get ships in and out of Long Beach, Oakland, and Los Angeles harbors. Now we got out of that. We came out of the pandemic, and we went right into a different kind of a constraint with -- constraint for silicon as well as for GPUs because of demand.

That makes sense. Maybe you can sort of parse out kind of some of the nuances with the training versus inference. Obviously, inference right now still a smaller mix, but -- so they're forecast to be much bigger growth kind of going forward as you have more applications. The L40S is probably kind of target for the inference use cases and also kind of ASIC in the CSP kind of in-house chips, maybe more for the inference versus for the H100, H200, or could be more training. So I think Super Micro is agnostic on those different workloads. So maybe you can sort of double-click on that.

Yes. So we try to bring the very best technologies together in our solutions. And so we don't use any 1 technology exclusively. We're going to bring about, number one, what we think are the highest-performing solutions for a particular workload. Now, if a customer has a preference for one vendor over another one, we're going to follow that preference, but we largely will recommend to a customer the very best, top-performing solution for their particular application whether it's online gaming, online payment processing. We have 0-based -- 0-trust-based cybersecurity providers. We have companies that are doing cloud-based storage solutions. So whatever the application is, we're going to bring the best -- the very best technology. But George is correct. The -- we believe that the market will be moving over from training to inferencing. So initially -- so we were selling to autonomous-based driving companies to -- for training as they were looking at images and training their systems on how to identify objects and then later that will move to inferencing, where they're sending that information out in order to run in their network. And so we think there are some really good inferencing, like the L40S. There are some really good inferencing solutions that are coming out. And those have particular desire or their particular appeal in certain workloads.

Got you. And maybe you can talk about the capacity expansion. And obviously, with supply improving week by week, in order to better need to fulfill the customer demand and backlog, you kind of want to eventually increase capacity. So it's nice to see kind of improving from 4,000 rack scale per month to 5,000 next year. So maybe you can talk about kind of capacity expansion and eventually Malaysia coming up kind of the latter part of next year.

Okay. So we've grown last 2 years where we've grown at a CAGR of 42%. We moved our operating margin up 300 -- 700 basis points, and we moved our gross margin up 300 basis points. We doubled our profits the last -- our EPS the last 2 years going in fiscal year '21 from $2.58 up to $5.65 and $5.65 to $11.81 on a non-GAAP basis. So this kind of increase in demand, which was largely led by AI because we were first to market with a complete set of AI solutions. In fact, our CEO, developed a supercomputer for Jensen Huang, the CEO of NVIDIA about over 10 years ago. And this was actually released as a -- in an interview that was done by Jensen, and saw it on YouTube, about thanking Charles for developing that system for him, that AI-based -- that supercomputer for AI applications. So we think that this growth is -- it will continue for our company, and that's why we have developed additional capacity over in Taiwan. I was over in Taiwan back in 2019 when we were breaking ground on a new facility there and -- which is now, say, 40% utilized. But we're adding in Johor, Malaysia, which is about 20 minutes away from Singapore. We are adding another site that we've broken ground on and are starting to make good progress on. That should be done towards the back half of next calendar year. That will, again, give us bigger capacity as we continue to sell a lot more servers and more importantly, a lot more racks.

Yes. Maybe we can talk about kind of the margin and ASP. Obviously, the gross margin being 3x. The Taiwanese ODM is bigger volume to the value add from Super Micro kind of pricing power. And also with additional overseas capacity coming on, much -- 50% or 60% lower labor cost by our estimates should lead to better OPM going forward. And also the ASP uplift kind of underappreciated as the world move to next-generation kind of H200, is much higher than H100, on the legacy's -- traditional compute, going to kind of Genoa, Bergamo. That's also kind of double-digit increase in ASP. So maybe you can talk about kind of the sustainability of this margin trend and actually potentially work up going over time.

Okay. So back in March of 2021, we put out a target financial model. And that's actually on our website, so you can take a look at that. We set out with a target of top-line growth of 17% to 23%, a 14% to 17% gross margin target. And then we wanted to keep our OpEx below 10%, which we have. And in fact, we have one of the lowest OpEx rates, we think, in the server industry. If you look at our spend in OpEx, it's geared toward R&D. We spend a lot of money on R&D, and we're very -- and we will continue to do that because our engineers, which are, by the way, amongst the best engineers we think, in the industry. They worked very hard. And we focus on R&D. That's part of our DNA. Very, very fast to market. And we think that -- we think that's, again, a differentiator of our company. And we think that margins will continue to, we believe, be within our target range of 14% to 17% because of our speed, our Building Block Solution approach to engineering as well as our speed to market, and that gives us an edge. So if you look at that 300 bps increase in the last 2 years, that coincides with the fact that we were -- the AI was driving our growth. And now, as these new technologies come out that we incorporate and use into our solutions, we think that we will continue to -- that very first to market's capability with the latest technologies.

Got you. Just in terms of the few kind of top catalysts over the next 12 months, maybe you can elaborate kind of -- sort of continued wins from additional customers and -- so the additional share gains from both Tier 1 OEM and kind of Taiwanese ODM with the liquid cool, the kind of technology ramping up. So maybe you can talk about kind of a few things, kind of the investors can look forward to over the next 6 to 12 months.

Okay. So over -- Super Micro has -- growth has always been part of its story. So between 2010 and 2018, which was the year that I joined, we had a CAGR of 21%. Now, like I said last 2 years, we've been at 42%. But we think that we've grown typically much faster than the server industry as a whole. In fact, the 42% in the last 2 years compares to a 7% to 8% growth rate for the overall server industry. So we're basically -- we believe we've been -- we've grown at 5x the last 2 years. And what that means is that we're taking market share. Now remember, we believe that we're -- I think we believe that we're somewhere around 5%, 6% of the server industry, so we just have to win 1 out of -- with a market size of probably $100 billion to $120 billion formerly, we would say that we had to win 1 out of 20 deals. Now, with AI, we believe that the market TAM is actually up over $200 billion. And so we just have to be successful in, like I said, 1 to 2 out of 20 occurrences to make margin -- to make improvements in our market share. And so we're doing everything that we can to do that by bringing the very best products to market.

Yes. So I guess it's remarkable kind of Super Micro grew revenue rapidly through different cycles, right? If you look at last 5 to 10 years, irrespective of macro, so like some of the external factors, maybe you can talk about kind of beyond, so the Super Micro control, so to speak kind of from chip cycle, macro cycle, but you guys still grew revenue kind of, alibis, could be less or more. Maybe you can talk about some of the kind of internal levers you can pull to self-help to kind of continue to sustain this double-digit growth.

Okay. Yes. Thanks, George. That's a great question, and it gives me a chance to, again, reemphasize what our strengths are. And so during the pandemic, even though we had -- even though everyone in the industry had supply shortages, we were able to grow, and we did that because, again, of our architecture, the way we architect our products. The way we architect our products, we qualify a number of different components to be able to work in our systems. So if there's a shortage in 1 area, we're able to pivot and use different solutions. And so additionally, when we design our motherboards, we design them or -- and/or chassis, we design them to be able to work in a lot of different applications. So that gives us the ability to -- when there's shortages in 1 area to quickly pivot over and to use other technologies. We also have -- we also can innovate in some cases to design our own components as needed. For instance, at one point, when there was a shortage on switches, we built our own switches, not because we wanted to be a switch company, but because there was a shortage. So I think our engineering capabilities and our abilities in design help us to -- helped us to make it through several different shortage situations. And we think that, that will continue to help us as we -- as technologies become even more complicated and also as the technology cycle has shortened and gets faster. And we also think that liquid cooling is, again, going to be something that is -- that helps our -- helps the attractiveness of our solutions as companies both seek to reduce their electricity costs as well as try to reduce their carbon footprint because a lot of companies do have ESG as a target. But what we always ask is, are they doing that, are they doing that in their data centers? Are they really investing the money to help reduce their carbon footprint? And we think if not for ESG purposes, perhaps it will just be because of the immense heat that's now being generated in these systems that will move them to embrace green computing.

Yes. The additional 2 points, maybe not as well understood by investors, you guys have de minimis exposure to China on 2% or 3% revenue versus other direct competitors kind of either manufacturing in China or selling to China so kind of being restricted. And also it's kind of your close proximity to kind of key partners. It seems that you guys are the only sort of a server delivery supplier kind of based in Silicon Valley. So maybe you can address this to differentiated kind of competitive edge.

Okay. Yes. So we have been in Silicon Valley since 1993. We were founded in San Jose, the -- actually the same year as NVIDIA was founded. And actually, we've been a partner of theirs for most of that time. We -- so we started in San Jose. We actually opened up -- that was in '93. I think it was around '97 we opened up our -- we started operations in Taiwan and then later in -- over in the Netherlands. We built a site there, assembly test site there as well. But we have over 5,000 -- approximately 5,400 employees and with 20 -- say 2,600 of those in San Jose, down in the South Bay. And we think that we have -- it is an advantage to be close to where a lot of the server technologies are developed, and it gives us -- it gives our engineers a chance to work directly, not just on current product solutions, but on future product solutions. So we're kind of out working on the next things, that way whenever the products are released we have a full set of solutions that we can offer to people. We do have low exposure because, as everyone knows, GPU sales in China were unfortunately stopped. And so that represents about 2% to 3% of our business. And -- but -- so we don't have too much exposure there. But we do like the fact that some customers like the fact that we manufacture here in the U.S. Others want the very lowest cost, and so, therefore, they like the fact that we can also manufacture in a lower-cost region. And so different customers have different preferences, but we like to be able to offer as much as we can, as much choice as we can to our customers.

Yes. So we have last minute left in our session before we wrap up. Maybe we can take some questions from the audience. I see there's a gentleman, go ahead.

Yes. With the -- at the AMD launch yesterday, Charles says, we are growing "faster than fast". What does he mean by that?

Well, I think that our -- historically, I guess our growth rate was about -- it was about 21%, 2010 to 2018. So last 2 years, we grew at 42%, and we gave a guide, which was at the midpoint, higher than that 42% for the year. So if you look at the overall industry growing at 7% to 8%, I would say that that's faster than fast.

Okay. I'm just laughing because just hearing stories about your 30th-anniversary party a couple of weeks ago, it has just started like it was fun, so obsessed. Second question is, more seriously, he's updating event. And obviously, you've been pretty supply-constrained with NVIDIA GPUs. What's the opportunity with this AMD, the new GPUs, and obviously, the whole platform that they have? What does that do for the opportunities for Super Micro now that there's now a second supplier in the market? You can quantify something, that would be great too.

Yes. So we have been selling AMD solutions for some time. I mean, we -- out at Lawrence Livermore Lab, they have -- we have -- we added to their cluster -- their Corona Cluster, an AMD -- AMD CPUs as well as AMD GPUs. And so there are some customers that -- who will favor AMD, and we're very glad to offer those products, and we know they will do well because they're a good engineering company. And then their -- yes. And so for us, we will -- we believe that it will give the ability to -- because certain CPUs and certain GPUs will have better performance in certain applications. And so it gives us the ability to offer the very best performance in -- based on the workload. And so that's really what it comes down to is not -- is being able to have the -- what we call, the optimization -- the application optimization to give the customer the very best experience. So we think that we're excited about the AMD technologies that are coming out. And so we're very glad to offer those products.

Okay. Your -- last question.

Give some color on the equity offering...

Yes. So with our high growth, we needed additional capital to -- really to purchase inventory because as a manufacturing company, we have to carry -- we have to purchase inventory, carry it as we build it, carry it as it's an accounts receivable until it converts to cash. So just with rapid growth we need additional working capital. We -- this also gives us -- it also gave us a chance to add some additional coverage from analysts, some really, really good analysts to the company to better get the story out to the investment community and also get some very good shareholders as well, expand our shareholder base and our -- the broader coverage and holding of our company.

Okay. Great. Thanks, again, David for taking the time out.

Okay. Thank you for having me, George. Yes, I appreciate it.