Aug 27 (Reuters) - Hindenburg Research on Tuesday disclosed a short position in Super Micro Computer and alleged "accounting manipulation" at the AI server maker, the latest by the short seller whose reports have rocked several high-profile companies.
The report pits the short seller, which has tussled with billionaire-investor Carl Icahn and India's Gautam Adani, against the server marker that has been one of the biggest winners of the generative artificial intelligence boom.
Shares of Super Micro were down 3.5% in morning trade. The stock has nearly doubled in 2024, after more than tripling last year.
Hindenburg said it found evidence of undisclosed related party transactions, failure to abide by export controls, among other issues, citing an investigation that included interviews with former senior employees and litigation records.
"It (Super Micro) benefited as an early mover but still faces significant accounting, governance and compliance issues and offers an inferior product and service now being eroded away by more credible competition," Hindenburg said in its report.
Super Micro did not immediately respond to a request for comment. Reuters could not independently verify the claims in the Hindenburg report.
Close ties with chip giant Nvidia have allowed Super Micro, known for its liquid cooling technology for high-power semiconductors, to capitalize on the surge in demand for AI servers.
Though revenue has surged, margins have taken a hit recently due to the rising costs of server production and pricing pressure from rivals including Dell.
Analysts have flagged the company's hefty spending on supporting new generation of AI chips, including those sold by Nvidia.
The company's shares have also come under pressure in recent months on rising worries that Big Tech could scale back AI spending due to slow payoffs from the billions of dollars they are investing in the technology.
Here is Hindenburg's viewpoint:
Super Micro: Fresh Evidence Of Accounting Manipulation, Sibling Self-Dealing And Sanctions Evasion At This AI High Flyer
Super Micro Computer Inc. is a $35 billion server maker based in Silicon Valley, California that has ridden the wave of AI enthusiasm.
Our 3-month investigation, which included interviews with former senior employees and industry experts as well as a review of litigation records, international corporate and customs records, found glaring accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures, and customer issues.
In 2018, Super Micro was temporarily delisted from Nasdaq for failing to file financial statements. By August 2020, the company was charged by the SEC for “widespread accounting violations,” mainly related to $200+ million in improperly recognized revenue and understated expenses, resulting in artificially elevated sales, earnings and profit margins.
Less than 3 months after paying a $17.5 million SEC settlement, Super Micro began re-hiring top executives that were directly involved in the accounting scandal, per litigation records and interviews with former employees.
A former salesperson told us: “Almost all of them are back. Almost all of the people that were let go that were the cause of this malfeasance.”
According to a lawsuit filed in April 2024, Super Micro waited only 3 months after the SEC settlement before restarting “improper revenue recognition,” “recognizing incomplete sales,” and “circumvention of internal accounting controls”.
Even after the SEC settlement, pressure to meet quotas pushed salespeople to stuff the channel with distributors using “partial shipments” or by shipping defective products around quarter-end, per our interviews with former employees and customers.
One former salesperson described pushing products to distributors based on made-up demand forecasts, completing a partial shipment, then later coming up with an excuse for why the rest didn’t happen. “And now you have a problem. Accounting problem maybe.”
Former employees told us Super Micro’s business culture has not improved. Former senior sales director: “I don’t think the behavior of the company in many ways has changed in the 5 years since I started, and I started shortly after that delisting problem.”
Three senior employees who left in early 2018 amidst the accounting scandal were rehired, individually serving as (1) a member of the board of directors (2) a consultant serving close to the CEO (3) and a VP of business development.
Former CFO Howard Hideshima left the company in January 2018 and was later individually charged by the SEC with accounting violations. In May 2023, he was hired by a key related party owned by Super Micro CEO’s brother.
A new CFO, praised by co-workers for his integrity, was hired in January 2018 to help the company recover from the scandal. He helped Super Micro re-list but resigned in January 2021. A former sales director suggested that he was edged out by the company.
Beyond fresh questions around its revenue accounting, we found that Super Micro’s relationships with both disclosed and undisclosed related parties serve as fertile ground for dubious accounting.
For example, disclosed related party suppliers Ablecom and Compuware, controlled by Super Micro CEO Charles Liang’s brothers, have been paid $983 million in the last 3 years. Ablecom is also partly owned by Super Micro CEO Charles Liang and his wife.
The relationships seem oddly circular. Super Micro provides components to the entities which assemble them and sell them back to Super Micro. They also rent warehousing and factory space to Super Micro even though it has its own sprawling factory.
The related parties seem to do little other business: ~99.8% of Ablecom’s exports to the U.S. since 2020 were to Super Micro, and ~99.7% of Compuware’s U.S. exports were to Super Micro, per trade records.
In addition to the concerns around the disclosed related parties, we found evidence of undisclosed related parties. The youngest brother of Super Micro’s CEO owns two Taiwan-based entities that make server components. Media reports and former employees indicate the entities are Super Micro suppliers.
Both entities operate out of the Super Micro Science and Technology Park in Taiwan, but Super Micro has not disclosed related party transactions with them.
Another brother of Super Micro’s CEO operates a disclosed related party but is also the director and shareholder of undisclosed Hong Kong and Taiwanese entities, which appear to resell Super Micro products and provide “professional OEM services.” It operates out of the same building as related party Compuware.
Collectively, disclosed and undisclosed related parties pose accounting risks relating to revenue recognition and reported margins. A former executive told us: “Basically it’s a governance issue and just kind of shows you that Charles doesn’t give a shit what you think…you’re right to worry, though, that you just never know what’s lurking.”
In addition to the CEO’s brothers, the company has an odd relationship with a key customer. In February 2024, Super Micro made an undisclosed investment in tech startup Lambda Labs as part of its $320 million funding round, per Bloomberg and per a confirmation we received from Lambda’s COO.
In August 2024, Super Micro signed an “unusual” $600 million contract to lease space at a California data center and sub-lease it to Lambda. The CFO glossed over questions about the reason for this arrangement.
In October 2023, two related parties run by CEO Liang’s brothers, one of them partially owned by Super Micro’s CEO, reportedly invested in small Taiwanese tech company Leadtek. Leadtek’s website advertises products almost identical to Super Micro’s, yet Super Micro discloses no relationship with Leadtek in what appears to be a clear undisclosed related party.
Super Micro has claimed its liquid cooling technology will “revolutionize the industry” and is its “competitive edge.” But at a recent industry conference, Super Micro featured related party Ablecom’s liquid cooling solutions, per an Ablecom engineer.
Ablecom has several patents for its liquid cooling technology. Despite this, Super Micro has never disclosed any related party involvement in its liquid cooling technology.
Besides questions around related parties and proprietary product offerings, in 2006, Super Micro pleaded guilty to a felony count of exporting banned components to Iran. The CEO said the company was in its infancy and had learned from its mistakes.
When Russia invaded Ukraine in February 2022, the U.S. government imposed stringent restrictions and bans on exports to Russia of high-performance computers and components.
Super Micro disclosed that some of its products were subject to export bans and said it was halting all sales and had “not recorded revenue” from Russia since the day before the war started.
Exports of Super Micro’s high-tech components to Russia have spiked ~3x since the invasion of Ukraine, apparently violating U.S. export bans, according to our review of more than 45,000 import/export transactions.
At least 46 companies that handled Super Micro products to Russia since the invasion are now under OFAC sanctions or on U.S. government watchlists.
Almost two-thirds of Super Micro’s exports to Russia since the invasion correspond to “high priority” components that the Russian military may be diverting to the battlefield, per U.S. government warnings.
One of the biggest importers of Super Micro products in Russia is a supplier to one of Russia’s largest “supercomputers” at a once-secret, now-sanctioned research center. That importer, Niagara Computers, has received at least $46.3 million worth of Super Micro products since the start of the Russia-Ukraine war, per trade data.
The sales were initially made through a distributor in California, but were later made through 3 newly-formed Turkish shell companies, including one that was eventually sanctioned for smuggling restricted items to Russia.
Almost $30 million worth of Super Micro components have also been shipped to Russia’s largest importer of dual-use civilian-military chips via a newly created Hong Kong shell entity. That Russian importer is now under OFAC sanctions.
Since 2016, Super Micro has had a joint venture with a Chinese state-run company called Fiberhome, which is involved in a campaign of “human rights violations and abuses,” high-tech surveillance, and repression of ethnic communities in western China, per the U.S. government.
Super Micro has sold ~$196 million of sophisticated computer components to the joint venture since Fiberhome was watchlisted by the U.S. government in 2020. Super Micro justifies the sales by saying the JV entity itself wasn’t watchlisted, even though its partner was.
Besides accounting issues and sanctions evasion, competition and quality concerns have resulted in major companies dropping Super Micro entirely or reducing their share.
Nvidia is a key partner and chip supplier to Super Micro. In May 2024, CEO Jensen Huang publicly endorsed Super Micro’s competition: “Nobody is better at building end-to-end systems of very large scale for the enterprise than Dell.”
CoreWeave was Super Micro’s largest customer over the last year, per Bloomberg Intelligence. But in December 2023, Dell announced a deal with CoreWeave for “thousands” of GPU servers, potentially worth over $1 billion.
Tesla had been sourcing its servers exclusively from Super Micro, per Barclays Research in September 2023. But recent reports in May 2024 and posts by Elon Musk show Dell has now won major deals from Tesla, and Musk’s xAI, eroding Super Micro’s exclusivity.
Super Micro has conceded that it is “under-indexed” with the world’s largest technology companies, called “hyperscalers.” Amazon AWS was a customer but cut ties after delivery issues, per a former employee.
Digital Ocean, a U.S. cloud service provider, switched from Super Micro to Dell after service issues, according to a Digital Ocean employee, describing the relationship as “a train wreck of sorts” fraught with reliability issues.
Genesis Cloud is touted as a “success story” on Super Micro’s website. But current and former employees told us otherwise: “Catastrophic. It is, on the technical side, one of my worst experiences I’ve had…in the industry.”
GMI Cloud, a start-up GPU cloud provider in Asia and the U.S., told us they experienced a malfunction rate of 17.5% on its orders of 256 Super Micro servers. GMI is now moving away from Super Micro to HPE less than a year after its first order, per an employee.
NexGen Cloud, an Nvidia partner, disclosed in October 2023 that it was investing $1 billion to build an AI super-cloud in Europe with over 20,000 Nvidia GPUs. But a NexGen employee told us that sometimes up to half of the orders received from Super Micro had firmware issues.
Multiple former employees and channel partners confirmed that after-sales service is undermining Super Micro’s ability to retain customers. One former salesperson said: “It’s their Achilles heel. It’s just horrible.”
All told, we believe Super Micro is a serial recidivist. It benefitted as an early mover but still faces significant accounting, governance and compliance issues and offers an inferior product and service now being eroded away by more credible competition.