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

Thank you, everybody. Welcome to the Super Micro fireside chat at the Goldman Sachs Communacopia and Technology Conference. I have the privilege of introducing David Weigand, CFO of Super Micro Computer. Prior to joining Super Micro in 2018, David has worked at Hewlett Packard Enterprise, Silicon Graphics International and Renesas Electronics America. My name is Mike Ng. I cover hardware and com tech here at the firm. Just in terms of housekeeping rules, we have about 35 minutes for today's presentation. First, thank you so much for being here, David. It's really a privilege to have you here.

To start things out, maybe we can start with the bigger picture question. Super Micro clearly has had a tremendous amount of success with the class of customers, which many refer to as [ Tier 2 ] cloud or AI CSPs. Could you talk a little bit about what has made Super Micro a partner of choice for these customers? How does Super Micro drive differentiation relative to some of the OEM server competitors?

Okay. Thanks for having us and hosting us. So before I begin, I wanted to say just a few points. Investors should refer to our cautionary safe harbor statement regarding risk factors and forward-looking comments on our Super Micro IR website. Also recall that we recently disclosed, we needed additional time to file our 10-K. We also said that based on what we know, we don't expect any material changes to our fourth quarter or full year fiscal year '24 results. Appreciate everyone's understanding that there's nothing more I can say on that topic at this time. We remain focused on delivering the very best products to our customers and executing on our business plans. So let me go ahead and answer your question. And the answer is that Super Micro's success has really been founded on a couple of things. One is that we have -- we build very efficient systems. We build very reliable systems. And we also are very fast to market. We are really quick to market with new technologies. And liquid cooling is really the latest example of that. We're shipping liquid cooled racks at scale. And this is at a time when the market is moving toward higher heat with GB200 with MI325x processors and GPUs that are consuming more power, generating more heat. And we're early to market. So it's really the combination of that along with our -- what we call Building Block Solutions, which is really our ecosystem. Those are the things that have been attractive points for those customers to come to us.

And you've talked about speed to market as one of the many competitive advantages for Super Micro, could you just discuss why Super Micro has had a history of being first to market with these new technologies. What is it about the engineering or the company's history that supported these competitive advantages, and do you worry that some of these advantages may be dampened over time just as the competition intensifies, right? Dell is somebody who comes top of mind when I think about that.

Sure. So first of all, we're vertically integrated, which means that we do -- in San Jose, we do design, we do manufacturing, we do testing. We do rack assembly, all under one roof. And that allows us to be really, really fast to market. We are a very engineering-focused company and we have a very unique way of our approach to building server technologies. And that unique approach is that we look at the server as an ecosystem kind of similar to maybe like an iPhone. We want everything in our -- in that ecosystem to work well with other components. So that way, when something new is introduced, it already fits into all of the other components. And so we've always grown organically. That's helped us. But now to the second part of your question, Michael, how does that affect us going forward? And the answer is that there's a lot of new technologies that are ramping now. So you've got -- you have GB200 coming out. You have Gaudi 3, you have MI325X. And so there's a we do best in a period when there is technology disruption. And that's because, number one, we're very fast to enable those new technologies to come out with a complete platform of AMD, of NVIDIA, of Intel solutions. Number two, they're going to be high-quality solutions, and they're going to be customized. I mean we have customers that we prepare 20 different types of servers for one customer. And so that's our specialty.

And maybe you could expand on that a little bit. Super Micro clearly has a long history of partnership with all the silica -- semiconductor companies, all the [ compute ] suppliers. How do you think Super Micro is positioned to perform in the next wave of innovation, whether that be Blackwell or Rubin or other chips from AMD and Intel. And what does that mean for the financial profile, if anything?

Yes. We're always working on the next technology. So we really value our relationships with AMD, Intel, NVIDIA, Broadcom and others. And so we always want to be one step ahead, and that's -- we believe that we did that again with liquid cooling. It hurt us a little bit on the margin side as we ramped up on our shipments in the June quarter for our liquid cooled racks, but ultimately, it was the right investment because of where the industry is going. And so that's it.

Yes. One other industry dynamic that I would like your thoughts on is just the shift to what feels like more reference design or closed system architectures. Is that a meaningful shift that you're seeing in this upcoming cycle versus prior ones? And does more of the design coming from your compute partners mean there's less value add and margins potentially for somebody on the server side?

Yes. So the reference designs are kind of -- I think they're excellent. But you have to remember that not everyone wants a red Corvette, okay? And a lot of people they want to customize their car a little bit differently. And I mentioned a minute ago, the fact that we have one customer who we build at least 20 different servers for. And that's not because they're not sure what they want. It's because they know exactly what they want because they have end customers who have different workloads. And so their solution is built on our hardware and their software. And so with different workloads come different requirements and also different economies of purchase. So in other words, you don't always need a Cadillac for the job that you need to do. So what we're expert at is bringing about the best total cost of ownership metrics. And that means you're going to get the best cost per dollar per watt, and that includes taking reference designs and customizing them to a particular customer's needs. So that's what we're -- that's what we think will happen. It already happened in DGX and HGX. We think it will happen again with other -- with future technologies.

Great. And on the last earnings call, Super Micro provided guidance of $26 billion to $30 billion of revenue for fiscal '25. I was wondering if you could talk about the AI server demand environment that you're assuming to support that guidance. What gives you visibility and confidence into providing that outlook for fiscal '25?

When we talk to our customers about what they're doing, when we see some of the financing that's being put in place to build data centers around the world, we believe that there's still a lot of runway left and that demand continues to be very strong. So that's what gives us confidence in the overall market.

And one thing that we all have to consider as we think about the server revenue outlook is how you're thinking about the generation of components and the timing of those components. So what are you assuming as it relates to the Blackwell chips in that outlook? What are the potential offsets to the extent that there's more copper demand if there is some sort of slowdown on the Blackwell side?

Yes. So we -- I think we said on our last earnings update call that we expected the first half of '25, which is the second half of our fiscal year that there would be -- that we would really start to ramp in -- with the GB200, with Blackwell. And so the -- but in the meantime, we have really highly efficient, highly reliable H100, H200 liquid cooled racks that we can ship right now. And that we are shipping right now. So therefore, we think that there's still a lot of runway left on those products. And we've got the -- we have MI325X coming out. And so there's still a lot of products there that we can provide that customers want.

And we started out this fireside chat, talking a little bit about Super Micro's investments in liquid cooled servers that may have impacted margins a little bit last quarter for the guidance in the upcoming quarter. Could you talk a little bit about liquid cooling as a margin headwind and when and why does that get better? And while we're on the topic of gross margins, I think you also called out customer mix as an impact as well. So if you could touch on that, that would be great.

Sure. So we mentioned, again, on our conference call that we shipped about -- that we couldn't ship about [ 800 ] million to a customer that -- whose data center wasn't ready. And so those things happen, that would have been a better margin profile. So that hurt us a little bit on the margin side. In Q4, we weren't expecting that. And then also, we encountered more costs than we expected in ramping up on large-scale shipment of liquid cooled racks. So we had more expedite costs. We had higher component costs. We had manufacturing. We were still working out some of the manufacturing efficiencies, not of liquid cooling, but of shipping at large quantities. And so that was really the challenge, but we've perfected that process now. And so we went right into Q2. And so the processes are much more efficient. Efficiency to me means a better cost profile. And so that's why we were able to give the guidance that we gave.

That's great. And maybe just on that. So it sounds like some of the expedite costs and initial efficiencies of liquid cooling will fall off. You're probably getting a little bit of operating leverage, and it seems like the production process is better. Is that what gives you confidence around the 14% to 17% long-term gross margin outlook? Why is that the right range? And maybe you can talk about why the gross margin trajectory should get better throughout the year?

Sure. So Super Micro sits between the ODMs on the low side and the large server manufacturers on the high side. So we sit in the middle as a producer of customized solutions. And so we think that -- we still believe that we have the best value to our customers because of the -- again, because of that cost per watt or per dollar metric. And so that's why we set our target margins at 14% to 17%. Now when we -- in the early stages of H100 when we were one of the first to start shipping reliable, efficient H100 servers, we started ramping with great demand because we were one of the few companies that could do that. So we were able to command higher margins than even we expected as we went over 18%. So now I think what you have is you have -- where there's a little bit of a pause here as we start -- as we await the new technologies to come out. And so that brings about a little bit more competition. But we think that in the long run, we still think 14% to 17% is a good target for us. And if you look back over history, we -- it's one that we -- that's achievable for us.

Shifting gears and maybe talking about liquid cooled AI servers, Super Micro shipped, a bunch of liquid cool AI server racks last quarter. I don't think it's too controversial to say that, it was the first to market to deliver something like that at scale. And Super Micro certainly talked about the strength in the market share there. Why is liquid cooling important even with copper-based AI servers? What portion of your sales are liquid cool today? And how big do you think that will get over time?

Yes. So we didn't announce what portion of it is, but one thing we said was that we grew from between the March quarter and the June quarter, we grew $1.5 billion. And we said that, that growth came a lot from liquid cooled racks. And the reason we think it's important even for the hopper is that we've always promoted green computing. And so we completely believe that it makes sense to utilize less energy, less power by using liquid cooling. And by -- and we actually used highly efficient air cooled designs to get the best performance that we could out of air cooled. And that had to do with the way we designed all of our products from the chassis up. So liquid cooling is a natural extension of that. It's trying to lower your -- lower the carbon footprint, green computing, it's been part of our DNA for a long time. We still promote that. But the market wasn't quite ready for that. And that was one of the reasons we even discounted it to try to get a foothold. And we weren't sure where all of the competition was, but we kind of found out that we were actually -- we actually had an edge, and that edge we believe, is going to help us because now where the market is headed is where you have to have liquid cooling. And so guess who happens to be ready to ship liquid-cooled products, and others are going to have to do the same thing that we went through in terms of engineering, in terms of -- manufacturing -- is manufacturing and manufacturing know-how is very overlooked, but we're one of the remaining companies in the U.S. that is building things here on America, on U.S. soil because we know how to do that. And a lot of our customers like the fact that we make our products here, that we design our products here. And so we're proud of that fact.

And just as a follow-up on that, maybe you can talk a little bit about Super Micro's liquid cooling design advantages relative to peers. Is it more in-house design and in-house sourcing, obviously, there are a lot of liquid cooling component companies out there that may sell to some of your competitors like what's different about a Super Micro liquid cooled AI server versus someone else's?

Sure. That's a fair question. So there's not a lot of products we could compare that with on a scale basis. But one thing I can tell you is that we put the same effort or maybe even more into our liquid cooled design as we have all of our products. And that is we design them carefully and thoughtfully to make sure that they are compatible with all of the other products in the Super Micro ecosystem. That means that we can prepare liquid cooled racks for AMD products, for Intel products, Gaudi products for -- and NVIDIA H100, H200s. So it's really the same level of care and design. And we believe that, that's going to carry -- it's going to carry us in the future.

In response to a lot of the demand that Super Micro has been seeing, the company has been investing in production capacity expansion, including with the new facility in Malaysia. My understanding is that production in Malaysia is supposed to come online in November of this year. Could you talk a little bit about what that ramp in production looks like? And what's the best way to think about Super Micro's capacity, whether that be in revenue terms or rack terms, whatever you think would be most helpful for the audience here?

Sure. So we had said that we have a rack capacity of 5,000 servers per month. And then we went on to say that 1,000 of that was -- we used to say 1,000 a month capacity -- per month for liquid -- of that 5,000 was liquid cooled. So now we're actually at 1,500. In July, Charles said that we were at 1,500 liquid cooled racks capacity. That doesn't mean that we're shipping that amount. That just means that's what our capacity is. So to your question, we have a site in Johor, Malaysia, which is about 25 minutes away from Singapore. And we're very excited about that site. And we believe that it dovetails nicely with the demand in Asia for AI computing, and it also gives us a chance to lower the cost envelope in a lot of areas. And so we're -- we want to produce liquid cooled racks in Malaysia, but that's -- we're not going to start there. But that's where we want -- that's where we eventually want to go. And we think that -- we think that we have -- I think we've announced that we're going to increase by our fiscal year-end, June of '25, we'll increase our liquid cooled capacity up to 3,000 racks per month.

And just as a point of clarification, when we think about the 5,000 rack capacity and the 1,500 on liquid cool, is that including Malaysia? Or is that kind of the current today?

That's the current today.

Okay. Got it. Could you touch on the working capital requirements and whether or not Super Micro potentially needs to raise more funding to support customer demand?

Yes. So we -- last year, we more than doubled our revenues. We went from $7.1 billion to almost $15 billion. And by the way, our profits went up 87%. So we needed more capital clearly to take our inventory levels up to $4.4 billion at the June quarter in and take our accounts receivable up to about $2.7 billion. So it took -- it takes -- it absorbs working capital to carry those figures. So we did have to do some equity raises. But now we believe that we're an IG profile company. And as such, we -- our goal now is to try to utilize our balance sheet to get unsecured lines, unsecured funds, and that will help us much better than some of our historical methods of borrowing money, which were basically on asset-based lines. And so we think that the next phase, we want to move to using debt as for working capital. And that doesn't -- based on growth, of course, sometimes we may have to do something different, but we're hoping to use debt to finance our growth.

Let's talk a little bit about customer types. On the last earnings call, Super Micro had talked about being hyperscale ready. And I was wondering if you could just clarify where Super Micro's position is right now as it relates to hyperscale customers. I'll define those as the big 4 versus next-gen hyperscale companies, which are obviously this group of large and emerging group of CSPs.

Yes. The definition of hyperscale is definitely changing right now because it's really the companies that are providing massive amounts of data and storage to its customers with the ability to scale. And so, yes, as you mentioned, Michael, there's kind of a new -- there's an emerging group of companies that have stood up and that are building data centers first in the U.S., are now around the world, also over in Asia and in the Middle East. And in Europe, there are former Bitcoin miners and others that are standing up AI-as-a-Service, Infrastructure-as-a-Service at large scale. And so -- so yes, the definition of a hyperscaler has started to evolve a little bit because you have some companies now that are really handling some very big customers. A lot of data. And in some cases, they're taking some of the -- they're helping out with some of the capacity requirements of some of the other hyperscalers. So they become like a -- they're kind of a quasi hyperscaler. So then you've also got some companies with the generative AI models, the large language models, they are building, and we're shipping to some of those customers that are building the largest -- some of those customers that are building large clusters in the world. And that is going to be in providing generative AI solutions. Companies are often now doing a sandbox, trying to build out -- enterprises are trying to build out their potential use cases for AI using a CSP. But eventually, they may decide to build their own data center. And that's what -- one of the things that Super Micro is moving towards is what we call Data Center Building Block Solutions. And that is we want to help customers to design their data center properly, utilizing liquid cooling, which means that they can use less CapEx to buy less -- smaller chillers. They can also use -- they can also save money on OpEx by having less electricity requirements. And remember, if you need a 20-megawatt data center, if you are using liquid cooled racks in there, it's going to make a huge difference in your density and how many racks you can get into the data center and also in what your power requirements are. So we want to be able to assist our companies with our Data Center Building Block Solution products to help them to maximize their green computing element of data center usage.

I think it's been well publicized and reported on that Super Micro is one of the key AI server vendors for the xAI Memphis Supercluster, 100,000 GPU cluster, was xAI the 20% customer, last quarter? Anything you could share about demand trends from that customer? And how would xAI be characterized when you think about the customer segmentation that Super Micro lays out?

Yes. So we try not to talk too much about our customers and let them speak to that. But I can say, but I think in terms of how we characterize customers, we have three verticals. We have a 5G telco edge product vertical. And then we have an enterprise vertical. And then we also have a large data center and OEM appliance vertical. So the large data center OEM appliance, the OEM appliance is really like a Nutanix where they take our server, they put their software on top, and they provide a solution in their case, like a hyperconverged infrastructure or HCI solution. And we have other customers that use our servers as an OEM appliance to provide cybersecurity solutions, kind of a zero-based trust cybersecurity product. We -- and so that's a good business model for us because customers are buying from us quarter after quarter. Then we also have customers like Intel, that use -- in the enterprise vertical. They're buying from us. We designed a very unique, highly efficient server for them back in like 2016, 2017. So they're in the enterprise vertical. And then you've got the -- kind of let me jump back to the OEM and large data center. Then you've got customers that are just providing AI-as-a-Service. They're providing a large data center. And we also have a lot of customers in that category as well. That vertical has done very well this year.

We just have a couple of minutes left. I was wondering if you could end with a more big picture outlook, what are Super Micro's strategic priorities in the next 3 to 5 years? Do you expect Super Micro to look more like an ODM or an OEM or somewhere in between?

Yes. So I mean, our goals in the next 5 years are really to help our customers maximize their data center experience, number one. Continue to provide customized, differentiated solutions, high performance, high reliability, optimized for the customer's particular workload and application. And we -- but we want to provide end-to-end total solutions. And so we view ourselves in a unique category of -- not we're not a CM and also we're not yet a large server in the large server category. But at $15 billion, not doing too bad. But we really want to provide our customers with the very best product and the very best experience that they can have. And we have some of the very most -- very demanding -- we have very demanding customers, too, and we're fine with that.

It's a wonderful place to cap off. It's been a privilege to be able to spend some time with you. Thank you so much, David.

Yes. Thank you.