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

Good afternoon. I'm Samik Chatterjee. I cover the hardware and networking companies at JPMorgan. For the next fireside chat, I have the pleasure of hosting Super Micro. With me is David Weigand, who is the Chief Financial Officer. David, thanks for taking the time to come to the conference and thank you to the audience as well.

I'm starting off all my companies with a macro question or asking you to predict what the future looks like. And the question I have for you is, how are you thinking about what the end markets look like in 12 months? We all know where we stand today. And maybe more specifically for you, it's about forecasting what AI-led demand or investment cycle looks like? Share your thoughts.

Thanks, Samik. First, thank you for having us here. And I wanted to remind everyone to check our cautionary safe harbor statement regarding risk factors and forward-looking comments on our Super Micro IR website. So for the first question, what I would say is that we're still early stage, we believe, on the investment cycle. And when we see some of the recent capital raises domestically, both on equity and on available debt lines, there's still -- there's some very large numbers being pulled up. We also have knowledge that both sovereigns as well as other enterprises in EMEA as well as Europe, are really starting to plan a lot of investment in AI. So we believe that in 12 months, things will still be going at a very strong track.

Okay. On the flip side, and just to sort of take the other side of this argument, a lot of investors are concerned that one day we wake up and everyone realizes that the returns on these investments are not material enough to continue to invest towards AI. How do you think about those to raise? And I mean, to some extent, investors talk about it being similar to the dot-com bubble in that sense, how do you differentiate versus that and say, okay, no, this is definitely different because we have line of sight to XYZ.

What accelerated computing has done is it has sped up the times that normally took applications to run. So in other words, if you look at weather forecasting for instance. I mean what accelerated computing does is, it speeds up the time in which you could make more accurate and timely forecasts. So I think that is a -- that's a real business return. So is the reduced time for drug discovery and things like that. So there's so many applications. This is not -- this is really a game changer. It's a paradigm shift. And so we don't see that as a high risk.

Okay. Okay. Before we go forward with the AI demand questions and obviously, we have a lot of them. But more internally, how do you think about using AI or leveraging AI internally in the organization? Do you see enough tangible improvements in house as well when you're leveraging AI? Just share your thoughts on sort of what are you seeing? Because I think that in itself is the confidence level in terms of the sustainability of that demand, right?

Yes. Yes. We're using AI internally in a number of areas in the business, both for -- in R&D and in testing as well as in quality control, marketing and even sales. And so there's a lot of companies doing that right now. They're exploring ways that they can use AI in their business. Some of them are going -- doing that through hyperscalers or CSPs, Others are going ahead and taking it into the enterprise and developing those applications or customer service models or otherwise.

I mean from a time line perspective, do you expect those improvements to be tangible and something investors can track in the near term? Or is it much more of a longer time line in terms of when you see those productivity improvements?

I think that there's going to be both near-term and long-term evidence of returns. And so I think we're just starting to get metrics on those now.

Okay. One of your Super Micro's key differentiation created to the rest of the industry has been the speed with which you get products to the market. That's raised a lot of questions around how sustainable that differentiation is. Once supply lead times start to moderate, share you a sort of perspective on that, when you think about the current supply environment and if availability of products like GPUs improve, how sustainable is that differentiation that you have?

Yes. Actually, it improves because I would say that if we had unlimited supply chain, our edge in being first to market could have been exploited a lot more. So therefore, as supply chains smooth out, silicon is more available as your lead times go down from 52 weeks to 36 weeks to maybe 4 weeks, 6 weeks. Our ability to take products to market, get better. And it's because of our engineering prowess that we're able to take market -- take products to market quickly.

Okay. Interesting. Talk about the modular approach for your systems. How do you think of that as a differentiation related with some of your competitors? Have you seen any competitors take a similar approach? Or how many years of investment in R&D would it require for your competitors to take the same modular approach that you have with your systems?

Yes. It really it took us almost 31 years to get here. And we have a very engineering-focused company. So half of our employees are engineers, we also have a CEO who is himself one of the best engineers around. And he actually drives our culture, and he drives the engineers to build some of the very best products in our industry. And that's really our edge is that we have a focus on high-quality products. We have a very low -- we have about a 4% OpEx, and that's what allows us to do what we do.

Okay. You have greater than 10% customers in most quarters. Help us think about how concentrated or diversified the demand you're seeing from the infrastructure side is right now. And how are you thinking about broadening out the customer base?

There's always -- with the developments in AI, there are those companies that are going to be disruptors and then there are those companies that are going to be disrupted. And so some of the early disruptors are really pursuing this fast. And so they've emerged as kind of our high 10% plus customers. And we're glad we've had 4 of them over the last 4 to 6 quarters, and we expect to have more. And so -- but we believe that as the -- as AI moves more broadly into the enterprise, it will continue to filter down to the rest of -- to all midsize and larger enterprises. So we think that will diversify. But right now, people are using CSPs, for instance, to get there to walk into the AI marketplace.

Okay. So one of the -- I think one of the comments you've made historically, if I get it right, is that you're under-indexed with hyperscalers but have done really well with Tier 2 cloud and companies, which, in some cases, are selling the capacity back to hyperscalers. What has driven that customer dynamic? I mean, which companies do you see as primary competitors when you go up against in terms of bidding for contracts with the hyperscalers versus on the Tier 2 side? Is it a different competitive landscape as well? What has driven this market your sort of indexing being higher to the Tier 2s and the hyperscalers?

The market has grown so fast. I mean, first of all, if you go back and look at what we've done with AI. We've actually been growing with AI over the last 2 years. We didn't just recently discover AI. In fact, our CEO, Charles, he built a supercomputer for NVIDIA to develop AI 10 years ago back when Jensen was talking about the GPU becoming a prominent player -- having a prominent position in the server. So we've been working on AI for a long time and it's driven our revenues the past 2 years. And now with the large language models and ChatGPT, it's kind of its growth has obviously expanded exponentially. And so we think that, that will continue and go on.

And is it a different competitive set when you go up against further wins in the hyperscalers versus the Tier 2s? Or is it pretty much the same compared as you run up against?

Well, in this market, a lot of the hyperscalers are now getting capacity through CSPs. And so -- and we sell to CSPs. So indirectly, and in some cases, directly, we're supporting -- we're selling, as I said, to hyperscalers.

Okay. Let's move to talking about NVIDIA, which is a large supplier or as a company, you have a great relationship with them as well. How does the transition of product generation in relation to NVIDIA's transition here, impact demand for Super Micro's products?

Yes. So we believe that we -- with respect to GPUs, we have a number of great partners. We have NVIDIA, we have Intel, and we have AMD. And so we always want to make sure that we're bringing the very best products to market. And by very best, I mean, the highest performance per dollar per watt, the highest reliability and also the great things that -- the great support that comes with selling those products. So that's really our goal. And we want to -- we partner with all of those companies to bring the very best solutions to market. And we have always found a way to innovate, and we have to continue to do that in the future as well. And -- but I think with our engineering-based culture, we think that we're very optimistic going forward.

I mean -- when you -- maybe going back to that question, when a product transition happens for one of your large suppliers, be it Intel, which will obviously have product transitions once they are more relevant in this market, do you necessarily see it just as a pricing opportunity? Or do you see it as a volume opportunity as well with your customers?

Yes. It's both. I mean, the -- certainly, the ASPs have gone up with -- really, any time you have a technology which returns more to the customer that you're going to have an increase in pricing. It would be like going to a 1,500 horsepower motor from -- and you're going to be able to charge a higher price. But we think also volume because everyone sees the potential for AI in their applications. And we think that will drive higher volume.

Okay. What about this concern that the market has that there will also be pauses from the customer base in terms of buying before the product transition. What do you see in that regard? Are you seeing customers act that way? What have you seen?

Yes. There are always going to be some customers, and this used to happen when back when there was a TikTok changes in Intel CPUs, for instance. So some customers will choose to wait for the next technology that comes out. But again, you have to go back to the disruptor or disrupted model because some companies don't -- they fear that if they wait, there's going to be a delay on general availability. There will be problems with the general supply chain or that they will just have their competitors overtake them. And so they don't want to wait. So there's a balance of the desire to wait for the next thing that's coming out versus the fear that you're going to lose traction in your market because you waited. So those things help to balance, I think, the sales.

Yes. Got it. NVIDIA also has expressed interest in doing full system solutions rather than just the components alone. How do you think about that impacting your TAM and the addressable market you can think of with some of your customers?

Yes. I think that we always manage to innovate. And we've done that with the H100. We've done that with the MI250, and we've done it with Gaudi2. Those are all products that we're shipping. So we always find a way to make our solutions the very best based on the technologies that are out there. So some -- I think that's really the -- some customers want a turnkey solution and they're willing to pay for that. Really, a couple of years ago, people used to ask us, isn't everything going to go to the cloud. And we would say, we think that that's probably going to play a part, but there's still going to be a place for us. And what we found is that, indeed, customers want choices and they don't want to be locked into just one solution. So we think that the market is very large, and we specialize in customized solutions. So we think that customization is definitely appropriate in a disruptive market such as we have now. But what I mean by disrupted is, is that there's a lot of really good technologies that are coming out. And it's a positive disruption.

Okay. Great. So this goes to your point about innovation, but there's also been the discussion about NVIDIA changing partners in relation to reference designs from the prior generation to the next generation. How does that impact your position in the market given that you were -- one of the reference designs last in the prior generation? How do you innovate? And what do you provide as incremental sort of features to the customer with their customization related to a reference design?

Yes. Again, we always find a way to design in the very best features of every new technology offering. And so we'll do the same. And we'll do the same with all of the new releases that are coming out from AMD, from Intel and from NVIDIA. So we welcome those new technologies. And we believe that they're going to ultimately benefit our customers. And so we look forward to coming out with full releases.

Okay. Moving to the alternative suppliers, Intel, AMD, what are you seeing in relation to customer interest as well as any sort of things you can share in relation to pipeline of opportunities related to those suppliers when we start to compare to NVIDIA as the incumbent here?

Yes. I mean, you probably saw the announcement by Microsoft. I mean they have -- they have an interest, I think, in an alternative technology. And that's just normal. There's normal technology choices that every company makes. And we actually have -- we've prepared -- we'll prepare whatever CPU, GPU or combination thereof that our customers want. And by the way, not every customer needs a GPU. It depends on their workload. So whatever optimizes the customer's particular need, that's what we'll build for. And so we're glad about all of the technologies that are coming out. But we have a very close relationship with all of our technology partners. We were in Silicon Valley with our engineers, and we always are looking forward to the next things that are coming out. We are. And you asked me about the pipeline. So we still see -- we are -- we still see a lot of interest. We have a lot of interest in the MI250, MI300 Gaudi2 and Gaudi3. So we're looking forward to those orders.

Okay. Okay. Before I move on, let me take a pause and see if anyone in the audience has a question? Do you want to ask any questions. Okay. So let me continue and we can check in again in a few minutes. Revenue drivers for Super Micro, how do you think about the next few years, how you think about the next few years, how do you think about the drivers between pricing and volume for the company?

Yes, we think it's going to be both higher volume and higher pricing as well because there is -- there is no doubt about the fact that accelerated computing is here to stay. I mean it's not even a question that the server runs better in many applications, not -- again, not every application, but any applications with both a CPU and a GPU, it just increases the throughput. So that battle is over for a large part of the market. And so it's -- we think that that's going to help to continue to help us.