Super Micro Computer: Auditor Increases Odds Of Continued Nasdaq Listing -- Hold

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Super Micro Computer: Auditor Increases Odds Of Continued Nasdaq Listing -- Hold

seekingalpha11-19 23:35

Just three weeks after the resignation of Ernst & Young LLP, Super Micro Computer, Inc. surprised market participants with the appointment of a new independent audit firm.While not as large as market ...

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Erik Isakson  Note: I have covered Super Micro Computer, Inc. (NASDAQ:SMCI) previously, so investors should view this as an update to my earlier articles on the company. After the close of Monday's regular session, beleaguered high-performance server and storage solutions provider Super Micro Computer, or “Super Micro,” surprised market participants with the appointment of a new audit firm just three weeks after the resignation of Ernst & Young LLP (“EY”) :  (...) Super Micro Computer (...) announced today that the Audit Committee of its Board of Directors has engaged BDO USA, P.C. (“BDO”) as its independent auditor, effective immediately. BDO is a member firm of BDO International, one of the world's top five accounting firms network with over 115,000 professionals across its global network and a recognized leader in audit and assurance. “We are pleased to welcome BDO as Supermicro’s independent auditor,” said Charles Liang, President and CEO of Supermicro. “BDO is a highly respected accounting firm with global capabilities. This is an important next step to bring our financial statements current, an effort we are pursuing with both diligence and urgency.”   While not as large as market leaders Deloitte, EY, PwC and KPMG, BDO USA certainly has the capabilities and resources to conduct an expedited audit of the company's FY2024 financial statements. Super Micro also submitted an eagerly awaited Nasdaq-listing compliance plan (emphasis added by author):  Additionally, the Company announced that it has submitted a compliance plan to The Nasdaq Stock Market (“Nasdaq”) to support its request for an extension of time to regain compliance with the Nasdaq continued listing requirements. In its compliance plan to Nasdaq, the Company indicated that it believes that it will be able to complete its Annual Report on Form 10-K for the year ended June 30, 2024, and its Quarterly Report on 10-Q for the fiscal quarter ended September 30, 2024 and become current with its periodic reports within the discretionary period available to the Nasdaq staff to grant. Pursuant to Nasdaq rules, Supermicro’s securities will remain listed pending Nasdaq’s review of the compliance plan.  To provide some background: Should Nasdaq staff accept Super Micro's compliance plan, the maximum extension period would be 180 calendar days from the due date of the first late periodic report plus the 15-day extension secured by the company's notification of late filing on August 30. Nasdaq.com Assuming Nasdaq granting the maximum extension period, Super Micro Computer would have to file its FY2024 annual report on form 10-K by March 13, 2025. While certainly not an awfully long amount of time for a newly appointed audit firm, I expect both the company and particularly BDO to allocate sufficient resources to complete the audit in due course. As a result, Super Micro Computer's FY2024 audit fees are likely to be a multiple of the $4.8 million paid to Deloitte for FY2023. Based on statements made by EY in their resignation letter and the recent update provided by the company's Independent Special Committee regarding the recommendation of remedial measures to strengthen Super Micro Computer's internal governance and oversight functions, I would expect BDO to issue a qualified opinion on the company's internal control over financial reporting based on criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). That said, I wouldn't be surprised to see BDO providing an unqualified opinion on the company's financial statements, which would likely result in another relief rally in Super Micro Computer's shares. However, should the company miss the assumed deadline, Nasdaq would not hesitate to delist the shares, as also evidenced by its course of action back in 2018. Depending on the reasons for the delay, the stock might experience material selling pressure:   Author's Work Indications of fraud might also result in the company being removed from the S&P 500 index. In sum, at least in my opinion, the quick appointment of a large, capable audit firm has added some much-needed credibility to Super Micro Computer's plan of compliance and consequently. Accordingly, I would expect Nasdaq to grant the maximum extension period permitted under its regulatory framework. From a valuation perspective, Super Micro Computer's stock looks cheap with a P/E ratio of below 10 based on current consensus expectations for FY2025 and FY2026:   Yahoo Finance However, following the company's disappointing H1/FY2025 guidance and resulting concerns of market share losses to domestic and Taiwanese competitors and a clean and timely audit opinion anything but certain, I am reiterating my “Hold” rating on the shares for now. That said, I would get more constructive on Super Micro Computer's stock should the company issue strong H2/FY2025 guidance in February. Bottom Line Just three weeks after the surprise resignation of Ernst & Young LLP as the company's independent audit firm, Super Micro Computer managed to appoint a reputable and capable replacement. As a result, I would expect Nasdaq to grant the maximum extension period permitted under its regulatory framework, which should be sufficient to catch up on the company's delinquent SEC-filings. With a near-term delisting increasingly unlikely, I would expect market participants to refocus on the company's preliminary Q2/FY2025 report and updated full-year guidance in February. While the quick appointment of BDO is good news, the massive after hours rally and Super Micro Computer, Inc.'s muted H1/FY2025 outlook is keeping me from getting more constructive on the shares at this point.  Consequently, I am reiterating my “Hold” rating on the stock.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}