As demonstrated by the latest financial reports, big corporations are still making significant investments in artificial intelligence. However, a major issue that has emerged is the substantial electricity consumption of these energy-intensive AI servers. The introduction of even more powerful AI chips in the upcoming year is expected to exacerbate this issue further.
In order to reduce the significant energy consumption of AI systems, data center operators are beginning to implement direct liquid cooling (DLC) for AI server racks instead of the conventional air-cooled racks commonly found in most data centers.
At the beginning of this year, liquid-cooled data centers represented just 1% of the market. However, they are now poised for significant growth, which could potentially disrupt the rapidly expanding AI server sector. Given its established track record of innovation in energy-efficient solutions, it comes as no shock that Super Micro Computer ( SMCI -0.23% ) is positioning itself to become the leader in this industry disturbance.
From 1% to 15% almost instantly
Up until now, liquid cooling has only accounted for 1% of the data center market due to the lengthy deployment process, higher costs, and the risk of leaks leading to component malfunctions. Additionally, overseeing liquid-cooling systems requires a unique skill set compared to managing air-cooled systems.
Nevertheless, it seems that Supermicro has managed to solve a particular challenge in implementing large-scale liquid-cooled racks. This could have significant implications.
Analysts expressed concern over the decrease in Supermicro’s performance. gross margins In the previous quarter, the decrease could be seen as positive news for. investors with a focus on holding investments for an extended period of time Management reported that after introducing their new liquid-cooled solutions at Computex in the beginning of June, the company experienced a higher demand for liquid-cooled racks than anticipated. Consequently, they had to opt for faster shipping of liquid-cooling parts, resulting in increased costs and a negative impact on gross margins for the last quarter.
Nonetheless, having a higher demand than anticipated is a positive challenge. During the latest earnings conference call, the CEO of Supermicro, Charles Liang, mentioned that the company had delivered approximately 1,000 liquid-cooled racks in June and July. Liang stated that this accounted for over 15% of all new data center installations worldwide during those two months. Additionally, Liang highlighted that Supermicro predicts that 25% to 30% of upcoming data center installations will adopt DLC solutions in the next year, with the majority expected to be provided by Supermicro.
Supermicro is making significant investments to become the leader in this market.
Before the era of artificial intelligence, Supermicro’s high-end, personalized servers were not very popular in the competitive enterprise server market, holding only about 5% of the market share. Nonetheless, Liang believes that Supermicro now dominates the market by supplying a significant majority, estimated to be between 70% and 80%, of the DLC servers that have been sent out in recent months.
Although it is improbable that Supermicro will retain such a large market share in the long term, the company is evidently allocating resources now to ensure it remains a top player in the DLC market.
The enterprise server industry might experience a significant shift as Datacenter Liquid Cooling (DLC) is quickly growing from 1% to a possible 30% share of the server market in a year. The substantial increase in DLC revenue has led Supermicro to forecast a revenue of $26 billion to $30 billion in the upcoming year, which is almost double the $14.9 billion it generated in the previous 12 months ending in June.
Picture credits: Getty Images.
What is the reason behind Supermicro not increasing its prices?
If implemented successfully without any issues, Data Liquid Cooling (DLC) offers benefits such as reducing power consumption by up to 40%, enhancing computing efficiency, and speeding up the time it takes to go online by eliminating the need for bulky air conditioning units. Additionally, DLC helps in reducing the environmental impact of data centers.
Analysts are questioning why Supermicro is not increasing its prices. The company’s gross margins dropped to 11.3% in the quarter, mainly because of higher shipping expenses. However, Supermicro aims to restore its gross margins to the usual range of 14% to 17% by the end of the year.
However, if you offer a value-added solution like DLC, you can choose between charging a higher price or attempting to shake up the market by selling at lower prices in large quantities. It seems that Supermicro is opting for the disruptive strategy, especially in the initial phase of the liquid-cooling trend.
It could be a wise decision in the long run, as it might lead to capturing a greater portion of the market. While AI is an innovative technology, it comes at a high cost. By maintaining competitive prices, Supermicro may encourage customers to invest more in AI servers. In the future, if Direct Liquid Cooling (DLC) becomes as affordable as air-cooled servers, it could also find use in conventional data centers.
Supermicro is planning to introduce a new data center building block solution (DCBBS) that includes complete data center construction, along with maintenance software and services. This move could potentially increase the revenue from recurring maintenance and software associated with their deployments compared to when they primarily focused on providing hardware components.
Acquiring a larger number of high-volume customers initially could prove to be a strategic decision. Additionally, Supermicro is expected to reduce its expenses next year when its new manufacturing facility in Malaysia begins operations in November, resulting in significantly reduced costs.
Although some Supermicro investors may be seeking immediate profitability, the company’s significant investments in pioneering direct liquid cooling technology for AI data centers, potentially giving them a significant advantage, could be a pivotal development.
