Not looking good for SMCI:
Super Micro’s shares plunged as much as 35% Wednesday morning after the company disclosed its auditor had resigned following months of disagreement with the firm over its governance and board independence.
Ernst & Young in its resignation letter said it was “unwilling to be associated with the financial statements prepared by management.” The accountancy also raised concerns about the board’s independence from CEO Charles Laing and “other members of management.”
Thanks to Saul and others for helping me overcome my FOMO and take a look at the smoke that now has become fire. With so mnay opportunities, the risk of impropriety, albeit small, was not worth taking.
My portfolio is not nearly as concentrated as others, but seeing this and reaction to TMDX to the downside and TSLA to the upside suggests preparation and diligence if a key success factor for me.
Vince
Thanks for flagging this, @5thhorseman! If the auditor is out, then I’m out as well. I was hoping this flap wasn’t substantial, but if E&Y says they can “no longer rely on management’s and the Audit Committee’s [of the Board] representations”, then neither can I. Right now, the stock is in freefall but I’m out. I’ll give it a few months and then come back to poke at the wreckage to see if there are changes to senior management that would make me feel interested once again.
Barron’s article has SMCI’s response:
“Supermicro disagrees with E&Y’s decision to resign, and we are working diligently to select new auditors,” a company spokesperson told Barron’s. “We remain focused on delivering on our customer commitments, product roadmaps, and robust growth and expansion.”
And repeats what now few believe, no restatement coming:
“Importantly, the Company does not expect that a resolution of the matters raised by E&Y or those under consideration by the previously announced Special Committee of the Board will result in any restatements of its quarterly financial results for the fiscal year ended June 30, 2024, or for prior fiscal years,” the company added. “We have announced a first quarter business update call for Tuesday November 5th.”
If they take questions during that call…
I must admit, I truly did not anticipate this. When an accounting firm such as E&Y states that they were unwilling to be associated with management’s financial statements, it’s very damning.
All along, I felt that the worst that would come of the accusations leveled at SMCI, even if true, would be some fines and that would be the end of it. A one time event which would be a blot on GAAP statements.
I did not see how any of this would constitute a business impairment, SMCI would continue to deliver high end, customized servers to a host of clients worldwide. Their customer fall into two main categories based on size, about 40% are the major hyperscalers, CSPs, etc. The remaining 60% are mid-size enterprises that comprise the fastest growing business sector.
I had confidence in management’s assertions that prior financial reports would not be impacted. Even though they continue to make that claim, I must concede that my confidence has been badly shaken. Even if the fundamental business operations are not impaired, it’s hard to trust their financial reports regarding the performance of the company.
At this point, I wonder if they will file the 10K in a timely manner or request an extension. I wonder if they will report 1Q25 in the near future (10/30 or 11/6 depending on which estimate you read), or if that too will be put on ice for an indefinite period.
Saul always said, don’t copy his actions. I have always paid attention to what he does and his analysis, but I have never blindly copied him. So when he sold, I did not for the reasons I stated above. Now, the stock is down an additional 30% and I still hold shares. I’m truly in a quandary. Will the stock recover to some extent over the next week or continue to slide? For sure, if they postpone their quarterly report, it will be another impact. It appears that Hindenberg cashed in their shorts too soon.
Addendum: I thought about it for another 10 minutes and decided if they don’t announce 1Q25 report date soon, it will for sure go down some more. Even if they announce, but it’s scheduled for late November, the stock will continue down. I’m out. I may get back in (other than the account that would record a wash sale). But for now, I’m out.
They have just announced they are posting their earnings on Nov 5 followed by a call at 5pm. I’ll stay invested at least till then to see what they make of it all and to see if things can recover from here. I now wish I had not bought back in again last month.
Jonathan
I am sorry for those holding this stock but you really need to look at what is happening. It sounds like a lot of people are shell shocked and hoping that they can salvage some money out of this. That is possible but this stock isn’t coming back for awhile now. It will languish because there is to much bad news on it. Now with the auditors quitting? Most institutions will not touch this stock.
It was at $122.90 at it’s high and is now at $33.30. I think it is time to listen to what the market is telling you. Also if you are running a concentrated portfolio you had better be more nimble. You can not afford to take losses like this.
I’m sorry about people still holding this, but here’s what I wrote in my End-of-August Summary:
“I didn’t pay attention to all the talk about Nvidia’s delay affecting SMCI (it would be the same business a month or two later), and I pretty much ignored the short attack. But then when SMCI announced, the day after the short attack, that it was postponing filing its 10-K, I sold out. You don’t get many such clear signals in investing. Granted, it may turn out to be a false alarm, but that’s just a wish and a guess. I’m not in this to gamble, so I sold out of my entire position.”
Now we have Ernst and Young pretty much saying they don’t want to be associated with the kind of accounting that SMCI is using. What more do you want? What are you waiting for? Delisting?
Saul
Yes, I hear you and I’ve now just sold out in spite of what I said above about waiting till Tuesday earnings. I did sell out a month ago after the missed filing deadline and the DOJ probe announcement - but then I mistakenly bought back in a few weeks ago at 47 only to sell all today at 33! That is an example of how not to do it!
I wont be buying back in. I am pleased to have still made a good profit on this stock of up 67% since I bought early 18 months ago - though of course it would have been a much greater profit if I had not bought back in last month.
Where to re-invest the proceeds? Tesla perhaps?
Jonathan
I unfortunately sold at a loss - bad timing. As stated above, I had been of the mind that the reaction to the bad news was overblown and in all likelihood the stock would recover quickly after the accusations were resolved, irrespective of what the resolution might be, there was little room for things to get worse and the basic business operations were still intact. I also didn’t think any customer would care one way or the other if their accounting was sketchy, they were interested in the products, not the financial reports.
Well, despite the logic of my thinking - and I think it was logical - I was wrong. As things stand now, it’s hard to see a near term recovery for the stock price. Regardless of what they report on 11/5, even if it’s a glowing report, the question now is whether or not it’s credible. I could be wrong again, but I think at best the market will be skeptical of the numbers they put up.
I’m 100% positive that E&Y did not just spring it on them. I’m sure there were extensive discussions in an attempt to resolve the issues without a public announcement. Accounting firms don’t like this kind of news about one of their customers, it reflects poorly on them as well. Why weren’t the issues noted and resolved much earlier? Why did it festered to the point of departure? It looks bad for all parties involved.
I am pretty sure that SMCI will have a very good quarterly report. I am a whole lot less sure about how the investment community will react. As it stands right now, I could buy back in at a lower price than the one I sold at. November 11 is a week and half away. I’ll watch from the sidelines. Maybe I’ll take a much smaller position than the one I sold prior to earnings. I don’t recall ever second guessing a position like this ever before. At this point it’s probably best to defer to Saul’s wisdom.
The Nov 5 release seems to be a somewhat qualified report. I’m not sure, but I think they said it will not be a full financial report for the quarter. I really have no idea what that might be.
It’s an interesting exercise (to me at least) to go back to basics here and work with Saul’s oft mentioned idea of opportunity cost.
For a moment, forget that you owned SMCI or that you had been up big or down big…
You have x dollars available to invest. You’re presented with the opportunity to own a stock trading at ~33. You might see SMCI come up on a screen due to yoy revenue or an attractive P/S ratio or whatever…
You start to dig a little deeper…wait a second…holy crap…
this company was previously delisted. They’re back in the news again for similar accounting shenanigans. They’ve well past overdue on the their 10-K. The DOJ might be involved. And now the auditor says I can’t in good faith work with these guys…
There are at least a dozen other higher quality, lower risk and potentially greater reward options discussed on this board regularly. More if you consider MF more broadly. And that’s only from the pov of maximizing returns.
If you want to consider ethics or professional standards or the sleaze factor as part of your evaluation then, let’s just say that part is not a plus for SMCI. You lie down with dogs, you wake up with fleas…
I’m not unscathed…my timing was also poor. I was an SMCI owner until the 10-K postponement came out. I sold on the giant dip that day. Truth - I regretted it for a little while as the price bounced back to 40+. Now…I’m trying to learn the lesson and have the lesson stick!
Thanks tts11, in my opinion that was a great and insightful post, with lots of wisdom.
Saul
What I once considered Supermicro’s best aspects with relationships in the industry turned out to be its biggest liability.
Charles Liang the CEO, has a long standing friendship with Nvidia’s Jensen and is also related to Lisa Su the CEO of AMD. There could not have possibly been two better relationships in place when Supermicro is selling Nvidia’s and AMD’s products. I thought there may be loyalty among the three of them as I gathered that Charles Liang had cultivated these relationships over the years.
However, it seems Liang also had loyalty to family members running the subsidiary Ablecom. I remember reading in the prior 10-K after Ablecom was mentioned in the short report that Supermicro could sell to Ablecom and Ablecom could sell back to Supermicro. It sounded like the exact definition of self dealing, or improperly recognizing revenue. I was then thinking what if Ablecom is being run fraudulently and what impact that would have on Supermicro. It would be devastating as Ablecom it turned out was making almost all of the “chassis” part of the equipment.
Other aspects I viewed as a huge plus for Supermicro was they had never done an acquisition, over half their employees are engineers, founder led, and they had an extensive research operation publishing all sorts of white papers and industry research. Now I am wondering if they never did an acquisition in 30+ years because they did not want to have to open their own books.
In the end I believe the CEO Liang was loyal to a fault. While he was focused on building a premiere engineering company, he entrusted people close to him who took advantage and either egregiously mismanaged finances or committed fraud. The fact that people were rehired who were shown to have done wrong in the past, is why I wrote loyal to a fault. I don’t know how else to explain why someone would build a company since 1993 as his life’s engineering work to then cook the books.
I don’t believe Liang was complicit in the fraud but ultimately the responsibility falls to him as CEO and founder to keep things above board. Unfortunately for this company they may be entering a death spiral of sorts where they have to restate numbers over and over again, each time lowering the market’s confidence in the results.
The fallout is starting:
This excerpt was posted on the Supermicro website the day before yesterday. There is a lot more to it that addresses in detail the findings of a special committee that was formed to investigate the allegations made by, amongst others, their former auditors Ernst & Young who resigned after alleging wrongdoing, or at least lack of transparency with respect to revenue recognition and sales practices (among other things).
December 2, 2024
Special Committee, supported by outside counsel Cooley LLP and forensic accounting firm Secretariat Advisors, LLC, finds no evidence of misconduct on the part of management or the Board of Directors and that the Audit Committee acted independently
No restatement of reported financials expected
Board adopts recommendations of the Special Committee and appoints new Chief Accounting Officer, approves the transition to a new CFO and authorizes additional executive hires, along with other measures to strengthen the Company
SAN JOSE, Calif.–(BUSINESS WIRE)-- Super Micro Computer, Inc. (Nasdaq: SMCI) (the “Company”), a Total IT Solution Provider for AI, Cloud, Storage, and 5G/Edge, today announced that the independent Special Committee formed by the Company’s Board of Directors has completed its review (the “Review”). As announced on August 30, 2024, the Board of Directors formed this committee in response to information that was brought to the attention of its Audit Committee.
Among its findings, the independent Special Committee determined that the resignation of the Company’s former registered public accounting firm, Ernst & Young LLP (“EY”) and the conclusions EY stated in its resignation letter were not supported by the facts examined in the Review, the Special Committee’s interim findings reported to EY on October 2, 2024, or the Special Committee’s final findings.
(end of excerpt).
The entire article addresses each allegation by E & Y as well as the short sellers report published in August. As well as the composition of the committee and it’s findings.
They say they are prepared to complete their 10K and 10Q forms within the guidelines that the NASDAQ has the authority to grant.
I sold out after their auditors resigned and I don’t know that I’m sold on their explanation as well as the steps they are taking to address the situation that led up to this but anyway for any who are interested the response seems fairly detailed and may help any who haven’t already done so to make a decision.
At any rate the market seemed to like it. The share price spiked the day it was posted.
Thanks, I found the full SuperMicro statement here: https://ir.supermicro.com/news/news-details/2024/Supermicro-Announces-Completion-of-Review-by-Independent-Special-Committee/default.aspx
It throws the CFO and CCO under the bus after saying there was no bus.
First there’s this gem:
- The investigation focused on the rehiring of nine individuals, either as employees or as independent contractors, who had previously resigned from the Company following the 2017 Audit Committee Investigation.
- The Special Committee regarded the lack of any finding in the 2017 Audit Committee Investigation that these individuals had engaged in conduct that was intended to cause the Company’s financial results to be misstated as an important factor in assessing the Company’s decision to rehire them.
So these people that resigned in 2017/2018 didn’t need to resign, and so it’s OK that they were rehired. In other words, there was no bus.
But, we’re throwing the CFO and CCO under the bus anyway:
- The Company generally had appropriate processes for rehiring these individuals and ensuring proper guardrails were in place.
- There were, however, lapses, including in ensuring guardrails were always in place and observed. The Special Committee determined that, because the Company’s Chief Financial Officer/Chief Compliance Officer (CFO/CCO) had primary responsibility for the process of rehiring these employees, he had primary responsibility for process lapses.
So, it’s OK that the resigners were rehired, but not OK that the CFO and CCO let them be rehired, so we gotta fire those two individuals. I guess they need someone to blame.
And, of course, if the 9 people that resigned after the last fraud didn’t need to resign, who did need to resign and did they?
Maybe someone can explain this to me:
- These lapses included … not informing EY prior to entering in June 2024 into a now terminated consulting arrangement with the Company’s former CFO, who had resigned following the 2017 Audit Committee Investigation.
So, the CFO/CCO didn’t tell Ernst and Young they were going to rehire as a consultant the CFO who resigned after the last fraud. What?
I lost the link but this “special committee” was not a “committee”. It was one “independent” director. Suzanna Giordano.
One could have made bank betting on them finding a new auditor just in time. Thought of it but passed.
They screwed up a peanut butter sandwich.
Kudos to Jimbo for finding this on my forum.
That’s not accurate - there were a lot of attorneys from outside involved. I talked with a friend in the industry and reviewed their report. Actually I think it is more positive than many people perceive it on X or here. But I will not go into further detail as this is a company with multiple compliance missteps and as such can not be recommended even with the positive direction this case takes.
From the link in my post:
The Special Committee is comprised of Susie Giordano, an independent member of Supermicro’s Board of Directors. Mrs. Giordano, an experienced attorney, joined the Board in August 2024 specifically to lead the Special Committee’s efforts to review the matters outlined above, independent from any existing Directors. Mrs. Giordano has over 25 years of experience advising management and boards of directors, as well as extensive management experience at some of the world’s leading technology companies.
Now sure, yeah, there were others involved:
Special Committee, supported by outside counsel Cooley LLP and forensic accounting firm Secretariat Advisors, LLC, finds no evidence of misconduct on the part of management or the Board of Directors and that the Audit Committee acted independently
The 9 individuals who resigned weren’t intending “to cause the Company’s financial results to be misstated,” but those financial results were misstated on their watch. So, maybe at best they’re incompetent? And yet they claim rehiring them is “the product of reasonable business judgment,” yet we’re going to fire the people who allowed them to be rehired?
Incompetence is a good excuse?
Then for export:
The Special Committee did not see any evidence suggesting that anyone at the Company tried to circumvent export control regulations or restrictions, or that anyone at the Company was aware that any of its products might be diverted to a prohibited end user or location.
OK, so not intentional, but did it happen?
The Special Committee also did not identify products that were sold to Russian customers or shipped to Russia in violation of export controls or sanctions laws that were in place when products were shipped.
That’s not a “didn’t happen,” that’s a “we still don’t know.”
Do you have a link to the actual report, or is it not on the web?