SMCI - Super Micro

[Foreign Tuffett]

@ $13 per share I think the market cap here is somewhere around $640 million. For $640 million you are buying:

 

$22 million in net debt (94 million cash - 116 million debt).

 

Based on the 6/30/17 balance sheet the company is close to being a net-net. Assuming no inventory write-offs, it probably is a net-net at this point given the growth that they showed last fiscal year.

 

FY 2018 results (ended 6/30/2018): $3.3 billion in revenue, at least $428 million in gross profit, and a minimum of $1 per diluted share GAAP earnings.

 

2 million sq feet of real estate in San Jose, CA + a manufacturing facility in Taiwan.

 

Obviously this is a speculative situation (do you own due diligence!), but I think a case can be made for buying this here.

 

To update my original post on this:

 

@ $14 per share the market cap is ~$700M

 

For ~$700M you are buying:

 

$24.5M in net cash

 

FY 2018 (ended 6/30/18) revenue that will probably come in over $3.3B. Although I expect their business will slow down, they just did at least $952M in revenue in Q1 2019. Company is consistently profitable.

 

2 million sq feet of real estate in San Jose, CA + a manufacturing facility in Taiwan.

 

On the restatement: This company was (IMO) formerly operating as a de facto privately owned Taiwanese company. This manifested in the accounting department allowing overly aggressive salespeople to ship product and book revenue in earlier periods than was appropriate. On the CC the CFO used the phrase "roll effect" to describe how the restatements are pushing revenue recognition to later Qs. I think the important thing is that the sales and revenues appear to have been real, not fraud, straw man purchases, or other financial tomfoolery.   

 

[Foreign Tuffett]

Some smart thoughts on Super Micro. I agree with most of his points, but am significantly more circumspect on valuation. No affiliation.

 

https://twitter.com/CVCResearch/status/1063836063720857600

[Foreign Tuffett]

No clue why this is up over 9% amidst general market weakness. I took the opportunity to lock in some gains.

[writser]

Good for you. No clue why shares were up so much yesterday. Some people speculated it was due to good Cloudera earnings but what do I know. Seems a bit far-fetched.

 

I also sold some shares (was only a small position to begin with). The past few weeks we've heard nothing about the 'hacked chips'. Story has been firmly denied by everybody except for Bloomberg. Shares have creeped up and now trade around prices also seen in May and in August - before the Bloomberg article. Looks like the storm has passed. Company might still be cheap and I'm probably selling too soon but I'm too stupid / lazy to figure out the long-term value of this company.

 

After the storm has blown over Nate can buy my shares and make the easy money.

 

So, time for Nate to step in?

[Foreign Tuffett]

Good for you. No clue why shares were up so much yesterday. Some people speculated it was due to good Cloudera earnings but what do I know. Seems a bit far-fetched.

 

I also sold some shares (was only a small position to begin with). The past few weeks we've heard nothing about the 'hacked chips'. Story has been firmly denied by everybody except for Bloomberg. Shares have creeped up and now trade around prices also seen in May and in August - before the Bloomberg article. Looks like the storm has passed. Company might still be cheap and I'm probably selling too soon but I'm too stupid / lazy to figure out the long-term value of this company.

 

After the storm has blown over Nate can buy my shares and make the easy money.

 

So, time for Nate to step in?

 

I've also seen similar speculation about the pop yesterday, but I wouldn't pretend to know. I also wouldn't pretend to know what the right valuation for this company is. I wouldn't be surprised if it goes significantly higher once they finish getting the financials cleaned up. I also wouldn't be surprised if the stock goes lower on more controversy around motherboard security vulnerabilities (even though the "spy chips" story looks to be complete bunkus).

 

Also, I don't like SMCI management. It's not uncommon for East Asian companies to be run like they are the founders' personal fiefdoms. SMCI, although technically an American company, fits that mold really well. [Anyone reading this can insert here their favorite Munger quote about how it's really hard to change a company's culture].

[writser]

https://www.reuters.com/article/us-supermicro-chips/super-micro-says-review-found-no-malicious-chips-in-motherboards-idUSKBN1OA12R

 

A person familiar with the analysis told Reuters it had been conducted by global firm Nardello & Co and that customers could ask for more detail on that company’s findings.

 

Nardello tested samples of motherboards in current production and versions that were sold to Apple Inc and Amazon.com Inc, which were both named in the article, the person said.

 

It also examined software and design files without finding any unauthorized components or signals being sent out.

 

Of course it's unclear if there's much added value in this research given that it was instigated by SMCI, who have denied the whole thing all along.

[writser]

Another mysterious day of trading. Shares traded as high as $16.50 two weeks ago, sold down to $14 and are up ~10% today. All on basically no news (as far as I can see). No clue what is going on. Tax loss selling and subsequent buying?

[Gregmal]

Another mysterious day of trading. Shares traded as high as $16.50 two weeks ago, sold down to $14 and are up ~10% today. All on basically no news (as far as I can see). No clue what is going on. Tax loss selling and subsequent buying?

 

At least for one day, I've noticed probably what I'd refer to as the Mother of All January effects in A LOT of names that got the beat down last year.

[writser]

Some snippets from yesterday's press release and conference call:

 

We continue to generate cash and estimate cash generated from operations was approximately $42 million. After deducting CapEx of $4 million, we estimate free cash flow of approximately $38 million for the quarter.

[..]

On a cumulative basis over the last three quarters, we estimate free cash flow was approximately $114 million.

Impressive, but is this sustainable, normalized cashflow or not?

 

The Company expects to report the following financial results for the quarter ended December 31, 2018:

 

Net sales in a range of $915 million to $925 million compared to its previous guidance range of $830 million to $890 million

 

[..]

 

Our fiscal year today total revenue approximately 23% ahead of last year, in line with our traditional growth trend

 

[..]

 

The Company expects net sales in a range of $800 million to $860 million for the third quarter of fiscal year 2019 ending March 31, 2019.

 

[..]

 

We believe we are back to business as usual.

 

Beating guidance. Guidance for q3 2018 was $785m - $795m.

 

As of December 31, 2018, total cash, cash equivalents and short-term investments was $109.1 million and bank debt was $48.3 million.

March 2018: $136m cash and $186.3m debt.

 

We deliver a draft of the fiscal 2017 10-K with restating financial statements from 2015 and 2016 to our independent auditors in late January. They are reviewing the draft 10-K and are working to complete their integrated audit. As a result of our conclusions, our independent auditors continue to perform more testing of our accounting analyzes and internal control assessment.

 

We are working closely each day with our independent auditors to complete the remaining audit procedures. Our internal audit team is developing a prioritized remediation roadmap to address the material weaknesses from our internal control assessments. We continue our procedures on fiscal 2018 financials in parallel and are making solid progress.

 

So to close, we remain laser focused on resolving our SEC filings.

 

Of course the filings are still an incredible mess. How many shares are outstanding now? No idea .. However, 'spygate' still looks to me like a complete non-event. The balance sheet seems to be solid and the company generated boatloads of cash (paid off $138m in debt last three quarters).

 

I only bought a small position last year and sold half my shares during the run-up but the more I follow this story the more I'm tempted to get back in ..

[writser]

I got so enthusiastic after reading the previous forum post that I decided to buy back my full position on the opening. Worked out great so far. Impressive uptick today. Loved stocks surprise on the downside, hated stocks surprise on the upside.

[Foreign Tuffett]

I got so enthusiastic after reading the previous forum post that I decided to buy back my full position on the opening. Worked out great so far. Impressive uptick today. Loved stocks surprise on the downside, hated stocks surprise on the upside.

 

Nicely Done!

[Liberty]

Did Bloomberg retract their uncorroborated piece yet?

[Foreign Tuffett]

Did Bloomberg retract their uncorroborated piece yet?

 

No, I don't believe they have.

[Foreign Tuffett]

Alright fellas, I just jumped back onto this garbage barge full of cut rate motherboards. @ $16.40 I estimate the stock is currently around NCAV + they own real estate that has significant value. 

 

 

[Foreign Tuffett]

Earnings look good. Revenue at the top of the guidance range. They continue to generate cash as working capital shrinks.

 

One nice detail on the call: Financials for FY 2018 (ended 6/30/18) have been submitted to auditor. This shows that they continue to make progress getting their financial statements up-to-date.

 

https://www.businesswire.com/news/home/20190815005647/en/Supermicro%C2%AE-Announces-Fourth-Quarter-Fiscal-2019-Preliminary

[scorpioncapital]

Do China Tarriffs in some ways effect them? I know Intel and some of the others were impacted somewhat.

[writser]

Earnings look good. Revenue at the top of the guidance range. They continue to generate cash as working capital shrinks.

 

One nice detail on the call: Financials for FY 2018 (ended 6/30/18) have been submitted to auditor. This shows that they continue to make progress getting their financial statements up-to-date.

 

https://www.businesswire.com/news/home/20190815005647/en/Supermicro%C2%AE-Announces-Fourth-Quarter-Fiscal-2019-Preliminary

 

Almost a year after the hacking 'scandal' I think it's safe to say that that story was overblown and that the market overreacted. I sold my position when shares traded over $20 this year but I'm tempted to get back in. Some random thoughts:

 

- If you compare the 2017 press release to the new 2017 annual report, book value decreased by 27 million, inventory increased by 100m, and short-term debt increased by 93m (wtf?), gross profit down 8m, etc. Not some obscure minor issues: just a total mess. That doesn't inspire much faith. Also note that the CFO on the most recent conference call didn't want to confirm that the final audited 2018 statements would be 'in line' with the 2018 quarterly press releases. Ugh.

 

- Even given their accounting issues disclosure the past few quarters has been abysmal. Even ASTA Funding disclosed more information when they were past due with their filings and that is not something to be proud of. We know nothing about the balance sheet apart from net cash, we don't even know the current share count.

 

- Since June 2017 they've gone (reportedly) from from a -50m net cash position to a +164m cash position, generated ~$2.20 / share in GAAP earnings and grew revenue at a nice clip. Even if you allow for some accounting restatements it looks ok. Doesn't look like the large increase in revenue generated lots of extra earnings though.

 

- I'm not sure how sustainable the reported cash flow is. I think SMCI had very inefficient working capital management and they are working on fixing this (which is a good thing) but the resulting cashflow is not normalized cashflow. The CFO in the latest conference call: "I think if you look at the cash that we have now, certainly, we have harvested some of that from the balance sheet. And we know that they're going to need that soon we continue to grow again". Doesn't look like a return of capital is on the table.

 

- Insider transactions paint a bleak picture. I don't see a single buy the past 10 years and insiders have been selling a lot .. Sharecount is steadily increasing.

 

Tangible book is now probably around $17 (is that relevant?), $3+ / share in cash, and TTM earnings of ~$1.60 / share.  Probably too cheap but I don't think I want to own this with the thesis being it should trade at a premium multiple. Tempted but probably not buying.

[Foreign Tuffett]

Do China Tarriffs in some ways effect them? I know Intel and some of the others were impacted somewhat.

 

Yes, they have been and continue to be negatively impacted. They work closely with Intel, so I would imagine there's a similar dynamic.

[Foreign Tuffett]

Earnings look good. Revenue at the top of the guidance range. They continue to generate cash as working capital shrinks.

 

One nice detail on the call: Financials for FY 2018 (ended 6/30/18) have been submitted to auditor. This shows that they continue to make progress getting their financial statements up-to-date.

 

https://www.businesswire.com/news/home/20190815005647/en/Supermicro%C2%AE-Announces-Fourth-Quarter-Fiscal-2019-Preliminary

 

Almost a year after the hacking 'scandal' I think it's safe to say that that story was overblown and that the market overreacted. I sold my position when shares traded over $20 this year but I'm tempted to get back in. Some random thoughts:

 

- If you compare the 2017 press release to the new 2017 annual report, book value decreased by 27 million, inventory increased by 100m, and short-term debt increased by 93m (wtf?), gross profit down 8m, etc. Not some obscure minor issues: just a total mess. That doesn't inspire much faith. Also note that the CFO on the most recent conference call didn't want to confirm that the final audited 2018 statements would be 'in line' with the 2018 quarterly press releases. Ugh.

 

- Even given their accounting issues disclosure the past few quarters has been abysmal. Even ASTA Funding disclosed more information when they were past due with their filings and that is not something to be proud of. We know nothing about the balance sheet apart from net cash, we don't even know the current share count.

 

- Since June 2017 they've gone (reportedly) from from a -50m net cash position to a +164m cash position, generated ~$2.20 / share in GAAP earnings and grew revenue at a nice clip. Even if you allow for some accounting restatements it looks ok. Doesn't look like the large increase in revenue generated lots of extra earnings though.

 

- I'm not sure how sustainable the reported cash flow is. I think SMCI had very inefficient working capital management and they are working on fixing this (which is a good thing) but the resulting cashflow is not normalized cashflow. The CFO in the latest conference call: "I think if you look at the cash that we have now, certainly, we have harvested some of that from the balance sheet. And we know that they're going to need that soon we continue to grow again". Doesn't look like a return of capital is on the table.

 

- Insider transactions paint a bleak picture. I don't see a single buy the past 10 years and insiders have been selling a lot .. Sharecount is steadily increasing.

 

Tangible book is now probably around $17 (is that relevant?), $3+ / share in cash, and TTM earnings of ~$1.60 / share.  Probably too cheap but I don't think I want to own this with the thesis being it should trade at a premium multiple. Tempted but probably not buying.

 

- No dispute that the financials were a mess. The two principal financial people at the company were the CEO's wife (that sounds familiar) and a CFO who had been there since the beginning of the company. In my opinion neither of them were qualified. Additionally, the CEO is an engineer who appears to focus 100% on product development. The good news is that the old CFO left in early 2018 and the CEO's wife is no longer Chief Administrative Officer and Treasurer. Now she is just a "Vice President." They also just added the former CFO of Brocade to the board.

 

- My understanding based on the comments they've made is that the vast majority of the financial restatements relate to the timing of revenue recognition. Basically the sales guys were allowed to book sales super aggressively...in ways that a competent accounting department would never allow. So, for example, sales that should have been booked in Q2 were booked in Q1. The company is now having to go sale-by-sale to try and correct the revenue recognition post hoc. That's a big, big job. Think about how that would affect the inventory levels, etc for any given period.

 

- I have no idea how they screwed the 2017 short term debt # up, but the total amount of debt looks to be the same on both statements

 

- Yeah, disclosure hasn't been good since the accounting problems were revealed. I have in my notes that @ 3/31/19 there were 49,881,914 [basic] shares. I think they said this on the Q3 call

 

- No, they have $236 million in net cash @ 6/30/19

 

- The recent FCF is not sustainable. Like most manufacturers they need more working capital when they are growing, and less when they are shrinking. Revenue has been down Y/Y the last two Qs, so cash has gone up as inventory is sold.

 

- CFO basically refuses to make any statements about future buybacks, dividends, etc. The company has bought back shares in the past.

 

- CEO looks to own ~16% of the company.

 

- Premium multiple isn't something that's even on my mind here.

 

 

[Foreign Tuffett]

Look, all I'm really saying here is that I'm going to keep posting in this thread until Liberty puts 110% of his portfolio in this name.

[writser]

Yes, the reshuffles and the new board member are good. 164m cash was a bit sloppy from me, that was the previous quarter.

 

- Premium multiple isn't something that's even on my mind here.

 

I didn't mean I expect this to trade at a 50x P/E ratio or something like that. But what I was trying to say is: where do you think this should trade? It's not _super_ cheap at the moment. Maybe it is when you look at an EV/EBIT basis but I think that that is a bit optimistic as the cash will be plowed back into the business. After today's run we're trading at a TTM P/E multiple of ~11, slightly above tangible book and a EV/EBIT of 6 (guesstimate)? What I'm saying is I'm not really comfortable buying at a 11x multiple saying it should trade at a 15x multiple. First of all that's not my cup of tea and second, this is a business with some issues so I'm not actually sure a much higher multiple is warranted. I guess it is cheap but I like to have something more tangible.

 

Do you have a target price in mind and if so, how did you arrive at it? I've been in an out twice or something opportunistically but I find it hard to peg a price on the business.

[scorpioncapital]

Do China Tarriffs in some ways effect them? I know Intel and some of the others were impacted somewhat.

 

Yes, they have been and continue to be negatively impacted. They work closely with Intel, so I would imagine there's a similar dynamic.

 

I read they moved some manufacturing to Taiwan...although in theory Taiwan is still China, not sure if that means things going in or out of Taiwan from the USA are affected the same way.

 

It may be a conspiracy theory, or maybe just local cultural connection but the CEO is of Chinese heritage. Do you think China might somehow make exceptions to a more rigid import or export regime for companies like this?

[Foreign Tuffett]

Do China Tarriffs in some ways effect them? I know Intel and some of the others were impacted somewhat.

 

Yes, they have been and continue to be negatively impacted. They work closely with Intel, so I would imagine there's a similar dynamic.

 

I read they moved some manufacturing to Taiwan...although in theory Taiwan is still China, not sure if that means things going in or out of Taiwan from the USA are affected the same way.

 

It may be a conspiracy theory, or maybe just local cultural connection but the CEO is of Chinese heritage. Do you think China might somehow make exceptions to a more rigid import or export regime for companies like this?

 

CEO is from Taiwan. And no, I don't think that.

[Foreign Tuffett]

Yes, the reshuffles and the new board member are good. 164m cash was a bit sloppy from me, that was the previous quarter.

 

- Premium multiple isn't something that's even on my mind here.

 

I didn't mean I expect this to trade at a 50x P/E ratio or something like that. But what I was trying to say is: where do you think this should trade? It's not _super_ cheap at the moment. Maybe it is when you look at an EV/EBIT basis but I think that that is a bit optimistic as the cash will be plowed back into the business. After today's run we're trading at a TTM P/E multiple of ~11, slightly above tangible book and a EV/EBIT of 6 (guesstimate)? What I'm saying is I'm not really comfortable buying at a 11x multiple saying it should trade at a 15x multiple. First of all that's not my cup of tea and second, this is a business with some issues so I'm not actually sure a much higher multiple is warranted. I guess it is cheap but I like to have something more tangible.

 

Do you have a target price in mind and if so, how did you arrive at it? I've been in an out twice or something opportunistically but I find it hard to peg a price on the business.

 

I don't have a target price here. I doubt anyone knows the intrinsic value (a phrase I dislike) of something like this given the significant uncertainty and lack of full financials.

 

I think an argument could still be made here that the company trades around liquidation value. That's still too cheap for a company that is consistently profitable and has shown impressive growth (they did significantly more rev last Q than in all of FY 2010).

 

Hopefully they will grow. If they don't grow then they will have the cash. If they do grow...well, the market likes companies that are growing (and rightfully so).

 

All this said, I did sell part (not all) of my position on Friday. So I have taken some chips off the table, so to speak.

 

 

[Foreign Tuffett]

Now completely out of this. Very well could go significantly higher if/when it gets financials caught up, but I think that at this point the market is pricing it more like a "normal" company and less like a fraud/spy chip installation facility/overseas arm of the Chinese government.