Q4 2020 Smart Global Holdings Inc Earnings Call

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 statement that refers to expectations projections or other characterizations, if future events, including Financial projections and future market conditions is a forward-looking statement actual results, May differ materially from those expressed in these forward-looking statement.

For more information, please. Refer to the forward-looking statements disclosures in our earnings press releases as well as the risk factors discussed in the documents. We file from time to time with the SEC including our most recent form 10-K and form 10-qs. 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 reconciliation to the comparable gaap. Financial measures are included in today's earnings. Press release wrong with that. I will now turn the call over to Executive chairman of the board.

Thank you. Thank you Suzanne. I'd like to welcome everyone to this call and take this opportunity to introduce you all to Mark Adams marks newly appointed CEO and a member of our directors. We are very excited that he has joined our team and I look forward to supporting Mark and the rest of the management team in our in my ongoing capacity as executive chef of the board. When I stepped into the CEO role about two years back who helped lead a transformational smart. The company had roughly two-thirds of its revenue from memory sales in Brazil off. My goal was to take this base in business at the team had built over the past thirty years to grow and diversify our Revenue base into new markets by leveraging our operational strength.

Since that time we've come a long way we built up especially compute and storage business that has transformed the profile of our Revenue mix improved our gross margins took us with exciting new areas in which to grow at this stage. The company now has a tremendous opportunity to build and scale our organization and to further approve our go-to-market strength and Market positioning.

I think you would share the enthusiasm that the board and I have that Mark is the right person to take this forward as our new CEO.

I have no Mark for many years and more recently gotten to know more much more personally. It brings a wealth of management and Technology experience and a tremendous industry Network. That will be great benefit to smart as we move forward.

With that introduction, I'll turn it over to mark.

Thank you first and foremost. I'd like to thank God and the rest of the board for entrusting me to carry on what he and the team have built so far.

And my grief time working with our management team and dedicated Global team members. I've only become more excited to lead our growth and diversification strategy.

Actually known smart for many years when I joined Micron through the acquisition of Lexar. I ran the Digital Media Group, which was a combination of Luxor and crucial a competitor with smart bulb later after they served as president of Micron smart was a valued customer. So I had a good appreciation of the organization's core competencies.

What I'd really appreciate more so during the search process and even more recently during my time with a company if a transformation that has led along with the management team.

Work mobile holding is very different than the memory company. I knew in a prior life.

Penguins high performance Computing success coupled with Martin bed and wireless Computing are growing into strong contributors to our overall business.

I'm also very impressed with the operating platform that Jack runs for the company which world-class operations in the US Brazil and Malaysia in short. I'm excited to join a company in smart bulb is a strong mindset roads focused on diversification combined with a strong operating discipline.

Operating business. I'm looking forward to leveraging my background and m&a activity during our continued diversification.

As I look at the industry landscape today is clear that semiconductor companies are facing unique challenges of increasingly more difficult to sagra fees as well as to develop and use more advanced packaging capabilities.

Additionally compute resources are taking increasingly more critical role in applications such as machine learning and data analytics.

When you look at all of these areas in terms of the growth markets and the segments they serve we align very well with the assets that we have in high performance Computing memory integration capabilities wage is compute and storage. The future is very bright smart is extremely well positioned to grow as a valued ecosystem partner to our customers.

Let me now provide a business update after which I will turn the call over to jack for a closer. Look at our financial results and forward guidance.

Fiscal 2020 ended on a strong note with net sales and non-gaap earnings per share are coming in better-than-expected which we believe is a testament to our employees across the globe who have excelled during these unprecedented of times in addition. We have made good progress, executing our growth and diversification strategy and remain in excellent position to capitalize on longer-term business trends that play to our strengths.

Well believe in particular our business next is dramatically transformed over the past several years just two years ago. Our business was dominated by Brazil at 60% of net sales for fiscal year 2018.

We now enter fiscal 2021 with a much more balanced mix of businesses.

For the full-year official 20/20 Brazil was 35%

Especially memory was 42% and especially computer stores was 23% of overall Revenue.

Especially computer storage will continue to grow as a percentage of our overall business in fiscal 2021.

Let me turn to a review of each our businesses for the fourth quarter.

I'll start with specialty revenues revenues are special tools 67 million in the quarter representing increase it increase of approximately 10% from the prior quarter wage driving 23% of overall fourth-quarter Revenue.

Increase in the quarter was driven primarily by the resumption of some federal spending and importantly a growing contribution from Penguins supper and service offerings, which are key areas of our strategic Focus thousand good example of penguins recent launch of a solution to meet the demands a real-time application for memory infrastructure.

Barons offering scale cost cost effectively too many terabytes using Intel optane persistent memory virtualized new method pools of software-defined memory. This is a good example of increasing wage is a memory as it moves closer to the computing power and HPC application and we look forward to announcing more of these type of successes in the future.

in addition

Can I have an update to the partnership between penguin and Andy round research enabling ways to fight covid-19 that we announced in the prior quarter just two weeks ago saying when announced that the first credit Block City and its data centers now online and available for researchers. We look forward to continuing to support and d and the participating universities and labs in this important endeavor.

We were pleased to be selected by Nvidia the Parker never had the HTC OEM preferred partner of the Year our third year in a row of achieving this distinction.

We greatly appreciate that recognition for our strategic partner which reflects our long history of driving Innovation and serving in the evolving needs of our customers.

Our pipeline continues to strengthen highlighted by the recent receipt of penguins largest order ever.

Just two weeks ago and we are increasingly optimistic given the demand signals. We were getting from our customers going into 2021.

I want especially memory which was 42% of our fourth quarter Revenue, totaling $120 million in the quarter roughly in line with the previous quarter.

Phone number Enterprise and Industrial customers are seeing a reduction in customer demand due to covid-19 and general macroeconomic weakness. However, our design activity remains strong with new-age the networking Telecom compute and defense and markets. We also continue to broaden our reach geographically with the formation of a western Europe sales operation headquartered in Germany our team on the edge of the deep understanding of the market and the requirements of industrial customers in the region and we are optimistic about our ability to gain share in this new market for tomorrow.

On the product and technology sign we recently announced a gen Z development kit the industry smallest and easiest to use solution for developing and testing. Jensy fabric manufacturers offer for remote and tiered Metro.

This demonstrates our ability to deliver more advanced designs for leading OEM customers as we move up the stack and create higher-value solutions to be see increasingly complex needs of our customers.

And finally our Brazil business which generated approximately 35% of the quarterly net sales and told $105 up 13% sequentially.

As we expected. All right see improved in Brazil driven by both an increase in the average density of memory and the recovery in the unit sales.

As mobile memory densities in Brazil still lacked World averages. We continue to see ongoing Improvement in Ras fees.

Additionally the latest forecast from our customers show a continued recovery in unit sales position us for a solid start official twenty twenty-one.

We continue to advance our technology development in our Brazil operations, which recently began qualification of eleven technology that are leading mobile customers Investments Like This Town and Country support of our major customers.

We indicated last quarter. The new Point space manufacturing rules have been favorable to memory and less able to other parts of the business. We have recently made a strategic decision to exit the batteries and refocus our efforts and Investments on to growth areas iot an SSD. We will continue to update on our progress there.

No, I will turn the call over to jack for a closer look at the financials before coming back to provide closing comments deck. Great. Thanks, Mark.

We do for the strong quarter to solid improvements in Elke Financial metrics fourth quarter fiscal 2020 net sales for $297 million was 5.6% higher sequentially driven by specialty computer storage in Brazil non-gaap net income increased by 19.5% sequentially and non-gaap EPS grew by 17.1% over the previous quarter reach an 82 cents per share demonstrating the issue of leveraging our business model caption equivalents increase to 150.8 million at the end of the fiscal year, which is 20 million higher than the previous quarter.

Breakdown of net sales and market for the fourth fiscal quarter was as follows mobile and PC 31% Network and Telecom 25% servers and storage 12,000 industrial offense and other 32% strength of the mobile and PC's industrial defense networking and Telecom more than offset lower sales to the server and storage and Market.

Now moving to the rest of the income statement non-gaap gross profit for the fourth quarter was 57.8 million or 19.5% of net sales compared with the last quarter is 55.9 million months.

Which is 19.9% of net sales non-gaap gross profit margin by business group was as follows, especially the computer storage 28% specialty 16% off 19%

in her fourth quarter Brazil margins were lower than expected due to an accounting changed that had no impact to net income. Is it impacted operating expenses in a similar matter? This accounting change is also reflective of our guidance for q1 in this related to how the Brazilian government is, encouraging local manufacturing without this change gross profit and operating expenses would both have been around 2% higher.

It's Mark mentioned earlier. The points-based system is less favorable two batteries. We have made a decision to discontinue the operation of of Brazil battery business and are just completed fiscal quarter results in charge of 3.5 million.

Non-gaap operating expenses for twenty nine point four million compared with thirty five point five million in the previous quarter. Non-gaap. Net income for the fourth quarter was 20.4 million / 82 cents per diluted share compared with 17.1 million or $0.70 per diluted share in the previous quarter and adjusted ebitda total 33 million + / / 25.4 million in the prior quarter. Our non-gaap effective tax rate for the quarter was 25.2% which was around 5% higher than expected.

as many of you know

So we taxes are calculated the based upon an estimate made at the beginning of the fiscal year as to what net income for the full year will be by geography and company within a geography or where profits will be held there are different tax rates for geographies as well as companies within a geography example in Brazil. Armando company has a forty 34% tax rate of our packing company has a 9% tax rate. I'll pull your profits by country and Company or different than what we had four caps and go into our fourth quarter.

Turning to working capital Arnett accounts receivable total 215.9 million compared with 220 3.2 million. Last quarter are Day sales outstanding remained essentially flat with laughter at 45 days inventory total 163 million at the end of the fourth quarter compared with 180 point six million at the end of the third quarter inventory trying to remain flat around 9 for both quarters consistent with past practice accounts receivable days outstanding and inventory turns are calculated on a gross sales and cost of goods sold basis with your 438.2 million and 381.9 million respectively for the fourth quarter.

As a reminder the difference between gross revenue and net sales is related to our supply chain service business, which is accounted for an agency basis. Meaning that we only recognize as net sales the net profit on a Supply Chain Services transaction. We act as a year with a very strong cash position of 150 point eight million of cash and cash equivalents compared with one hundred thirty one point eight million at the end of the prior quarter back in ninety-eight point 1 million at the end of our last fiscal year fourth quarter cash flow from operations increase to 16.2 million compared with thirteen point six million in the prior quarter. So from operations total 78.4 million.

We exited our fourth quarter with a very strong balance sheet as well as the vastly improved capital structure. Thanks to the convertible note and subsequent restructuring and repayment of debt that was executed earlier in the year.

For those of you tracking Tampax and appreciation a fax was 7.4 million for the quarter and depreciation was 5.2 million.

And now turning to our fiscal q121. Let me first provide you with some context with respect to our guidance our values reflect the accounting change. We made in Brazil which decreased our gross margin its operating expenses with no impact to our net income. But that is a backdrop. Let me turn to a guy who's for the first quarter of fiscal 2021.

We currently estimate that. Our first-quarter net sales will be in the range of 280 million to 300 million.

Gross margin for the quarter is estimated to be approximately 18 to 19%

Yeah, burnings per diluted share is expected to be approximately $0.28 per share plus or minus $0.05 on a non-gaap basis, excluding share-based compensation expense money in tangible asset amortization expense convertible discount of ID and fees and other infrequent unused or unusual items. We expect non-gaap earnings per diluted share would be in the range of $0.70 plus or minus of five sales.

the guy

For the first fiscal quarter does not include any of you in the foreign exchange gains or losses and includes an income tax provision expected to be in the range of 12 to 16% The number of shares used to st.joe earnings per diluted share for the fourth fiscal quarter. The first fiscal quarter is $25 million Capital expenditures for the first fiscal quarter are expected to be in the range of 10 to 15 million.

Please refer to the non-gaap financial information section in the reconciliation of non-gaap financial measures Gap result and Reconciliation of gaap. Net income to adjusted ebitda tables or any special lease for further details.

Operator we are now ready to take questions.

As a reminder to ask a question, you will need to press star one on your telephone to withdraw your question. Press the pound key, please standby where we compiled the Q&A roster.

Our first question comes from the line of from need him your line is now open.

Yes, thank you for taking my questions. I appreciate it. Just Jack a little bit more clarification on the accounting change. When did you can go and detail? What's what's driving the accounting change specifically wrong? And should we be thinking about this type of gross margin and this type of effects level on a go-forward basis?

So answer the last part of your question. Yeah, so we expect this will impact gross margin and operating expenses that we talked about by about 2% So we would expect to have a lower gross margin off because of this in the future also operating expenses decreased. So in Brazil, you know, they've been changing the rules because of the points-based system and also to do have manufacturing more competitive. So there was a a change made to the law to give a what they call the financial credit the company for local manufacturing to make them more competitive when the accountants looked at the rules and they came out they said that you had to adjust and put this credit into as a contra to your operating expenses. We had to reduce our operating expenses for this credit which then takes it out of other costs of goods sold. And so it just a reclass between the two has no impact to net income and we expect it to be you know, the same impact on a go-forward basis.

Okay, so just kind of moving it from from one bucket to the next but yeah, zero. Okay. Yeah. Okay. Thank you. Now. I'm just on in terms of the the fundamentals and and and welcome Market. We look forward to working with you in the future in terms of the the the penguin the specialty business you had mentioned that the federal spending has resumed and and that drove some growth but also mentioned some traction with with penguin. I'm wondering how we should kind of think about that business going forward. Is that as it contains many different segments now contains in for speeding Computing artisan and and and and and and a like, so I'm thinking I wonder what are the kind of the growth drivers in that segment?

I'm actually going to kind of fiscal year 21.

So yeah, I appreciate the question and look forward to working with you as well. I think those questions can actually be broken up. You know, it does come up to Specialty compute and storage as a business category, but in each of them they're very unique in there in terms of and markets and and as you noted we did comment specifically on the call today about the backlog and phone. No England has has built up and I mentioned our largest order ever at penguin. I think in terms of that. We we look at both the government and Commercial sector within the commercial sector. There are areas like academics oil and gas telecommunications Investment Banking. We've actually had one of our largest customer opportunities with the Hedgehog provider whose using our technology for advanced data analytics and as you get closer to you know, Edge and and on-premise UC application

In our artists in business and our uh enforced business in terms of smart embedded in Smart Wireless that are driving segments that are more iot offer related and then having to do with you know, opportunities around commercial around government around education around manufacturing jobs Supply Chain management applications. And so as you get further away from the the high performance Computing environments more iot driven Wireless applications, even some consumer technology applications that are really pretty Innovative. We're playing a great role in providing Solutions. So it's a broad ecosystem and that's why it's easier probably to break it down into a way. The business is used to work there having said that I think one of our biggest opportunities from the solution standpoint is that we're now providing an architecture that can go and and in terms of uh, an application environment for strategic

Customers we have a a Gas customer right now where they're using our high-performance confused capabilities for analytics around customer behavior. And they're using our iot technology package at the point of interface to the customer and we think that the one of the reasons of consolidating the Strategic development of our Solutions is that those assets high performance Computing and i o t with increasing investment in managed Services can provide a really unique place for a Smart car about future growth.

Okay, excellent. And then on the specialty of memory, you mentioned reduction Enterprise spending, you know, we saw this Echo by by Micron and specific markets. Can you talk a little bit about wage? Um, you know your view of Enterprise spending and the impact that show but had and and how we're thinking about next quarter in the design wins that that you're seeing in in networking and tell him how are they off letting it have any question by the way, I just like to provide a little commentary cuz I did have a a decade in in in the memory on the micro and sighed and perspective. I had you know, when it I kind of felt like there was a typical reaction by the customers to maghreb inventory heading into the summer and the fall and I thought the man was propped up some that having said that as you can see from the projections that Jack provided for q1, we're pretty confident going to have a pretty strong solid quarter now that has not dead.

The case and embroider semi is that have already announced and so pertaining to our business. It's not that we see a dramatic softness and demand. We're just seeing that.

Pertaining to Cove it. I think there are some been some inventory burn some usual on unusual Dynamics relative to for example, Huawei and what what their name and profile look like going into the back half of the calendar year or so a lot of different Dynamics going on we called it out because we're seeing maybe some softness in certain areas, but certainly would suggest growth another that's another area they put us in a pretty good position for q1.

Thank you.

Thank you. Our next question comes in the line of Brian Chen from stifel your line is now open.

Hi there. Good afternoon. Audrey first. Thank you and best of luck in your new role and Mark. Just wanted to welcome you aboard as well. Maybe maybe for my first question in terms of the November quarter guidance. Maybe just to be a little bit more granular. Look at your sequential Revenue Trend. What what are you implying in terms of specially compute Brazil in a specially memory and also, you know just that's that's part of the question of the part is in terms of specially computer. Was that big order that you're seeing? Is it more directed to the federal or commercial Market kind of what's the shipment timing against that and what what are those other signals that you're getting Mark that gives you confidence in the near-term revenue trying to the the birth of referred to was indeed in part of our

Federal spending and so we're pretty excited about that but across both Federal and Commercial we're seeing increased spending in this environment and demand I should say off the results of been injured but our funnel in terms of our backlog probably the healthiest ever since we've had the business at smart and when you think about that the competitive landscape and you think about our position, you know, Penguins had a very long history in this business and as we continue to find new opportunities and scale off the HTC Market is is kind of uptick because the end segment drivers are there as I said, you know, as you as you you're aware AI is a very hot world right now with people getting out and starting to further develop applications around that machine learning for sure and and, you know, even data analytics like we're seeing a lot of investment into you know, High performer.

Quick quick data analysis type models that are providing kind of an investment wrote in the area of resulting in HPC demand. So while we're not necessarily a phone number for sale, I want to make sure that as we do that we have a benchmark for you to understand but we're not doing that for say specifically we see a much bigger fun. All the best Sana we've had since we all in the office and we were very optimistic about some of these successful implementations we've had as kind of a beachhead for further growth.

Okay.

Yeah, thanks. Another question may be directed at you marked clearly the Strategic expansion of smart into the special computer Market has been evident the past few years. I understand it's early days for you. But looking at high performance compute specifically to achieve the right balance or mix of customers. Do you need to look outside the company to augment sort of the existing offerings with additional products services and infrastructure? I think that's right. I think maybe there's two areas think about it. They're you know, we've improved the margins in this business since day one. They would think if I could call the margins that upon acquisition on day one. We're roughly 15% plus or minus and those margins are now kind of approaching 20% and 21% growth markets. Now having said that wage, um, I think that business is going to be critical for us to add different capabilities that we don't actually have today but have you know, kind of a road map of what we'd like to get to I think dead.

Do things Partnerships which we think we have a good core set of Partnerships with the likes of Nvidia and AMD and Intel and others but more so in terms of value-add capabilities suck from a software services and uh application-layer that we'd like to to develop and and either through inorganic activities or kind of kind of partner with phone not an existing software platform. That's pretty pretty sophisticated as is it's just as we think about going out the stack and that's a you know, you said it's only 30 days in I'll tell you one leg of em was this is going to be a big strategy for us going forward. It's going to reflect and margin expansion. This is a great opportunity for this company and we deserve more we've got invest more and go get it and I think we have the opportunity to do that based on again services and software later on top of our Hardware architecture at penguin.

That's great. Thanks. Thanks for that. That's that color. Maybe just one quick thing on Brazil, you know putting the local content changes to the side. It's been a while since we had units content and pricing all working together in the company's favor of scariest what gives you the confidence that the film Market in Brazil has turned a corner and what are you seeing or expecting in the quarters ahead in terms of content growth and also pricing trends?

Yeah, I mean we we, you know, we talked about early, you know, I think last call that we're starting to see the densities grow get in Brazil, right? So we've now I think it's more attention to call, you know, we've developed a 64 gigabytes and now 138 product that's involved. So if you look at the 64th, it's doubling the amount of flash that we've ever used in the hundred thirty two would be four times right toward ends are going to go up in Brazil based on these newer products that are under qualification. Remember, we don't qualify a product in Brazil and then go try and spell it. Right. We've already worked the cell phone guy just on the road map. This is what they need we go qualify that product so we know they're moving to higher products. And also remember, you know, Brazil lags the world, right? So Brazil's way behind the balance of the world when we're talking about, you know, the densities of the phones. So even if if they slowly catch up on Thursdays will go left. You know, we're seeing Improvement when we look at the data in Brazil. It talks about his number of cell phones being sold and things like that. It turned the corner. They're starting to go up a little bit from where they were so we're seeing you suck.

And unit growth and cell phones and PCs down in Brazil that the it's turned a little bit on both of the demand for both is getting better down in Brazil. Yeah. Have you couple that with just raw technology Evolution that's going on global, you know, the memory requirements going to get driven up because the performance and expanded use of the platform in the in the hands of the consumer. So, you know where Brazil May lack it's eventually going to walk drive there and things like 5G and and other additional application drivers. We're going to be in a pretty good position to capture the advantage of

the higher SPF trendline

great. Thank you.

Thank you. Our next question comes on the line of Kevin Cassidy from rosenblatt Securities. Your line is now open.

Yeah, thanks for taking my question. Welcome Mark and also congratulations on your promotion Jack. Maybe I'll give you your first question. Then on the spur of the memory gross margins are seem to be stuck in the 16% range. Can you discuss that a little bit is there some opportunity to increase that gross margin? You know what life is to increase? I think you're seeing the gross margin for specialty bottom an object. You know, we've had some new products that have been qualified and sometimes when you when you qualify new products, you have a higher productivity which kind of translate into lower margins. So we've had some impact on margins for that. But you know, our our view is going forward, you know, as we go through next year get to the back after the year specialty margins will definitely improve and get back to where they have to historically cigarette the low area right now for specialty margins here in this quarter, maybe next quarter and they will they will start to improve again Kevin.

Okay, are you thinking like back up to say 21% range or can I get to the point where it may be the high teens and then you know slowly get up there I get too excited, but that's okay. And and how about the demand in in the Enterprise is is it an inventory issue or you know kind of like what Mark said, is there some reporting that happened early on and now it's just have to suck at that inventory run-down. Yeah, I think so. I mean you look at some of our customers regular, you know, you follow some more large customers in the space, right? They've they've been guiding down. What would be our Q104 demand rights of our largest customers are going to be guiding a little bit down and demand that's definitely going to impact the Enterprise spend within the specialty memory, you know, you know, I think they they built up some inventories maybe early in the summer and you know, it's the question is is it it's a little bit demand issue I think on our customers which translates back to demand issue for us.

as well

Okay, great. Thanks. Congratulations hun good report for this environment. Thank you.

Thank you. Our next question comes in. The line is Sydney ho from Deutsche Bank your line is now open.

Thanks for taking my question. First of all, welcome. We'll can bookmark. I'll cross the first question to you. Maybe it's a little early are there any changes in strategic Direction and whether they are. That you want to focus more on areas. You wanted the emphasize and may be related to that. There are some organizational changes that you guys are announced a few weeks ago. Can I talk about the importance of those changes? Of course, maybe let me take the the strategy. Um, you know, I think at this point I would say that if you look across all of our birth, the smart strategy has been defined markets where they can differentiate with the with delivering specialty Solutions and to kind of a diverse set of end markets and you think about that the segments in high performance Computing vs. The segments and specially memory, you know, obviously Brazil's this unique in his own specialization of of capabilities that we have and then you continue with birth

The embedded Wireless businesses. So the common theme around developing specialty specialty Solutions and subsystems is

Kind at the core of what our strategy is now, you know as we've talked a little bit on this call, you know, we want to make sure that we're developing additional capabilities to bring to our customers allow differentiation and that will kind of prompt us to look both organically on development. But also more strategically on expansion through inorganic acquisition around both Technologies and go to market opportunities and so from a strategy standpoint, it's not wildly different as I see it at least not as I sit here today, but I would see is the the execution side of the business leveraging the operating platform and running the company's. Well, you know, I think there's an opportunity there. I mean I am very often. Penguin. Yep over the last year or two penguin hasn't really grown for us. I think there's a great opportunity with the right focus and energy to drive that business to a really a much better place on a Goldberg.

For basis and the truth same is true in our embedded in Wireless business. And so some of its more about the execution side. And then also, you know, when you think about m&a the plunge we have and and the operating leverage that we have in terms of low-cost operation for specialty business is very unique and I think that will give us the right platform to go out and acquire creatively wage and Scout the business and you know, the the differentiation Focus will maintain as we look at those type of opportunities. We're not looking just to go business the business we want to find Opportunities where we have our Market leadership and unique application and markets where there's enough differentiation that leverages smarts core competency around manufacturing supply-chain and go to market and so I don't think a broad strategy change as much as an emphasis on driving differentiation going forward above and beyond to allow us to expand our margins cuz that's going to be a critical leg of the stool for us off.

We want to grow but we want to grow while we spend margins. That's that's the message. I would like to give give today is that you know, we're not, you know, we're not exactly satisfied where the margins are and we want to grow them. We want to find ways to grow them and providing more value and I think our customers would like that providing the values tangible and that's going to drive the strategy specific to the announcement on a go-forward basis as you guys know from my past. It's kind of very similar to what we did in my crime where we established these business unit mentalities and I think from an accountability standpoint a leadership standpoint, Jack is demonstrated over his career that he will be the right person to this company to deal win in the memory Solutions business, uh, and he's got the support of an outstanding executive and Keel on that has really crafted a a really strong business and in Brazil and we believe that these leadership Thursday.

Options are well-earned and reflect an organization structure as we go forward that we will have.

Outstanding leadership at the top of these business areas and we will continue to look for this type of leadership both inside the company and outside the company to put the right team in place cuz as you might imagine one of my highest priorities as an incoming CEO is to make sure that we have the right leadership in place that drive these businesses. Cuz when you think of these opportunities at penguin, for example, or other businesses managed Services involved in the embedded business as an example, these are new capabilities. We're trying to establish and you know, it's nice to be able to put them on a PowerPoint slide, but you gotta go execute and on the excuse side. We have to have faith in place to build the right plans develop the right capabilities and go to market and as we think about the expansion capabilities and all of our businesses, we want to have you know, the a jackhammer one clone across the whole set of businesses where in and make sure we have the right leadership development for our company and that's what I'm going to be focused on a lot of them the next 60 to 90 days.

Great. Thanks for that detail answer moving on to the especially computer since I think last quarter you guys talked about the commercial contract where it was generally pretty strong maybe with a full package and weaknesses in terms of and markets and in your prepared remarks. Do you talk about Federal Business coming back a little bit yet? The Cisco Q4 results came in a little low then I would expect so a few questions here one. Can you give us some in Market color? Is there was there any kind of negative surprises in terms of in markets second. Do you have any visibility when some of these Federal contracts come back after the initial pick up that that you you guys saw in August and Alaska? How should we think about the mix between Federal and commercial contracts in fiscal q1 versus a normal environment? Thank you. I'll take the first part the Federal Business per se for us has picked up a bit off.

The major design wins, uh and inbound orders from having said that obviously there's a lot of unknown in the government relative to the administration and what will happen in November, but you know what we can see from our demand that's an area of great opportunity for this company. And so now let Jack get a little more color in the specifics. But Monday, we're pretty well, it's through the cycle because of some of the solutions we have that are specific and not just in one area certainly Penguins exciting but also in terms of our embedded business, we've got some some design win opportunities that have come to fruition and we're generally bullish uh, and again with the with the hesitation that you know, November May in fact the long-term prognosis. We just took know but we're following that and we believe we can ride through that with some some growth in that area.

Yeah back. I think I think you for the penguin business performed as we thought it was we didn't you know in federal came in right where we thought we don't think it was weaker than we anticipated need to listen to Mark say it needs it would tell you that maybe in q1 a potential a little stronger than we thought right so, you know paying when you know will be probably doing a little bit better in q1 than we originally anticipated. I think that some of the business is popping back sooner than we thought so we're looking for a pretty good you want out of the penguin group.

Okay, thank you. Thank you.

Thank you. Our next question comes from the line of blank Curtis from Barclays. Your line is now open. Hey, thanks a my question. That's actually a good because I was just kind of curious about November part question asked about what the segment to be doing. You said supposed to be good at you just said it would be up I guess trying to square that with gross margin which is down and you would think that if if mix was moving but to the especially the computer the margin would be up. So if you just walk me through that

Sure. So the overall, you know, especially compute. Yes. We think that'll be up and you're right that has a higher gross margin, but then you know, we look at in Brazil the change with Brazil off and all that. So, you know Brazil will potentially be a little bit drag on the margins a while. You'll see the margin come down a little bit blind in the quarter potentially but wage especially, you know, we'll have a what do better in q1 and also puts on a margin site but Brazil, I think especially memory a little bit especially Brazil drive that margin down a little bit in the quarter.

Okay. So the accounting change is not fully implemented is that way the right way to look at it and therefore, you know, you should see some benefit or not effects from it as well. No, it's just that the Brazil business in life based on some sort of activity that we had lower margins in q1 as we go to market in the quarter. Those were driving volume down there. We expect more than wage the impact a little negatively if you want to Brazil.

Gotcha, and then I guess it kind of a two-part on the Brazil Market. You mentioned entities is the driver. I'm just kind of curious you had good growth in Brazil. I mean, there's a unit story there's density and then there's kind of like the Strategic own nature of how people use the credits and and onto the new system and you know, you're exiting batteries. So clearly memory is in the category that you have said people may use more and that would drive growth as well. I'm just curious if you look at those factors of the last couple of quarters and what you think has driven the most part of the growth and then I guess you look out are there any other segments, you know used to having, you know, Wireless modules and batteries and other areas, but is there is there any future areas that you could look at for Brazil or should we just you know continue to think about this just just memory

You know we commented in in in the earlier comments around to that were pretty bullish around one is around ffd development and we're actually been in development of those products and we're starting to get some early Revenue traction. Um, I believe SSD is an exciting opportunity for us given the memory, you know off in that which makes it a very attractive product for in country and we're starting to work with our customers on developing some scale in terms of getting share in their memory procurement country. So I think SSD first and then as we develop and cultivate, uh, some go-to-market capabilities around iot will be able to take some of that product in country as well. So I think that's where we found out, you know over time. The battery business is a difficult one for us to scale and not as advantaged from the local production standpoint. We think SSD and birth

The arm or so and that's what we're shifting our Direction.

Thank you. Our next question comes from the line of Mark from Jeffrey. Your line is now open.

Hi, thanks for taking my questions. First of all, thank you very much for all the help and and Mark congrats letting the new role. I have two questions from our first one. I'll mark you started to share log into your framework on m&a then I was hoping you could maybe fill that out a little bit more. Can you talk about like your view on the The Sweet Spot in terms of the size of the companies and you know to the extent you have an appetite or exploring some kind of a transformative m&a deal like a merger of equals or are you thinking about Tucker's and the willingness to live off with Dad or issue Equity? Sure. So for those of you who knew me in a prior life and then when you think about how Micron survived

we did four or five major Acquisitions in a ten year period during some really turbulent times in the memory industry and I would argue that those Acquisitions and with the help of the financial engineering so to speak to the right of the opportunity gave us, you know, great platform that the companies built on and obviously Sunday and team have done a great job continuing the growth

I think that you know the company smart as we sit today could really use some additional inorganic activity. I'm an activity wage around 10 gentle space. It's to the core business today. And so you got confused memory imbedded and and in areas of wireless and so I don't think that the companies should be necessarily taking a transformative massive, you know merger of equals Approach at this point because I think there's a lot less to develop an add you to our current businesses having said that adjacency is to what we do well manufacturing of subsystems and Specialty markets. Well, those can be very interesting because when you age of the holding company model at smart, you've got these Acquisitions that object team have had already consummated, you know penguin and memory from a business standpoint sure their own no,

Thanks.

Stopping in some areas, but from a go-to-market customer said not so much and these unique opportunities to deliver. These products individual expanding markets is where the growth can come from. So I don't think that's silly emerges the vehicle is necessarily what we be thinking about just to just to answer your question specifically, but I could see some some significant transactions in adjacent businesses that take advantage of our operating discipline platform, you know, again, the manufacturing supply-chain expertise go-to-market Support Services quality. And as I think about that, there are a number of different industries that we should be exploring that have the same type of criteria that has made these businesses successful at smart again criteria. I look for are you sure especially Solutions at defendable differentiated and markets that require really good operating discipline and those three criteria for me is what's wrong.

Adult son and I think there's more of those opportunities out in the industry.

And again and adjacent industries that allows us to take advantage of our capabilities and competencies that we have today, but yet expand our reach in the Newmarket.

That that's very helpful. Thank you and follow up if I may on penguin, it looks like there's a a view that there's an opportunity for improving the profitability wage. I believe you mentioned the soft, you know developing a software application layer, um, uh capability and I was wondering to what extent have you explored you do you think that you know, hosting Services yourself are providing the capex yourself investing in the in the in the system yourself and and and offering that it's just solution also is that is that enter into the type of job that out? Sorry about that earlier when I when I was I referring to software and services. The service is part of the business really wage was was a comment based on our desire to develop Todd Penguin on demand as an enhanced business growth driver for the company and it's a very unique birth.

Forest but when you think about what would go onto that's uh that type of service platform it'd be high power compute capabilities coupled with Advanced memory technology and storage. Well, those all those assets we have in terms of integration and high-performance are under the roof of of smart today. And so what it takes for though is I said earlier about skill sets and Thursday, we're going to need to make sure we have the right plans in place and the right team in place to go off and execute that you know, what I've seen in private lives and larger companies these great ideas off don't don't have to pay pan out as quick as you like them because they they lose focus and you know, my my my commitment to the board and my focus on a go-forward basis is dead an opportunity like that we stuff it. Well, we got the right team in place and we go into these businesses and I think that is a good example of a great opportunity that we have to flush out a good plan, which I believe they're dead.

And got the right team in place to go execute and allow them to go run and execute and software and solutions services around things like pod or or layered sauce on top of the penguin architecture. Those are capabilities that we will invest in to grow the margin.

Gotcha. This is very helpful. Thanks for clarifying that that's all I have. Thank you.

Thank you at this time. I'm showing no further questions. I would like to turn the call back over to Mark Adams CEO.

Thank you operator in San Francisco. Twenty one has concluded on a strong note the miss these challenging times. We are grateful for the outstanding work of our employees across the globe and I'm optimistic about the opportunities that lie ahead with our strong balance sheet multiple growth factors and differentiated portfolio Technologies. I believe we're in an office position to drive growth both organically and through opportunistic and creative m&a in the next phase of smart evolution.

thank you for

Interest in and start the company and I look forward to meeting and working with you in the months ahead.

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