Q1 2020 Earnings Call
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I'd now like to hand, the conference over to your speaker today, Ms. Suzanne Schmidt with Investor Relations. Please go ahead.
You operate or good afternoon, and thank you for joining us on today's earnings conference call to discuss Smart Global Holdings first quarter fiscal 2020 result.
Jay Shah Chairman and Chief Executive Officer will begin the call with a discussion of the market in the business followed by Jeff The Chico Chief operating and financial Officer, who will review the financial results in more detail and provide the forward guidance after which we will open the call your question.
As a reminder earnings press release and a replay of today's call can be accessed under the Investor Relations section, It's worth website at smart G.H. Dot com.
We encourage you to go to our website throughout the quarter for the most current information on the company, including information on the various financial conferences, we will be attending.
Before we begin the call I would like to note that today's remarks and the answers to questions may include forward looking statements.
Any statements that refers to expectations projections or other characterizations of future then.
Including financial projections and future market conditions is a forward looking statement.
Actual results may differ materially from those expressed in these forward looking statements.
For more information please refer to the risks out certain risk factors discussed in the documents we file from time to time with the FCC, including our most recent Form 10-K .
We assume no obligation to update these forward looking statements, which speak as of today.
Additionally, during this call our non-GAAP financial measures will be discussed reconciliations for those directly comparable GAAP financial measures are included in today's earnings press release.
With that I will now turn the call over to chairman and CEO Jay Shah.
Thank you Suzanne and and welcome to everyone on the coal.
Oh, we completed the first quarter fiscal 2020, with our memory businesses, which are specialty memory products and Brazil memory.
Both performing at or above our expectations.
Our specialty compute and storage or a C. S S group.
Came in below expectations for the quarter.
As we saw delays and some orders in our Penguin computing government business due to some of the budget delays.
As we've communicated previously some of our C. S. S is exposed to large government programs and this area of our business can be lumpy from quarter to quarter.
In total net sales for the first quarter came in at $272 million, just slightly below our guidance range and below the previous quarters 278 million revenue.
This revenue shortfall.
Contributed to lower than expected profitability, resulting in non-GAAP EPS at 55 cents for the quarter.
But higher than the previous quarters 50 cents per share.
In this first quarter fiscal 2020.
Approximately 38% of revenues came from our specialty memory products business.
35% from our Brazil business.
And 27% off revenue from specialty computing products, which is a very good balance overall.
Businesses and provides stability it expands our markets served in a very meaningful way.
So we're well on our way to transforming into a balanced set of businesses that provide solutions for the far edge.
Components with the enterprise data center.
Embedded components and systems for a broad variety of telecom networking industrial transportation and defense applications.
As well as large high performance computing systems for scientific and <unk> development.
All these businesses are underpinned by our ability to address our customers unique requirements through our go to market.
And efficient supply chain and delivery systems.
During the quarter.
Our team here at S.G.H. has made tremendous progress and successfully integrating two new acquisitions into our operations and supply chain systems as well as into our IP and financial systems.
We continue to work on integration into our design and development as well as sales marketing and general management organizations.
Now, let me turn to a more detailed review of each about 3 billion lines of business.
Beginning with specialty computing.
Which represented as I mentioned, 27% off net sales of our net sales in the quarter, which is approximately $75 million.
Inside the SCS has group we have three main areas thing when computing.
Embedded computing or do you see.
And our wireless computing line of products.
When computing has seen a meaningful increase in its sales pipeline as we are now the second largest dedicated supplier of high performance computing or HPC systems, particularly HPC ice systems in North America.
However, in this past quarter.
Some government programs pushed out for budget reasons and results fell short of our expectations for the quarter.
As a reminder, in the previous quarter fiscal <unk> previous quarter.
To this one.
Thing was revenues had more than doubled sequentially.
As our fourth fiscal quarter is the strongest from a seasonal basis in the government segment.
One highlight for paying win from the last quarter.
Is the new magma supercomputer and HPC system enhanced by artificial intelligence technology.
They wouldn't developed in partnership with Intel for a major National lab.
We're proud of is converged platform that integrates IRI.
To accelerate HPC modeling for a data scientist customers.
It is one of the first deployments of Intel Xeon Platinum 9200 series processors.
The system qualifies as one of the top 100, HPC computing systems in the world.
In addition, during the quarter, we released our cluster way 11 software a major upgrade of our software stack, that's been very well received by our customers as it enables them to scale clusters to virtually any size.
Our embedded computing or E C and and wireless computing businesses.
Both performed inline with expectations for the first full quarter.
As part of our businesses.
We are well ahead of plan on he sees overall integration.
In particular, he sees manufacturing transition into our U.S. in Malaysia manufacturing locations.
She was completed the months earlier than expected.
And further we are optimistic about the synergies between easy and Penguin.
As we develop a combined go to market strategy.
Merge some of the organizational functions for efficiency.
And develop a more platforms based business model in the HPC ice space as well as for the emerging edge computing applications.
Turning now to our specialty memory business, which represented 38% of net sales for the quarter and was up about a 103.5 million in revenue.
Sales were roughly the same as the previous quarter.
And we know our major customers demand is still weaker than expected.
However, we are continuing to make progress in developing a broader base of tier two and two or three customers.
And more domestic and international sales channels and this is resulting in increased sales into that segment of customers.
Also we made great progress in our on our in house development of control agnostic firmware.
Embedded ssds, both sat a and B I mean, so we will soon release, a broad range of products based on our own internal former developments.
And be able to take advantage of this major market opportunity.
Finally, our Brazil line of business represented 35% of total company in itself.
Compared with.
32% last quarter and totaled approximately 94 million.
We grew sequentially over the last quarter due due to a combination of an improving domestic economy.
In Brazil higher unit demand.
And moderate price declines in the memory market.
It's important to note that in this first full quarter of the new score based local manufacturing pools.
Our business performed better than earlier forecast.
And this gives us confidence that we have bottomed out in our Brazil memory business.
Although fiscal Q2 is a seasonally weak period in Brazil with with the Christmas holidays.
In addition to PC and mobile memory products. We're also seeing solid traction with a battery business in Brazil.
Which grew quite well in the quarter.
Overall.
In summary, we begin fiscal 2020 with a heavy combination of businesses and Jack will address our guidance in more detail later in the call leading the call, but as we enter our second fiscal quarter.
We see our normal seasonality more pronounced this time with the delay of a defense program.
Which was to be awarded this quarter for embedded computing business.
Looking out to the rest of the fiscal year, we're optimistic that our business is now in a stronger position as the economy strengthens and new technology drivers such as Fiveg and he I systems drive incremental demand.
I'd like to conclude my discussion by reiterating that a transformation is well underway.
With expanded addressable markets.
New products and continued execution, we look forward to reporting on our progress as the year unfolds.
Let me turn the call over to Jack for a review of our financials and guidance Jack Great. Thank you all Jay overall gross revenue for the first fiscal quarter was 418 million well net sales were 272 million as a reminder, the difference between gross revenue and net sales is related to our supply chain services business, which is accounted for an.
Agency basis, meaning that we only recognize the net sales net profit of supply chain services transactions.
A breakdown of net sales by end market for the first fiscal quarter was as follows.
Mobile Mpcs, 30%.
Work in telecom, 23%.
Servers and storage 10%.
The industrial aerospace defense and other continuing to be our largest end market at 37%.
Now moving to the rest of the income statement non-GAAP gross profit for the first quarter was 55.7 million an increase from last quarter is 53.4 million.
Primarily due to our memory businesses.
non-GAAP operating expenses were 37.4 million compared with 35.4 million in the previous quarter.
The increase was primarily due to a full quarter of our two recent acquisitions.
non-GAAP net income for the first fiscal quarter was 13.4 million or 55 cents per diluted share.
Compared with 11.9 million or 50 cents per diluted share in the previous quarter.
Adjusted EBITDA totaled 22.5 million compared with 25.2 million in the prior quarter.
Turning to working capital.
Our net accounts receivable.
<unk> increased to 200 to 220.8 million from 217.4 million last quarter.
And our day sales outstanding increased to 50 days for this quarter compared with 47 days last quarter.
And then their inventory totaled 160 million at the end of the first fiscal quarter.
Compared with 199 at the end of the fourth fiscal quarter.
Inventory turns dropped to 9.1 times from 12.5 times last quarter.
As we added the inventory from our two recent acquisitions.
And an increase inventory for some supply chain programs.
Consistent with past practice accounts receivable days outstanding and inventory turnover are calculated on a gross sales in cost of goods sold basis.
Which are 418 million.
And 364 million, respectively for the first fiscal quarter of 2020.
Right.
Cash and cash equivalents increased to 111.4 million at the end of the quarter, an increase of 13.3 million from the fourth quarter fiscal 2019.
After taking into account 6.4 million of cash to reduce debt.
You didn't want this fiscal quarter, we will make terminal debt amortization payments on a quarterly basis.
We have been granted a holiday for making those payments in fiscal 2019.
Fourth quarter cash flow from operations totaled 25.3 million compared with 48.99 in the prior quarter.
And for those of you tracking capex in depreciation Capex is 5.2 million for the quarter and depreciation was 6.1 million.
Now let me touch on some of the financial dynamics is RG mentioned earlier, we have seen some delay in the timing of certain federal programs.
Our specialty computing group isn't working on.
We expect this impact our second fiscal quarter fits well.
With that as a backdrop, let me now turn to the guidance for the second quarter fiscal 2020.
We currently estimate that our second quarter fiscal 20, net sales will be in the range of 265 million to 275 million.
Gross margin for the quarter is estimated to be approximately 19% to 21%.
The decrease in gross margin is mainly due to our seasonally weak period in Brazil.
GAAP earnings per diluted share is expected to be between bid expected to be 14 cents plus or minus five cents on non-GAAP basis, excluding share based compensation expense.
An intangible asset amortization expense, we expect non-GAAP earnings per diluted share to be 50 cents plus or minus five cents.
The guidance for the second fiscal quarter does not include any view on the foreign exchange gains or losses.
And includes the income tax provision expected to be in the range of 2% to 6%.
The number of shares used to estimate earnings per diluted share for the second fiscal quarter is 24 million.
Capital expenditures for the second fiscal quarter are expected to be in the range of 6 million to 10 million.
Please refer to non-GAAP financial information section and the reconcile a reconciliation of non-GAAP financial measures to GAAP results and reconciliation of GAAP net income to adjusted EBITDA tables.
In the earnings press release for further details.
Operator, we're now ready to take questions.
As a reminder, ladies and gentlemen to ask a question you will need to press Star then one on your telephone keypad to withdraw your question press the pound key.
Our first question comes the line of Brian Chin with Stifel. Your line is now open.
Hi, there can you hear me now.
Yes, we can hear you now.
Sorry about that.
Hi, good afternoon. Thank so much for taking our questions.
Yes, maybe to start with that.
Yes.
The tailwind business in terms of the revenue shortfall I understand you kind of highlighted are low lighted federal as kind of the at the.
Reason for that but micron did yesterday talked about some shortages at high density DRAM modules, just curious whether that was a constraining factor at all in terms of project timing for any of your customers.
No. We I don't think the that was the issue of what we understand and I have to say based on our understanding many of the.
Hubs and government agencies have been waiting for the budget appropriations bill to to be passed which.
Follow very closely as a result, so as you can you might have tracked that that is going through.
I believe the Senate like now and hopefully we'll be approved but through the through the white house. Shortly so the the issue. We're talking about is mostly to do with order releases. You know all these programs have been approved but did not waiting for budgetary greenlight.
And that is what has delayed the release of these orders.
So maybe.
Maybe just could steer revenues, maybe more on the back half of this fiscal year perhaps.
Yes.
Our back half of the fiscal year is always stronger in the government anyway.
And you know we don't expect that this means that we will stack. This business on top of any other forecast. This is just slight everything.
Out by some period of time maybe.
Our best expectation is three four months, but unfortunately, it's a a pen that is a goes all the way to the White House I mean, some of these are programs that have to start once they start they go but you don't like age they don't add on top so if you lose X amount. This quarter. The starts next quarter that doesn't start on top of some out that just want to start just pushes out everything just pushes out.
Another 3456 months to the end of the program.
Sure just one more question here that one more question.
Our business, but in terms of them the operating margins that maybe you kind of our targeting by the end of this fiscal year.
Even given the softer start in terms of especially compute.
Revenue what are you sort of targeting exiting this fiscal year in that business.
And the payment business.
Yes.
Specialty compute and storage business overall.
Yeah than we typically don't breakout our.
Margins by the the varies in various areas and look at the company I mean look at smart overall with respect your operating margin.
Well somewhere.
And you know maybe the.
Hi, mid to high single digits.
Sure.
To start we've had.
Okay.
That's helpful. And then yeah, I think qualitatively given sort of that.
Slide us plus or minus revenue guide somewhat.
Especially compute down maybe sequentially in Brazil down sequentially, then sell especially memory I guess up.
Q1, Q and so yes corresponding to sort of.
Your comment about February quarter could sort of be the bottom in that market.
Do you think we're already passed sort of the bottom in specialty memory revenue right now and then you see sort of like momentum build in the quarter I'm kind of beginning to end.
Yes, I think specialty definitely I, we think in Q1, we're starting to see a little bit better traction.
Exited the quarter some are larger OEM customers. So we were we expect the Q1 was kind of the bottom for that business.
Yes. So there's two comments here right one is to do with Oh goodness level that our major customers.
Our major customers, we've been expecting a recovery for a couple of quarters and it's been slow in coming to be honest.
So as I was attempting to explain we have over a year ago started to invest in broadening our customer base into tier two tier three customers and our product base and that is what has allowed us to continue to deliver.
Essentially flat revenues, even in the declining SP environment, maybe prices continuing to decline.
So hopefully the memory prices will stop declining that's the indication we're getting from the markets and in fact, it's a it's a pretty specific indication because.
Our NAND prices are actually going up a little bit and lead times are definitely going out.
And so we're optimistic that especially memory business with both of those legs.
One being new customers new design wins.
And then the other being a price is not going down.
Even going up.
And God knows if our major customers started to be a little stronger than that would be if another.
Yeah.
I don't know if that's.
Onto you were looking for I think it is.
Very helpful. Thanks, so much.
Our next question comes from Roger Gill with Needham and company. Your line is now open.
Yes. Thank you.
The question on on the gross margin so the margins came in.
Lower in November .
Lower revenue and are kind of guiding.
Slightly actually guiding down about 50 basis points sequentially came in below expectations.
Is this just primarily a function of the lower volume because of the government programs that are being delayed.
And if so once that.
Once that business returned do we expect to kind of have an uplift in margin and any other kind of specific commentary around the the drivers of mix as we go into next fiscal year.
Really actually the main driver of the gross margin decline that we're forecasting is really.
Brazil, Brazil, we have a high fixed cost basis in Brazil, Brazil had a.
If you were saying, we're bottomed out in Q2, but Q2 their seasonally weak quarter in Brazil, right and so we.
The impact there as you know it's enough of an impact on gross margin was taken it down.
You know when point half from where we had kind of thought it would be so it's really more targeted to Brazil than the mix, even in the especially compute business.
Okay, but in Q1 fiscal Q1.
The gross margin came in below your guidance correct, Yeah that was about 550 basis point.
Well that was that was impacted by this penguin, especially to compute.
Having some orders that we thought ready to get some business, we didnt get that it was a higher gross margin kind of business.
And our forecast.
Right, Okay, and the under utilization I mean, the so called Oak Cogs as we call it the non materials costs.
Just a fixed.
But the revenues reduced so you end up with a little gross margin.
So it was good to know that you've now have one full quarter of the new.
Content rules, new point systems in Brazil, and that you you said you performed better than you thought.
I was wondering.
Is that.
Is there potential upside in that business because of the new rules.
Is or better visibility that will be granted to you.
Our upside to drive higher penetration.
Or is the kind of the sequential growth in Brazil, mainly a function of as you said higher unit demand and moderate price declines.
I'm just curious about your commentary that.
You performed better than you thought.
Now that you have a full quarter of new rule I'm, just wondering if the new rules could actually.
Can help your Brazil business going forward or is it just really based on these other factors I know I think I think new rules have have I I was a I think we would try to explain the last time as well that the new rules allow us to be much more dynamic in terms of how we address this business you know we're no longer constrained buys.
<unk>.
You know.
Percentage that the customer must buy.
And therefore that was a floor and a ceiling.
However, now the customers not constrained in the same way in terms of a floor, but it's not constrained the same whereas in a ceiling if you're not I mean, and so we've been very active in terms of talking to our customers and persuading them to both you know.
Our service level, making it easy for them to two really concentrate most of that points on memory and as I mentioned before.
Memory turns out to be the lowest cost per point of any major item.
So as a result, we think that that's actually a gives us the ability to drive the business.
So to come back to your question that allows us to to figure out how we want to play you know market share.
Versus revenue growth.
This is profitability.
Or other call it gross margin.
And we can work with our vendors as well to try and best position ourselves in front of these customers. So.
We had net net look at that is good news for various reasons.
Increased flexibility the ability to grow the business for the.
And so too.
You know try and give you a simpler answer to your question.
Yeah, I think it creates some upside possibility.
And just see housekeeping question, Jack on the tax rate of 4%.
But that going forward, it's been kind of all over the map last year.
How do we think about that you can think our a county regulators for that okay, but I think Q2 will we guided a pretty low tax rate in Q2, but I think we will go back up to where we kind of thought we should be as we get into Q3. In Q4, just how are we have where we forecast our profits to be.
Okay. So you would.
We should model a.
What tax rate in Q3 in Q4, something higher than 4%. Yeah Me Backlighting, we said about 12 or so somewhere between 12, 16%. It's kind of we talked about kind of for the years have been model start looking at somewhere in that kind of range to get back to the back half orders.
Okay. Thank you.
Thank you.
Our next question comes from might ask Mark let basis with Jefferies. Your line is open.
Hi, Thanks for taking my questions.
I'll first one on the Penguin computing business I'll tell you had mentioned the pipeline.
Looked really good despite some near term push outs is that can you.
Give some color and not as that is that due to the consolidation that's happened in the industry and are you are is there like.
Do you view this is kinda like up like a sustainable step function and share gains for you guys. There is as we go through the next several years is our there's new kinds of programs that you guys are are able to prosecute because of this that's the first question I have a follow up thanks.
Good morning, yes.
That is exactly right because of now.
Really Oh, you know as will take two different maybe three different sectors. One is sort of government government me who.
But.
Suddenly large HPC systems.
In the government as you know, there's a requirement to have more than.
At least two it maybe three vendors and so a where we might have been a on the custom of a cut out we're now in on on many of these programs. So that is certainly helping the pipeline.
And by the way in some very significant and large opportunities.
Hopefully and I don't want to Jinx. It we I think we would really well positioned for a couple of very large opportunities.
Then.
That's the government sector than in the commercial sector, particularly related to some of the new systems the Intel based.
We've been investing a lot of our efforts in developing products.
Around some of the new Intel processors as I mentioned before we.
Shipped one of our largest systems ever that magma system.
And so we're seeing increased opportunities through through those product areas.
Particularly the commercial customer base and finally, I mean are you seeing.
I talked about this and it may not.
You know resonate easily but in the past Penguin has always been simply about integrating solutions that the customer wants.
Other words, we were very customer driven in terms of the actual configurations, which we ended up creating.
However are worked with what we've been doing is a prototype using some of these and we now offer what we called solution packs at that out for different applications, such as it and yeah applications for example, retail automation.
And now those solution packs give us a different kind of a pipeline opportunities so that that's really helping.
To be able to pipeline as well.
Is that along the lines of the question, Yes, that's a that's very helpful and not a follow up if I may on the.
The battery business in Brazil can you give us had a sense of where you are in the ramp how big is that and does that as that business grows has that helped to offset the the higher fixed costs. They all costs. As you described it in Brazil or is there a separate set of old Cogs for for battery that.
That you have to absorb.
Separately from your existing.
Sorry module business, and and Brazil, Yeah, I'll take that went to the I mean, we've we've kind of said when you remember way back when we started the thing that we thought this about.
25 to 30 million dollar opportunity in the first year and you know, it's looking to be that kind of an opportunity and so Q1, but well underway to.
Get in that range for this year on the battery business.
On the old Cogs is not the problem low cost for now with the fixed part is really the packaging operation is has a huge fixed cost to it and so when the units go down our seasonally weak quarter. It definitely drags on the gross margin the battery business a whole separate set of equipment.
Not anywhere near the fixed cost of a packaging type operation. So it's.
Impact I know cognizant much lower than what you have from the packaging side of the house.
Okay. That's all very helping <unk> last question. If I may the can you talk about what you're seeing in inventory in the supply chain downstream from from yourselves.
You say downstream you mean out our costs at your guide your your customers or like I mean, your history. We've always we've been having as those guys had lots of inventory in their downstream channels and they've been slowly burn it off but it looks like with some of the increased demand that we're seeing.
For some are larger specialty customers that they are they're starting to get more of that through the channel.
And so they are inventory should be declining in the downstream.
Should be but you know we've been.
Hoping I mean and being frankly been given predictions by some of 'em major customers that was going to happen faster than it is happening, though actually that's somewhat of a disappointment for US right. Now yeah started has been a disappointing yeah, we're seeing a little bit of.
In some of our supply chain business, we're seeing some we're seeing more shortages and more kind of.
Going out looking for parts, which means that they are building little bit more maybe in the C.M., so which should translate into less inventory, but we'll wait and see what actually happens there.
Fair enough. Thank you very much.
Thank you.
Our next question comes from Sidney Ho with Deutsche Bank. Your line is now open.
Great. Thanks for taking my question on my first question is can you help us understand the revenue contribution from the three separate acquisitions in your guidance or in the quarter well that you prefer in terms of dollar all growth rate something we can.
Yes, it as an anchor point and related that for the segment as a whole how should we think about the end market exposure that segment and what does that mean to seasonality going forward.
Well, it's an excellent question said im not sure I want to answer it but a heck of a good question [laughter] [laughter].
No I mean, but we said that this news group of companies right would be somewhere 80 to 100 million dollar type business for us when we bought him and I think there on a quarterly basis, well know the two new ones to out.
109, they're tracking a little bit ahead of that I mean, so we had a good.
Q1 with those businesses.
Paying one.
You look at paying one from 19 to 20, we said it should grow.
Yeah, I was going to grow 10, 15% of you took kind of where it is.
No thats kind of the growth rate of Penguin. So maybe you can kind of get to where you want to be but.
You know the to visit we acquired both came in right, where we thought they were for the quarter for plans. They both did very well.
The wireless Comm business, we said, we would double that revenue that business of should be a 30 kind of million dollars company and we're well underway to achieving that in the first quarter.
Wireless business.
Yes, okay.
For all the specialty computing segment.
Is looking like its wouldn't see 50 plus for the right.
Roughly around there.
But 350 for the year for that that it was three.
Pieces together.
And you'll see as we report the Q that we've now decided to give you more visibility into a the gross margins for each of our segments. So you'll see that into Q.
HM.
Yes.
Okay.
Maybe I'll I'll.
Hey, with the especially to compute business and you already prepared remarks, you mentioned, you're working on redness synergies between the easy and Penguin.
Can you elaborate a little bit on what you're doing there and are there any kind of milestone. One thing you can you can share with US absolutely. Yeah. That's that's a very interesting area Sydney and.
You know I'm glad you asked about that one because it's it's.
The market opportunity has to do primarily with edge computing.
So if you think about what what are the embedded computing business would be acquired used to do it was mostly focused on you know.
Deep embedded systems that were.
Then sort of customized you either in mechanical physical ways or in terms of software or in terms of the.
Hi availability aspects.
For different applications.
Meanwhile, Penguin.
So large high performance computing systems, which tend to be racks and racks of servers.
Sometimes as many as a couple of thousand modes of servers, so and often the very latest servers. So now we were able to take those server platforms that we already have.
Which we are very efficient with and competitive with.
And be able to customize them as the team at the embedded computing side is able to do and has the SKU fit for into applications. The first.
Listing area is around edge computing, particularly as we look at.
You know a range of applications and gaining a payment.
You know retail automation and so on so that's that's a area that has some interesting potential. So we've got a number of opportunities there that we're trying to.
You know, it's only been three months so it hasn't been long enough to really you know.
Come back to you and say what we've been successful all of this but very interesting opportunities lot of customer interest. That's that's one area.
That's it synergies more in the field and in the product and then we have a lot of synergies in terms of being able to.
You know for example, develop a switch.
For high performance computing that is that embedded computing team is a lot of experienced with doing so we have the ability to know develop particular switching platforms backplanes that go into high performance computing and AI applications. So I can go on but.
Hopefully I'll give you a flavor there.
Yeah. That's super helpful. Maybe one last question for me on the Brazil side.
Last quarter, you guys mentioned that the what the new local content rewards customers, that's giving you more multi visibility into their requirements and obviously you guys did better than than what you thought for the last quarter.
How would you characterize the visibility you said aboard and feel month and maybe related that S. T has been a bake headwind for you guys in my past few quarters, how do how you think about the ASP going forward.
So tightly ASP onest for this quarter you know, we definitely saw about 50% drop in ASP teeth in mobile, but we would we expect that in Q2 or ASP will start to go up in mobile as the content.
Her phone will is going to start to go up yeah. We are getting good visibility from our customers were getting you know you get six months, a pretty good visibility and.
We have took we have to create new products pretty early in the process until you know we look as we get into our Q2, we will start shipping higher density products to our phone customers. So we would we expect our Sps to start to increase again as we get into Q2.
You know Oh long overdue, we've been predicting or maybe wishing that as commodity prices come down the amount of memory that goes into a phone would go up but it hadn't been right and this is the first indication that in Q2, we start to see the densities go up no I just you know much as we do get pretty good visibility.
Just the our customers have the ability to move.
Forecast up and down so just to be clear. These are not like fixed six month forecast, but nevertheless, it's great visibility and it's it's better than it used to be.
Great. Thank you very much.
As a reminder, ladies and gentlemen, if you'd like to ask a question at this time that Star then one.
Our next question comes the line of Suji Desilva with Roth Capital. Your line is now open.
Hi, I would say hijacked to follow up on maybe said question about Brazil and task now do we have a more normalized pricing environment, yet better visibility is there kind of a a step the thought process for what kind of year over year growth. We can expect from <unk>. The current levels now that they've they've stabilized versus obviously, it's 2% down the came last pricing.
I spend year over year for Brazil.
Correct, correct now that leveled out what's what's a more reasonable expectation for year over year correct.
Paul I mean, if you ever year, if you look at fiscal year 20 versus this year 19, I mean, Brazil will not grow I mean, FIS remember in Q1 of 19, we did almost $200 million a revenue in Brazil, right and that was of a monster quarter. So I was referring more to quarter to quarter from this quarter say pork wears out kind of if you look at it well even Q2 right it's still maybe.
As you start getting into Q3 Q4 for Brazil that I think you can start looking out maybe we will start growing that business.
510% maybe quarter over quarter over quarter.
Yeah, I think I see this the and the good and bad news is that Brazil business is dependent on his piece.
But as a result.
You know, what we really could say that if you take out.
Some of the cyclicality, which I don't know how you do that completely but I think you know overall, we're looking at unit growth of 10% to 15% to use.
And looking for.
Entities to grow to neutralize the following a cost but bid at least and so.
We would expect a you know that kind of 15 ish percent type of annual growth, but of course the cycles.
Don't show the numbers that way.
Okay. I appreciate now we actually can ask that question, so better environment that way and then also the the especially compute.
Businesses, you've acquired put together where are you in the gross margin improvement versus what you targeted acquisition integration or we already there or is there more room across Penguin artisan enforced to expand the gross margin just just on kind of bringing those into the fold and it's Mike level.
We've made a lot of progress on paying when I mean gross margins is going to 700 basis points and they look to continue to.
<unk> range.
So we've we've.
Button, a large part of.
Kinda efficiency related gross margin improvements now we have to get to business model related gross margin improvements what that means is that our services component has to come up.
As a percent of the revenue.
What that means is that we need to be able to provide.
More value add to our solutions approach and so it's no longer well better supply chain management, Oh, you know manufacturing.
So on and so on.
And so.
That's kinda wherever you are with respect to Penguin with respect to the other two businesses that still very very early but we didn't forecast.
I mean.
The good and bad news as we didn't expect.
Huge margin improvement in terms of gross margin for those businesses, we had a you know.
Through the transfer from a external manufacturing.
For the artisan embedded computing business to our own factories, we gained a we've modeled again and which we've already.
To a good extent accomplished.
And that was simply by you know, we would not add much overhead and our factories, where we take out a bunch of third party costs.
Okay helpful. And then one last question I know you mentioned SSD controllers and you just recap that that's the strategy you have there and trying to be neutral to I guess certain elements and then what's what's the size that opportunities that a small opinions that a meaningful uptick relative to your revenue. Thanks.
It is a seminal opportunity.
It is one of our biggest opportunities in a range of applications like industrial like defense like.
Networking and telecom you know medical just a range of applications.
Where you need a SSD that is fumed for that particular requirement.
To this point well, including up to today.
We've been using not only third party controllers, but to a good extent did not have control over the phone.
About a year you're in a quarter ago, we started to invest in our own from where we've built up a pretty significant team Oh.
Over 40 from actually is.
Our investment over the last year plus.
And that is starting to now be a product, which is what I was trying to say so that significant investment which has been part of our business as you've seen it over the last year.
As no or in the next few months, we would start to introduce specific products and that gives us two benefits one is.
Lower cost because we control our own destiny with respect to the controllers and framework.
And the other is much better ability to tailor our products to these different applications because we control.
And we control the functionality of the flash through that so.
It's a very significant.
Milestone for US obviously, we then have to get the products out get to get good design wins could you know before we get to design wins get the lead.
You know if the marketing machine going but its a very meaningful advancing our products.
Very helpful. Okay. Thanks.
I'm showing no further questions in queue at this time I'd like to turn the call back Dodgy Shah for closing remarks.
Thank you operator, well. Thank you all for your interest we look forward to reporting on our progress in the coming months and to meeting many of you at that at CES is you're gonna be there or at any of the conferences like the Needham growth conference coming up in January .
Wish you all happy holidays, and all the best for the coming year. Thank you once again for your interest.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.