Q3 2021 Smart Global Holdings Inc Earnings Call
Good day, and thank you for standing by and welcome to the S. T H <unk> third quarter fiscal 'twenty 'twenty 1 earnings call.
This time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you require any further assistance press star zero.
I'd now like to turn the conference over to your Speaker today, Suzanne Schmidt with Investor Relations. 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 third quarter fiscal 'twenty 'twenty 1 results.
On the call with me today are Mark Adams, Chief Executive Officer Jack.
Jack Pacheco, Chief operating officer.
And Ken <unk>, Chief 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 financial conferences, we will be attending.
Before we begin the call I would like to remind everyone to read the forward looking statements information that we have included in the earnings press release and the earnings call presentation.
Please note that certain of these statements made today may constitute forward looking statements.
And that these statements are our present expectations and that actual events or results may differ materially.
We will also discuss both GAAP and non-GAAP financial measures non-GAAP measures should not be considered in isolation from as a substitute for or superior to our GAAP results.
We encourage you to consider all measures when analyzing our performance.
A reconciliation of GAAP to non-GAAP measures is included in today's press release.
We will begin the call with CEO, Mark Adams, who will provide a business update and then Ken Xie CFO will review the financials and forward guidance after which we will take questions.
Mark.
Thank you Suzanne.
We hope our U S. Listeners enjoyed the fourth of July weekend, and appreciate all of you joining todays call.
We are excited to present, our fiscal third quarter results and share with you our outlook for the fourth fiscal quarter.
Business execution was strong across all of our companies as our financial results exceeded expectations.
We achieved record quarterly revenues of approximately $438 million.
We improved non-GAAP gross margins to approximately 22% up from $19.5 per cent in Q2.
And we generated $1.39, and non-GAAP earnings per share for the quarter compared to 87 cents per share last quarter.
Our team remains focused on the execution of our growth and diversification strategy.
And our first full quarter with Cree Leds as part of S. G H.
We are reporting a more diversified revenue mix.
Memory solutions, which includes specialty memory, and Brazil accounted for 55% of total revenues.
Within memory solutions specialty memory was 28% of total S. G H revenues.
And Brazil was 27% of total SDH revenues.
Leds solutions came in at 23% of total revenues.
And intelligent platform solutions or Ips was 22% of revenues in Q3.
Let me now cover some highlights for each of our businesses.
Yeah.
Our Ips group turned in another strong quarter with revenue of approximately $96 million, which was 12% higher than last quarter in line with our expectations for double digit growth and 57% higher than the same quarter a year ago.
These results reflect growth across our key focus areas of core edge and cloud.
For reference I P. S includes Penguin computing.
And Penguin edge, which is our new brand comprising the former smart embedded and smart wireless businesses.
Gross margin percentage was down sequentially due to a larger mix of hardware sales in the quarter.
On prior earnings calls, we have discussed the potential variability of Ips gross margin percentages due to software and services movement quarter to quarter.
That said the Ips team is making very good progress on expanding software and services, which represents 20% of Penguin computing revenue on a year to date basis up from low teens in the prior year to date period.
Our Penguin computing team has a robust solutions roadmap focused on core data center edge and cloud offerings.
Targeting customer requirements in the AI high performance data analytics and traditional H B C workloads.
We have a number of new platforms and solutions planned for introduction in the second half of calendar year, 'twenty, 1, including Penguin computing origin AI.
And AI platform targeting customer needs at the core data center for at scale training and inference.
Additionally, Penguin edge released the PCI E 80, 130 <unk>.
Which is a high performance server add on card use to accelerate and facilitate voice over 5 G and L. T E.
<unk> continues to focus on growing Penguins cloud based solutions business.
As evidenced by expanding engagements with existing and new customers and the financial oil and gas and federal sectors.
We will continue to scale, our investments and paying rent on demand or pod and government pod cloud based solutions to capitalize on future on demand opportunities, which have the potential to drive reoccurring revenues for Ips.
We are excited about the recent performance of Ips and continue to strengthen our new business funnel to drive future growth potential in Q4 and beyond.
Now turning to the memory solutions group, which encompasses specialty memory and our operations in Brazil.
Revenue grew by over 10% sequentially to reach $240 million in Q3, and by 9% year over year on the same quarter.
Gross margin expanded 240 basis points sequentially to $18.1 per cent in the quarter, largely due to improved pricing and mix.
Our specialty memory business executed well in a challenging supply environment.
Beyond our core business with traditional customers in telecom networking and the enterprise, we are gaining traction and more data intensive applications, where new standards such as open cappy are helping to drive performance improvements.
Opened Cathy is an open interface architecture standard, which supports very low latency and high bandwidth memory.
We are seeing our DRAM opened Kathy models moving into production for compute intensive applications and expect to ramp this business as we move into fiscal year 'twenty 2.
Backlog for our flash product portfolio grew nicely in the quarter, and we anticipate strong quarter over quarter revenue performance in Q4.
We are expanding our product development focus for customers across new end markets to meet their application specific needs.
We are in early production of many and very low power did modules for use in cyber security applications.
And custom SSD products used in surveillance as well as the transportation sector.
Each of these areas represents new segment opportunities for specialty memory.
Our strong results in Brazil were due primarily to increasing unit demand and PC notebook and server, which grew 26% from the previous quarter.
Demand for mobile memory remains stable, while asps increased slightly when compared to Q2 asp's.
Additionally, our plans to build ssds and country remain on track and we are optimistic about this new catalyst for growth in revenues during our next fiscal year.
Okay.
Now turning to Cree, Leds, which exceeded expectations recording revenue of $102 million versus the guide of $90 million to $95 million.
Non-GAAP gross margins were almost 30% well ahead of guidance despite operating in a supply constrained environment, a testament to the team's focus and ability to execute.
The manufacturing transformation that Claude outlined during our recent analyst day is progressing well.
With the transition from Silicon carbide to Sapphire wafers, and the migration to a fab light model with our key strategic partners driving our operating performance.
The <unk> team continued to drive technology leadership across their product portfolio.
For example, free Leds flagship outdoor lighting led product the X lamp X P. G..3 S line is 1 of the brightest and most reliable Leds available in its class.
This product line is optimized for directional high lumen lighting applications, where efficacy and optical control are critical.
Demand across Cree Leds targeted end market segments continues to improve.
We saw new customer wins in general lighting specialty lighting video and horticulture lighting.
We remain confident in the team's ability to deliver strong results.
And couldn't be more excited to have the Cree team on board.
Fully engaged in driving growth and profitability as part of S. G H.
Let me stop here and hand, the call over to Ken for a detailed look at our Q3 financials and Q4 forecast Ken.
Thanks, Mark at our Analyst day in April we outlined our strategy to continue to grow and diversify our business.
The third fiscal quarter of 2021 demonstrates how our strategy is playing out with strong performance across all of our businesses intelligent platform solutions memory solutions in OLED solutions.
As Mark mentioned earlier, we reported a strong quarter with all key metrics above our guidance range net sales for the third fiscal quarter of 2021 or approximately $438 million, an increase of 56% year over year.
<unk> from the third fiscal quarter of 2020 and 44% sequentially.
A record result for the company.
In addition, non-GAAP gross margin came in at 21, 9% and non-GAAP diluted earnings per share was $1.39.
For the third fiscal quarter of 2021.
Both above our guidance range.
Now turning to highlights from our non-GAAP income statement.
On a year over year basis total S. G. H revenues grew by approximately 56%. This growth was driven primarily by the incorporation of Cree Leds into S. G H.
We added approximately $102 million of sales in our third fiscal quarter.
Excluding Cree Leds, our revenues grew by approximately 19% on a year over year basis, mainly driven by Ips, which grew by approximately 57 per cent and memory solutions, which grew by approximately 9%.
For the third fiscal quarter, Ips and revenues on a quarterly basis of approximately $96 million a record for that business.
Our memory solutions group had revenues of approximately $240 million in the third fiscal quarter of 2021.
Within the memory solutions group specialty memory reported revenues of approximately $122 million in the third fiscal quarter, while Brazil reported revenues of $118 million.
Gross margin for the third fiscal quarter of 2021 was 21, 9% up from the 19, 5% in the prior quarter and up from 19, 9% in the third fiscal quarter of 2020 and helped by the performance of the law.
D solutions group.
Gross margin for Ips was $23.1 per cent.
In the third fiscal quarter of 'twenty 'twenty 1.
Down from the same period in the prior year, primarily due to a higher mix of hardware sales.
As we have discussed previously we expect some quarter to quarter variability in gross margin for Ips based on the timing of solutions and services revenue.
We are expecting however to see an uptick in gross margin for Ips in the fourth fiscal quarter of 'twenty 'twenty 1.
Gross margin for our memory solutions group was 18, 1% up approximately 240 basis points from the second fiscal quarter and relatively flat with a year over year period.
Gross margin for Leds solutions was 29, 6% in the third fiscal quarter.
Operating expenses for the third fiscal quarter of 2021, or approximately $52.4 million up from the $35.5 million in the third fiscal quarter of 'twenty 'twenty.
Operating expenses were up primarily due to the inclusion of Leds solutions.
<unk> investments in Ips.
As well as increased bonus in the third fiscal quarter of 2021.
In addition, operating expenses benefited from approximately $8.2 million in financial credits in Brazil.
This helped to offset our Brazil, R&D spending which is required to benefit from this credit.
As discussed during our last earnings call. The current law relating to these specific financial credits is expected to expire in the beginning of calendar year 'twenty 'twenty 2.
Non-GAAP diluted earnings per share for the third fiscal quarter of 2021 was 1 dollar and 39 cents per share compared with 87 cents per share in the second fiscal quarter and almost double from 70 cents per share in the third fiscal quarter of 2020.
<unk>.
Adjusted EBITDA for the third fiscal quarter of 2021 was $51.4 million or approximately 12% of sales compared to $25.4 million from approximately 9% of sales in the third fiscal quarter of 2020.
Our breakdown of net sales by end market for the third fiscal quarter of 2021 was as follows.
Mobile and PC was 24% net.
At work and telecom 15 per cent.
Server and storage 12 per cent.
Advanced lighting, 23%.
And industrial defense and other 26 per cent.
Turning to working capital, our net accounts receivable totaled $274.9 million compared with $203.4 million last quarter.
The increase was largely driven by the addition of Leds solutions.
<unk> sales outstanding came in at 39 days compared with 41 days last quarter.
Inventory totaled $289 million at the end of the third fiscal quarter compared with $189.3 million at the end of the prior quarter driven by the addition of Leds solutions as well as strategic inventory build during the quarter.
In preparation for a higher revenue ramp in our fourth fiscal quarter.
Inventory turns were 7.7 times in the third fiscal quarter versus $8.3 times in the prior quarter.
Consistent with past practices accounts receivables days outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $643.3 million and $558.8 million respectively.
For the third 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 the net profit on a supply chain services transaction.
Cash and equivalents totaled $189 million at the end of the third fiscal quarter, which.
Which was $49.2 million higher than the previous quarter.
Third quarter cash flow from operations totaled $49.3 million compared with $24 million in the prior quarter and was up sequentially from the second quarter, primarily due to the inclusion of Leds solutions.
On a trailing 12 month basis cash flow from operations totaled $133 million.
For those of you tracking capex and depreciation Capex was $5.2 million for the quarter and depreciation was $9.1 million.
And now turning to our fiscal fourth quarter 'twenty 'twenty 1 guidance we.
We expect our net sales for the fourth quarter of 2021 will range from approximately $440 million to $480 million, an increase of approximately 55% year over year at the midpoint of our guidance.
Our GAAP and non-GAAP gross margin for the fourth quarter of 'twenty 'twenty, 1 is expected to be approximately 22% to 24%.
Our non-GAAP operating expenses are expected to be in the range of $55 million to $60 million in the fourth quarter of 2021.
The sequential increase is in line with our comments from the last earnings call.
And driven primarily by Cree Leds, having an additional week of expenses in the fourth fiscal quarter versus the third fiscal quarter.
As well as additional investments to support the growth in our intelligent platform solutions group.
GAAP earnings per diluted share is expected to be approximately 95 cents plus or minus <unk> 15 cents.
On a non-GAAP basis, excluding share based compensation expense.
Angela will asset amortization expense and convertible debt discount we expect non-GAAP earnings per diluted share will be in the range of 1 dollar in 60 cents.
Plus or -15 cents.
Cash capital expenditures for the fourth fiscal quarter are expected to be in the range of $10 million to $12 million.
Our GAAP diluted share count for the fourth quarter of fiscal 2020..1 is expected to be approximately 27 million shares based on our current stock price.
Our non-GAAP diluted share count for the fourth quarter of fiscal 'twenty 'twenty..1 is expected to be approximately 26 million shares as it includes the benefit of our convertible note capped calls.
Our forecast for the fourth fiscal quarter is based on the current environment, which contemplates the constraints in the global supply chain.
Please refer to our non-GAAP financial information section and the reconciliation of non-GAAP financial measures to GAAP results and a reconciliation of GAAP net income to adjusted EBITDA tables in our earnings press release for further details.
With that let me turn the call back to Mark for some concluding comments before we open the call to questions Mark.
Thanks, Ken.
Before opening the call for Q&A I would like to end my prepared remarks with a few additional comments.
First I'd like to acknowledge that we are making good progress on our environmental sustainability and corporate governance or ESG disclosures, and we will be providing updates in the coming quarters.
Secondly.
I want to recognize all of our factory workers around the globe, who have done a fantastic job of keeping our sites operating at a high level of performance, while maintaining a safe and healthy environment.
Our operating teams at Cree, Leds smart modular and Penguin.
From an extremely well during these uncertain times.
So during the Covid pandemic situation and broad electronics supply shortages.
With new Covid outbreaks in Brazil, and Asia, we are continuing to maintain strict employee safety measures and have not had any major operational issues in our facilities to date.
As outlined during our analyst day back in April.
Our key strategic objectives are to drive shareholder value by growing our business, both organically and Inorganically.
When you couple the outstanding results from free L. A D with the growth in Penguin computing and strong operating performance that smart modular.
I hope you see evidence of this strategy playing out.
While we are proud of our third quarter results, we feel we've got a tremendous opportunity for growth in the future.
Operator, we are now ready to take questions.
Alright, so as a reminder to ask a question you will need to press star 1 on your telephone tours. All your question grasp on key again that is star 1 on your telephone please standby what we composite Q&A roster.
We do have a question from Tom O'malley from Barclays. Your non alive.
Good afternoon, and thanks for taking my question and congrats on the nice results. My first question was on the led business, obviously, a really strong contribution in the quarter. When you guys. First did the deal you kind of laid out 350 to 400 million of contributions in the run rate in the quarter was even a little bit ahead of that can you talk about what happened during the quarter to kind of get you outside of that run rate and you kind of see that higher run rate.
<unk> on the near future.
Yeah, Tom This is mark.
Yeah, I think we're pleased with the demand profile on the business and the broader Leds sector and certainly the markets we play in.
I think that what's lost on the led the industry a little bit as they've been.
In a downturn from the last 2 or 3 years.
There has been some some good signals positive signals on the demand side of the house and of course.
On the operations team at <unk> did a great job in reacting accordingly.
And we think there we think that there's potential that we're catching this thing on a drop and there is some upside growth as we predicted at the analyst day or forecasts at the analyst day.
Mid single digit growth for a 5 per cent.
And like I said, we are investing in this business, we want to grow it we didn't just buy the harvest it.
Initially we were looking at that kind of a thought.
About 9 months ago, right now back in October or so or 6 months ago I should say.
We were looking at.
That was kind of traditionally doing about $100 per quarter.
But the market is starting to turn on but more favorable on the demand as it goes on where we're kind of bullish on the on the opportunity to grow from here.
Great. That's helpful. And then in your prepared remarks, you talked about going into August and seeing I think your particular comment with specialty memory will be strong quarter over quarter. Obviously, you have a big sequential increase in revenue can you talk through some of the moving parts, what's really driving this increase outside of the specialty memory day to point you gave us already.
Are you, meaning from a tech business or just in terms of memory for for the whole for the whole business into August.
Well I think that.
On.
Bradley demand across the sectors are doing very well driven.
Driven by different dynamics, when you look at Ips and <unk>.
Computing and bandwidth edge.
Things like edge computing, and Iot are certainly catalysts on the front on the business but.
And the back end, where Penguin computing.
Offering strong growth, that's driven primarily by our AI initiatives.
Many of our customers on some of them are on early stage development on some of them are actually rolling this out.
But the dynamics on the H B C sector around.
AI is very strong.
And traditional kind of a workload optimization workload efficiency are many application sectors around HCC are continuing to be strong. So we're on the Ips platform primarily penguin.
Hang on being driven by AI and workload performance management on the.
Memory side.
As you can see by the broader indicators.
High performance compute.
In memory computing.
Storage enterprise storage, just a number of different trends that are driving for higher memory consumption.
Both on the cloud and data center and Hyperscale.
We're starting to see new market opportunities in that way.
And so you couple that with pretty good.
Economic situation notwithstanding the COVID-19.
Implications to Brazil, but the economic indicators in Brazil, largely favorable GDP is good inflations are generally in hand unemployment.
Pretty pretty standard.
Range that normally operates.
So for a net.
Currency is pretty strong so Brazil economic indicators are good and so servers in it spending in Brazil are positive.
So you've got that coupled with new memory applications and especially business.
So you've got Ips and memory and then of course as I mentioned to your first question is the <unk> business.
Just demand across our sectors is relatively robust and I think thats a phenomenon thats kind of over the last 9 months or so that we've seen strength in and we think Theres more road from here.
Great Congrats again guys.
Yes.
Next 1 on the Q, we do have Brian Chin from Stifel you were in our lives.
Hi, there good afternoon, congratulations on the results and thanks for letting us ask a few questions.
Maybe first on gross margin is very good sequential improvement clearly.
Are the improvements here in memory, but particularly in early D sustainable or is this a little bit above trend line based on the current progress youre, making on outsourcing.
And the conversion of Sapphire wafers.
Well I think.
There's improvement in front of us are still I think debt.
We would kind of suggest that we are.
Getting some momentum here from the demand picture I just painted in addition, some operating efficiencies that we're getting across all of our businesses.
With the exception as Ken called out on his comments relative to in quarter Ips gross margin.
We're down a little bit.
Due to mix, but I'll be speaking.
Mix was favorable operating efficiency and transformation of Cree.
It's been successful in terms of where we were a plan on.
And so if you combine that with again mix mix and pricing benefits.
As shown on the strength, we think there was improvement from here, but we think it's.
More incremental than we just experienced in Q3, and so I'll, let Ken talk to that in a second.
And then on the memory side.
Good margin, but I think our biggest opportunities in net and memory are in these new market opportunities that have been in development for some time and they are starting to get traction.
We think memory margins from here can prove as well primarily in especially we think Brazil is more of a kind.
Kind of a flattish to slightly up.
Improvement from here, but broadly.
Broadly speaking, we think memory can improve like you can improve and we were pretty confident on the Ips side that it will improve.
From Q3, just given we were.
We're forecasting a better mix.
<unk> services on a go forward basis, what got any comment.
Hey, Bryan Thanks for thanks for the question. So if we look at the Q3 margin profile on a non-GAAP basis, if you recall.
We guided from 19 up to 21%. So we did exceed that that was driven by a couple of factors 1 of which is the performance of Leds solutions on Cree Leds.
Which had a very good margins on a non-GAAP basis, 29.6%, so higher than what we were expecting that helped drive that.
That outperformance as we look into Q4.
We're seeing some nice trends overall.
So Marc highlighted some of those trends.
Within those 3 segments memory solutions, Ips and free L. A D that.
That should drive us to that range of 22% to 24%.
Gross margins overall would also like to just highlight 1 on 1 item as we move from Q3.
Into Q4.
Within our memory solutions group, we have a logistics business, where historically, we've taken revenue on a net basis. There. There was there is 1 customer. However that we are migrating or we have migrated now from a gross basis to a net basis.
This has the effect of a couple of fold.
So 1 as.
As we look at Q. This is already baked into our guidance.
If you look on an apples to apples basis.
Q4 versus how vs Q3, our revenues would be at midpoint of guidance closer to 490 million. If we took that customer on a gross basis, but we've now moved that customer to a net basis.
And that's embedded in our guidance range of $440 million to $480 million.
The other piece that does.
Flow through the P&L is the fact that on a gross margin basis by taking that 1 particular customer on a net basis.
The margins do improve a bit and that's why we feel fairly comfortable with the 22% to 24% non-GAAP guidance for Q4.
Oh, Okay got it so if I heard you correctly, it's sort of like a $30 million at the midpoint midpoint benefit benefit I guess.
Reduction in the fiscal <unk> revenue can you quantify what the margin impact was on associated.
Associated with that yes. It is a balance in that 70 to 100 basis points benefit as we move.
Into Q4 from Q3.
Okay. Okay I appreciate that.
Just a couple more questions, but that's going to Ips.
On data, where you're coming up with your tracking a strong growth year here in fiscal 'twenty 1 for.
Mark curious you think the Ips business can sustain double digit growth coming off such a strong year in your fiscal 'twenty 2.
With that or are you already building any any sort of meaningful backlog that's shippable.
Super Bowl in the next fiscal year.
Yes.
You know, what I'll comment and aligned on what we outlined at the analyst day. So we sit on a longer term basis. We believe we can sustain a double digit type of CAGR for that business.
Any given year, we're not we're not providing guidance for 2022, but we do have good backlog as we head into Q1, obviously, we'll have to see what the global economy looks like in 2022, but that business continues to have good momentum, if we looked on a quarter to quarter basis or year.
Over year basis.
Strong momentum, especially on the commercial side of that business.
Okay, Great and real last quick 1 on just on cash flow really good operating and free cash flow generation in the quarter I guess at the higher expected revenue levels in fiscal <unk> do you think the free cash kind of around similar levels.
Yes, I would expect as we look at the free cash or you can look at an EBITDA, maybe as a proxy EBITDA -2 minus Capex, we would expect equivalent type of free cash flows are slightly higher based on the guidance Q4 to Q3.
Thank you.
Thank you.
Next 1 on acute is Sidney Ho from Deutsche Bank your in our lives.
Great. Thanks for taking my questions and congrats on the solid results on a.
A couple of questions on the memory side last quarter, you said mobile units in Brazil was not a source of upside and notebook SSD should benefit in fiscal 'twenty..2 are you starting to see in a celebration of these drivers now that it seems like retail sales on breathing Covid Covid cases are declining and are you seeing it sounds like youre, saying its a little bit on E. S. P. S.
Well my follow up to that is I guess related to the specialty memory you talk about good progress on data centers and some recovery in industrial last quarter curious how much of that business would you say is tied to the traditional ikea and a price spending which I would think it's also starting to become powerful I have a follow up question on that thanks.
Well I'll start and let Jeff jump in I think to your second question first.
Definitely starting to see the traditional customer base.
Increased demand.
Of course as you know there is a.
Memory is 1 of the categories I think are probably on tight supply relative to the broader supply conditions, but.
The demand profile that we're seeing is pretty strong in terms of our core customers.
As well as some of the new markets that we highlighted.
These would be Brazil in your commentary there.
Talking about ssds in Brazil in fact that there is.
Our growth dynamic going on in the category. It's a much more earlier stage of penetration in terms of the notebook and desktop and server world.
Brazil, where we're at.
Really focused on is in country manufacturing to take advantage of the infrastructure, we have there less leverage on our capital.
Place.
To drive the benefits of the incentive system to Dubai and on board points too.
D purchases, where we think we can drive growth in the category as the largest memory player in Brazil exactly on commentary you have around that.
Question, Yes, I mean in Brazil, I think the city the real growth from Brazil, right. Now is really units up on the PC notebook server area for Brazil mobile has been fairly flat quarter to quarter. So we're seeing growth on that part of the business down in Brazil on Isps.
Went up a little bit, but that's more of a unit growth driving Brazil in that area.
Okay. That's helpful. Maybe as my follow up question is on the supply chain can you mentioned your guidance contemplate at some supply constraints in there can you give us a little more color, which businesses will likely be more impacted how are you thinking about the impact of these new lockdowns in Asia that may have on your memory on intelligent platform.
Solutions I think those are the 2 things that manufactured there is that more relates to availability of parts are always more COVID-19 related gross margin headwind that you're thinking about thanks.
So then let me just make a comment before Ken contributor.
The nice part about it.
The businesses, we're in it's obviously, an essential business, our Malaysia, and Brazil operations have been up and running we're being very careful obviously, but there.
Running at the capacity, we need and a lot of our manufacturing assets as you know on here based on the U S. So from an operational standpoint.
We're not being hit so much as it relates to being able to produce and supply.
I'll, let Ken on the second part of the question sure.
So if we look at our inventory and we talked a little bit about this on the previous earnings call. The inventory did go up this quarter for really 2 reasons for 3 reasons..1 we included Cree Leds.
So that was a large portion of the increase from Q2 to Q3.
And then the second factor, which we talked about on the last call was the fact that if we were able to find inventory to secure parts for our revenue not only in Q3, but Q4 and into Q1, we were going to take that opportunity.
<unk>.
To secure that inventory so as it relates to our businesses the areas.
That we saw growth excluding the Cree Act.
Acquisition and the incremental inventory for that was primarily around our memory business and that constituted.
Probably 2 thirds of the increase excluding Cree.
In terms of the growth quarter to quarter in our inventory and that was just to secure supply as we look at both the Brazil and specialty businesses.
Great. Thank you.
Next 1 on on the line is Rajiv Gill from Needham and company your non alive.
Yes, Thank you and congrats on great momentum across the board very impressive.
Mark I was wondering if you could talk a little bit about the growth youre seeing in some of these end markets. If you when you breakdown mobile networking server storage.
It looks like the server and storage business.
More than doubled year over year in terms of growth.
And then Youre seeing.
Strong growth in industrial and defense.
And at the same time mobile mobile Pcs continues to grow but I'm wondering if you could maybe comment on server and storage and industrial because those seem to be kind of the outliers on on end market basis.
Sure.
Really when you think about it if you break up server and storage, which only from a perspective of what.
What's the catalyst of each obviously, there's an integration of those 2 lots for Dennis.
Growth, but.
On the storage growth just the amount of data being.
Stored and generated.
Is staggering and continues to be a kind.
Something Thats got forecasting.
Water sector growth and this is true for SSD.
Ssds as well as even if you look at the hard drive members and what he likes of Seagate and western digital or forecasting.
Explosion and the market is just validated and we think it continues on the storage piece on the server piece.
In terms of the Hyperscale and cloud businesses as well as.
You know as computing and the.
On a go.
Core to edge architecture.
Both those markets both in terms of the applications as well as the investments in <unk>.
<unk> enterprise networks.
Our leading to a pretty high number high growth numbers there in the content.
Those systems is relatively strong.
Beyond that beyond just the kind of the enterprise architecture of the benefits of a cloud implementation of our Hyperscale model with with core to edge. You also have these catalyst of data analytics and AI and machine learning just just a lot of investments at the enterprise corporate level as well.
The federal sector driving Kai. This is just kind of combine demand profile that leads to pretty good growth in both the server and storage space as you acknowledged.
And just another question on on the revenue growth if you look at the.
On the Ips business.
It grew 57% year over year off a very tough compare in may of 2020, which grew that business grew 70% year over year.
And so.
Pretty pretty strong growth on tough compares.
Wondering maybe if you could characterize what specifically youre seeing in terms of customer trends.
And also could you talk about the change the shift in the business model that you've that you've developed to focus more on services how has that helped.
That business is progressing forward.
Sure.
The catalyst really is it's really kind of the answer I. Just gave you because we are in that business, we're selling kind of compute capabilities and we're also selling solutions around that platform as well as storage and so.
Data analytics workflow.
Optimization application provisioning, just all the traditional SPC platform capabilities as well as custom design.
Applications, It's all day.
Favorable I think the more important thing that we're starting to see an increase in is is what you said relative to services and our role.
When you think of what the larger enterprises are investing in in terms of capabilities, they're looking for a partner like Penguin to be there kind of outsourced integration solutions provider and what I mean by that is as.
As far as designing systems at the hardware and operating system. The security level. They wanted on expert to come do that for them they prefer to invest their limited capital dollars on.
Kind of application layer capabilities and so what we're starting to see is things like design.
Deployment and post sale maintenance and service those are all things that quite frankly, our largest customers would prefer that we do in that dynamic I think has changed maybe slightly accelerated by COVID-19. When people didn't have the right resources to bring in all of that in house.
Prefer a hardware O S.
Layered software partner like a penguin to do that job for them and that kind of an advisory consulting way.
And from my last question, Ken Great job on the gross margin quarter and congratulations on the guide.
On the 23%.
But a question on the on the volatility in the Ips segment I know you've touched upon it.
But the the gross margin for Ips was down about 620 basis points quarter over quarter, it's going to go back up again in Q4.
How do we think about the components of mix of services and hardware how does that what is the percentage of revenue is services or hardware. How does it vary quarter by quarter is there some sort of seasonality in services and hardware quarter to quarter as we kind of try to model that segment going forward.
I Wonder if there is there is seasonality in that that overall business because we do have.
Federal related business versus commercial and federal.
<unk> does.
We have some incremental sales as we as we head into our fiscal Q1 typically.
But when you think about software and services for that business.
There's longer term software and services like managed services, but there are also.
Services as we install.
These large systems.
Into our customers and that's where there can be some lumpiness.
Quarter to quarter. So as we looked at Q3 I would say more hardware oriented sales in Q3 as we look at Q4, there is going to be some incremental services. That's why we highlighted we would expect.
That the margins for Ips would uptick.
Q3 to Q4.
Because there will be some installation related services for those systems.
Overall on a long term basis.
We highlighted that that business can be in that 25% plus or minus.
But longer term at the analyst day, we're looking to drive that business towards 30%.
30% plus on a long term basis as we.
Add more services and software into that business.
Alright, so again if you.
Yes, if you would like to ask a question. Please press star 1.
Next 1 on NICU, we do have Kevin Cassidy from Rosenblatt Securities you were in our lives.
Hi, Thanks for taking my question and congratulations on the great results.
I'm going to ask more about the software services also just you know that's great. It's moved up it is growing faster than the group overall.
From <unk>.
Low teens to 20%, but in your funnel of sales you know.
Coming in.
Do you expect us to continue to outgrow and is this going to be.
50 per cent of the group's revenue.
Maybe just to understand how many opportunities you're looking at for this.
I think Kevin I think that there is.
There's still some growth as a percentage basis I would stop short of saying, 50% I think more of what youre going to see is the timing of these deployments and the mix is just Ken commented on but I think.
It's reasonable to think that we can get this higher than 20% maybe in the mid <unk> mid to high <unk> over the next 12 to 18 months.
Okay, and you know the debt.
Got you.
Named the products the edge products says Penguin edge or how many of the opportunities.
In the edge along with the core.
I'm not I don't know that I have the right breakdown per se by opportunities to track it like that but I would just say roughly think about the revenue mix somewhere in the.
So I think probably like 2 thirds, 1 third 30%, 70%, 70% high performance computing Penguin computing.
30% Penguin edge.
Okay, good that helps alright.
Alright, congratulations again.
Thanks, Kevin.
There are no further question on acute I'll now turn it back to the presenters.
Right well again, we'd like to thank you all for joining us on today's call. While we are very excited about the results. We announced today, we continue to be focused on our strategy and continue to focus on delivering great results in Q4.
Have a great day. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Okay.
Yeah.
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