Q2 2021 Smart Global Holdings Inc Earnings Call
Thank you for its funding by and welcome to the Smart Global Holdings second quarter fiscal 'twenty to 'twenty one earnings call. At this time all participants lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session and to ask a question during day session, you'll need to press star one.
On your telephone please be advised that today's conference is being recorded.
Require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Suzanne Schmidt Investor Relations. Thank you. Please go ahead.
Thank you operator, good afternoon, and thank you for joining us on today's earnings conference call to discuss Smart Global Holdings second quarter fiscal 2021 results.
On the call with me today are Mark Adams, Chief Executive Officer.
Jack Pacheco, Chief operating officer and cash.
When was the Chief financial Officer.
This call is being webcast from our website at smart T 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 financial conferences, we will be attending.
Before we begin the call I would like to note that today's remarks and the answers to questions may include forward looking statements.
Any statement that refers to expectations projections or other 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 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-Q.
We assume no obligation to update these forward looking statements, which speak as of today. Additionally, during this call non-GAAP financial measures will be discussed.
Reconciliations to the comparable GAAP financial measures are included in today's earnings press release.
We will begin the call with CEO, Mark Adams, who will provide a business update and then Ken risky CFO will review the financials and forward guidance after which we will take questions.
Mark.
Thank you Suzanne and thanks to all of you on the call for joining us today.
We've had a very successful second quarter of our fiscal year operationally.
As well as strategically where we continue to make significant strides on our growth and diversification initiatives.
We believe we are set up for a great remainder of our fiscal year 'twenty, one and beyond.
During our last earnings call on.
Highlighting my personal philosophy that performance is driven by people purpose planning and process.
S. G. H, we are continuing to invest in these pillars to drive a new chapter for the company.
And all of our key constituents, including our employees customers suppliers and shareholders.
We made significant progress in terms of strengthening our management team. This past quarter with the addition of several key leaders.
I'm very pleased with the level of talent, we've been able to attract to the company.
Since our last earnings call, we have hired Ken <unk> as our CFO, allowing Jack to focus on the joined roles of Chief operating officer, and President of the memory solutions group.
Kieran Pellegrino as president of intelligent platform solutions group, formerly known as specialty compute and storage solutions as Youll recall theory comes to us from Dell.
Where he led their HBC and AI business.
And with the addition of free led D.
We are pleased to have clawed denby as president to lead that business.
Claude brings more than 25 years of leadership experience at companies, such as Procter and Gamble.
E L N L products.
In addition, three new leaders have joined US as of April one.
And kick on though is our new general counsel for S. G H.
And was most recently general counsel and VP of HR for Maria D. B Corporation, and before that held various senior legal management roles with cloud era and cadence design systems.
Bruce Goldberg, our formal general counsel will now take on a new role as chief of staff reporting to me focused on building, a winning culture and our overall human resource strategy.
Joining us as VP of marketing is Valerie Society, who come to us after nearly two decades at Lam research.
Valerie will be instrumental I am flying the SDH family of brands, leveraging our expertise in marketing and communications.
And lastly, gene Mcdaniel joins us as VP of the office of transformation.
Jean most recently worked at Micron, where for 25 years. She led teams focused on M&A and corporate integration.
A major step in the next chapter of becoming a growing and diversified SDH is the completion of our acquisition of Cree Leds.
Which closed at the beginning of March just after the end of our fiscal second quarter.
With Kris outstanding customer relationships industry, leading technology, new product development capabilities and strong intellectual property portfolio.
We are able to greatly expand our served addressable markets with differentiated offerings, while leveraging our foundation of operational excellence.
With the addition of free LCD, we will now organized the company into three primary lines of business.
First intelligent platform solutions, formerly called specialty compute and storage solutions.
Which consists of Penguin computing, and smart embedded and smart wireless.
Next memory solutions, which consist of smart modular technologies, comprising our specialty memory business largely operating in the U S.
And our Brazil module business.
And finally led solutions, which consists of Cree Leds.
By focusing on these three business segments, each with outstanding leadership in place.
We are even better positioned to align our people purpose planning on processes and executed on our strategy to address the tremendous market opportunities ahead of us.
At our upcoming analyst day on April 20th you'll have the opportunity to hear from many of these leaders.
As we outline our growth initiatives in more detail.
During fiscal Q2, we remain focused on our growth and diversification strategy, while achieving another strong quarter of financial results.
All key metrics came in better than expected.
Both revenue and non-GAAP gross margin for the second fiscal quarter were at the high end of guidance range provided on our last call coming in at 304 million 19, 5% respectively.
And non-GAAP earnings per share of 87 cents exceed.
We exceeded the high end of our guidance range.
Ken will cover these financials in more detail later on the call.
Let me now turn to our second quarter business performance.
Starting with our intelligent platform solutions group.
This glue, which includes Penguin computing, along with smart embedded in smart wireless had a very strong quarter.
Revenues grew approximately 30% sequentially to reach $85 $4 million or 28% of total SDH revenues.
Our performance has been driven by growth across high performance computing embedded computing edge.
Edge computing and AI solutions.
Demand continued to be fueled by key customers across vertical markets, such as cloud service providers financial services energy Federal and telecom.
Gross margin in this group also improved in the quarter and reached 29, 3% for the second fiscal quarter up from 27, 3% in the prior quarter.
The intelligent platform solutions team is making excellent progress on evolving and expanding software and services, which grew by more than 50% sequentially.
We are proud of the recognition we continue to garner as a leader in HBC and embedded computing.
One recent example was penguin being named as one of the 10 hottest new enterprise servers of 'twenty 'twenty by CRM, a top technology news and information source.
It's highly dense tundra, a P platform for HBC and AI workloads. The team is focused on a number of new platforms and solutions in the areas of edge and AI analytics.
Which are slated for introduction in the second half of fiscal year 'twenty one.
These platforms and solutions are targeted for military retail transportation and <unk> applications.
We continue to have strong momentum heading into Q3 and the remainder of this fiscal year.
Yeah.
Now turning to the memory solutions group, which encompasses specialty memory and our module business in Brazil.
Especially memory revenues totaled $115 5 million in the quarter.
Down slightly from the previous quarter as expected.
Up 4% as compared to the year ago same quarter.
As the market is showing optimism with regards to a potential COVID-19 recovery, we are seeing demand returning from industrial customers and.
In addition, we are making good progress expanding into new vertical end markets, such as Hyperscale cloud data centers and transportation.
Our N. B, then controller based memory products continue to gain traction and storage applications with customer applications, such as cyber security and surveillance solutions.
Our <unk> solution, which is open cafe based memory module is showing some early success in HBC applications.
Emerging memory and storage technology combined with growing computational demand from emerging workloads, such as AI are driving the need for high performance server designs utilizing advanced memory technologies.
In addition, we recently introduced a new high density module solution aimed at maximizing network bandwidth and reliability, which is critical for data center networking applications.
In our Brazil operations revenue totaled $103 $1 million.
And were approximately flat compared to last quarter.
On a year over year basis revenues grew approximately 6% and if we exclude the end of life of our battery business revenue was up by 12% compared with last year due to increasing memory densities in mobile and stronger unit sales in notebook related memory.
We expect to generate higher revenues in Brazil in Q3, driven by increasing the units of both mobile and notebook memory.
Additionally, we continue to invest in capabilities to build ssds in country by leveraging our manufacturing knowhow, our advanced packaging capabilities and our strategic supplier relationships.
We believe ssds will be a growth catalyst for our Brazil business in fiscal year 2022.
Now turning to Cree Leds, we are thrilled to formally welcome the <unk> team to SDH.
The acquisition closed on March one and the integration is off to a great start.
The transition from using silicon carbide to Sapphire wafers is progressing on plan as.
As well is the move to the outsourced wafer model.
Over the next 18 months, we expect to substantially complete both of these transitions.
We are excited about this manufacturing transformation to a sapphire based fabless organization.
Which we believe will drive greater agility, resiliency and create a platform accelerating technology leadership, all of which will contribute to profitable growth.
Longer term Cree Leds will focus on markets, such as high power and mid power lighting.
Specialty lighting and video screens.
Targeting key applications, where we deliver a differentiated value proposition.
Some specific examples of these applications include stadium in outdoor lighting.
Fine pitch video horticulture and architectural applications as well as applications in the invisible spectra, including <unk> and ultra Violet.
You'll hear about these plans in more from Claude at our analyst day.
And now I'd like to introduce you to Ken <unk>, our new CFO for a closer look at the financials and guidance for Q3, Ken.
Thanks, Mark first let me begin by saying how excited I am to take on the CFO role at such a pivotal time at S. G H.
I'm grateful for JAKKS continued guidance.
And look forward to working with Mark Jack and the rest of the team at S. P. H as we execute on our growth and diversification strategy.
As Mark mentioned earlier, we reported a strong quarter with all key metrics at the high end of our guidance range.
Net sales for the second fiscal quarter of 2021 or $304 million, an increase of approximately 12% year over year from the second quarter of fiscal 2020.
In addition, non-GAAP gross margin came in at 19, 5% and non-GAAP earnings per share was <unk> 87.
For the second fiscal quarter of 2021.
Our year over year revenue growth was driven primarily by high sales from our intelligent platform solutions group, formerly known as specialty compute and storage solutions, which saw a 36% year over year growth to $85 million in the second fiscal quarter of 2021 from <unk>.
$62 $9 million in the second fiscal quarter of 2020. In addition, our memory solutions group revenue, which include specialty memory, and Brazil increased by approximately 5% on a year over year basis.
Specialty memory reported revenues of approximately $116 million in the second fiscal quarter of 2021.
Which was an increase of approximately 4% year over year, while Brazil reported revenues of $103 million in the second fiscal quarter of 2021, which was an increase of approximately 6% year over year.
Our acquisition of <unk> closed on the first of March and we will begin reporting <unk> results from the third fiscal quarter of 2021.
Non-GAAP gross margins for the second fiscal quarter of 2021 was 19, 5% and flat with the second quarter of 2020.
Non-GAAP operating expenses for the second fiscal quarter of 2021 was approximately $32 1 million down from $35 6 million in the second fiscal quarter of 2020.
Operating expenses were lower and benefited from $6 $2 million in financial credits in Brazil.
This helped to offset our Brazil, R&D spending which is required to benefit from this credit.
The current law related to the specific financial credits is expected to expire in the beginning of calendar year 2022.
We plan to offset the vast majority of the expected decrease in financial credits through cost reductions, including our move to announce.
Reduced spending in Brazil, R&D, along with other cost savings programs.
In addition, we plan to modify our pricing as the supply chain adjust to the expected reduced credits.
Non-GAAP diluted earnings per share for the second fiscal quarter of 2021 was <unk> 87 per share.
Approximately 67% year over year compared to 52 per share in the second fiscal quarter of 2020.
Adjusted EBITDA for the second fiscal quarter of 2021 was $31 million or approximately 10% of sales compared to $22 3 million or approximately 8% of sales in the second fiscal quarter of 2020.
Our breakdown of net sales by end market for the second fiscal quarter were as follows.
Mobile on PC was 31%.
Network and telecom was 21%.
Servers and storage was 13% and.
In industrial defense and other was approximately 35%.
Strength from server and storage drove most of the growth on a year over year basis. Please.
Please note that for the third fiscal quarter with the addition of Cree Leds business, we will be revising these categories to more accurately reflect the new mix of our business.
As Mark mentioned earlier, beginning in the third quarter with the addition of <unk>, we will be recasting the way, we discuss our business into three main areas intelligent platform solutions, which is comprised of Penguin smart embedded and wireless businesses memory solutions.
Which is a combination of specialty memory in Brazil, and <unk> solutions.
Turning to working capital, our net accounts receivables totaled $203 $4 million compared with $212 $9 million last quarter and our day sales outstanding came in at 41 days compared with 46 days last quarter.
Inventory totaled $189 3 million at the end of the second fiscal quarter.
Paired with $147 $2 million at the end of the prior quarter as we added strategic inventory ahead of a more challenging global supply environment and as we prepare for a higher revenue ramp in our third fiscal quarter.
Inventory turns were eight three times in the second fiscal quarter versus $10 one times in the prior quarter.
And consistent with past practices.
Our accounts receivable days outstanding and inventory turnover on.
Calculated on a gross sales and cost of goods sold basis, which were $448 $1 million.
And $394 7 million, respectively for the second fiscal 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 recognize.
As net sales and the net profit on the supply chain services are transacted.
Cash and equivalents totaled $139 8 million at the end of the second fiscal quarter, which was $24 $3 million lower than the previous quarter and reflects the $44 million of share repurchases in the quarter.
Second quarter cash flow from operations totaled $20 4 million compared.
Compared with $35 $6 million in the prior quarter and was down sequentially from the first quarter, primarily due to changes in our working capital, including incremental strategic purchases of inventory on.
On a trailing 12 month basis cash flow from operations totaled $94 6 million.
For those of you tracking capex and depreciation Capex was $20 million for the quarter and depreciation was $5 4 million.
And now turning to our fiscal Q3 2021 guidance.
We believe our net sales for the third quarter of 2021 will grow to approximately $400 million to $430 million.
An increase of approximately 48% year over year at the midpoint of our guidance.
Of this amount we currently expect Cree Leds to contribute approximately $90 million to $95 million of our sales in our third fiscal quarter of 2021.
Note that due to the timing of the Cree led transaction closed in March we only have 12 weeks from Cree Leds in our third fiscal quarter of 2021, instead of a normal 13 weeks.
Our non-GAAP gross margins for the third quarter of 2021 are expected to be approximately 20% plus or minus 1%. Our non-GAAP operating expenses are expected to be in the range of $48 million to $53 million in the third quarter of 2021, an increase driven primarily.
Merely by the addition of Korea led from the beginning of our third quarter as well as additional investments to support the growth in our intelligent platform solution group on.
Also a reminder for folks that Cree Leds will have one additional week of costs for the fourth fiscal quarter as.
As compared to our third fiscal quarter.
GAAP earnings per diluted share is expected to be approximately 64, plus or minus <unk> 10.
On a non-GAAP basis, excluding share based compensation expense intangible asset amortization expense convertible debt discount and other infrequent or unusual items. We expect non-GAAP earnings per diluted share will be in the range of $1 10, plus or minus 10.
The guidance for the third fiscal quarter does not include any view on foreign exchange gains or losses and includes an income tax provision expected to be in the range of 12% to 15%.
Cash capital expenditures for the third fiscal quarter are expected to be in the range of 10 million to $12 million and include approximately $2 million.
Capital expenditures for Cree Leds.
Our GAAP diluted share count for the third quarter of 2021 is expected to be approximately 27 million shares based on our current stock price.
Our non-GAAP diluted share count for the third quarter of 2021 is expected to be approximately 26 million shares and includes the benefit of our convertible note capped calls.
Our forecast for the third fiscal quarter is based on the current environment, which contemplates constraints in the global supply chain as well as the potential impact due to the COVID-19 pandemic.
And consistent with U S. GAAP guidelines, we will finalize the purchase accounting, which requires us to fair value Cree Leds opening balance sheet.
The fair value assessment may impact areas, such as the value of property plant and equipment inventory and intangibles among other items, which should not have any impact to our operating cash flows and the adjusted EBITDA from this business.
These factors have been contemplated in our Q3 guidance we.
We will provide further details on this on our next earnings call for the third quarter of 2021.
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 in our earnings press release for further details.
Operator, please open the line to Q&A.
Thank you per center.
As a reminder to ask a question you'll need to press star one on your telephone until the day question press the pound key please standby, while we compile the Q&A roster.
Yeah.
Your first question comes from the line of Tom on mainly with Barclays. Your line is open.
Good afternoon, guys and congrats on a really nice results and welcome Ken.
I just wanted to ask on the segments heading into Q3 here I think you gave us some great color on the creek contribution but on the two other segments the memory solutions and intelligent platform solutions could you give us a little more color on where youre seeing strength because you are obviously, indicating a pretty strong guide here with the midpoint of the range being at 415.
Yes, thanks for the question.
Well, primarily we've seen strength.
Pretty bullish in the past calls on our.
With now we're calling intelligent platform solution.
Primarily driven by strength in our Penguin business as well.
Embedded space in the end markets really are around.
Hi, driven workloads.
And the cloud data center segments as well as.
Oil and gas energy.
And in our federal business between those three segments are driving a lot of the upside growth.
As mentioned in our pre recorded scripts.
That segment was up 30%.
Quarter over quarter and margins were up and we remain bullish in Q3 and Q4.
On the memory side.
We also.
We're slightly ahead of our forecast for the quarter.
In our specialty business and we're starting to see some return from our industrial customers.
Telecommunications network space.
Well as we're getting some design wins and very much at the same type of segments that I mentioned relative to the the computing environment HBC AI.
And compute intensive workloads, where memory is taking on a different role.
On the Brazil front.
We mentioned.
The.
Mobile net.
Memory is.
The density we benefited from increasing density data in Brazil.
On environment and also notebook memory unit sales are growing and so the combination of that if you excluded.
End of life of the battery business was up about 12% and so if you sum all that together all three right now of the business units are operating.
In a in a growth environment.
Great. That's helpful. I guess my follow up was around the led business. Obviously in the deck you guys put out you talked about 200 to 400 bps of margin improvement could you talk about the transition you mentioned 18 months, what's kind of the time frame for what would you kind of saw the initial transition, but could you give us a little more color on.
The gross margin profile there on how quickly can you ramp that up to the high <unk> low <unk> and could you give us just a little extra color on the timeframe that you think you can get there of.
Of course.
If you if you go back to.
Kris last reports on <unk>, which wasn't there.
December call. It was actually their September call because there was not classified as a reporting unit in December if you go back to September I believe the gross margins were roughly 22%.
And I articulated at the time of the acquisition and I reinforced on our last call that we expect over the next.
Kind of 18 months or so.
In the area of 400 to 500 basis points improvement in gross margin.
Youre going to see to start to see some of that in Q2 and I'll, let Ken discussed this on a second.
But a lot of it is dependent on.
A number of factors, including the.
The silicon carbide, the Sapphire transition.
Transition to an outsourced manufacturing partner and other efficiencies the team is driving in their manufacturing transformation.
Specific to the short term I will let Ken just talk a little bit about the gross margin.
Our outlook on the short term sure. Thanks, Mark Yeah, if we look at the gross margins for Cree in the near term as Mark had mentioned, we're probably looking at somewhere in the mid 20% range on a non-GAAP basis now the reason I say non-GAAP is that as part of the purchase price accounting we will.
To step up the inventory on day, one of Kris opening balance sheet. So that will go through the P&L that should go through in the Q3 timeframe.
But on a non-GAAP basis those margin should be.
In that 25% range, plus or minus a bit.
We will work to try to improve those over time.
Great Thanks, guys and congrats again.
Thank you.
Your next question comes from the line of Bryan Keane, we'd start with Stifel. Your line is open.
Hi, there good afternoon, welcome to the call Ken and thanks for letting us ask a few questions on there.
Okay.
Maybe first to follow up on that last question about <unk>.
Thanks again for the revenue break out and then I guess, the gross margin in the fiscal third quarter.
I'm also curious what sort of a starting point the opex.
Look like against that and how that how you can maybe lean that out over time or a certain timeframe.
Yeah. So.
Discuss Brian earlier on the call.
We're going to have a shorter week or will be one week short here in Q3 for free.
And then from Q4.
We will have the normal 13 week quarter.
So for this.
Quarter for Q3, I would expect that non-GAAP opex to be in the neighborhood of $18 million for that <unk> business.
<unk> forward, we will not break out the opex for each of the businesses, but just to give people some context.
In terms of the starting point given this is the first quarter with Cree Leds, that's what we're expecting to get in Q4 that will uptick given that theres, an additional one week for Cree led.
Okay. Thanks, that's very helpful maybe to circle back to Brazil.
For a moment.
There was a recent announcement that one of the larger handset companies LG is exiting the handset market they have a big base in Brazil, obviously.
I'm just curious are you seeing any discernible impact from that in your fiscal third quarter guidance and you know this does seem more like a temporary effect you ultimately just view this as washing out in another quarter or two as other Oems like Samsung absorb that market share.
Correct I think your assumptions are spot on.
Remember, we're the largest memory manufacturer down in Brazil, and so.
As we supply many of the largest.
On a handset makers in the country.
Whether the share shift to us from a to B to C to day, we anticipate very little impact.
And it's also any of that would be contemplated in the guidance that can provide it.
Okay.
Great.
Mark.
Maybe towards the balance sheet and maybe towards Ken accounting for that your cash after the March 1st close of the Curry acquisition can you just remind us what minimum cash on hand is needed to run the business.
If we look at the business itself the minimum cash that we need to run the business.
In that $80 million range, if you look.
On a normalized basis.
We exited Q2 with about $140 million of cash on the balance sheet, just as a reminder.
Okay, great. Thank you.
Yes.
Okay.
Your next question comes from the line of Kevin Cassidy with Rozenblit. Your line is open.
Yes, Thanks for taking my question and congratulations on the Great results and also welcome Ken could you just talk to you again Ken.
Okay.
The.
In this environment.
I see your inventories are up quarter over quarter. So it seems like it's a very good accomplishment can you talk about you know what.
You are handling the shortage is so well publicized in the long lead times and then also what.
On the visibility you are getting from your customers.
Yes, so if we look at our inventories Kevin Youre spot on.
As we looked at Q1.
Q2, we did grow inventories strategically.
In part due to constrained supply environment.
And then also we are seeing a nice uplift in demand not only Q1 to Q2.
But as you can see by our guidance into Q3, and so the supply chain team has done a great job on.
Jack and the overall team to secure that supply for those projects. We are working with our customers who are fairly large in size and have a good.
Footprint and are able to help us in terms of securing that supply, especially as we move into Q3 and Q4 of this year.
Okay, Great and maybe I was a bit surprised when he talked about the Brazil market.
You seem to be on the growth is going to come from units and we've been talking about it for a few quarters of the.
Memory content increasing per phone.
But there wasn't any mention of average selling price increases.
I was just a bit surprised that that's not a factor in part of the growth can you discuss that is that going to happen later in the year.
Sure. Kevin This is Jack how are you doing.
Yes, ASP for Q3 for Brazil price for around $20. We think we finished Q2 at around 19, something so still fairly flat. So we're still not seeing a huge growth yet.
The content on memory on the phones that we expected and part of it is the reality of weakening a little more expensive.
We would expect to see the density you start to go up a little bit more as we probably get into early next year for phones in Brazil right. Now is that the units are driving the growth in Brazil.
Yeah.
Okay, but DRAM prices going up isn't helping.
We already see margin yes.
Q3, we're just starting to see some price increase remember Brazil for Q2, we didn't see anything so asp's are up a little bit in Q3 for DRAM.
But it's still more of a unit based growth down there than it is anything from DRAM on the ASP front.
Okay, great. Thanks for clarifying that.
On a bit just one other classification.
Remember the accounting for the Brazil business is one month.
Earlier in.
In the quarter, so any of that price and that youre, implying probably wouldnt show up in Brazil.
And the Q2 numbers.
Okay.
Okay. Thank you.
Thank you.
Your next question comes from the line of Rajiv Gill with Needham <unk> Company. Your line is open.
Yes, thanks for taking my call.
Questions and congrats and welcome Ken.
Ken on the on the led business.
You indicated that for the May quarter will be about $92 5 million on you and you talked about the different timing.
How do we think about kind of a normal normalized quarterly led business.
On a going forward.
Particularly with.
Some of the piece parts of led some areas I think you've talked about you might want to exit out of some areas you might want to keep so.
So how do we think about kind of the normalized quarterly kind of run rate per lead.
Sure happy to provide a little context and color, although we will not be guiding on a long term basis for any one of our business segments, but if we look at that business for Q3 as I mentioned nine.
$90 million to $95 million in terms of the range.
And that's based on a 12 week quarter here in Q3, so our expectation as we head into Q4 as.
As we should be more closer to a $100 million $100 million normalized run rate plus or minus a bit.
And as we get into the end of Q3 and on our next earnings call, we'll provide a fuller.
Fuller guidance on the <unk> business and in terms of the in terms of both the revenue and AOI.
Look.
Okay. That's helpful.
And in terms of kind of the gross margin by by segments could.
Could you just.
The highlight again the gross margin by segment I think you said <unk>.
Telegent platform solutions of the Formula.
On the 29% gross margin.
What was the Brazil gross margin the specialty margin.
And how do we think about the gross margin drivers for those three segments, Yes sure no problem. So if we look at Brazil, Brazil in Q2.
It was about 15, 2% on a gross margin basis specialty memory was about 16, 1%.
<unk> gross margin and as you mentioned earlier, the intelligent platform solutions group at about 29, 3% in Q2 of 'twenty one.
I would give you some ranges in context on a go forward basis. So for both the specialty business, sorry, specialty memory, and Brazil, I would think those margins will be reasonably flattish plus or minus a bit Q2 to Q3 and the range I would provide.
For intelligent platform solutions would be in the mid to high 20% range now just to put into context for the intelligent platform solutions. There is a bit of lumpiness based on the services component that we can see in any given quarter, so that being moved around.
A bit that's why I gave you a broader range there.
That's really helpful. Thank.
Thank you Anne.
And Mark on if Youre looking at kind of the.
Last quarter, you talked about simple, 40% increase in backlog is driven.
Driven by oil and gas.
Cloud some of these other markets.
How do we think about the backlog.
As we go into May as we go into the back half of the summer and in the year, how does that backlog being converted over to revenue and kind of.
What's driving those.
Those end markets. Thank you.
I think it's the same drivers that I've mentioned earlier on the call on I'm happy to repeat them again.
In high performance computing.
Key segments for us today, our cloud federal.
And energy with oil and gas.
I think that's.
Not exclusive but those are the big three contributors for us in high performance computing.
In the embedded space is primarily.
Federal plus.
Transportation and telecommunications so.
For us.
On the drivers continue our backlog is actually healthier going back going into Q3.
And really the back half of the year looks very very strongly on that business.
Which is why we guided as such.
I think Ken referenced and if you didn't reference on let me just clarify debt coming off of a 30% sequential growth Q2 over Q1.
We're continuing to forecast an increase in that business in the area of high single digit low low double digits.
Off of that quarter. So we remain very confident in the back half of the year.
On the topline growth for the <unk>.
Intelligent solutions business.
Thank you.
Yeah.
Your next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open.
Great. Thanks for taking my questions and welcome Ken as well maybe start off with a key business not trying to steal any thunder from your analyst day, but Mark can you talk about your general philosophy really cheap debt basis, what are your priority Sir is that mostly the two technology transitions.
You talked about in your prepared remarks, and Covid related bad and you talk about the gross margin goal in the near term maybe little longer term, but at the at the operating margin level debt line fiscal Q3, we would be more like mid single digit range. Just based on numbers. You gave how are you thinking about debt debt operating margin might overtime.
Great question, Thank you for asking.
There's a couple of things in addition to the manufacturing transformation we've discussed.
We see improvements in demand.
C.
More of a.
More focused initiatives in the topline growth on strategic projects out 12 to 18 months.
So the team is now not limited by the manufacturing capacity.
And their captive environment in North Carolina, we have the ability to grow from a share capacity perspective and so.
I think youll see better.
Opportunities in terms of these differentiated markets with theme is driving.
In addition to the.
The go to market piece.
We see the opportunity for as I mentioned on the.
Earlier calls.
Somewhere in the area of 10, 10% to 12% operating synergies over the next 18 months and if I look at gross margin.
I would suggest that.
That's four or 500 basis points over the next 12 to 18 months also fits in well so the culmination of that I think.
Significantly better operating results than you are referring to on your question.
Okay. That's helpful. Thanks, maybe my follow up question is relates to the supply shortage that was discussed in the Q&A you talk about building strategic inventory for yourself, but are you assuming any kind of chip shortages impacting your revenue guidance in the near term.
And have you seen any changes in your customers' buying behavior in anticipation of memory.
Couple of them on pricing going on.
Yeah.
That's a good question. So I think we've contemplated that in our guidance as.
As we look at Q3.
I think the reality is there could have been or there could be some upside if we're able to get.
All of the supply that we want for specific chips in parts.
But in general we.
We are comfortable in terms of the supply we need to.
To meet our.
Our Q3 guidance and the range, we've provided I would say as well given that lead times have moved out a bit customer.
Customers are placing backlog.
Further out so we are starting to see a bit more visibility, especially as it relates to the specialty memory business.
And to some extent in Brazil.
Great. Thank you.
Thank you once again, if you'd like to ask a question. Please press star one on your telephone keypad. Your next question comes from the line of Mark He passes with Jefferies. Your line is open.
Hi, Thanks for taking my question and good to talk to you again first question on the intelligent platform.
Really nice high sequential growth and I Wonder Mark if you could just.
Sure on a little bit of this but.
I understand that this is a lot of it from software and services to what extent is that you know that.
Big jump in the sequential growth from pent up demand versus a new trajectory I appreciate youre, saying.
High single low double digits is kind of how youre thinking about it near term.
Maybe if you could just talk about share a little color on the capacity of that business I guess software.
Unlimited upside potentially but on the services side of the the products side.
How should we think about any kind of capacity constraints you might have down on.
And then we're on a follow up thank you great, yes, notwithstanding ken's commentary around.
Some of the mix.
Issues will see guiding.
On the gross margin between mid to high 20% gross margins on the software and services, implying that there was a mix sometimes because it's depending on the amount of hardware, we ship in a quarter versus how much of the software services.
We are selling in that period, notwithstanding all of that.
Yeah, we.
We see significant upside in the business and we are a little bit constrained as Ken noted relative to some of the key components.
In Q3, we will get a better handle on Q4, that's all contemplated in this guidance.
But.
These these workloads that we're working on in the different segments I've identified on the top three in HBC are.
Primarily in our cloud service providers.
In terms of our federal business.
As well as.
Our oil and gas.
<unk> represent some of our largest customer engagements and.
I tried to describe it on our last call.
Another shot here.
What happens in some of these installations.
Installations as debt.
Yes.
Again with a development platform.
That is in development to work on a specific application at a given customer and oftentimes once we get through the development phase It goes into production phase.
That represents a pretty attractive rollout opportunity for us with the customer and that is what youre starting to see in some of our larger customers are at.
Add on opportunities as well as new customer development, but add on opportunities on an increased scale. So.
The the coming off of a 30% growth in the business in.
In Q2, Q3, and Q4 still represent some upside growth from where we are today and we're pretty excited about the opportunity.
Great. That's very helpful. Thank you Martin I had a follow up for.
Ken and then and then maybe for Jack.
Then on the capacity constraints.
Can you describe the extent that debt the constraints are more on the material side or was there support services that you guys.
Look two and then a question for Jack I think Jack and you had I think previously described.
That's smart did not have a lot of exposure.
The time that you purchased raw materials from memory modules on the time, you sell them, but I believe there was some exposure I don't know if it was three years or five days or something like that could you and could you just remind us of that and then.
I guess my understanding that pricing is going higher during that time than that.
Our crews to a slight benefit to your profitability.
And if it's going lower it hurts a little bit if you could just.
Remind us.
Those dynamics and how they hit your profitability.
Ability and that's all I had thank you very much.
Sure. Let me start and then Jack will chime in here. So if we look just to be clear, we're not constrained from a capacity standpoint and.
And even as we look at our Q3 guidance in the range. We provided we feel very comfortable based on the inventory we have on hand in inventory that we will receive we can achieve.
That guidance range as of today so.
So we feel comfortable from that standpoint, as it relates to specifics around inventory on the second part of the question, maybe I'll turn it over to Jack to answer sure. Thanks, Ken So I think Brazil markets, where we have the most risk of the inventory in Brazil, we will own the inventory anywhere from four to six weeks.
We process it into either a module into a multi chip package.
When pricing starts going down we can shore that up to four weeks and now we're probably a little bit longer, but we don't see any issue in Brazil the inventories.
Sample for what we're trying to do.
Pricing is going up that will benefit us a little bit in Brazil on the specialty business. We typically don't take a risk on the inventory the inventory we have we pretty.
Pretty much a full without the price.
We need to sell it out so we really don't have a risk on it when you look at it from a specialty standpoint.
Okay.
Great. Thank you very much.
No problem.
Well there are no further questions at this time I would now like to hand, the conference over to Mark Adams, Chief Executive Officer for closing remarks.
Thank you operator, and thank you again to all of you on the call as well as to our global team at SGA for their outstanding contributions to our second quarter results.
Given the strong momentum in our business, we remain confident in our growth and diversification strategy.
As we embark on this exciting new chapter at SDH.
Thank you.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Yes.
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