Q2 2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Smart Global Holdings second quarter fiscal 2020 earnings call.

This time, all participant lines in listen only mode.

After the speakers presentation, there will be a question and answer session.

To ask a question during the session you will need to press Star then one on your Touchtone telephone.

Please be advised to today's conference maybe recorded.

Acquire any further assistance. Please press Star then zero and an operator, we'll be happy to assist you.

I would now with the other conference over to your Speaker today, Ms. Suzanne Schmidt with Investor Relations. Please go ahead.

Thank you operator, good afternoon, and thank you for joining us on todays earnings conference call to dispel Smart mobile holdings second quarter fiscal Twentytwenty visible.

Jay Shah Chairman and Chief Executive Officer will begin the call with a discussion of the market in the business followed by Jack 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 to your question.

As a reminder, our earnings press release and a replay of today's call can be accessed under the Investor Relations section of Smarts website, that's 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 know that today's remarks and answers to today's question may include forward looking statements.

Any statement that refers to expectations projections or other characterizations of future events, including financial projections in future market conditions.

Any forward looking statement.

Actual results may differ materially from those expressed in these forward looking statements.

More information please refer to the 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 todays earnings press release.

That I will now turn the call over to chairman and CEO Jay Shah.

Thank you Suzanne and welcome to everyone on the coal from from I assume Oh, you at home.

All right. It is the most amazing time that we find ourselves in.

And our fiscal second quarter has been one of the most difficult we've seen in a long time, given the environment around the world.

However, our team at smart stepped up to the challenges and delivered strong operational and financial results.

With both revenue and non-GAAP earnings per share above the midpoint of our guidance range Inspite of some delays we experienced some component availability from China.

And from some customer operations in China.

Ladies and gentlemen, please standby your conference call will resume momentarily once again, thank you for your patience and please.

Mr trials reconnected, though.

I'm, sorry, I I apologize for the difficulties, we had I will start again since I was right at the beginning.

And and as I'm, saying, our fiscal second quarter as being one of the most difficult we've seen a long time, given the environment around the world.

However, our team at smartest stepped up to the challenges and delivered strong operational financial results, we booked revenue non-GAAP earnings per share above the midpoint of our guidance range. In spite of some delays we experienced in component availability from China.

From some customers operations in China.

We're just with the Cobot 19 crisis is pretty clearly created operational challenges and Macreconomic <unk> uncertainties.

But considering the circumstances, we drew actively taking the necessary steps to first and foremost prioritize the safety and well being of our global workforce in smart.

Why did the same time, keeping the company's operations functioning and serving our diverse customer base.

Sure there continued success.

In the second fiscal quarter. Our performance also benefited from a good make when I'm in for memory products.

And also from stability in Brazilian policies and the economy there.

Furthermore.

Our acquisitions from fiscal 2019, showing improved performance and increased potential with a robust pipeline of new business in place.

Finally, and importantly.

The convertible debt refinancing that to be completed in early February this year is accretive to earnings.

And significantly strengthened our balance sheet and cash position to be able to better weather challenges ahead.

And also to take advantage of the opportunities that would be created in this changing environment.

Today.

We have our team around the world working from home a working you know manufacturing facilities.

Vitamin D essential services and products, our customers need from us.

One of manufacturing operations continue.

In all of our facilities around the world So far.

In some manufacturing locations, we're operating at reduced levels to keep within local guidelines.

And to maintain employee safety.

Overall, we've been able to prioritize requirements with our customers and keep them satisfied.

In support of this effort, we've been fund to pick up.

That's a secure our supply chain.

Properly, we allocate our resources.

And device contingency plan.

Aggressively meet the challenges.

Facing all of us today from a supply chain perspective.

We are functioning very well despite the destruction from Kobin Nike.

As the crisis continues.

We are running numerous contingencies neighbors to mitigate these challenges as much as possible in.

In addition, our leadership team in all our locations around the world are engaging with their local communities in hospital to supports it.

You need a in the areas.

Turning now to the review of each of our lines of business.

The second quarter fiscal 2020, approximately 41% of revenues came from our especially memory products business.

36% from our Brazil business, and 23% from our especially computing products business.

Starting now with specialty memory, which represented 41% of overall revenue and achieved about 111 million in revenues in the quarter.

Revenues in this quarter were 8% hard in the previous quarter.

Despite some supply should shortages.

And some shutdowns by trying to be supplies.

During the quarter, we introduced some of the first of a range of specialty SSD products.

Based on our own recently developed swimwear controller.

Technologies also we're seeing a strong pipeline of new opportunities as we ramp up our skills afterwards.

Focused on a broader base of customers in new areas, such as medical industrial defense and security.

During the second quarter, we had one of our strongest performances in terms of new design wins that resulted in additional customers.

And orders.

All of which will start shipping as early as the third and fourth quarters in fiscal 2020.

For example, the increasing OTI processing at the edges in network is driving more demand for storage.

And we want to new customer in the area of body cameras market segment, where we would not present before.

In addition, we had a very strong bookings quarter for NVDIMM products.

Which offer a low density alternative.

To Threed Cross point technology based products.

Moving on out to our Brazil business, which grew by 4% over the previous quarter to reach 98 million in revenue approximately.

36% of our overall revenue.

Brazil outperformed our expectations and what is normally seasonally weak quarter due to calendar year and shutdowns in holidays.

Our mobile memory products experienced higher selling prices as we saw significant increases in the average density.

Oh mobile memory products shipped in the period.

We've also had some exciting new <unk> mobile memory product introductions in products and qualification that our customers.

Also our DRAM products in Brazil performed well in the quarter and pricing has Terry.

In Brazil, with the new manufacturing rules in place as of July last year.

And with our customers now clear about the new tax incentives.

We signed into law at the end of December last year.

We're now getting longer term forecast and we also participating to greater degree in their higher density product demand.

Nothing new area of progress for our business in Brazil is the introduction of a line of Lora based aiotv product for smart cities applications.

We received the first try motives for some of these products.

As you May know Laura is a long range low power wireless technology, that's become a de facto technology for Aiotv networks worldwide.

Well, it's difficult to anticipate the effects of covert 19 related effects on the economy.

And operations in Brazil.

As well as the significant weakening of the Brazilian real high wishes. The U.S. dollar that has happened recently.

Longer term, we remain optimistic about the prospects for profitable growth from this part of our business.

Our especially computing line of business.

Totaling 63 million of revenue in the quarter.

Representing approximately 23% overall revenue.

Well. This is also a seasonally weak period for this line of business revenues in the quarter were further lower than expected due to delays of shouldn't government related orders.

However, we've made significant progress in improving gross margins through operational improvement.

Integration.

And then improve mix of business with isn't increasing share revenues coming from services in this business.

You may recall that this business can be lumpy and is dependent on large projects, particularly those with government agencies.

The quarter was also notable in terms of our strong bookings of multiyear managed services contracts.

Which led.

Do our strongest booking quarter ever in this business in terms of total contract value.

During the quarter, we introduced the first to five solution set for different vertical applications, utilizing GPU and graphics processors and CPG technologies integrated with our networking and plus the management software tools for AI, HPC and other modeling and analytics epic.

Patients.

[noise] These solutions set offerings I know, leading our new systems bookings.

We're entering the second half of our fiscal year with a robust pipeline for new business across specialty compute.

And a solid competitive position boost the Irish recent industry consolidation, which has happened.

And this has put us in that put US forward is a strong alternative for many large project.

Additionally, more and more applications are emerging driven by AI.

Edge computing and also we are seeing new applications in our wireless computing products, where we continue to win new design.

Input in partnership with Qualcomm.

We remain optimistic about the longer term perspective prospects across all of our specialty computing areas.

To further drive our efforts in these areas, we've integrated the management and many engineering services and sales organizations across embedded computing and thing when computing businesses.

This will help to drive further operating cost improvements.

As well as a broader set of product offerings to the marketplace.

And.

Hey, stronger go to market effort.

In conclusion. These it clearly challenging times for all of us to navigate and indeed to forecast.

However, the long term underlying business trends point to it and increasing need for more data center.

Wow and AI related capabilities.

As well as greater requirements with specialized application specific memory solutions.

All of which leaves us confident in our position to meet these demands in the future.

Finally in examining our portfolio.

Our lines of business have very limited exposure to affected end markets such as automotive.

Travel and hospitality and real estate.

We do have some exposure to oil and gas.

And particularly in Brazil.

To the consumer market.

That said, we have a significant position stronger in markets, such as enterprise and infrastructure computing and communications.

Yeah, I am HPC.

Government and defense applications and in enterprise computing.

In the enterprise storage.

We're in a strong financial position with over 140 million in cash and minimal debt.

We have indeed run many financial simulations and scenarios and feel comfortable with our ability to withstand a prolonged downturn.

As I said before they should enable us to weather the storm.

And to be well positioned for the opportunities that will emerge.

With that let me turn the call over to Jack for review of our financials in our guidance yeah.

I think you RJ.

Overall gross revenue for the second fiscal quarter was 420.9 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 on agency basis.

Meaning that we only recognize net sales and talk about supply chain services transaction.

A breakdown of net sales by end market the second fiscal quarter was as follows.

Mobile and PC.

34%.

Networking telecom, 24%.

Servers and storage 11%.

Industrial defense another 31%.

Now moving to the rest of the income statement.

Non-GAAP gross profit for the second quarter.

It was 52.9 million.

Comparing last quarter's 55.7, Mike.

Primarily due to product mix.

Non-GAAP operating expenses were 35.6 million compared to 37.5 million in the previous quarter.

As we had lower audit Soc is all trade show related expenses.

Non-GAAP net income for the second quarter was 12.8 billion.

62 cents per diluted share.

Compared with 13.4 million.

35 cents per diluted share in the previous quarter.

In adjusted EBITDA totaled 22.3 million compared with 23.5 point in the prior quarter.

Turning to working capital our net accounts receivable totaled 217.4 million compared with 228.8 million last quarter.

Our day sales outstanding decreased to 47 days for this quarter.

Compared with 50 days last quarter.

Imagery totaled 161.4 million at the end of second quarter.

Compared with 169 at the end of the first quarter.

Inventory turns remain flat at around dying for both quarters.

Consistent with past practice accounts receivable days outstanding and inventory turnover are calculated I gross sales in cost of goods sold basis.

Which were 420.9 million.

And 369.49, respectively for the second quarter.

We ended the second quarter.

With 141.9 million of cash cash equivalents.

Compared with 111.4 million at the end of the prior quarter.

Second quarter Castle from operations totaled 23.3 million compared with 25.3 million in the prior quarter.

We exited our second quarter was a very strong balance sheet as well as a vastly improved capital structure.

Issued 250 million of convertible notes on February 11th of 2020.

And used 204.9 million to the proceeds to pay off our existing term loan, thereby extending or debt maturity. After 2026.

<unk>, which means we didn't have any turned on debt payment for six years.

We also used 21 point is going to proceeds to purchase cap calls.

Which is expected to reduce dilution to shareholders upon conversion of the notes.

The maturity of our $50 million revolving line of credit also extend about five years.

We did not had any revolver draw them at the end of Q2, nor do we anticipate too in the third quarter is we expect to continue to generate cash during our third quarter.

Completing their debt refinancing reducing their cash spent on interest it's walter interest expense booked each quarter, well over 3 million per quarter.

And this along with eliminate or cap spend on amortizing debt each quarter.

Which was approximately 5.6 million will save us over 9 million cash per quarter, we get in our third quarter.

For those of you tracking capex and depreciation Capex of 4.29 for the quarter.

And depreciation was 6 million.

Now, let me touch it from the financial and operational dynamics, we're currently facing.

At this time all of our manufacturing facilities across the global operating and servicing our customers is our Jay mentioned earlier.

We're still staying strong demand from our customers in our third quarter and our guidance reflects its current deal the quarter.

We had analyze it continue to assess our customers.

And their end markets for weaknesses and strength.

I will yeah is expected to be weaker.

Well, our networking telecom server and storage business.

I would just some of our largest end markets looks to be before me stronger due to the increased demand for cloud Internet services in telecom.

The World I crisis due to cope with 19 has also further weaken.

The Brazilian react to new levels.

We're not seeing this impact consumer spending yet, but believe it could have had negative impact on the Brazilian economy.

Which had expected positive GDP growth for 2020.

We have taken a number of steps to minimize the impact on the economy when the company.

Have you foreign exchange board contract for accounts payable.

Which we believe should minimize FX losses for payments.

As a reminder, repricing U.S. dollar so and we convert to the <unk> when we invoice nor to minimize any negative impact to us.

We will continue to monitor the situation in Brazil very carefully.

Worked to minimize any resulting impact to our business.

With that as a backdrop, let me now turn to our guidance for third quarter fiscal 2020.

We currently estimate their third quarter net sales will be in the range of 270 million to 300 million.

The midpoint of which represents an increase of 5% sequentially.

Gross margin for the quarter, its estimated gets possibly 20% to 22%.

GAAP earnings per diluted share is expected to be approximately 33 cents per share.

Plus or minus five cents.

On a non-GAAP basis, excluding share based compensation expense.

And intangible asset amortization expense.

We expect non-GAAP earnings per diluted share will be in the range of 68 cents plus or minus five cents.

The midpoint of which represents an increase of 31% sequentially.

The guidance for the third fiscal quarter, there's not any does not include any view on the foreign exchange gains or losses for a mark to market adjustment for our cap call.

Turning to include the income tax provision expected to be in the range of 14% to 18%.

The number of shares used to estimate earnings per diluted share for the third fiscal quarter is 24.6 million.

Capital expenditures for the third fiscal quarter.

Expected to be in the range of 4 million to 6 million.

Please refer to non-GAAP financial information section and the reconciliation of non-GAAP financial measures to GAAP result.

And reconciliation of GAAP net income to adjusted EBITDA tables in our earnings press release for further details.

Operator, we're now ready to take question.

That's a reminder, ladies and gentlemen to ask the question you will need to press Star then one on your Touchtone telephone to withdraw your question press the pound <unk>.

Our first question comes from the line of Blayne Curtis with Barclays. Your line is now open.

Thanks for taking my questions, but obviously the backdrop here I think most companies are lowering numbers you had some good results Im curious kind of couple of things on that front. One maybe just talk about where are you saw shortages hi, if there's any quantification of the kind of how much that impact was and then I'm kind of just curious as you're looking forward here you can.

One of two opposing factors seems like you probably would benefit from some work from home, which could be a near term boost Ah. But then obviously you have a big consumer business in Brazil, and yeah, I'm no expert on koby exposures in Brazil, but I think most people that assume that's going to get worse is just kind of curious how your handicapping that.

As you don't blame Jack and I in different places.

So we will try to give you a coordinated risk.

I I will start and Jack can sit in two to come back to your question about Uh Huh.

You know, let me start at the end with respect to Brazil, Brazil has been where many of the same restrictions in place today as we as we do in most of the United States. So in other words, we have a you know stay at home restrictions.

As well as retail and and travel a significantly limited.

And so effectively a what you have is most of our staff or.

Oh working from home, except for manufacturing, which is not possible due from home.

We're seeing some of our customers or have you know slowdowns in shutdowns for temporary or maybe because they had a case.

ER positive or you know [laughter] <unk> and so.

It is an uneven environment and less predictable, but as you pointed out.

You know some of the beneficial benefits we are seeing our from.

The particularly the P.C. and the civil market.

You know PC laptop, so not as much.

In the mobile phone market, the mobile phone market at least for now.

We can see production levels of down.

And that was to some degree driven by component shortages.

But now I think we're gonna see a different effects, we choose factories Olson slowing down.

Because of shutdowns in some temporary situations a accident customers not all customers.

So it's a it's it is a fluid situation.

But we've been obviously looking at our backlog and what we've shipped already.

And as a result, we were pretty comfortable with where we are in terms of our Q3 estimates.

And Ah you know obviously, we have backlog at this stage for much of what we're talking about.

Barring some significant incident, which causes us to shut down operations or something like that we were pretty confident in our estimates.

Now do come back to the beginning or your question, which is shortages from China.

Which was a little earlier in the quarter, we had shortages and be ripple through all the way for the supply chain, mostly what we buy in China is a circuit boards.

And passives, but Jack you might catch elaborate further on that.

Sure you know real quick Blaine to also.

You know there we did some are customers had component shortages, if you're going that would the question seems like even in Brazil. One agent mentioned that we didn't ship some mobile memory because of component shortages, because our customers who couldn't get who couldn't get parts not out. So you know the phone guys couldn't get apart so don't phones, they shut down for a little bit during the quarter.

As far as US you know, we didn't really have an issue getting our parts. So we had customers who couldn't get some of their parts out of China.

China and then we had the Chinese contract manufacturers shut down.

For five weeks yourself in the quarters now there's a minimal impact was in the quarter, but it wasn't anything dramatic in our Q2.

Thanks, Ed just one often a if you could just the gross margin improvement may what's driving that.

Sure I mean, a lot of it is that definitely compete which is the highest gross margin.

Segment of business, what is going to project you have a better quarter in Q3 remember Q2, we talked about.

Governments have got pushed that I got pushed into Q3 and so there the performance there will improve the margin somewhat in the quarter.

Okay. Thanks.

Our next question comes from Roger Gill with Needham and company. Your line is helping.

Yeah. Thanks for taking my questions I'm a question on the the memory market.

My understanding is that the lead times, it's kind of stretched out for.

For memory and both for DRAM, and NAND and we're starting to see increase pricing in flash and DRAM.

I'm wondering.

I'm wondering if you can kind of comment on a on your thoughts on that dynamic that you're seeing in the market and how that's I'm kind of bleeding into your business.

Sure I could start maybe analogy committing.

You know come in and finished level, but yeah. We're seeing now we are definitely seen DRAM lead time stretch out we've seen those gets out to told 15, we are seeing flash so longer as well, especially capital was this just kinda back to situation our customers are.

Placing orders earlier get their parts, which itself helpful to us with an argument you hardly get a backlog for most of our business during the quarter and so we're getting more backlog again from customers as they have to order farther out to make sure that they get their parts.

So so far as not hurting us from a revenue or margin standpoint.

Just you know gets a little bit better visibility.

Okay got it and you talked about you know some the end markets oil and gas being weaker.

Offset by network storage.

Hi, Telecom, you kind of lumpy, a PC and mobile together at the 34%.

It seems to me that it could be some you know issues in mobile given the production problem wondering if you can kind of break out the mobile and PC I'm, a little bit finer. It seems like interplay species will be okay networking telecom will be okay storage I'm, just trying to see what do you want to.

The pinpoint the exposure.

So most of the mobile and PC all pretty much all that's in Brazil.

The only place we really playing the consumer markets are in Brazil, So that's really.

Paul Brazil exposure.

Model worldwide kind of phenomenon, there and so.

View, there you're probably still looking out two thirds of that is probably mobile sort of that would be where it would be PC.

Okay and in terms. This is the weakening the real so you're talking about putting uptakes contract to try to minimize drainpipe payment.

But you have not see the impact yet on actual end demand I'm just wondering what would you know where when would you see that in and would it be just obviously in just a lower sell through for these phones.

Yeah, I mean, we should see it in our you know we should see it from our customers right we would start getting.

Lower forecast from a cellphone guys in Brazil, you know feta Lenovo LG that there are six months workouts west from start to decrease get their sell through was going down.

So far we haven't seen that yet in Brazil.

Okay. Thank you.

As you might imagine Roger this is the point that were particularly focused on because we can see that the effects of a 20% change in the exchange rate.

On a on a on the in price at the product.

And two topping off you have a significant slowdowns in retail right then and there are quite a few phones. So two retail.

So you know Meanwhile, online is even in Brazil are growing much faster.

And so.

If we sound like we're not able to give you extremely clearance is because we're not.

[laughter].

And that you know we <unk> the forecast beginning as recently as as a this week.

Our continued to show a pretty you know and I'm not showing any significant drop off I mean, this changes but not significant.

What we are seeing or the effects of factories shutting down for a week two weeks because if.

Issues with the infection.

Great. Thank you.

Our next question comes from Sidney Ho with Deutsche Bank. Your line is open.

Oh, Thanks for taking my question a couple of them I, what I put especially computing business I Wonder if you can double click on that and give us some color what portion of that business you consider it a stable and what is more like GDP driven doesn't make it impacted in the back macro environment. We're in particularly interested in your view on some of the government projects.

And kind of related that Oh, Gee, you talked about increasing put that you see see increasing potential from from the three acquisitions. Maybe can you can you get get into little more color, what what those potential could be thanks.

Sure Sydney. Thank you.

I'll start and and or maybe I can add to it the.

Are you starting with this sectors we have.

A fair amount of businesses, you noted with the government and government labs and different government agencies.

And we don't see any drop off in activity the if anything.

Uh huh.

Spending has increased as you've noted in the credential.

We do have a fair amount of business with a financial services with a you know mostly from an analytics point of view with medical, particularly analytics and and trials.

And that business seems Oh, right, Oh, we have a fair amount of business with social media and that business.

Seems pretty but all right.

We have some business in that entire segment related to telecom and so but that's that's good.

Oh, we have some business related to industrial and and frankly to small segment, but we.

We could see a little bit of push out in the industrial segment.

And as you as I think I noted in my comments, we have some business related to oil and gas.

And that oil and gas business frankly, it's it's kind of a I'm speculating when I say, we expected to get weaker because we have not seen didnt get weaker yet, but maybe that's because they all working from home and haven't do you have got to the point where they've.

Decided to re look at their capex.

So I'm speculating I I don't I don't really know.

I'm guessing that one would expect people within gas related or large installations to to be weaker going forward.

Much as our business today, it doesn't seem to be showing that and finally, oh, we have a in a wireless computing area. Some consumer related exposure, which is actually doing extremely strongly.

And then we have some enterprise related which we're not quite sure how it's going to pan out, but when we combine all that and take into account the seasonality of that business you know at least in our third quarter and ER and from what we can see going forward.

But it is pretty strong position and not a lot of weak weak ones.

Great and in terms outside he talked about this increasing potentially that you're seeing from the acquisitions can you give us a little color though.

Well most of what we're talking about especially compute all of our acquisitions have been in that line of business, especially computing and storage line of business. So that is what I was talking about and and.

You know who.

One area, which we acquired Penguin computing high performance computing, that's doing pretty well another area is embedded computing and there we have a fair amount of a government related business and defense related business and that's doing pretty well and then we have wireless computing, what you're doing really well because.

That's growing varies significantly with.

Both existing customers did a growing at new customers. So.

Yeah that's.

Yeah like Oh my.

Great.

Maybe a follow up question I appreciate the gross margin color you guys provided into coyly falling a as we look for what how do you think about the gross margin for the specialty computing business.

I think it does it improve like these 10 points from a year ago is that something you can think about a three handle and then what's your that sweep. It's a three basis do you expect to see to most upside potential from where they are today.

Turning them I can.

Jump into that what I mean, you know you. The reason you seem to me the big increase of artists and right when we bought artisan.

We said that was like 40% gross margin type business. So the yeah.

Of course of artisans like bumped up the gross margins as to why you'll see that definitely higher let's get higher now I think going forward is we've been talking about we think we can continue to improve the penguin margins like go forward. The biggest improvement in this area will be dependent margins, especially as we get more and more managed services in that business.

We need you talked about this quarter was our best quarter for bookings and lot of that was in kind of some that managed service areas. We continue to improve that business. It's a managed services business grows we'll continue to see your gross margin in those businesses grow.

Great if I can squeeze in one more question. Okay got you sure no no and you might see a threed handle sometime for that business in the future said.

Great.

One last question for me how are you a into guidance are you expecting any one time charges, whether that's in cost of goods sold to operating expenses related to a logistics related costs, Oh, Hi, Jamie you mentioned component availability from China operational challenge in the trying anything specific that is a onetime think that may come off that's only quarter.

Thanks.

No.

Well, maybe maybe a you know I again, not knowing exactly what you're referring to so convertible debt. We had a significant number of onetime expenses related to that offering and.

And to related to the ER extinguishing off our term debt.

So you see that already enough financial statements is that if that's what you mean.

Yeah, I was thinking Oh.

I was thinking more on the operational side, yeah on the operational and it's a question as to whether you would call. This operational I mean.

The depreciation of the re our Brazilian real high.

Me, you know who watched it's been a very rapid appreciation exactly how that's going to play through its still trying to figure out obviously reduces our.

Our our local costs or you know labor and in facilities and so.

But Meanwhile, you know it means that price is a in local currency are higher how that's all going to play through we don't know, but no. We're not anticipating any very specific onetime cost related to operations. If that's your question.

Yeah that that answers. Thank you.

Our next question comes from Brian Chin with Stifel. Your line is helping.

Hi, Thanks for taking a couple of questions from us and.

Oh, I hope, you're all well and maybe the first question.

Just to levels that you go back to just your outlook for the make order, 5% sequential growth at the midpoint can you maybe walk us through your thinking in terms of how Brazil's gonna do there relative to the guide special memory as well as especially can be compute.

Sure I can think it at high level at a high level, we would expect there Brazil business to be maybe fairly flat kind of quarter over quarter.

We would expect both specialty compute and specialty memory to grow in Q3.

I'm, especially computer probably were a little bit faster than specialty memory.

The Q3 quarter.

That's helpful.

And then maybe a couple of follow ups asked first in terms of specialty memory, and obviously, a strong a solid growth there.

Every quarter growth again for the make order.

Yeah, I know that a lot of your <unk>. Your production I believe is this are in Malaysia, Southeast Asia, and probably your neighborhoods in Newark, but when when those shelter in place measures started to become more acute sort of mid mid March. If you will early in the quarter. I'm curious you know it sounds like you haven't really seen impacting your business.

From a production side I'm curious if your customers what was sort of their reaction when that happened was it kind of maybe to buffer up more product you know do you see a change in terms of their behavior.

[noise] Sidney I mean, I think it especially memory section now the customers were just one wanted to make sure that we were going to operate to support them right a lot of our customers that we haven't stuff that your memory.

And the critical infrastructure from the medical in the defense area and so they're all critical north central business as well the need to operate so moral let me das making sure we were going to operate which would work.

And then just wanted to make sure that we couldn't be their schedule. They had the most of the products.

Right now as you know we've talked earlier in the long lead times have lengthened out considerably and so.

You know they want to make sure that we're still be gonna be able to ship 'em, we committed to for the quarter was mainly not nice making sure that we can ship, but we are going to you know we already committed to in the quarter. During this time.

Okay, well then maybe yeah. That's helps thanks Jack.

Yeah walking ever get Brazil, then.

Yeah. It sounds like it maybe you could how bad one is there based on customers like you said that kinda frontal intact.

Down production.

The virus outbreak are you seeing any impact into fiscal Threeq you in terms of that you said your Brazilian kind of flattish rather but are you seeing an impact there that flash and then secondly on that on the demand side of that.

What extent have you seen.

The <unk>.

Reale sort of customers actually adjust their product pricing.

I'm not sure your customers in terms of them selling to the consumers out there had that adjustment. The name. This is that part of the lag here and kind of from a timing perspective.

If you did see sort of or the rolling forecast revisions maybe trend down you know give a sense on timing is that sort of like a mid year calendar year event or you know any color you could provide there to help them.

Sure I'll take part of that maybe.

The answer bunch, I mean as far as.

The customer forecast doesn't meet customer forecast pretty much every week every two weeks from the customers and they're kinda constantly looking out the future and adjusting them. So we don't you know we don't wait like six months and get a whole new forecasts, a pops and things change. So they didn't you know slowly adjusting their forecast but.

As I do not generally we haven't seen any major change from our customers in Brazil yet.

On their forecast.

Due to demand a their demand seems pretty good.

We've had some ups and downs I didn't mention because somebody might or set a copy down for a week or two another backup in rates have been little blip like that but nothing from a long term forecasts and as I mentioned, a real we really haven't seen any impacted the <unk> weekend their demand yet and I think you know they've been bhavan, putting through price increases on their products, you're not eating the <unk>.

Sorry, I am.

Based on our forecast consumers might still be buying them out this at a higher price.

Interesting fact in Brazil is that a lot of people finance.

Products, even phones in Brazil, even though the reality is weakened a little bit.

Are you know the bank for lending rate the government money rates really low right. Now. So you have lower interest rates you'd had looked at a long time to that might be impacted you know might be going the other way from on a week or re I think it finance a cheaper so maybe there overall bad hasn't been change that much I don't know.

Yeah, I I mean to be I see I, we totally get your question.

And we've been asking exactly the same question off our team in Brazil, and trained chicken with customers as well.

Because you know we can see what's happening in and if prices go up by 20% and a you know wouldn't we expect.

That to affect demand.

And so.

We kind of show you that it's not going to be really I wish I could.

But what we can tell you is that we've been checking on that and so far our customers.

I'm not telling us in fact, we're asking kinda aggressively are you sure. Your forecast is real because what we don't want is a is a repeat of an inventory build up followed by a cliff.

And they assure us that they have recalculated their forecast based on the demand.

That does seeing no and based on that visa their forecasts you know.

So well, we're blessed with only so much visibility into this and and that's what we have so far.

Maybe just to that to watch one more thing and relative to so any units could and a forecast or maintain.

I see what what headwinds evolve there, but in terms of the content.

I think you did allude in the prepared remarks to seeing some content improvement maybe in terms of like a emcps are what made you can kind of comment on maybe what you might be seeing in terms of content pickup.

We've mentioned before that in Brazil, a there was a system that went into place in July last year that has local content measured in points.

And we mentioned at the time that if you think about it from our customers point of view.

They have a significant benefit in you know certain commodities from the point, because they can know to pick and choose which commodities they want.

To emphasize in their purchases of local locally produced product.

And it turns out memory provide some of the best advantages so what you're seeing relieves a flow through of exactly that which is that for our customers.

Are you know memory provides them with the best a way by which they can meet their local.

10 requirements.

And and as I was also say a as if the end of December literally the very end of December there's a new law in place.

Which went into effect April one so that it's it law that is effective or roughly a week back.

And this law effect it you know very clearly spelled out.

How tax benefits will work going forward for all these companies, including for ourselves and so as a result.

Customers are comfortable that they know how to operate in this environment for a year now you know maybe six to nine months I should say there was a fair amount of uncertainty, but now I think that that's cleared up and that's helping customers to.

Be very clear about their strategies and therefore, they give us a longer term view of that business and and also it's helping them in that you know both the average densities are going up I mean, that's just happening across the world ER products are consuming more memory.

I mean, I'm talking with smartphone.

And they're giving us a greater share of them the higher density product mix. So.

That's what we're seeing and I think.

It has a lot to do with the fact that there's there's less.

I don't know confusion or a uncertainty about what the regulations huh.

Thank you.

Our next question comes from Suji de Silva with Roth Capital Your line is helping.

Hi, like conversation about Brazil, but I wasn't sure. If you covered it can you talk about why Brazil in the quarter you recorded was outperform seasonality.

Was there was there Poland essentially.

Oh, no mostly it was higher density product.

In the mobile area.

ER and in DRAM, you know a Pcs have been fairly strong.

But.

I clearly a higher density product a units were a little lower compared to the previous quarter as expected.

Because you have a two week shutdown at Christmas.

And then a slowdown related to carnival that comes in little later.

But.

In spite of that.

We had to you know good quarter above our plan.

Particularly because oh, no mobile product entities.

Yeah, I mean, asps were up about 60% in the mobile area in Q1 to Q2 through the turning back up.

Identity products are growing again.

Got it.

Okay. Then my other questions on the SSD part of the business is there a percent of revenue a material part the revenues you would call out that SSD is expected to provide in the next 40 quarters, you get a sense of how big you didn't gubbins could be.

When you say at the so you talked about specialty flashy, you're talking to Brazil I.

Yes, no no no seven, especially flush it out.

I mean, you know.

We've talked about that growth engines of specialty memory as a whole. So I mean it continues to grow.

But.

Yeah, Yeah, Yeah, we don't have affirmed number that's it's gonna do you have to this record the bill <unk> keep getting wins and what we've added a lot of big went in the specialty we're in the DRAM business isn't great. It's a great quarter for DRAM as well, so even though especially flash SMB business is growing up the new control or were getting new design wins, we had a very good quarter in NVDIMM design wins.

You mentioned and.

And just memory design wins, the whole business the whole had a very good quarter is ramping up the continued to grow with you see in our numbers.

Okay, Alright, thanks, guys.

Thank you.

Your last question comes from Michael basis with Jefferies. Your line is open.

Hi, Hi, Thanks for taking my question one of my I was on but my line dropped and so I apologize I suppose that.

The.

So I guess, some investors that I speak with or are concerned that I see I, just have iris moves and around the world Oh that it's going to impact different supply chains, and I think most people believe that China has been coming back but some other places are.

Starting to get hidden stuff have been shutting down I was wondering if if there is take up if you could just sort of you briefly like how your supply chain weren't you know what geographies, you're you're most exposed to.

Sure do you want me to stuff that off Jack.

Okay got you.

[laughter].

Yeah, Mark <unk>. The you know we have a essentially see major manufacturing locations and then we have a number of other smaller ones. The major ones are in Malaysia.

You know I mean Asian centers in Malaysia.

And then of course, we have the Brazilian one, which you talked about quite often.

And finally, we have in the Bay area, Yeah, two manufacturing facilities one.

Primarily focused on on on the high performance computing large systems and the other one a mixture components inboard system.

And you know Malaysia was relatively unscathed in the early part of this crisis in say January when when China was going through a particularly difficult or listen to the shutdown.

January in parts of February.

That's.

It is clearly a you know improved.

Leading Chinese improved Milt, Malaysia. Meanwhile, had a number of cases, Oh and the government got quite restricted in terms of or any gatherings of people, including four or four workover manufacturing.

However.

This is now being a very specific discussion with the Malaysian government.

By and what is called the American Chamber, Oh, mostly technology companies and there's there's as a result, a agreement that is in detail and the details what we can do in terms of number of staff and and so on.

And details would be caught.

And we get checked on that so we think that in in a way. It's a good thing because we're clearly are regulated if you will.

And we're operating under those regulations at less than a full strength.

That's already today now.

No.

This is a changing world and I can assure you that that would be the case or two weeks from now.

But I think that the government is showed that if we take reis reasonable measures and make sure and we are really really focused on the safety of our stuff first and foremost.

We will not take risk that that puts them at <unk> and <unk> in harm's way.

So in Malaysia, I think we're okay in Brazil, we operate a factory, which is really a clean room. The lots of you know very heavy airflow and weve put in place a whole lot of procedures to make sure that social distancing works.

And and so far we haven't had any issues.

And finally, a in we operate in Alameda County, and we've had discussions with the Alameda County, or health authorities and show them exactly what we're doing.

And they've been a satisfied with it and have continued to let us off rate is an essential business I. It maybe a long answer to your question I'm not sure. If that's what you want.

No I'm not going on there.

What I was hoping to get yes, sorry, Jacko had no problem that's good.

So I had a follow up if I may you know what we've been doing a lot of a checks in the supply chain and I think of thing I've been.

Surprised about if not shocked about is.

How how little that we're hearing about material order cuts in fact, sometimes the opposite and it's in and you're at the quarter. You just reported in the outlook is a personification of that and it seems like you might share that.

Kind of perspective have a surprise and I guess my question as to what extent do you think this is coming from.

You know that we just finished and inventory correction in the supply chain and.

So the the supply chain inventories had gotten leaned out are ready versus you know the fact that you guys are in the quote unquote, good end markets or or versus you know is this is this something that's just going to calm.

That's an impossible answered I had a question I have an answer too but.

I was hoping you might share your view on that if it's possible Mark for me too as I use that question [laughter] <unk> and then credit I can send you might report on that.

I think we've been listen we've been listening to your web cast or to Mark [laughter] trying to get trying to get information from you.

Yeah, you know its its oh.

Yeah, it's a very uncertain time, but we think they raise elements of all of what you said.

Meaning first and foremost the sectors we serve.

Our sectors that are actually doing you know almost to a degree of being pushed forward by this crisis.

[noise] like for example, the communications area.

I suppose telecommunications in enterprise communications.

The other areas that are we sort of you know also seem pretty strong so that maybe but is one issue. The other might be an inventory issue and it could be two forms it could be what you sort of suggested which is a previous inventory.

We note that snow being filled backup or or it could be a a little bit of overbuying to make sure that they're not short.

And we try very hard to keep an eye on that but I can tell you we have perfect visibility into that.

So at least you know those two things are strong enough favor.

Fair enough.

Thanks, Thank you for sure on your view on that Okay. Appreciate it.

Well I had.

And that will conclude today's question and answer session I'd like to turn the call back to Mr. Shah for closing remarks.

Oh, Thank you operator.

Well, we look forward to reporting on our progress in the coming months, it's gonna be interesting.

Oh, Thank you all again for joining us today Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

[noise].