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

Welcome to the Super Micro fireside chat at the Goldman Sachs Communacopia and Technology Conference. I have the privilege of having Mike Staiger, SVP of Corporate Development of Super Micro. My name is Kat Murphy, and I cover SMCI and IT hardware here at Goldman Sachs. We have about 35 minutes for today's presentation inclusive of Q&A at the end.

So to start, Mike, thank you very much for being here. I appreciate the opportunity to get to talk to you in front of the audience. Let's start on the raised fiscal '27 guide? Really impressive to see on the earnings print last quarter, expectations were $65 billion to $72 billion in revenue, which implies another year of substantial growth on top of revenue nearly doubling or more than doubling in the last year. Can you talk about the major building blocks that are supporting that outlook as we look forward to next year?

Yes. Great. Thanks for having us. It's good to see you catch up. So I think it's not lost on anyone demand and actually pretty excellent. I think a couple of years ago, we were $15 billion, and now we're on our way doing $15 billion per year, and now we're on our way to do $15 billion for 1 quarter and beyond. So the building blocks, obviously, the foundation here is that AI adoption is underway. We're leading the charge with innovation. We have a whole host of different various solutions that we're bringing to market with our partners. The order book, obviously, at $60 billion underpins the guidance for the year. We're pretty focused on scheduled build-out, so to speak, for our end customers. There's a diversification within that customer base that's really helpful. So we see it broadening out. And it looks to be a multiyear -- a multiyear cycle and customers are looking for solutions as opposed to components, so to speak. So it's pretty awesome.

In terms of thinking about this growth going forward, too. You underline the healthy demand, the diversification of customers. How should we think about maybe put more simply, parsing the growth between TAM expansion and then Super Micro gaining share? You're obviously going after this opportunity in enterprise, which is not a place you played historically. How should we think about the balance of those 2 driving the growth next year?

So there's multiple layers of that, which is awesome, but the TAM itself has been segmented out as $2 trillion to $4 trillion build. And whether or not the market truly believes that that TAM, but if we're thinking is $2 trillion to $4 trillion. And we're 10% of that market, and we said this before, we're 10% now of the market itself, which implies that we're a significant enterprise player. So we'll go back to that. But that gives us a $200 billion look. And I think that there is more opportunity for us because as we move forward in this market. Our focus is not -- our focus is on solutioning the customer. And if we're solutioning the customer, by nature, we should be gaining share. And I think the underpinnings of this is that, we're transitioning from a traditional compute stack that people have been following for years, server storage, networking, et cetera. And the deployment model could change to next-generation innovative solutions, which we've been leading the charge. This is why it's been driving the growth. The customers are wanting application optimized solutions for AI and beyond. And we're developing those with a whole host of partners and we can get into that later. But so from that perspective, that underpins the growth on the innovation front. So we look to capture more customers. So we're focused on the customer as opposed to are we going to -- how much of the market share we can gain, so to speak. So there's a lot of nuance to that, but I guess we can dive into that with whatever the question we have.

Yes. Maybe a part of that, that would be helpful if you touch could touch on. Super Micro's right to win historically has been your engineering-led model that's been differentiated relative to some of the domestic OEM peers that you have. As AI infrastructure becomes increasingly more complex with every chipset with every requirement, how does your engineering focus do you feel differentiate you versus some of your peers?

No, I think it's major, right? The time to market, the time to engineering -- the time to solution is a material differentiator from what we're doing. So when we -- working with multiple large name partners, many of them are here today, they all have variations of their different chipsets and different platforms and those platforms all need different motherboard architecture, framework, and we're able to manage or understand that element and put into a product -- into a system. So you take any chip, any server into any rack into any data center as a whole to solution or an AI factory. So the engineering piece of this is what leads customers to us and which leads us to gain share. And we've always done this. We've done this in the enterprise day 1 back in the days of x86, Will X86 still the platform, but a big platform. We were able to put more compute in a system that with a lower power draw with better thermal dynamics at a lower cost. At that time, no one cared about power and cooling. So the DNA of the company is all about packaging these solutions to enable the customer to do more with their gear. So if you take that, ethos, so to speak, then you move forward and you can productize that and you see the AI platforms actually requiring what we're able and capable of doing where half of our stab is engineering. Our focus is on this. We're sitting in Silicon Valley. All the major partners there, we can flex incredibly fast. And so we're bringing brand-new technology to the market in volume and at scale, and that's a great viewpoint for customers and they notice.

Part of the mix story should also help one of the main investor questions around Super Micro, which is around your margin profile. Incredibly strong margins last quarter, beat guidance expectations, I think 17.5% gross margin. And you've talked about returning the margin profile for the company back to stable double digits next year. What are some of the structural changes within the business versus maybe 1 or 2 years ago that gives you line of sight into that stable double-digit margin framework? And is it mix? Is it the plan being executed as expected, like anything to share there to give us confidence that Super Micro will get back into that range?

Yes. So I think the backdrop of the market in early days, there was a few large buyers and a lot of folks who wanted to serve those buyers. And so there was a lot of price competition in that segment. And I think many of the larger buyers realize that when they were getting, I think, to use systems or reference architecture that they had to do a tremendous amount of work to stand that up. And I think one of our partners has mentioned that if it's -- if you have 8 racks and it takes you 30 days to make them operational. It's like a $3 million. So some of these operators are looking at 100 to 1,500 rack deployments. You're talking hundreds of millions of dollars if you cannot stand up your infrastructure immediately. So I think the end market is looking for time to online time to revenue. So if you think about what's happening at the neo cloud level and you see some of these major contracts where these neo clouds are -- many of them growing they're getting hyperscaler contracts. So in essence, our systems at the neo clouds are serving hyperscale. So they need to get those systems up and running immediately time to market. So when we solution those customers, there's a solution value. We're putting more content into those particular packages for the customers that form a DCBBS. And if you go back a year, 1.5 years ago, we told the market that we were going to do DCBS, building blocks and we have power cooling, CDUs or redo heat exchangers, stores, which -- that software to integrate these things. So when we put together a system or a solution for a customer, the integration, the L11,/L12 element of this, they can turn it on day 1. And more importantly, they get time to revenue. But the more important element of this is the reliability of that integrated system that significantly -- we believe it's significantly higher than competitors. And so if your system availability is there for you and you can charge dollars for downtime kills you, right? You're losing revenue. So they're gaining the capability quicker, and they have greater reliability. So the cost savings to the customer is significant. So that's the solution value. And so that's supportive of the double-digit gross margin element that we've pointed to to the market. We guided to -- we'll say, in the midpoint 10.6% for the quarter. There is an element of there is a downtick and there's some contracts in there that potentially drug through from the prior quarter that put some pressure on that. But the focus is the solution to the customer. And as we do more on the DCBVS,tand we have more components that are more integrated, that we're putting -- we're doing more ourselves. Those margin profile is higher. So that mix and the customer mix. So we'll add to the diversification of the customer base helps. And so we're doing more than just serving neoclouds, enterprises and sovereigns. The enterprises and sovereigns and inclusive of the neo clouds you need these solutions because everyone wants to get their systems up and running and serve their customer because they're serving their customer. It's a revenue generator or it's a productivity enhancement for the organization, and that's kind of the direction we're going. That's what we're focused on.

You're talking about solutions architecture. You made reference to DC BBS or the data center of Building Block Solutions. For people who may be less familiar, can you define exactly what that is for Super Micro? And to the extent that these are things that Super Micro is doing internally versus partnering with some third parties to bring in capabilities, talk about that mix and how it makes more attractive the offering to enterprise?

So we're initially engaged with the market and the initial build-out, reference architecture and making that racks for customers and delivering racks. And I mentioned before that just delivering a rack technically isn't enough. We saw customers struggle with the cooling, with the power, power shelves, et cetera, with implementing the cabling and the back line of the cable management, the management software for the cluster itself. And so what we've done is develop -- productize those elements so that we can stand up those systems quicker. And the more important element is that if we control those elements, then we can get to revenue to the customer quicker and it's a lot easier to match order to time frame so that they can get online faster. So -- it's a product suite. It's inclusive of storage and switches downstream, we'll probably have more switches. But at the same time, the software tightly connect -- tightly integrates with this. And ultimately, we'll get to a point where we can go across, let's say, factories or solutions and do different architectures or different families and cross plans to manage the footprint because we think customers are going to ultimately have either it's GenAI or agentic CPUs or traditional CPUs, all those things will be very difficult to manage. So we're focused on downstream, making those things work collectively for the customer. So it's a total solution strategy for the customer. It's we haven't given that like what part would be the P&Q of each individual item that will be pretty complicated. But it's clearly working and we've shown the muscle strength of going from a lower margin or we had a headwind in core that scared people, to be honest. And now you were on a trajectory that the solution is looking so from a margin perspective. So it's a great thing for us, and we're looking forward to doing more with our partners as more product comes on stream.

Got you. I want to touch on the software piece. But first, could you just confirm on the ways in which you're selling these DC BBS products or components within that solution? Is this all Super Micro branded cooling and power? Or are there other parts of the...

We design almost everything, and we do have partners that help solution these pieces. So it will be a Super Micro design, and it ultimately, it's something that we think that we can do in-house. We'll do it. There's many other pieces that we do. And again, it's part of the solution. So they are all integrated together and they work better. So again, it's a customer wanted to DIY, and we've seen this. There's all kinds of mismatches and issues and problems. So we've been able to essentially productize this. So it time online for the customer is significant. So it's all about innovation and staying at the forefront of the curve. And we've seen customers go various different flavors or types of GPUs from our partners that match workloads. And so we're able to flex and within whether it's or AMD or Intel or ARM based, to be able to flex through those products. So the breadth of product is amazing, and the use cases are expanding or broadening out. And we think it's a multiyear cycle, and we have all kinds of solutions for those customers. And that's why they're coming to us and inclusive of expanding our go-to-market presence in the enterprise, our service capability in the enterprise, et cetera.

On the software front, you've talked in the past about early traction in the suite of management software that Super Micro -- there's the Super Cloud Composer, there's the Data Center Manager. There's the Orchestration Manager. Why is Super Micro the right person to sell this to your end customers? And who -- what are the other solutions that they may have? It's a very small share of revenue today, but it's where you're investing, anything to share on that front?

Well, so software and services, I think PAUSE fiscal '26, we just finished $538 million, so -- and growing. So it could be a substantial part of the business. It obviously -- we say, obviously, it's higher margin. Software margins are great. Everyone knows that. But from a standpoint of the integration and all the control plane for the racks and the cooling storage, et cetera, is internalized in that system. So it makes it seamless for the customer. And so we think it's a pretty essential toolkit, where we've integrated that with VCF. And so that's VMware VCA factory. And so it's another proof point from a standpoint of partnering and an expansion in the enterprise where the factories and the management plane from a VMware perspective, we can reach more customers than the enterprise.

Is this something that you sell or ship directly? Or is it part of how you're winning...

It's part of the solution. We'll go with our systems. And ultimately, I believe it's potential to cross different brand called clusters. We will see. But right now, it's a total part of the total solution package.

Going back to this notion of DC BBS opening up the aperture of the types of customers that you can serve. Is this an attach -- is this an opportunity to win new customers? Or are you seeing your existing maybe larger, potentially more cost-sensitive customers looking now at the broader scope of Super Micro's offering and maybe engaging in different product lines and features?

I think the first engagement process is I need an AI solution, I need a factory, I need a system. So it's kind of a tailwind to all of that. So it's inclusive of it as opposed to a point product. But I will say that we have gone to customers and upgraded or enhance their footprint, whether they needed some cooling solutions or some power solutions, we can do that. We can probably do that across multi-platforms. So we've done it, but it really starts with the customer and putting in a new deployment or upgrading the existing deployment that were inclusive of a total solution for those customers.

I want to go back to talking about your strength in Neo clouds third-party data estimate 40% market share in the NeoCloud as server business for Supermicro. There is an investor concern that as some of these most mature companies continue to grow, most mature no clouds a little. They will try to engage more with a Taiwanese ODM or a lower cost operating model. You talked about the importance of time to first token. But how does that change over time when the scale of the deal may be less favorable from a unit economics perspective for Super Micro?

So that concern was around at $7 billion at $15 billion at $22 billion, at $39 billion, and it's going to exist at $68 billion. So there's a certain function that they may serve again, shipping racks to customers, but we feel that there is a significant amount of customers that need that solution. So we will get them up to online time to online quicker and faster with the L11, L12 validation. As the complexity continues to increase, it becomes difficult, more difficult for customers to keep pace. We're keeping that pace. The second phase of this is that the notion that there's going to be one platform that everyone lands on it's clearly not the case when you see hyperscalers trying to do -- they're doing their own silicon and a number of platforms that are available to put into a rack or to put into a solution or a factory is significantly expanding. So we're expanding with all those types of solution sets. And so that fragmentation or expansion is something that would be difficult to theoretically mass produce. So we're just going to serve the customer with the solutions because we'll be there and ready day 1. And if it's part of the package, and we're providing value, we'll be fine, and there's business for them to do on the OEM front, and there's plenty of business for us to do from a solutions front. So the distinction between OEM and OEM, we're just trying to serve the customer, right? We're trying to make -- enable our partners. And I think we're doing a fantastic job with that.

On the point of chip diversity and even the custom silicon that's coming out of some of the hyperscalers. What Super Micro's opportunity to go after? I think Charles has in the past call the design for manufacturing opportunity, is that still something that's in the playbook? Or is that less a focus now that the enterprise opportunity is really starting to get some legs?