Super Micro Computer Inc (SMCI) experienced a deluge ofnegativity in August. As the myth goes, bad things happen in threes and thatwas the case, starting with a weak earnings report for their FQ4 followed by anegative Hindenburg (redundant) short report and culminating with anannouncement that they would not file their Annual report for the June 30, 2024fiscal year on time. Let’s use the Daloopa data sheet to highlight some of theyellow flags.
For FQ4 (June) the company reported their lowest GrossMargin on record of 11.2% down 430 basis points sequentially and down 480 bpsyear over year. They attributed the shortfall to a large hyperscale customer andsome one-off costs to procure scarce components. However, tougher competitionespecially from the likes of Dell and HP are likely to blame especially as theyare only guiding to a modest uptick in the quarter ahead. Accounts Receivableballooned to $2.7 billion, representing 46 Days Sales Outstanding (DSO) up 7days from the prior quarter. Whenever Accounts Receivable ballons like thatit’s a yellow flag at the least.
When evaluating a company’s financial soundness it’simperative to follow the cash, i.e. free cash flow, as accounting can mislead.Super Micro is the perfect example as in FY2024 they generated $1.35 billion innet income, corresponding to a $22.08 eps, impressive. However, on a free cashflow basis, operating cash flow less capital expenditures, they lost $2.5billion with the big swings being the large inventory and accounts receivableincreases.
The Hindenburg report pointed out the incestuousrelationship between SMCI and related parties owned and operated by their SMCICEO and/or his brothers. SMCI’s has tremendous supplier concentration toSupplier A that has only increased over the year. Using Daloopa data, thesefigures are highlighted below. (Note June 30, 2024 not available because of the10-k filing delay).
Super Micro took advantage of their strong stockstanding by issuing a $1.7 billion convertible note and selling $2.3 billion inequity. The company’s debt position excluding the convertible is summarizedbelow. The CFO remarked that they expect to further leverage their balancesheet with unsecured debt but given the aforementioned concerns that may be atough proposition
