Supermicro presents at JP Morgan Technology Conference

Supermicro (SMCI) presented at the JP Morgan Annual Global Technology conference on May 20, 2024.

The interview was with David Weigand the CFO of Supermicro. Here’s some highlights of Weigand and the analysts comments,

  • We’re still early stage, we believe, on the investment cycle
  • Knowledge that both sovereigns and other enterprises in EMEA are planning “a lot of investment in AI”
  • Believe in 12 months things will still be going on a very strong track
  • Analyst asked what if companies are not getting ROI on AI investment, and CFO gave examples of weather forecasting and drug discovery of examples where the speed up is providing substantial ROI
  • AI is really a game changer, it’s a paradigm shift, doesn’t see risk to companies spending less on AI
  • Using AI internally in a number of areas: R&D, testing, quality control, marketing, and sales
  • AI used internally is showing near-term and long-term evidence of return
  • Analyst mentions key Supermicro differentiation has been the speed of getting products to market
  • CFO says if we had an unlimited supply chain our edge in being first would be even bigger
  • As supply chains smooth out, silicon is more available, lead times from from 52 weeks down to 4-6 weeks
  • Ability to take products to market is getting better
  • Because of engineering prowess that we are able to take products to market quickly
  • Took us 31 years to get here, very engineering focused company
  • Half our employees are engineers and have a CEO who is himself one of the best engineers around
  • CEO drives the engineers to build some of the very best products in our industry
  • Have a focus on high quality products
  • 4% OpEx allows us to “do what we do”
  • Had four 10%+ customers over the last 4-6 quarters, early disruptors are pursuing opportunity fast
  • As AI moves more broadly into the enterprise it will continue to filter down to the rest of enterprises both small and large - thinks the company will diversify
  • Analyst says, “you’re under-indexed with hyper-scalers but have done really well with Tier 2 cloud companies”
  • The market has grown so fast, we just didn’t 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”
  • With respect to GPUs, have a number of great partners: NVIDIA, Intel, AMD
  • Always want to make sure bringing the best products to market, highest performance per dollar per watt, high reliability
  • Any time you have a technology which returns more to the customer than you’re going to have an increase in pricing
  • Companies fear if they wait there’s going to be a delay on general availability in the supply chain or competitors will overtake them
  • They don’t want to wait, but there is a balance with the desire to wait for the next big thing versus the fear you are going to lose traction in your market because you waited
  • Some customers want turnkey solutions are willing to pay for that
  • What we found is that customers want choices and they don’t want to be locked into one solution
  • We think the market is very large and we specialize in customized solutions
  • Customization is definitely appropriate in a disruptive market
  • We’ll prepare whatever CPU, GPU or combination that customers want and not every customer needs a GPU, it depends on their workload
  • We optimize for the customer’s particular need
  • Very close relationship with all of our technology partners
  • Have a lot of interest in MI250, MI300, Gaudi2, and Gauid3, looking forward to those orders
  • Accelerated computing is here to stay, will be both higher volume and higher pricing
  • Analyst, “You’ve acknowledged your willingness to be aggressive on pricing to solidify market share at this point”
  • Our position in the market has risen up so fast because we don’t look past any customers
  • An improved brand is being assisted by being a little bit competitive and getting a beachhead, getting some good installations
  • We’ve done that with liquid cooling recently, we are one of the early companies to ship higher volumes of liquid cooled racks at scale
  • We’re focused on just increasing and growing faster than the market
  • Goal is to grow faster than the market
  • Enterprise channel accounts for 50% of business, have 10%+ customers that have appeared in that vertical
  • Analyst, “There were a couple reports last week of share loss to one of the incumbent branded players related to one of the enterprise customers that’s been your 10% customer in the past” (I’m looking to track down who this is, I believe it’s Dell but not sure)
  • We’re actually gaining a lot of new customers right now
  • Our Asia sales grew most recently
  • Not concerned about who is a 10% customer or not, will have some repeats
  • Operating margin has been hovering over 11 - 11.3% recently with 4% OpEx, believe as we grow will get better operating leverage
  • Liquid cooling was an opportunity to take an early lead, shipping 1,000 racks of liquid cooled solutions
  • Want to establish a beachhead and then build in and out at customer sites
  • Analyst mentions Vapor.io which is building a product based on Supermicro servers, but CFO was unfamiliar so they skipped discussing it
  • Analyst asked CFO to compare to themselves to Celestica (CLS) (Canadian company, last Q growing at 20%, record EPS)
  • I don’t think you’ll find another company that has the same ratio of engineers as part of their workplace, Supermicro’s strength is its engineering prowess, big differentiator between us and anybody on the market
  • We look at building servers as a customer fit for a particular company
  • By end of June 30 will have rack capacity of 5,000 racks per month, and liquid cooled rack capacity of 2,000 racks per month
  • Malaysia factory will come online in July, be able to double our worldwide capacity as this site
  • Have capacity to grow a lot more and the Malaysia site will do both general racks and liquid cooled
  • Have very large backlog, “we haven’t talked about too much about that other than to say it’s at a record level”

Overall there was a lot of useful information in this conference. Biggest concern was that a competitor won some supply from a previous 10% customer, although I cannot find any news source on this. I’m interested to look into this company Celestica (CLS) too, while not a growth company, they are a competitor I was unaware of.

The story seems intact, with Supermicro seeing strong demand for the next 12 months+, record backlog, a more recognized brand, and the Malaysia facility coming online in July to double worldwide capacity.

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I still have a substantial allocation in SMCI, but I wanted to point out an issue that nobody seems to have caught anytime in 2024… and, to me, it’s important >>> LAST YEAR, in one of the earnings conference calls, the CEO said they would have… by the end of 2023… a capacity of… (wait for it…)… 5,000 racks per month.

Overly optimistic? Lying? I dunno. But I remain invested because the numbers still look good, which might be stupidity, but I believe the numbers. But I’m not comfortable with whatever is said that isn’t in the financials.

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

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That’s a good call out. I’d seen that 5,000 number before and thought they should already be there.

Having been following a number of hardware companies, the estimates for completing new production are often optimistic assuming no supply delays and the timelines for completing these projects are extremely long. A good example is Taiwan SemiConductor which has started building plants in the US that won’t reach completion till 2027 and 2028.

These aren’t padded financial guides the same way companies give guidance for financial numbers. I’m not too concerned about a 6-month delay on reaching that target.

As this company says in a lot of their reports they are looking forward not back, and are a very ambitious company. In this conference they are saying the Malaysia plant will double global capacity which I assume means a total production of 10,000 racks will be coming around at some point in the coming years. Asia is their fastest growing region revenue wise and this new plant opens a huge opporunity.


I learned a couple fascinating things about Supermicro recently.

The first is that the company has never done an acquisition of another company in its entire history - all engineering, product, and sales is organic.

The company also has an absolute treasure trove of information about their business on their white papers section.

I was taking a look at their hiring pages too and they have over 400 engineering positions open in a wide variety of countries and disciplines within engineering. I’m realizing what a powerhouse this company is in terms of research, innovation, and engineering.

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I will note that the recent forecast is a bit different than the older forecast since it is for 5000 racks, 2000 liquid cooled instead of just 5000 racks. I don’t know if that means 5000 of which 2000 are liquid cooled or it means 5000 total, of which 2000 are liquid cooled, but in either case it is a different accomplisment.

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