Q1 2021 Smart Global Holdings Inc Earnings Call

As a schedule to begin shortly please continue to standby. Thank you for your patience, ladies and gentleman today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

[music].

Oh.

[noise].

Ladies and gentlemen, thank you for standing by and welcome to the Smart Global Holdings first quarter fiscal 2021 earnings conference call on the final purchase have been line there in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session.

Then you will need to press star one on your telephone.

On the advice of today's conference is being recorded if you require any further assistance. Please press star zero.

I would now like to hand, the conference over to your speaker today, Suzanne Schmidt with Investor Relations. Thank you. Please go ahead ma'am.

Thank you operator, good afternoon, and thank you for joining us on todays earnings conference call to discuss Smart Global Holdings first quarter fiscal 2021 result.

On the call with me today are Mark Adams, Chief Executive Officer, and Jack the Chico, Chief operating and financial Officer.

This call is being webcast from our website at smart G.H. Dot Com. In addition, our website contains an accompanying slide presentation and the earnings press release.

We encourage you to go to our website throughout the quarter for the most current information on the company, including information on the various conferences that we will be attending.

Before we begin the call I would like to note that todays remarks and answers to questions may include forward looking statements.

Any statement that refers to expectations projections or other character characterizations of 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 statements.

For more information please refer to the forward looking statements disclosures in our earnings releases as well as the risk factors discussed in the documents we file from time to time with the FCC, including our most recent form 10-K and form 10-Q.

We assume no obligation to update these forward looking statements, which speak as of today.

Additionally, during this call on non-GAAP financial measures will be discussed reconciliations to the comparable GAAP financial measures are included in todays earnings press release.

We will begin the call with CEO, Mark Adams, who will provide a business update and then Jack the Chico's COO and CFO will review the financials and forward guidance.

After which we will take questions Mark.

Mark.

Thank you yeah.

I'd be 21 to all of you.

I want to take this opportunity you think our global team members for their commitment and resilience as we operate in these uncertain times.

During my first full quarter at Ft age I've been impressed with the team work up there.

I'm optimistic about the potential to execute on our growth and diversification strategy.

For me its success is largely driven by people purpose planning process.

In my first few months with the company.

Exactly what I'd been focused on.

Is the organization structure set up for success.

Our realigned the team on purpose, what we need to do and equally important.

Well, we need not to do.

After a while I'm on a purpose do we have the right plan to address the companys priorities.

Or are there some cases, where we have aspirations that need more clarity investment committee.

Once we other REIT structure in place aligned on purpose with the right plan.

Do we have the right process in place to execute and measure our performance to hold ourselves accountable.

Well, we are certainly a work in process on some of these areas I'm more excited today than I was a 120 days ago art.

Our future at S.P.H. is very bright.

Strategically we continue to focus on providing differentiated solutions across all of our lines of business.

We are targeting future expansion into growth markets, such as high performance computing on.

Artificial intelligence and cloud with Penguin computing.

Computing with our embedded business formally artisan embedded computing.

I O T solutions with our smart wireless formerly in force computing.

And advanced packaging memory low density storage and in memory computing.

Our memory solutions business, which includes our specialty memory and Brazil memory business.

Quite naturally each other lines of business.

The mandate to improve their profitability.

On this and future calls, we will be sharing proof points that demonstrate our progress along the way.

Turning to our first quarter performance.

Our revenue came in at $292 million seven.

7% higher than the same quarter in fiscal year 2020.

Gross margin came in just above the midpoint of our guidance range and our non-GAAP, earning per share of 78 cents exceeded the upper end of our guidance.

In addition, we.

We continue to strengthen our balance sheet cash and equivalents increased 9% over the prior quarter and is now at 164 million.

Overall I was pleased with our results as we continue to execute on our transformation into a diversified growth company.

Let me now provides more detail around each of our businesses performance.

Starting with specialty compute and storage.

Revenue and gross margins were approximately flat with the prior quarter at $66 million and 27% respectively.

As I mentioned on our last call.

We are conducting a careful review of all of our lines of business and if warranted will either find ways to improve gross margin.

Or exit those lines of business that don't meet our margin target.

One example of the latter with our recent decision to shut down our battery business in Brazil.

We will be aggressive and look into opportunities, but prudent on how we invest in monitors success.

In specialty compute and storage we are focused on developing higher margin opportunities as we leverage software and services as part of our solution portfolio.

This value add focus was reinforced by the official launch of Penguin computing solution strategy.

Which encompasses four dedicated solution practices targeted at enabling customers adoption of artificial intelligence high performance computing cloud and data analytics.

We will be bundling software and services optimized for each of these four practice areas.

While growth in the high performance computing and artificial intelligence market is primarily being driven by new entrants as these discipline.

Existing enterprise customers are benefiting from access to these emerging technologies as we help them to bring these capabilities in house.

Validating this new direction.

Hang on received the HPC wire Reader's Choice Award for Best HPC solution and financial services.

We were also recognized by our key partners in.

Intel awarded Penguin computing with their Executive Summit Award.

Outstanding platform innovation.

Well the I O selected segment as their 2020 partner of the year awarded for software defined storage.

Sports embedded business secured a 30 million dollar order from the U.S. government for Ruggedized HTC a system that operates under extreme shock and vibration condition.

On the technology from our embedded team released a new advanced Telecom computing architecture, or 80 see a memory blade.

Argue that both industrial and military as computing applications.

One example, other customer uses model for this technology.

Was the leading semiconductor company looking to use our memory blade product as part of an edge computing solution.

To enable on site maintenance on site maintenance predictability and they I application.

While some of our strategic initiatives and specialty compute or longer term in nature I am confident in our short term pipeline demonstrating customer validation of our vision.

We are forecasting sales in specialty compute to grow by over 20% as compared with our first quarter.

I am excited with our teams focus solutions and value added services.

And see this on the growth engine for the company in the future.

Now turning to specialty memory, which achieved revenue of $120.7 million in the quarter, a 16% increase when compared to fiscal Q1 2020.

Our DDR three product portfolio performed well on our first quarter due to increased demand as well as stabilization of DRAM pricing.

We also saw increased demand for our per system memory or and beat them products aimed at storage application.

As we look to broaden our customer base and markets, we are targeting specialty solid state storage or SSD as an important growth area.

We have customer sampling, our newest SSD product, which leverages smart module is internally developed controller.

The team is focused on expanding into new vertical markets such as surveillance.

And transportation end markets.

Strategically our specialty memory team is continuing to evaluate ways. We can provide higher valued memory solutions for customers focused on enterprise cloud AI and industrial applications.

Our Brazil business.

Total revenue of $105.2 million, an increase of almost 12% compared to fiscal Q1 2020.

Increasing memory densities led to strong mobile sales in the quarter, which grew by almost 30% compared with a year ago.

We also achieved strong remember sales for notebooks, which grew 27% as compared with the prior year's first quarter driven by a growing trend of more people working from home.

We continued to accelerate new product introductions and in support of our Brazilian customers.

We qualified a number of high density product from mobile applications, including 64, gigabyte and 128 gigabyte MCP.

The team is currently qualifying in country, SSD manufacturing, which leverages, our advanced packaging capabilities strategic customer relationships and Inc. Country manufacturing capabilities.

Now I'd like to provide a brief update on our pending acquisition Acree Ltd.

We remain very excited about Korea levied joining the smart family.

Pre El <unk> leadership position in the specialty L. D segment, a line well where are you.

With our overall specialty solution strategy, emphasizing growth margin enhancement and diversification.

I continue to be impressed with their leadership team culture, and overall operating discipline as we collectively work on a successful integration plan per Cree L.C.D. as part of S.G.H.

We have received positive signs on the regulatory front.

And the teams are working hard on integration milestones, which we feel will result in a potential flows into late February early March timeframe.

I will now turn the call over Jack.

For a closer look on the financials and guidance for Q2 Jack.

Thanks, Mark well first.

First quarter fiscal 2021, net sales of 291.7 million exceeded the midpoint of our guidance range is their combined memory sales, including specialty I mean, Brazil were up 14% from the year ago quarter non-GAAP gross margins came in at 18.6% non-GAAP EPS exceeded the high end of our guidance range, which you said.

<unk> per share.

As Mark briefly alluded to in his comments our balance sheet continues to strengthen with cash and equivalents, increasing by $13 million per quarter to reach $164 million alone.

Along with our continued focus on increasing our inventory turns which increased to 10 this quarter.

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

Global in Pcs, 34% network and telecom, 19% so.

The recent storage, 17% industrial defense and other 30%.

Mobile mpcs, along with servers and storage as a percentage of sales were both up from Q4 fiscal year 20 accounting for 51% of our revenue in Q1, which was 43% in Q4 networking and telecom was down 6% from the prior quarter, reflecting weaker enterprise spending and our just completed quarter.

Now moving to the rest of the income statement non-GAAP gross profit for the first fiscal quarter was $54.1 million or 18.6% of net sales compared with last quarters 57.8 million from 19.5 per cent of net sales.

Non-GAAP gross profit margin by business group was as follows.

Specialty compute and storage.

27% specialty memory, 15%, Brazil, 17%.

Non-GAAP operating expenses were $30.4 million compared with $29.4 million in the previous quarter non.

Non-GAAP net income for the first quarter $19.6 million per.

On a 78 cents per diluted share compared with 20.4 million per 82 cents per diluted share in the previous quarter.

Adjusted EBITDA totaled $29.5 million compared with $33 million in the prior quarter.

Our non-GAAP effective tax rate for the quarter is 14.1% in line with our expectations.

Turning to working capital.

Our net accounts receivable totaled 212.9 million cash.

Compared with $215.9 million last quarter.

Our day sales outstanding remained similar to last quarter at 46 days.

Inventory totaled 147.2 million at the other first quarter.

Compared with 163 million at the on the fourth quarter.

Inventory turns were 10 times compared with nine times in the previous quarter.

As we continue to work to increase our material efficiency.

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

Which were $423.2 million and 370.6 million respectively for the first quarter.

As a reminder, the difference between gross revenue and net sales is related to our supply chain services business, which is accounted for on an agency basis.

Meaning that we only recognized as net sales the net profit on a supply chain services transaction.

We ended the first quarter with 164.1 million of cash and cash equivalents.

Compared with 150.8 million at the end of the prior quarter.

First quarter cash flow from operations more than doubled in the quarter to reach $35.2 million from.

Current 16.2 net in the prior quarter.

On a trailing 12 month basis.

Cash flow from operations totaled $88.7 million.

For those of you tracking capex and depreciation Capex was $14.6 million.

In line with our expectations for the quarter and depreciation was $5 million.

We also increased our source of liquidity and turn into a 100 million dollar deal with Bank of America on December 20, Threerd has an effective interest rate of 2.25%.

Plus or minus <unk>, 0.25%, depending on the amount drawn on.

The line is undrawn at this point in time.

We also have a revolver of 50 million, which is also on undrawn.

Combined with our strengthening balance sheet, we feel we are well positioned for future success.

Turning to our fiscal Q2 2021, let me first provide you with some context with respect to our guidance on guidance reflects the accounting change we made in the fourth fiscal quarter of fiscal year, 2020 from Brazil, which equally decrease or gross profit as well as operating expenses.

With that as a backdrop, let me now turn to our guidance for the second quarter fiscal 2021.

We currently estimate that our second quarter net sales will be in the range of $285 million to $305 million first.

Gross margin for the quarter is estimated to be approximately 18% to 20%.

GAAP earnings per diluted share is expected to be approximately 38 cents per share plus or minus five cents.

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

And convertible debt discount, but I'd and fees.

We expect non-GAAP earnings per diluted share will be in the range of 80 cents plus or minus five cents.

The guidance for the second fiscal quarter does not include any view on the foreign exchange gains or losses.

And includes an income tax provision expected to be in the range of 10% to 14%.

The number of shares used to estimate earnings per diluted share for the second fiscal quarter.

$25.6 million.

Capital expenditures for the second fiscal quarter expected to be similar to last quarter in the range of $10 million to $15 million.

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

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

Operator, we 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 stand by while we compile the culinary roster.

Our first question comes from the line of Kevin Cassidy from Rosenblatt Securities. Your line is now open.

Thank you for taking my question and congratulations on the good results.

HM.

First question is on the market and Mark you mentioned that the memory market or the DRAM market is stabilizing in the last in the downturn last time, we found that some of the Companys manufacturing from.

On smartphones in Brazil, and I decided to build them out.

Outside of Brazil debt.

As prices are coming back up will there be a change is there a trend to building more phones within the country.

Hey, Kevin Jack Yes, I think I mean, I think thats owns in the book.

We will continue to build on the ones that are in the country will continue to build on the country I don't think we'll see any new entrants right now we're not we're not getting any.

And again made news going to come in at Brazil, setting you'll have the current the current companies continue to build the phones in Brazil have been building.

We don't think it will.

Okay. So with no no change in seasonality on them I guess is on it another way of saying that from my question.

And no change the seasonality right now we're not seeing.

Okay, because we're not giving up on the phone to a lot of flash memory on the phone on we're not we're not we're not seeing flash memory loss from price right size from continues to fall.

Oh.

Okay I see [noise].

And maybe that Marc turning to your comment about the.

On profitability.

And the Penguin business in particular as.

That's true leveraging for software and services.

Can you say about what progress you have on how much interest as they are from your customer base and maybe what is the customer base that would be interested in in.

Your cloud services or for a software services sure I appreciate the question Kevin Thanks.

When we look at a the elements of what might help us drive these margin opportunities really on.

Strength in our overall engagement gaydamak with the both the federal and our commercial customers and.

The way to think about it is there.

Theres kind of three buckets, theres kind of I would say hardware optimization.

There is a software and then there's services that include things like on.

On demand.

Type offerings as well as systems implementation installation and overall field service and so on a in each of those areas were kind of investing to strengthen our offering when.

When we talk about software on most of the software we're referring to are in these few areas around workload optimization.

Resource provisioning.

Concept called data gravity, which comes into play when we start to see customers wanting a hybrid implementation of cloud services for certain workloads and more compute intensive workloads on premise or so we're developing opportunities in partnerships with software companies.

In conjunction with anyone to be able to deliver these types of capabilities on the software side.

On the service side.

There's obviously presale configuration analysis there is.

System design work that's done to optimize.

Our platforms for the end market applications that we're looking at secondly, there's installation services.

And post sale or.

Capabilities that we're delivering to the customer a lot of these customers don't actually have the infrastructure and resources in place to be able to manage the hardware side of the data center.

Installation or even though sales are on break fix opportunities.

And then more longer term I think we've commented and in the past and I wanted just to kind of reinforce that were very heavily looking at.

On demand services at paying win and investing in business models that will allow us to extend our current customer relationships as well as engage with new customers on the on demand side.

Whether it be multi cloud or a again, a public to private or private to public type architecture using on demand models.

Some of the infrastructure, we already have built out.

And looking to roll out more are in the area pod, which is an acronym for Penguin on demand and then guff pod for our federal customers and so.

That's really kind of how we think about the enhancement model.

And it's a partnership that are primarily a third parties on the software side to two day or.

That we're evaluating how we want to play on that piece of it but a lot of the infrastructure that we have in place that has made pang with a strong player in HPC allows us to provide this kind of value add around these systems and on demand part of the equation.

Okay, great. Thanks, and maybe if I'll just add on on to that the the sales process for that is that a six month.

For a year you know I guess, how long is that from time Atlanta customer.

No typically are you kind of breaking this up because some of this is actually happening.

And I think you heard my comments earlier on the call today about our Q2. Some of this is already in play a lot of times a system level sales on company with these new levels of services that were offering.

So we do think margins will improve in the short term, but germane to your question around sales cycle.

It could be anywhere from three to six months on the pre sales side of getting a customer identified and a life project that is funded whether it be again on the federal side or the commercial side and then there's this kind of price.

Process, we go through to understand the customer requirements and a specific vertical and what application, they're trying to optimize around and that's really where our expertise at Penguin comes in because we've been around a high performance computing for so long that we have a skill set on a comp I see that our custom.

There's really value around understanding the system and the optimization around the systems for this goes application and were able to kind of emulate that test that and these different verticals on so I would say three to six months on a pre sales side and then.

No it's.

It's probably another six to nine months on a phase one rollout and so as I talked about the last call.

You know I was starting to see signs that we have some really good opportunities.

That are in the funnel on fund on mining opportunities, we're negotiating for and the conversion of those is really taken place in a nice way. We entered Kevin we entered Q2 with a backlog that was 40% higher four zero percent higher than the backlog, we had entering Q1 and so.

This process on managing that.

[noise] cycle is obviously, a you know it's a kind of a an art so to speak that we have to keep on optimizing but oh the size of the funnel and the commitments were getting.

On this time line of a of how we forecast in the quarter is getting more predictable for us as we are scaling the business.

Great. Thank you.

Thank you.

Thank you and our next question comes from the line of rising Gill from Needham and company. Your line is now open.

Yes, thank you and congratulations as well Mark.

That is correct me if on from on them you had mentioned that the peak when computing business for for February.

You're expecting that business to grow 20% sequentially I just want to make sure I have that correct and if that's the case then what's the drivers of of that.

Going into February quarter, and Jack it any kind of thoughts in terms of the guidance for the.

For the Brazil business and for the specialty memory business the moving pieces there in fact once every quarter.

Great. Thanks Raj I'll go first.

Relative to the the 20% that was our overall specialty compute business.

And penguins right on that actually on a.

We've got from.

Some very strong.

Backlog growth in the federal business as well as a.

ER newly accepted commitments.

That we're going to be delivering starting to deliver in Q2 or in our Penguin business and whats. So those are the two primary or customer types, our federal and our commercial customers. You know for obvious reasons, we don't like to kind of give that specific customer names out, but I can tell you that each of the orders that are.

I'm referencing are on the tens of millions of dollars and mind you that they don't all bill in one quarter, but given what I said about the healthy backlog again up about.

About 40% coming into this quarter when compared to Q1, a continuing growing funnel you can see where we're going to end up in a pretty good place in Q2 on the paying on business I also wanted to call out and recognize that our embedded business.

Secured a $30 million.

Order now that orders to be delivered over the course of the full calendar year, sorry, the full fiscal year, and Ah, which we delivered about 20% in the first quarter. So the combination of the stronger Penguin thought on some big commitments on the embedded side have a feeling pretty bullish and and I don't think.

This is a.

I don't think this is a one quarter phenomenon, we're really feeling pretty good about the continued growth in the execution of our especially compute business. It's.

Got a long way to go but I think it's got some really good upside opportunity in the future.

That you wanted to dress up Brazil, especially yeah. If you look at on where we think they are going to fall into two from human Raj I mean, you know, we said forget right.

We'll be seasonally down from Brazil, a little bit that we expect the memory business to be down you know low single digit percentage from Q1.

On that range so.

Lot of debt not a dramatic difference from we finished Q1, but down a little bit.

Okay. So the from the especially memory kind of down low single digits sequentially, and then Brazil seasonally down.

Yes, little bit yeah little bit other I've got it okay got it and so the.

The the special team non memory business, the the growth year over year.

In November so the 121 million in November and then.

And then the in November of the year ago quarter. It was 103 million.

So the growth can.

Can you maybe elaborate on kind of on what you're seeing there.

It it looks like there's been some from growth in the the storage.

And Ah networking market, but any any kind of thoughts of kind of the broader macro trends. That's that's driving the year over year growth and in specialty memory on how we think about that.

In town and you know it throughout this year in a potentially post kobin recovery just curious to see on your business could be affected positively if there's a recovering coven and that but there are I mean, the growth I think you've seen over the last year has really been on the DRAM seven DRAM sales performed well in a marks a smart literature DDR through getting good quarter.

We continue we continue to get new design wins in Didi or three so the DRAM business is doing.

Going well for specialty you know.

On as we get I think as we go towards the back half of this year, we expect to see the flash business pick up the glass business been impacted more by global 19, net we're trying to get new design wins and it's been a struggle to get design win in the COVID-19 era as our customers are not in their lab, that's been a lot flow or process. So they'll start to kick in I think you can get to recover.

You will see the flash business pick up on the back half of the year for the specialty.

Specialty memory business and I think that will help US you know backed up near drive up our margin is talked about for that business as well. So we we still the GAAP is it on track your arms and really well and we think the flash business will start to pick up her skewed towards the back half of this fiscal year.

And my last question on the gross margins. So the margins are are guiding up about 40 bips at them at the midpoint on on slightly higher revenue volume.

And you broke out the gross margin split and this quarter.

So.

Putting aside Cree.

On what is going to be the kind of the margin levers to push for each of these business lines.

And how do we think about you know, Brazil, improving the margin specialty memory, improving the margins et cetera.

Sure I'll start with I mean, I think Brazil.

You know, Brazil, we went and we talked about for a while but trying to get to a more fixed price model on Brazil on the unit our value add per unit in Brazil on so I think as we get Brazil growth will get through this year you may not see the gross margins in Brazil get that much better.

We're trying to be more you know get the gross margin on a more stable right day Sps glove if revenues go up.

We will get more value add but I think our gross margin percentage, who has stayed the same so really not looking Brazil have major changes specialty we said, we thought we could get specialty up back towards 20, as we exit the year on we still think we can do that and that's coming based on flash a lot of new design wins and flash as you know and also the return on smart enterprise cash.

Moving on the flash side, we've had some weakness on the enterprise, which is really impacted our flash business, which tends to be a higher margin business, we see that coming back as well again on the back half of the year net.

Specialty memory and then on average just one one point of clarification before I comment on specialty compute.

On the margin side.

During my comments around profitability, we're not going to jump in the flash business just to be a revenue play and as Jack mentioned some of our design in.

Efforts.

Have you taken a little longer than we like but again the emphasis is going to be on on specialty flash storage solutions, not just commodity trading of man.

That's not a bit as a minute and allow us to get into so.

As he mentioned some of the application work, we're doing on specialty NAND storage.

Is playing out it's just a isn't on the timing than we'd like but it's still going to be we're going to be very disciplined on how we how we compete in that space I think the NAND business. It is.

On to be a lot more volatile or when compare to DRAM and we're going to be really careful there. Although we expect growth and good performance in the backup we were just hoping it'd be here a little bit earlier on especially compute side I think I talked about it in the areas of software services.

And effectively a as we move into a more value add type applications.

That we sell into and I think thats going to be again very similar for us going forward, you're going to we're going to be a lot more disciplined or as we include these as part of the deals we like to go win or.

We're not looking for just hardware revenue.

And you know you've already started to see that this segment was acquired at the time of the acquisition. It was like a 50% gross margin business I think in the quarter.

Whereas we're about 20% gross margins and I think I mentioned on Alaska, albeit from today I think you know a next stop for us in the in the near term over the next quarter or two should be in the mid twentys.

And I have a lot on aspirations for a much better.

Gross margin picture and Penguin over the next day.

Three years or so, but we were on a good path there and we're going to be selective because it was in this business you want to get these customers, who really need your expertise in all those areas not just hardware and we're identifying these customers on some of these people on these vertical markets, we're talking about such as AI or.

Our sophisticated high and machine learning right with utilizing high performance computing, Yeah, we've become a lot more important than just a hardware provider and those are the skills that we're investing in and developing and I think thats going to show up in the margin.

As we move forward.

And last question in terms of Cree, a there's the shift over to Taiwan in terms of production any status update there.

So on track, we're you know what I'm I don't want to say too much because it's a other deals on close enough for them to comment on but.

I would just signal that we're very happy with where things on the process and continue to be very pleased obviously with the strategic value that they're going to bring to us, but just as we get to know the team better and they are operating philosophy and culture. Its a.

We're very excited about then join the team.

All right. Good deal. Thank you Mark is that do you think.

Thanks.

Thank you so much I line question. Our next question comes from the line of Brian Chin from Stifel. Your line is now open.

Hi, there good afternoon, happy new year, and thanks for letting us ask on a few questions.

Maybe just to kind of keep the discussion back on L. idea here for a moment.

Mark I heard the timing you can update it in terms of closing on the deal on I.

I guess what are some of those you cash indications that you're you have that you think you'll get that regulatory approval here over the next month or two on bank you just.

Especially given that I think probably the key hurdle you have there is in China.

Yeah I actually.

I don't think regulatory approvals, our problem and we'd actually when I shouldn't even say problem. There just a couple of things in terms of timing around integration matters with I T systems, because remember this is a carve out and pre acquisition.

Creeley de was part of a broader corporate IP infrastructure that was not being able to be carved out you know kind of nice and tidy.

And so I think the long pole on that 10, so to speak is going to be I cheat one of our closing conditions was a a third party audit of the business again due to the carve out nature of this transaction is a very important thing for us to to get a clear on us opinion of the other carve out financials.

Then that's on track, but I would tell you I don't think that we're we've gotten positive indication on the regulatory side, that's not the issue that we're dealing with it relative to the end of February target.

GAAP got it okay. Thank you and other costs.

Actually in terms of.

The clean business yeah.

Under the Cree did the equity component business carried a good debt a fixed cost yet once you close a smart will no longer have any of that wafer and wafer fab any of the way from wafer fabrication assets. So I guess my question is sort of off the bat lets you do close how.

How much higher would the LCD gross margins be consolidate under smart if we were excluded from the associated depreciation I think fully loaded it was something like 21% gross margins in our fiscal Friday and right now my 20% Yeah, Yeah I think.

Just from a modeling perspective I think.

It'd be safe to say somewhere on the EUR 400 basis points improvement now, yes on the one hand, the fixed costs go away, but on the other hand as it relates to cost of goods and they outsource model those fixed costs don't necessarily go away. They just may show up in cost of goods.

Relative to your partners pricing to you now having said all that we think there's a lot of efficiency and we do think there is a margin improvement opportunity with Cree and you know.

Yeah, and I were trying to be careful.

Well, we get really inside to understand all of the.

On the upside opportunity, but we're pretty comfortable that there's going to be some gross margin expansion on the other he does.

Got it so just to make sure I'm clear there I think you. Originally said you could be at a years time post close something like 200 to 400 basis points of improvement.

And that's inclusive of of you.

You know the specifics cost, maybe it's a little bit of shifting from Insourced outsourced.

Alright, thats going on.

I'll break down in terms of that plus other efficiency I think that yet I think thats on the rise of go to this point.

Yeah, and maybe even just one last question going back to the prior targets that you had established on when you announced the acquisition pending acquisition.

At the time I think you said that there was some organic growth sort of dialed in there, but if you look at sort of the current business. Its you know 400 million plus annualized revenue at the moment.

And you know if you kind of net you add that to what are your revenues, where our last fiscal year it kind of.

The embedded sort of zero cash growth and clearly you know HPC, especially compute sounds like it's got to be a good growth orientation to it certainly start the fiscal year I'm just wondering to what degree maybe you've reevaluate those are kind of weak as you dug a little bit conservative.

Okay fair enough, although as I said in my prepared comments we're.

We're continuing to evaluate businesses that we might have been chugging, along and without a lot on upside potential or gross margin. That's not at the level, we want to kind of hit as a company or target as a company I should say and so I think it's fair as we get a better understanding of of whats.

Going on inside at Cree beyond our due diligence and where we're at today you know.

I think theres theres a potential for that there is also potential that we if we can't get our arms around the gross margin up some of these lines of businesses that I referred to earlier.

We may kind of exit some of those businesses I don't think it's going to be dramatic I think I would say the range that we gave initially is certainly helping them comfortable with today and and and or kind of towards the end of our calendar quarter calendar quarter. This year I, probably give it be able to get a better update on how we.

On the operating model, having spent some more time inside of a really de and obviously a valuation on the existing on businesses inside of a stretch.

Okay got it so in terms of the revenue and that margin improvement on some of this addition by subtraction is contemplated it sounds like okay.

I think I, but I think your question is a good one I am not shying away from I think I think there is a potential for that we're.

We're not here to comment on that now because I, just I want to get more clarity on.

On on the on what's underneath the Hood at really day.

On specific product lines and see if there is oh, either need to reinvest in those businesses in skeletal more beyond where they are because gotta remember they've been pretty slim.

Limited at some level on that and their ability to grow given the picks wafer capacity out of North Carolina. So we have a lot to learn about that business. We see on its operating today, but we want to make sure that you know we want to invest properly. We think it's we think it's a really good acquisition for us obviously and so I.

I'm hedging a little bit because I want to go get those answers done and get back to you in kind of towards the end of the first quarter to be able to give you a per square to calendar to give you a sense on.

How we kind of look at the combined entity going forward.

Okay No I appreciate the.

The detail thanks Mark.

Thank you.

Thank you. Our next question comes from the line on Sidney Ho from Deutsche Bank. Your line is now open.

Hi, Thanks for taking my question I want to follow up on the gross margin discussion earlier, you talked about this gross margin improvement 200 to 400 basis points a year. After the telly deals close I was just hoping you could give us a sense as to how much of that improvement comes from the inclusion of that business first is coming on again.

Luckily I know Mark you talked about some of the deal profitability initiatives.

Especially on especially compete but I was hoping you can help quantify them on.

The one thing that I noticed that debt, especially memory today, it's quite a bit lower than what it was a year ago and I think last quarter, you talked about from a new product because having adequate margin headwind. So I'm just trying to get a sense as to how each test Lincoln can grow what kind of margin profile going to be without the without the LCD side.

Sure so.

It's a separate again this is to your point separate from the L.C.D. discussion that we just had which I think you're just you're satisfied with on the on the organic side within sch today, I mentioned that specialty computing area of software and services I mentioned some of the examples specifically with Penguin I think thats.

Inherently a meaningful uptick to on their gross margin and have a good impact on our gross margin on.

On the specialty compute side.

On you also have to consider that as part of that revenue stream. We have a a logistics service business that also has an impact on margin.

And so if you take if you separate that out Jack referred some of these new market opportunities that we're investing in for growth around again specialty flash not commodity flash for specialty flash lower density our own controller, a U.S individual kind of.

Ruggedized or or industrial strength type products.

On these products that we're aiming at for some of our newer efforts in memory.

Do carry higher margins. So I think if you think about gross margin across the table here already commented on Brazil being relatively flat I think you'll see you know.

Organically, a gross margin uptick in an area an area of 2% to 2.5% gross margin.

Before Cree and then you know as I said, Oh create create some margin opportunities on.

On their own I think its going to combine to a pretty good story overall.

Great that's true that's very helpful.

My follow up question is on the especially compute and storage business obviously.

Obviously, you made a number of acquisitions the past two years, but the growth hasn't been it's just not very consistent for reasons that are out of your control so ex.

You look forward now that you have 120 days into a job on what kind of growth rate do you expect that in aggregate can do organically and what type of seasonality do you expect going forward.

Yes, good question I think.

You're kind of hitting I hope on.

I do think it is a growth business be honest with you in the I know you said four months into the job.

I think we have to strengthening the leadership team and we'll be doing that.

I think we have to.

Keep on investing and not just the people, but the capabilities of the company, but it'd be software.

Or integration capabilities or a service capabilities.

But I do think that I don't think this quarter is an anomaly in terms of our growth opportunity.

You know, it's interesting and I just want to offer this to people on that the team on the call.

This is a different business so to try to make it look like a smart modular memory business. It doesn't work that way on.

So what I mean by that is it's a design in business that will grow.

It's less about seasonality there is some spending.

On patterns relative to the federal business for sure, but it's less about seasonality, it's more about design in and win and delivery schedules and so I happen to think by the way that will get crowded out by our increasing backlog and growth opportunities and so but I think the per.

You know, it's not it's not a fulfillment model, it's not a design in model like the memory business.

It's more of a.

Point to point customer to vendor relationship design on sale that is a longer term sale, then again per se memories from model. So.

It's a long winded way of saying I think the growth will crowd out a it's not really about seasonality as much as the the lumpiness that may exist as we as we are targeting growth in new vectors in new scale, but.

Coming from where we are coming from as you noted on your question I don't think you're going to see that I think you're going to see continued growth for the foreseeable future starting with Q2.

Great appreciate it thanks guys.

Thank you.

As a reminder to asking question on you wanting to press star one on your telephone to withdraw your question press the pound key.

Our next question comes from the line of Mark Natasha from.

Jeffrey Your line is now open.

Pardon me Mark Your line is now open please check your mute button.

Mark on the patients from Jefferies. Please check your mute button on your line is now open.

Operator, I think if.

If mark doesn't joined here in a second we can proceed to.

The one left in the queue or I can start with the commentary.

At this time showing no further questions I would like to turn the call back over to Mark Adams CEO for closing remarks.

Well, thank you again.

We started fiscal 21 on a strong footing as we embark on our journey to deliver profitable growth, while diversifying our business with a specialty focus.

We're doing that's true expanded strategic customer relationships their line with growth markets such as cloud.

And its computing I would see high performance computing enterprise storage and specialty memory solutions.

We've transformed our balance sheet for future success.

We are in the process of building out the leadership team to enable this next phase of scaling of our business.

We are focused on creating new approaches to extend the existing business models that will demonstrate our ability to deliver higher volume solutions to our customers with a greater focus on software services and on demand offerings.

Included in my list of top priorities.

Is to enhance the diversity of our leadership team across the company.

In addition.

We're launching a process around our environmental social and governance business practices.

I will be commenting more on knees in upcoming calls.

In closing I'm very excited.

For our future at S.T.H. I want to thank you for your interest and support of the company. Thank you.

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

[music].

[music].

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Smart from Global Holdings first quarter fiscal 2021 earnings conference call on the.

Five all participant lines on a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you wanting to from stock warrants on your telephone. Please be advised that todays conference is being recorded if you require any for other systems. Please press star Zero I would now like to hand, the conference over to your speaker.

Good day, Suzanne Schmidt with Investor Relations. Thank you. Please go ahead ma'am.

Thank you operator, good afternoon, and thank you for joining us on todays earnings conference call to discuss Smart Global Holdings first quarter fiscal 2021 result.

On the call with me today are Mark Adams, Chief Executive Officer, and Jack Pacheco, Chief operating and financial Officer.

This call is being webcast from our website at smart G. H Dot Com. In addition, our website contains an accompanying slide presentation on the earnings press release.

We encourage you to go to our website throughout the quarter for the most current information on the company, including information on the various conferences that we will be attending.

Before we begin the call I would like to note that todays remarks and answers to questions may include forward looking statements.

Any statements that refers to expectations projections or other character characterizations of 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 statements.

For more information please refer to the forward looking statements disclosures in our earnings releases as well as the risk factors discussed on the documents we file from time to time with the FCC, including our most recent form 10-K and form 10-Q.

We assume no obligation to update these forward looking statements, which speak as of today. Additionally, during this call on non-GAAP financial measures will be discussed reconciliations to the comparable GAAP financial measures are included in todays earnings press release.

We will begin the call with CEO, Mark Adams, who will provide a business update and then Jack the Chico's COO and CFO will review the financials and forward guidance after.

After which we will take questions Mark.

Mark.

Thank you Dan.

Happy 21 to all of you.

I want to take this opportunity thank our global team members for their commitment.

So again as we operate in these on certain Todd.

During my first full quarter, that's the age I've been impressed with the same work ethic and I'm optimistic about the pencil to execute on our growth and diversification strategy.

For me its success is largely driven by people purpose planning and profit.

In my first few months of the company. This is exactly what I am focused on.

Is the organization structure set up for success.

Are we aligned at the team on purpose, what we need to do an equally important.

What we need not to do.

After alignment on purpose do we have the right plan to address the Companys priorities.

Or are there some cases, where we have aspirations that need more clarity investment committee.

Once we other REIT structure in place aligned on purpose with the right plan.

Do we have the right process in place to execute measure on performance to hold ourselves accountable.

Well, we are certainly a work in process on some of these areas I'm more excited today than.

That was 120 days ago.

Our future at S.T.H. is very bright.

Strategically we continue to focus on providing differentiated solutions across all of our lines of business.

We were targeting future expansion into growth markets, such as high performance computing.

Artificial intelligence and cloud Penguin computing.

Edge computing with our embedded business formally artisan embedded computing.

T solutions with our smart wireless on the in force computing.

And advanced packaging memory low density storage and in memory computing, that's part of our memory solutions business, which includes our specialty memory, Brazil memory business.

Well naturally each of the lines of business.

The mandate to improve their profitability.

On this and future calls, we will be sharing proof points that demonstrate our progress along the way.

Turning to our first quarter performance.

Oh revenue came in at $292 million.

On a percent higher than the same quarter in fiscal year 2020.

Gross margin came in just above the midpoint of our guidance range and our non-GAAP earnings per share of 78 cents ex.

On the upper end of our guidance.

In addition.

We continue to strengthen our balance sheet cash and equivalents increased 9% over the prior quarter and is now at 164 million.

Overall I was pleased with our results as we continue to execute on our transformation into a diversified growth company.

Let me now provide some more detail around each of our business performance.

Starting with specialty compute and storage.

Revenue on gross margins were approximately flat with the prior quarter at $66 billion and 27% respectively.

As I mentioned on our last call we.

We are conducting a careful review of all of her line and it worked and will either find ways to improve gross margin.

Or exit those lines of business that don't meet our margin target.

One example of the lot or with other recent decision to shut down our battery business in Brazil.

We will be aggressive in looking at new opportunities, but prudent on how we invest and monitor success.

And especially compute and storage we are focused on developing higher margin opportunities as we leverage software and services as part of our solution portfolio.

This value add focus was reinforced by the official launch of Penguin computing solutions strategy.

Which encompasses four dedicated solution practices targeted at enabling customers adoption of artificial intelligence high performance computing cloud and data analytics.

We will be bundling software and services optimized for each of these four practice areas.

While growth in the <unk> high performance computing and artificial intelligence market, primarily being driven by new addresses these discipline.

Existing enterprise customers are benefiting from access to these emerging technologies as we help them to bring these capabilities in house.

Validating this new direction.

Hang on received the HPC wire Reader's Choice award for best.

H.B.C. solution and financial services.

We were also recognized by our key partners.

Intel awarded Penguin Computing with Executive Summit Award.

Net outstanding platform innovation.

Well the Io selected segment as their 2020 partner of the year awarded for software defined storage.

Smart embedded business secured a 30 million dollar order from the U.S. government for Ruggedized eight GCA system that operates under extreme shock and vibration condition.

On the technology from our embedded team released a new advanced Telecom computing architecture, or 80 see a memory blade.

Argue that both industrial and military edge computing applications.

One example, other customer uses model for this technology.

Well, the leading semiconductor company looking to use our memory blade product as part of an edge computing solution.

True enable on site made on site maintenance predictability and they I application.

Well some of our strategic initiatives and specialty compute or longer term in nature I.

Hi, I'm confident in our short term pipeline demonstrating customer validation of our vision.

We are forecasting sales, especially compute to grow by over 20% as compared with our first quarter.

I am excited with our teams focus solutions and value added services.

Let's see with other growth engine for the company in the future.

Now turning to specialty memory, which achieved revenue of $120.7 million in the quarter.

16% increase when compared to fiscal Q1 2020.

Our GTR threed product portfolio performed well on our first quarter due to increased demand.

Well its stabilization of DRAM pricing.

We also saw increased demand for our persistent memory or and beat them product aimed at storage application.

As we look to broaden our customer base and market, we're targeting especially solid state storage or at this day as an important growth area.

We have customer sampling, our newest SSD product, which leverages smart module is internally developed controller.

The team is focused on expanding into new vertical markets such as surveillance.

And transportation end market.

Strategically our specialty memory team is continuing to evaluate ways. We can provide higher valued memory solutions for customers focused on enterprise cloud AI and industrial applications.

Our Brazil business.

Total revenue of $105.2 million, an increase of almost 12% compared to fiscal Q1 2020.

Increasing memory density led to strong mobile sales in the quarter, which grew by almost 30% compared with a year ago.

We also achieved strong remember sales for notebooks, which grew 27% as compared with the prior years first quarter driven by a growing trend of more people working from home.

We continue to accelerate new product introductions and in support of our Brazilian customers.

We qualified a number of high density product from mobile applications, including 64, gigabyte and 128 gigabyte MCP.

The team is currently qualifying in country as if the manufacturing, which leverages, our advanced packaging capabilities strategic customer relationships and in country manufacturing capabilities.

Now I'd like to provide a brief update on our pending acquisition of Cree Elie day.

We remain very excited about reality, joining the smart family.

Pre El <unk> leadership position in specialty L. D segment, a line well we're on.

With our overall specialty solution strategy, emphasizing growth margin enhancement and diversification.

I continue to be impressed with their leadership team culture and.

And overall operating discipline as we collectively work on a successful integration plan per Cree L.C.D. as part of S.G.H.

We have received positive signs on the record Terry on.

And the teams are working hard on integration milestones, which we feel will result in a potential flows into late February early March timeframe.

I will now turn the call over Jack.

For a closer look on the financials and guidance for Q2 Jack.

Thanks Mark.

First quarter fiscal 2021, net sales from 291.7 million exceeded the midpoint of our guidance range because their combined memory sales, including special family in Brazil.

14% from the year ago quarter non-GAAP gross margins came in at 18.6% non-GAAP EPS exceeded the high end of our guidance range, which is 78 per share.

It's mark briefly alluded to it and this comment on our balance sheet continues to strengthen.

Cash and equivalents, increasing by $13 million in the quarter to reach a 164 million.

Along with our continued focus on increasing our inventory turns which increased to 10 this quarter.

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

In Pcs, 34% networking and telecom, 19%.

From recent storage, 17% industrial defense and other 30%.

Moving on Pcs, along with servers and storage as a percentage of sales were both up from Q4 of fiscal year 20.

County for 51% of our revenue in Q1, which is 43% in Q4 networking and telecom was down 6% from the prior quarter, reflecting weaker enterprise spending and our just completed quarter.

Now moving to the rest of the income statement non-GAAP gross profit for the first fiscal quarter was $54.1 million or 18.6% of net sales.

Compare with last quarter's 57.8 million or 19.5% of net sales.

Non-GAAP gross profit margin by business group was as follows.

Specialty compute and storage.

27% specialty memory, 15%, Brazil, 17%.

Non-GAAP operating expenses were 30.4 million compared with 29.4 million in the previous quarter.

Non-GAAP net income for the first COVID-19.6 million.

Or 78 cents per diluted share compared with 20.4 million per 82 cents per diluted share in the previous quarter.

Adjusted EBITDA totaled $29.5 million compared to $33 million in the prior quarter.

Our non-GAAP effective tax rate for the quarter was 14.1% in line with our expectations.

Turning to working capital.

Our net accounts receivable totaled 212.9 million.

Compared with $215.9 million last quarter.

Our day sales outstanding remain similar to last quarter at 46 days.

Inventory totaled 147.2 million at the other first quarter.

Compared with 163 million at the on the fourth quarter.

Inventory turns were 10 times compared with nine times in the previous quarter.

As we continue to work to increase our material efficiency.

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

Which were 423.2 million and 370.6 million respectively for the first quarter.

As a reminder, the difference between gross revenue and net sales was related to our supply chain services business, which is accounted for on an agency basis.

Meaning that we only recognized as net sales the net profit on a supply chain services transaction.

We ended the first quarter with 164.1 million of cash and cash equivalents.

Compared with 150.8 million at the end of the prior quarter.

First quarter cash flow from operations more than doubled in the quarter to reach $35.2 million.

Current 16.2 million in the prior quarter on.

On a trailing 12 month basis.

Lastly from operations totaled 88.7 million.

For those of you tracking capex on depreciation Capex was $14.6 million.

In line with our expectations for the quarter and depreciation was 5 million.

We also increased our source of liquidity and turn into a $100 million Bbl with bank of America on December 20, Threerd has an effective interest rate of 2.25%.

Plus or minus <unk>, 0.25%, depending on the amount drawn.

The line is undrawn at this point in time.

We also have a revolver, a 50 million, which is also undrawn.

Combined with our strengthening balance sheet, we feel we are well positioned for future success.

Turning to our fiscal Q2 2021, let me first provide you with some context with respect to our guidance our guidance reflects the accounting change we made in the fourth fiscal quarter fiscal year, 2020 from Brazil, which equally decrease or gross profit as well as operating expenses.

With that as a backdrop, let me now turn to our guidance for the second quarter fiscal 2021.

We currently estimate that our second quarter net sales will be in the range of 285 to 305 million gross.

Gross margin for the quarter is estimated to be approximately 18% to 20%.

GAAP earnings per diluted share is expected to be approximately 38 cents per share plus or minus five cents.

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

Tangible asset amortization expense.

And convertible debt discount well I'd and fees, we expect non-GAAP earnings per diluted share will be in the range of 80 cents plus or minus five cents.

The guidance for the second fiscal quarter does not include any view on the foreign exchange gains or losses and.

And includes an income tax provision expected to be in the range of 10% to 14%.

The number of shares used to estimate earnings per diluted share for the second fiscal quarter.

25.6 million.

Capital expenditures for the second fiscal quarter expected to be similar to last quarter in the range of 10 to 15 million.

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

And reconciliation of GAAP net income to adjusted EBITDA tables and earnings press release 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 stand by while we compile the culinary roster.

Our first question comes from the line of Kevin Cassidy from Rosenblatt Securities. Your line is now open.

Thank you for taking my question and congratulations on the good results.

Your first question is on the market and Mark you mentioned that the memory market or the DRAM market is stabilizing in the last in the downturn last time, we found that some of the Companys manufacturing.

On smart phones in Brazil decided to build them outside of Brazil.

As prices are coming back up.

Will there be a change is there a trend to building more phones within the country.

Hey, Kevin its Jack Yeah, I think I mean, I think I phones in the country. Okay.

We will continue to build on the ones that are in the country will continue to build on the control I don't think we'll see any new entrants right now we're not we're not getting any other.

Hey, Dan May new is going to come in at Brazil, setting you will help the current the current company as we continue to build the phones in Brazil other than building.

We don't think it will.

Okay. So with no no change on seasonality on them I guess is on another way of asking my question.

And no change the seasonality right now we're not seeing.

Okay, because if you think about the phone to the lot of flash memory on the phone on we're not we're not seeing flash memory love from price right Flash memory continues to fall.

Oh.

Okay I see [noise].

And maybe that Marc turning to your comment about the.

On price.

For the ability.

And the Penguin business in particular as.

That's true leveraging for software and services.

Can you say about what progress you have on how much interest is there from your customer base and maybe what is the customer base that would be interested in in.

Your cloud services are for software services.

Sure I appreciate the question Kevin Thanks.

When we look at.

The elements of what might help us drive these margin opportunities really on a strength in our overall engagement gave me on what Oh the federal.

And our commercial customers and.

The way to think about it is there's.

Theres kind of three buckets, there is kind of I would say hardware optimization.

There's a software and then there are services that include things like on demand.

Type offerings as well as systems implementation installation and overall.

Field service and so on a in each of those areas were kind of investing to strengthen our offerings.

Talk about software.

Most of the software were referring to.

In these few areas around workload optimization.

Resource provisioning.

Concept called data gravity, which comes into play when we start to see customers wanting a hybrid implementation of cloud services for certain workloads and more compute intensive workloads on premise or so we're developing opportunities and partnerships with software companies.

In conjunction with anyone to be able to deliver these types of the capabilities on the software side.

On the service side.

There's obviously presale configuration analysis there is.

System design work that's done to optimize.

Our platforms for the end market applications that we're looking at secondly, there's installation services.

And Oh sale.

Capabilities that we are delivering to the customer a lot of these customers don't actually have the infrastructure and resources in place to be able to manage the hardware side of the data center installation.

Even though sales are on break fix opportunity.

And then a more longer term I think we've commented and.

The past and I want to just to kind of reinforce that were very heavily looking at on demand services at paying win and investing in business models that will allow us to extend our current customer relationships as well as engage with new customers on the on demand side, whether it be multi cloud.

Or are you going to public private or private to public type architecture using on demand models.

Some of the infrastructure, we already have built out.

And looking to roll out more or an area pod, which is an acronym for penguin on demand.

And then Gov pod for our federal customers and so.

That's really kind of how we think about the enhancement model.

And it's a partnership that.

ER, primarily a third parties on the software side to two day or.

That we're evaluating how we want to play on that piece of it but a lot of the infrastructure that we have in place that may Pang with a strong player in HPC allows us to provide this kind of value add around these systems and on demand a part of the equation.

Okay, great. Thanks, and maybe if I'll just add on on to that they are on the sales process for that is that a six month.

For a year I guess, how long is that from time you land the customer.

No typically are they kind of breaking this up because some of this is actually happening and.

And I think you heard my comments earlier on the call today about our Q2. Some of this is already in play a lot of times a system level sales on company with these new levels of services that were offering so.

So we do think margins will improve in the short term, but germane to your question around sales cycle.

It could be anywhere from three to six months on the pre sales side of getting a customer identified and a life project that is funded whether it be again on the federal side or the commercial side and then there's this is kinda.

Process, we go through to understand the customer requirements on a specific vertical and what application, they're trying to optimize around and that's really where our expertise at Penguin comes in because we've been around a high performance computing for so long that we have a skill set and accounts I see that our custom.

There's really value around understanding the system and the optimization around the systems for this goes application and were able to kinda emulate that test that and these different verticals and so I would say three to six months on a pre sales side and then.

It's probably another six to nine months on a phase one rollout.

And so as I talked about the last call.

You know I was starting to see signs that we have some really good opportunities are that are in the funnel on fund on them I mean, the opportunities were negotiating for and the conversion of those is really taken place in a nice way we entered Kevin we entered Q2.

With a backlog net was 40% higher force set higher than the backlog, we had entering Q1 and so.

This process on managing that cycle is obviously, a you know it's a kind of a an art so to speak that we have to keep on optimizing but the size of the funnel and the commitments were getting on this time line of a of how we forecast in the quarter is getting more predictable for us as a.

We're scaling the business.

Great. Thank you.

Thank you.

Thanks, Kim on next question comes from the line of rising sales from Needham and company. Your line is now open.

Yes, thank you and congratulations as well Mark.

Correct me if all from on them you had mentioned that the the pink when computing business for per fair way, you're expecting that business to grow 20% sequentially I just want to make sure I have that correct and if that's the case then what the drivers of that.

Going into February quarter, and Jack or any kind of thoughts in terms of the guidance for the.

For the Brazil business into the specialty memory business, the moving pieces there in front of every quarter.

Great. Thanks Raj I'll go first.

Relative to the the 20% that was our overall specialty compute business.

And penguins right on that actually.

We've got some.

Some very strong.

Backlog growth in the federal business as well as the.

On a newly accepted commitments are that.

That we're going to be delivering starting to deliver and Q2.

In our Penguin business and whats. So those are the two primary or customer types that are federal and our commercial customers. You know for obvious reasons, we don't like to kind of give that specific customer names out, but I can tell you that each of the orders that I'm referencing are on the tens of millions of dollars.

In line you that they don't all bill in one quarter, but given what I said about the healthy backlog again up.

About 40% coming into this quarter when compared to Q1, a continuing growing funnel or you can see where we're going to end up in a pretty good place in Q2 on the Bang on business.

So on the call out and recognize that our embedded business secured a $30 million.

Order now that orders to be delivered over the course of the Oh calendar year, sorry that whole fiscal year.

And which we delivered about 20% in the first quarter. So the combination of a stronger paying one thought on some big commitments on the embedded side have a feeling pretty bullish and and I don't think this is a.

I don't think this is a one quarter phenomenon, we're really feeling pretty good about the continued growth and the execution of our especially compute the the got a long way to go but I think it's got some really good upside opportunity on the future.

Back to line dress up Brazil, especially yeah. If you look at on where we think they are going to fall into two <unk> you want to I mean, you know, we said, yes, right [laughter] will be seasonally down from Brazil, a little bit that we expect the memory business to be down you know low single digit percentage from Q1.

And on that range so.

Not a day or not a dramatic difference from we finished Q1, but down a little bit.

Okay. So the the specialty memory kind of down low single digit sequentially, and then Brazil seasonally down.

Well, yeah, a little bit Okay got it okay got it and so the.

The special team non memory business, the the growth year over year.

In November it was 121 million in November and then.

And in the end November the year ago quarter, It was 103 million.

So the growth.

Can you maybe elaborate on kind of on what you're seeing there.

But it looks like there's been some from growth in the the storage.

And Ah networking market, but any any kind of thought that kind of the broader macro trends that that's driving the year over year growth and in specialty memory on how we think about that.

In calendar throughout this year in a potentially you know post kobin recovery, just curious to see how your business could be affected positively if theres, a recovering cobot and that business from in the growth I think you've seen over the last year has really been on the DRAM 70, Ramsay performed well in a mark to market literature DT are through getting good quarter.

We continue we continue to get new design wins in Ddrthree. So the DRAM business is doing.

It's been well for specialty.

On as we get I think as we go towards the back half of this year, we expect to see the flash business pick up the platts business been impacted more by from a 19 that we're trying to get new design wins and it's been a struggle to get design wins in the COVID-19 era as our customers are not in their lab, but it's been a lot flow or process. Although starter kit. Yeah. I think you can get from.

Copper, you'll see the flash business pick up on the back half of the year for the specialty special.

Specialty memory business, and I think that will help us.

Back on your drive up our margins have talked about for that business as well. So we still the GAAP EPS is on track your other than really well, we think the flash business will start to pick up here towards the back half of this fiscal year.

And my last question on the gross margins. So the margins are are guiding up about 40 beds at the at the mid point.

On slightly higher revenue volume.

And you broke out the gross margin split it.

In this quarter so.

But putting aside Cree.

On whether that would be the kind of the margin levers to push for each of these business lines.

And how do we think about you know, Brazil, improving the margin specialty memory, improving the margins et cetera.

So I'll start with I mean, I think Brazil.

You know I presume, we went and we talked about for a while but trying to get to a more fixed price model on Brazil on the unit our value added per unit in Brazil on so I think as we get Brazil growth will get through this year you may not see the gross margins in Brazil gets that much better yeah from trying to do more you know get the gross margin on a more stable rates and fees go up and revenue.

Go up.

We will get more value add but I think our gross margin percentage was kind of stay the same so really not looking Brazil have major changes specialty we said, we thought we'd get specialty up back towards 20 other.

Yes, and we still think we can do that and that's coming based on flat on a lot of new design wins and flash as you know and also the return on smart enterprise.

Customer as you know on the flash side, we've had some weakness on the enterprise, which is really impacted our flash business, which tends to be a higher margin business, we see that coming back as well and then on the back half of the year.

Our specialty memory and then on just one on one point of clarification before I comment on specialty compute or on the margin side.

During my comments around profitability, we're not going to jump in the flash business just to be a revenue play and as Jack mentioned some of our design and.

Efforts.

Have you taken a little longer than we'd like but again the emphasis is going to be on on specialty flash storage solutions, not just commodity trading of man.

That's not a bit as I am going to allow us to get into so.

As he mentioned somebody application work, we're doing on specialty NAND storage.

Is playing out it's just a isn't at the timing that we'd like but it's still going to be we're going to be very disciplined on how we how we compete in that space I think the NAND businesses, that's going to be a lot more volatile or when compare to DRAM and we're going to be really careful there. Although we expect growth and good performance in the back on that we were just hoping on via here a little bit earlier.

On especially compute side I think I've talked about it in the areas of software services.

And effectively a as we move into a more value add type applications or that we sell into and I think that's going to be again very similar for us going forward. Your net we're going to be a lot more disciplined or as we include these as part of the deals we like to go when we're.

We're not looking for just hardware revenue.

And you know you've already started to see that the thing on was acquired at the time. They acquisition. It was like a 50% gross margin business I think in the quarter.

Where they were about 20% gross margins and I think I mentioned on last call reaffirmed today I think you know a next stop for us in the in the near term over the next quarter or two should be in the mid twentys.

And I have a lot on aspirations for a much better.

Gross margin picture on Penguin over the next three.

Three years or so, but we were on a good path there and we're going to be selected because it was in this business you want to get these customers, who really need your expertise in all those areas not just hardware and we're identifying these customers on some of these people on these vertical markets, we're talking about such as AI or.

Or a sophisticated high add on machine learning, a REIT with utilizing high performance computing and we've become a lot more important than just a hardware provider and those are the skills that we're investing in and developing and I think thats going to show up in the margin.

As we move forward.

And last question in terms of Cree, a the shift over to Taiwan in terms of production any status update there.

So on track, we're you know what I'm I don't want to say too much because it's a a good deals on closed on that's for them to comment on but.

I go just signal that we're very happy with where things are on the process and continue to be very pleased obviously with the strategic value that they're going to bring to us, but just as we get than other team better and their operating philosophy and culture.

We're very excited about then join the team.

Hi, good deal. Thank you Mark is that accurate.

[noise]. Thank you so much on line question. Our next question comes from the line of Brian Chin from Stifel. Your line is now open.

Hi, there good afternoon, happy new year, and thanks for letting us ask a few questions.

Maybe just to kind of keep the discussion back on El <unk> Air from moment.

Mark I heard the timing you can update it in terms of closing on the deal on.

I guess what are some of those you cash indications that you have that you think you'll get that a regulatory approval here over the next month or two on bank you just.

Especially given that I think probably the key.

Total you have there is in China.

Yeah I actually.

I don't think regulatory approvals, our problem and we'd actually when I shouldn't even say problem.

Just a couple of things in terms of timing around integration matters with I T systems, because remember this is a carve out.

And pre acquisition Creeley de was part of a broader corporate IP infrastructure that was not being able to be carved out you know kind of nice untidy and so I think along Paul on the 10th so to speak is going to be I cheat one of our closing conditions was a.

On a third party audit of the business again due to the carve out nature of this transaction.

It is a very important thing for us to get a clear net of opinion of the other carve out financials and that's on track, but I would tell you I don't think that we're we've gotten positive indication on the regulatory side, that's not the issue that we're dealing with the relative to the end of February target.

Got it got it okay. Thank you.

No other question in terms of.

The crane business onto.

Under the Cree the equity component business carried a good bet on fixed cost yet once you close a smart will no longer have any of that wafer and wafer fab and moved away from wafer fabrication assets. So I guess my question is sort of off the bat lets you do close how.

How much higher with the L.A. The gross margin is be consolidate on their smart. If we were excluded from the associated depreciation I think fully loaded on something like 21% gross margin in our fiscal Friday and right now when it cheaper Scott Yeah, Yeah I think.

Just from a modeling perspective I think.

It'd be safe to say somewhere on the a 400 basis points improvement now, yes on the one hand, the fixed costs go away, but on the other hand as it relates to cost of goods and they outsource model those fixed costs don't necessarily go away. This may show up in cost of goods relative to your partners or pricing.

Do you have now having said all that we think there's a lot of efficiencies and we do think there is a margin improvement opportunity with Cree and you know again I were trying to be careful until we get really on the side I understand all of the.

On a upside opportunity, but we're pretty comfortable that there's going to be some gross margin expansion on nearly to the.

Got it so just to make sure I'm clear there I think you. Originally said you could be at a year's time post close something like 200 to 400 basis points of improvement.

And that's inclusive of.

Yeah, that's the fixed cost you know, maybe it's a little bit of shifting from Insourced outsourced.

Well the net all baked that in terms of that plus other efficiency I think I've got I think thats on the rise of go to this point.

Yeah, and maybe just one last question going back to the prior targets that you had established when you announced the act with the pending acquisition.

At the time I think you said that there was some organic growth sort of dialed in there, but if you look at sort of the crane business, its 400 million plus annualized revenue at the moment.

And you know.

If you kind of net Oh, you add that to what are your revenues why last fiscal year it kind of.

And that sort of zero cash growth and clearly you know HPC, especially compute sounds like it's got a good good growth orientation to it certainly start the fiscal year I'm just wondering to what degree maybe you've reevaluate those are kind of weak as you know a little bit conservative.

Fair enough, although as I said in my prepared comments.

We're continuing to evaluate businesses that we might have been chugging, along and without a lot on upside potential or gross margin. That's not at the level, we want to kind a hit as a company or target as a company I should say and so I.

I think it's fair as we get a better understanding of what's going on inside at Cree beyond our due diligence and where we're at today.

You know.

I think theres theres a potential for that there is also potential that we if we can't get our arms around the gross margin up some of these lines of businesses that I referred to earlier.

And when they kinda exit some of those businesses I don't think it's going to be dramatic I think.

I'd say the range that we gave initially is certainly helping I'm comfortable with today and.

And or kind of towards the end of our calendar quarter calendar quarter. This year up probably give it be able to give a better update on how we see the operating model having spent more time on a inside of a three d. and obviously a valuation on the existing businesses inside of a stretch.

Got it so in terms of the revenue and that margin improvement on some of this addition by subtraction is contemplated it sounds like okay I.

I think but I think your question is a good one I am not shying away from I think I think there is a potential for that.

We're not here to comment on that now because I, just I want to get more clarity on on.

On what's underneath the hood at reality day on specific product lines and see if there is oh, either need to reinvest in those businesses and scale them more be on where they are because you got to remember they've been pretty on a.

Limited at some level on that and their ability to grow given the picks wafer capacity out of North Carolina. So you know we have a lot to learn about that business. We see on its operating today, but we want to make sure that you know we want to invest properly. We think it that we think it's a really good acquisition for us obviously and so I.

On the hedging a little bit because I want to go get those answers done and get back to you in kind of towards the end of the first quarter to be able to give you a first quarter calendar to give you a sense on.

How we kind of look at the combined entity going forward.

Okay No I appreciate the detail on thanks Mark.

Thank you.

Thank you. Our next question comes from the line of Sidney Ho from Deutsche Bank. Your line is now open.

Hi, Thanks for taking my question I wanted to follow up on the gross margin discussion earlier you talk about this gross margin improvement 200 to 400 basis points a year. After day Kelly deals close I was just hoping you could give us a sense as to how much of that improvement comes from the inclusion of that business first is coming organically.

I know Mark you talked about some of the deal profitability initiatives.

Shane, especially compute but I was hoping you can help quantify them on the one thing that I know day. So that's essentially that'd be today, it's quite a bit lower than what it was a year ago and I think last quarter you talk about someone new products is having adequate margin headwind. So just trying to get a sense as to how each day thinking.

Well, what kind of margin profile can be without the without the LCD side of things.

Sure separate again this is to your point separate from the L.E.D. discussion that we just had which I think you're just you're satisfied with on the on the organic side within sch today.

I mentioned that specialty computing area of software and services.

I mentioned some of the examples specifically with paying win I think that's inherently a meaningful up tick to on their gross margin and have a good impact on our gross margin.

On the specialty compute side.

You also have to consider that as part of that revenue stream. We have a a logistics service business that also has an impact on margin and so if you take if you separate that out Jack referred some of these new market opportunities that we're investing in.

For growth around against specialty flash not commodity flash, especially flash lower density our own controller you individual the kind of.

Ruggedized or or industrial strength type products. These products that we're aiming at for some of our newer efforts in memory do carry higher margin. So.

So I think if you think about gross margin across the stable. He already commented on Brazil being relatively flat.

I think you'll see you know working.

Organically, a gross margin up tick in an area in the area of 2% to 2.5% gross margin.

Before Cree and then.

As I said, Oh, Cree will create some margin opportunities.

On their own I think its going to combine to a pretty good story overall.

Great that's very helpful.

My follow up question is on the especially the compute soy specific obviously, you've made a number of acquisitions the past two years, but the growth hasn't been it's just not very consistent for reasons that are out of your control. So as you look forward now that you have 120 days into a job what kind of growth rate.

We expect that in aggregate can do organically and what type of seasonality do you expect going forward.

Yes, good question I think.

You're kind of hitting I hope on I.

I do think it is a growth business to be honest with you and I know you said four months into the job.

I think we have to strengthen the leadership team and we'll be doing that.

I think we have to.

Keep on investing and not just the people, but the capabilities of the company, but it'd be software.

Or integration capabilities or a service capabilities.

But I do think that I don't think this quarter is an anomaly in terms of our growth opportunity.

You know, it's investing in a and I just want to offer this to ER people on that team on the call.

This is a different business so to try to make it look like a smart modular memory business it doesn't work that way.

So what I mean by that is it's a design in business that will grow.

It's less about seasonality there is some spending.

On patterns relative to the federal business for sure, but it's less about seasonality, it's more about design in and win and delivery schedules and so.

I happen to think by the way that will get crowded out by our increasing backlog and growth opportunities and so.

But I think the business you know, it's not it's not a fulfillment model, it's not a design and model like the memory business, it's more of a.

On a point to point a customer to vendor relationship design on the sale that is a longer term sale that again per se memories from model. So.

It's a long winded way of saying I think the growth will crowd out a it's not really about seasonality as much as the the lumpiness that may exist as we as we are targeting growth in new vectors and new scale, but.

Coming from where we are coming from as you noted on your question.

On the here I see that I think you're going to see continued growth for the foreseeable future starting with Q2.

Great appreciate it thanks guys.

Thank you.

A reminder to ask the question well need to press star one on your telephone to withdraw your question press the pound key.

Our next question comes from the line of Mark the passion from.

Jeffrey Your line is now open.

Pardon me Mark Your line is now open please check your mute button.

Mark on the bases from Jefferies. Please check your mute button on your line is now open.

Operator, I think if.

If mark doesn't join here in a second we can proceed to.

Anyone left in the queue or I can start with the commentary.

At this time I'm showing no further questions I would like to turn the call back over to Mark Adams CEO for closing remarks.

Well, thank you again.

We started fiscal 21 on a strong footing as we embark on our journey to deliver profitable growth, while diversifying our business with a specialty focus.

We're doing that's true expanded strategic customer relationships that are in line with growth markets such as cloud.

And as computing I would see high performance computing enterprise storage and specialty memory solutions.

We've transformed our balance sheet for future success.

We are in the process of building out the leadership team to enable this next phase the scaling of our business.

We are focused on creating new approaches to extend the existing business models that will demonstrate our ability to deliver higher value solutions to our customers with a greater focus on software services and on demand offerings.

Included in my list of top priorities.

Is to enhance the diversity of our leadership team across the company.

In addition.

We're launching a profit surround our environmental social and governance business practices.

I will be commenting more on these upcoming calls.

In closing I'm very excited.

For our future at S.T.H. I want to thank you for your interest and support of the company. Thank you.

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