what’s going on Super Micro Computer (SMCI -3.77%)?

Shares of the once high-flying artificial intelligence (AI) server company collapsed after a growing scandal engulfed the business.

This timeline shows how the story developed:

• 27 August: In a short-selling report, Hindenburg Research accuses the company of accounting manipulation, acting in its own interests, sanctions evasion and channel stuffing. The stock is falling.
• 28 August: Supermicro files finds itself unable to submit the 10-K on time. At the time, it said it needed more time to “complete its assessment of the effectiveness of its internal controls over financial reporting.” He also stated that he does not expect any change in the 2024 financial results announced on August 6.
• September 3: Supermicro sent a letter to its customers and partners, restating that it does not expect significant changes in its 2024 financial results. Additionally, the company called the short selling report false and inaccurate and reminded customers that recent events have not affected their products.
• 20 September: Supermicro says he received a letter from Nasdaq It said it was out of compliance due to a late 10-K filing. The company has 60 days to regain compliance or submit a plan to do so.
• 26 September: Wall StreetJournal The Department of Justice is reportedly investigating the Super Microcomputer, apparently in response to accusations from a former employee about accounting violations.
• 30 October: Supermicro says audit firmErnst & Young (EY) resigned. In July, EY expressed concerns about Supermicro’s financial reporting and warned that timely 10-K filing was at risk. EY ultimately told the company that it could not rely on management’s statements and did not want to be associated with financial statements prepared by the company.
• 5 November: Supermicro reported fiscal 2025 first-quarter earnings that missed estimates. The stock falls further.

Image source: Getty Images.

Where Supermicro is located today

Supermicro announced its first quarter results and the numbers were both incomplete and below expectations. It said revenue would fall to a range of $5.9 billion to $6.0 billion, below its previous forecast of $6.0 billion to $7.0 billion. As a result, it expects adjusted earnings per share to be between $0.75 and $0.76, in the middle of the previous range of $0.67 to $0.83.

For the fiscal second quarter, management projects revenue to fall sequentially from $5.5 billion to $6.1 billion and adjusted earnings per share to be between $0.56 and $0.65.

Management also stated that the Special Independent Committee found that the Audit Committee “acted independently”, contrary to EY’s concerns that it was influenced by the CEO. In the press release, the Special Committee said:

(T)There is no evidence of fraud or abuse on the part of management or the Board of Directors. The Committee recommends a number of remedial measures to strengthen the Company’s internal management and oversight functions, and the Committee expects to present a full report on the work completed this week or next week.

Despite this update, Supermicro has no timeline for when it will file a 10-K, but plans to do so in accordance with Nasdaq’s compliance rules.

What investors need to hear from the company

At this point, Supermicro is two-quarters behind in its financial reporting. The stock is down more than 50% since the Hindenburg report was released and is down 80% from the all-time high it reached in March.

In the meantime, the company needs to hire a new auditor and management needs to share a plan to fix this problem as soon as possible.

Management also needs to complete the 10-K filing and give investors a reasonable expectation of when the filing will occur, or at least shed light on issues that prevent that from happening. Management mostly avoided discussing these issues in its most recent earnings release.

Although management has insisted that no significant changes will be required to 2024 financial results, allegations from Hindenburg Research, EY’s resignation, possible DOJ investigation and Supermicro’s failure to resolve the matter in more than two months suggest it could be more. a common procedural error. Despite what management says, financial realignments are possible and could go back quarters or even years.

What should investors do?

The stock should be avoided until investors get more transparency from management and see that steps are clearly being taken to regain compliance. For existing shareholders, it’s harder to decide to sell since the stock has already fallen, but the reality is that Supermicro may not be done selling.

It’s easy for a business to stray from there if it loses the trust of its customers. Now such reports are coming out that NvidiaSuper Micro Computer’s major supplier is diverting its chips to other server companies upon request, fearing a crackdown on Supermicro and damage to its own reputation related to any DOJ investigation.

It’s time for management to be honest with investors and stop confusing things. If it can’t resolve some of these issues by the end of the month, it will face the threat of being delisted from Nasdaq, making it even harder to restore its credibility with investors.

The Super Micro Computer is running out of time and needs to take action.