Q4 2021 Smart Global Holdings Inc Earnings Call
Good day, and thank you for standing by welcome to the F. G H fourth quarter and full year fiscal 'twenty 'twenty. One results conference call. At this time all participant lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your.
Telephone keypad please.
Be advised that today's conference is being recorded if you require any further assistance. Please press star zero to speak with an operator I would now like to hand, the conference over to your speaker today, Suzanne Schmidt Investor Relations. Please go ahead. Thank.
Thank you operator, good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss S. G. H S fourth quarter and full year fiscal 2021 result.
Joining me on the call today are Mark Adams, Chief Executive Officer.
Jack Pacheco, Chief operating officer.
And Ken Rosy Chief Financial Officer.
We opened the webcast today with a corporate video that highlights our newly launched S. Th brand to learn more about our new identity visit S. G. H Corp dotcom.
In addition, you can find the accompanying slide presentation and earnings press release for this call on this new website we.
We encourage you to go to the site 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 the statements made today may constitute forward looking statements and that these statements are our present expectations and.
Actual events or results may differ materially.
We 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 RISC V CFO will review the financials and forward guidance.
After which we will take questions.
Mark.
Thank you Suzanne and to all of you for joining us today.
I am pleased to report that we completed fiscal 2021 with outstanding fourth quarter results.
And theyre entering fiscal 2022 with strong momentum.
In many ways fiscal 2021 was a milestone year for S. G H.
We closed the acquisition of Cree Leds and with that.
Reorganize the company into three lines of business.
Intelligent platform solutions under the Penguin brand.
Memory solutions under the smart modular brand.
In Leds solutions under the Cree led Brad.
Our three businesses share a common operating model.
And that they all deliver custom solutions that address the requirements of the niche markets. They serve leveraging core capabilities in engineering manufacturing Manny.
Managed services and quality.
I couldnt be more proud of our team.
A year of unprecedented macro challenges from the Covid pandemic.
The micro electronics supply chain constraints.
Our businesses rose to the challenge and we're able to deliver outstanding results.
Let me share a few highlights from the fourth quarter and our fiscal year 2021.
Total revenue was $6.0 billion in fiscal 2021 an increase of 34% year over year.
Non-GAAP gross margins reached 22%.
240 basis points from the prior year.
And then Q4, we recorded gross margins of 26, 4%.
We achieved a more diversified mix of business with memory solutions accounting for just 53% of Q4 revenue down.
Down from 77% in the prior year same quarter.
Each of our individual businesses achieved outstanding results from record revenues at Penguin too.
Two new customer wins, and new vertical markets that smart modular.
Two significant gross margin expansion at Cree Leds.
On the governance side in the midst of our longtime largest shareholder silverlake divesting of their ownership position.
Appointed Sandeep and they are as lead independent director on the board.
In addition, with the recent announcement of Penny Hirscher joined the S. G H Board.
We are reinforcing the company's commitment to greater independence diversity and public company Board experience.
We've also made great progress on our ESG initiatives and released our inaugural ESG report for 2020, highlighting what we've accomplished to date and our long term commitment to creating a sustainable future.
And if some of you may have noticed we've launched our new S. GH brand and website to more accurately reflect our mission of powering growth.
And expanding possibilities in everything we do.
We made great progress in the execution of our growth and diversification strategy in 2021 and believe our go forward investment thesis is compelling.
We have built an outstanding leadership team and we are well positioned across each of our lines of business by driving innovation in the specialty markets we serve.
We are pleased by the progress to date, but even more excited by the tremendous opportunities for profitable growth that lie ahead.
I will now provide some more detail of our Q4 performance from each line of business.
Starting with intelligent platform solutions group or Ips.
Which turned in another strong quarter and record revenue of approximately $98 million, 46% higher than the same quarter a year ago.
Gross margins were up sequentially due primarily to a higher mix of managed services.
As a reminder.
We previously discussed the potential variability of Ips revenues and gross margin percentages due to the timing of deployments quarter over quarter.
The Ips team continues to make progress on its managed service growth initiatives with total software and managed services revenue growing by 40% in Q4 fiscal 2021 versus Q4 of last year.
Turning to customer highlights.
We received two awards from the Department of Defense High performance computing modernization program totaling $68 million for the Navy and Air Force Supercomputing resource centers.
For both awards, we will deliver Penguin computing true H P C platform.
Plus managed services and high performance storage.
True H P. C systems, our complete solutions equipped with the most advanced processing technology, coupled with our latest memory solutions, making them ideal for H B C simulation applications in Tech research.
Our systems will be among the most powerful supercomputers and the Dod's portfolio. This win is an example of the progress we continue to make in.
And expanding our engagements with existing and new customers in the federal ultra scale financial and oil and gas sectors.
In Q4, Penguin computing released major updates to skilled cluster, where skilled cloud manager and skilled cloud workstations software solutions.
These software enhancements focus on performance scaling and security to deploy and manage complex H P. C solutions, we're seeing customer demand continue to grow with a bias towards complete solutions.
P. S is well positioned to meet this demand with our hardware and software expertise 20 years of experience in HBC and AI.
And our cloud and service offerings. We are excited about the solid performance of Ips and continue to strengthen our new business funnel to drive more growth potential going forward.
And our memory solutions group revenue grew by 7% Q4 fiscal 'twenty, one versus Q4 fiscal 2020.
To reach $247 million.
Excluding the impact due to the customer revenue reclassification from a gross to net basis that we discussed on the Q3 call.
Revenues would have been up approximately 23% from a year ago quarter on an apples to apples basis.
The team continues to make progress expanding our customer base and developing new vertical market solutions.
One such success as the work we're doing for our large Hyperscale data center customer where memory requirements are becoming more critical to overall system performance.
The specific design requirements from large data center companies play to our strengths stemming from our long history of developing highly focused engineering, driven and application specific solutions.
In this instance, we delivered a high performance accelerator card that provides memory expansion and off loads selected algorithms from any host CPU by moving the compute processing near the data.
Labeling parallel execution with very low latency.
We continue to invest in new memory based products and technology and.
In Q4, we delivered first samples of memory modules based on the new CCI X standard to a leading server manufacturer.
<unk> is an emerging standard that improved performance by Offloading certain compute functions to the memory module. The CCI X module is designed for emerging applications, such as AI and machine learning.
In our Brazil business, we successfully concluded our internal Gen. Four SSD qualification and began our gen five SSD qualification process.
In addition, we launched our high density you MCP solutions for five smartphones.
Which is our first product in Brazil, utilizing uff's interface for low power and greater storage capacity.
Now turning to our led solutions group, which had an outstanding quarter.
Revenues grew to $123 million in Q4.
Okay.
Yeah.
Okay.
Operator.
Yes.
One moment.
Why the stocks.
And when I'm going I'm going to figure that out and give me just one second please thank you.
We apologize.
Please standby.
Yeah.
Yeah.
Okay.
Operator, we're going to go ahead and continue from this point on in the <unk> section Mark go ahead.
Yeah.
Thank you for your patience.
Just started to talk to our OLED solutions group, which had an outstanding quarter.
Revenues grew to $123 million in Q4.
And what is historically a strong quarter for the led business.
Gross margins were higher in the quarter as we were able to both meet the increased demand in the specialty markets we serve.
As well as advance on the execution of our manufacturing transformation.
Moving from Silicon carbide to Sapphire wafers and from a captive manufacturing model to an outsourced capital light model.
Cree Leds technology, a portfolio as a key competitive advantage.
Our focus on the high performance in specialized portions of the led market.
Including the high and mid power General lighting segment.
Video and specialty lighting segments reinforces our market leadership position.
Yeah.
We are investing in new technology areas, where tomorrow's growth will come from.
Example of emerging trends we are following include.
Improving lumen density.
Concentrix or 34% to a record one 5 billion driven by strong performance across all of our businesses intelligent platform solutions grew by approximately 30% on a year over year basis to a record $345 million.
Memory solutions grew by approximately 9% on a year over year basis to $932 million.
In addition, our led solutions group contributed approximately $225 million in sales during our fiscal 2021.
Non-GAAP gross margin in fiscal 2021 was up approximately 240 basis points to 22, 2% from prior year non-GAAP gross margin of 19, 8% driven by our accretive led solutions acquisition and Ips.
For fiscal 2021, our non-GAAP diluted earnings per share was $5 in 'twenty two.
Up from $61.0 in fiscal 2020 and.
And adjusted EBITDA was $188 million up approximately 80% from $104 million in fiscal 2020.
Now, let me turn to our fourth quarter results.
We reported another strong quarter in the fourth quarter with all key metrics above the midpoint of our guidance range net sales for the fourth quarter were approximately $468 million.
A record for the company and an increase of 57% year over year from the fourth quarter of 2020.
And up 7% sequentially.
In addition, non-GAAP gross margin came in at a record 26, 4% and non-GAAP diluted earnings per share was a record $18.0
For the fourth quarter, both above our guidance.
Turning to our non-GAAP operating highlights.
On a year over year basis total <unk> revenues grew by approximately 57% in the fourth quarter helped by the incorporation of Korea led into SG, H, which added approximately $123 million of sales in the quarter.
Excluding Korea led our revenues grew by approximately 16% on a year over year basis, mainly driven by Ips, which grew by 46% and memory solutions, which grew by 7%.
For the fourth quarter Ips had record revenues of approximately $98 million.
A record for that business.
As we have discussed in our previous earnings calls the Ips business will continue to have quarter to quarter variability in revenues and gross margins based on the timing of hardware software and managed services in any given quarter.
Our memory solutions group had revenues of approximately $247 million in.
In the fourth quarter.
Revenues grew primarily from the continued growth of our specialty memory business.
Our led solutions group had revenues of approximately $123 million in the fourth quarter.
This growth was driven by strong overall demand for our high power products as well as the benefit of an additional week for the led business.
The 12 weeks in the third quarter.
In the fourth quarter, we were also able to replenish the channel to a more normal level.
Some of our supply constraints eased.
As we head into the first quarter of fiscal 2022, we anticipate revenues or led solutions to come down sequentially.
We continue to migrate towards a fab light structure, enabling a more flexible operational model to better manage fluctuations of demand and supply.
As discussed at our Analyst day, we continue to expect this business to grow at a mid single digit CAGR on a long term basis, but anticipate some seasonality and variability quarter to quarter.
Non-GAAP gross margin for the fourth quarter was a record 26, 4%.
From the 21, 9% in the prior quarter and up from 19, 5% in the fourth quarter of 2020.
Gross margins for <unk> were helped by stronger margin performance from the led solutions group as well as Ips, which benefited from higher margin software and managed services mix in the fourth quarter.
As we have discussed in the past our Ips business will have variability in its gross margin profile quarter to quarter based on the mix of hardware software and services revenue.
In addition in the fourth quarter, we did have a onetime benefit to gross margin within led solutions related to the sale of previously reserved parts.
Operating expenses for the fourth quarter were approximately $57 million up from $33.0 million in the fourth quarter of 2020 off.
Operating expenses were up due to the inclusion of led solutions.
Continued investments in Ips as.
As well as an increased bonus accrual in the fourth quarter of 2021.
In addition, operating expenses benefited from approximately seven 8 million in financial credits in Brazil.
This helped to offset our Brazil, R&D spending which is required to realize this credit.
As discussed during our last earnings call. The current law related to these specific financial credit is expected to expire in the beginning of calendar year 2022.
Non-GAAP diluted earnings per share for the fourth quarter of 2021 was $18.0
Per share compared with $40.0 per share in the third quarter and up 163% from 82 per share in the fourth quarter of 2020.
Adjusted EBITDA for the fourth quarter of 2021 was $84.0 million.
Or approximately 16% of sales comp.
Compared to $33 million or approximately 11% of sales in the fourth quarter of 2020.
Our breakdown of net sales by end market for the fourth fiscal quarter of 2021 was as follows.
Mobile and Pcs was 23%.
Network and telecom, 11%.
Servers and storage 12%.
AI data analytics and machine learning, 13% advanced lighting, 26% and industrial defense and other at 15%.
Now turning to working capital.
Our net accounts receivable totaled $317.0 million.
Compared with $283.0 million last quarter.
Days sales outstanding came in at 39 days flat with the last quarter on a days basis.
Inventory totaled $369.0 million at the end of the fourth quarter compared with $289 million at the end of the prior quarter.
This growth was driven by additional inventory for our memory solutions group, including our supply chain business.
There we are not the risk taker for the inventory purchase on the behalf of our customers.
In addition, we built up inventory for our Ips business in the fourth quarter to support shipments early in our fiscal first quarter of 2022.
Inventory turns were six eight times in the fourth quarter versus seven seven times in the prior quarter and 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 $743.0 million and $627 million, respectively for the fourth 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 $223 million at the end of the fourth quarter, which was $34 million higher than our previous quarter.
Fourth quarter cash flow from operations totaled $48 million compared with $52.0 million in the prior quarter.
For fiscal 2021 cash flow from operations totaled $157.0 million.
For those of you tracking capex and depreciation Capex was $53.0 million for the year and $13.0 million for the quarter.
And depreciation was nine 4 million for the quarter.
And now turning to our fiscal first quarter 2022 guidance, we expect our net sales for the first quarter of 2022 will range from approximately $440 million to $480 million.
Our GAAP gross margin for the first fiscal quarter of 2022 is expected to be between 50%.
Non-GAAP gross margin for the first quarter of 2022 is expected to be approximately 25% to 27%.
As we expect a higher mix of software and managed services related to our Ips business, which is expected to help <unk> overall gross margins for the quarter.
Our non-GAAP operating expenses are expected to be in the range of $54 million to $59 million in the first quarter of 2022.
GAAP diluted earnings per share is expected to be approximately one dollar and 20 plus.
Plus or -20.
On a non-GAAP basis, excluding share based compensation expense intangible asset amortization expense.
<unk> debt discount and other adjustments, we expect non-GAAP diluted earnings per share to be approximately $2 plus or -20.
Cash capital expenditures for the first fiscal quarter are expected to be in the range of $10 million to $12 million.
Cash capital expenditures for fiscal 2022 is expected to be approximately $60 million to $65 million and includes approximately $10 million to $15 million.
Of integration related capital expenditures for led solutions.
Our GAAP diluted share count for the first fiscal quarter of 2022 is expected to be approximately 27 million shares.
Just on our current stock price, our non-GAAP diluted share count for the first quarter of fiscal 2022 is expected to be approximately 26 million shares as it includes the benefit of our convertible note capped calls.
Our forecast for the first fiscal quarter is based on the current environment, which contemplate the constraints in the global supply chain. Please refer to the non-GAAP financial information section and the reconciliation of GAAP results to non-GAAP financial measures and the reconciliation of GAAP.
Net income to adjusted EBITDA tables in our earnings release for further details.
Now, let me turn the call back to Mark for some concluding comments before we open the call to questions Mark.
Thanks, Ken.
Prior to when I became CEO of SDH over a year ago I was aware of the long history. The company had in memory.
The specialty business as well as our Brazilian operations.
What I didn't have as much of an appreciation for until I joined was the opportunities at our computing business now called intelligent platform solutions.
When you factor in the acquisition of <unk> on top of that we.
We truly are much different company.
Today, we are literally installing one of the largest high performance computer systems in the world.
Our led technology is making the world safer, enabling lighting solutions for the emergency vehicles segment.
And our specialty memory solutions are at the core of high bandwidth networks.
Enabling access to data anywhere in the world and an incident.
There are many more examples of how <unk> is powering growth and expanding possibilities.
We set record revenues in Q3 and in Q4.
We achieved gross margins of 26% in Q4 up by almost 700 basis points compared to the same quarter a year ago.
Ultimately leading to a Q4 EPS of $18.0
Our team an SDH feels we are building something very special and couldn't be more excited about our future.
Thank you all again for joining our call.
Operator, please open the lines for Q&A.
Yeah.
Yeah.
To ask a question simply press star.
Yes.
Okay.
To ask a question simply press Star then the number one on your telephone keypad again that is star one to ask a question.
Our first question comes from Tom O'malley with Barclays. Please go ahead.
Guys. Thanks for taking my question and congrats on the nice results forgive me if I missed this with some of the the call issues here, but obviously the biggest highlight of the beat is the gross margins here could you explain where you saw that margin leverage I know you mentioned.
More services and software business and Ips and then you also mentioned leidy, but you need to see a substantial increase in one of those could you just wait.
Which segment contributed most to the gross margin outperformance this quarter.
Sure. Tom This is mark first of all before I get to that we will get to it I wanted to apologize that our third party hosting service.
Apparently had some technical problems throughout the call and thank you very much for your patience.
Sometimes these things are out of our control.
To you on the Q&A here, but I appreciate your patients relative to the margin question you just asked.
I'll, let ken get into the specifics, but it really truly was a combination I would say heavily weighted towards continued improvement and the Cree led gross margin.
Expansion as well as the mix that Ken noted in his prepared comments vis vis the managed service at Ips.
Yes, so Tom if we look at it actually across the board.
Or memory solutions.
Or Ips and.
And for led solutions margins were up as Mark highlighted the two big drivers of the margin enhancement relative to Q3 and relative to our guidance for Ips as well as better performance in led solutions.
Both having good weight in terms of that margin upside to 26, 4% on a non-GAAP basis.
And then just another moving piece in the quarter you guys mentioned that within memory solutions. The strength really came from specialty memory and logistics I think last quarter you talked about the revenue headwind. You're seeing are you are you talking about that business line ex that headwind or on a dollars basis was that the.
<unk> business for you within memory solutions any sort of color on the moving pieces within memory solutions would be really helpful.
Yes, so Tom specifically within memory solutions, you saw that business grow.
From about $240 million in Q3 to $247 million here in Q4, and when we look at that growth most of that growth was due to the specialty business now.
One thing to note that we talked about in Q3.
As of Q3 or the tail end of Q3, we've moved one customer.
From a gross basis to a net.
And so even with that we did see.
Good growth in our specialty memory business Q3 to Q4.
That's helpful and let me just sneak in one more if that's okay. You obviously.
Great.
And you were mentioning two things you're mentioning Ips ramp and also some inventory.
Inventory as well.
Kind of described some seasonality in the OLED business in Q1 can you talk about your confidence in building that inventory is that is that primarily primarily related to Ips or can you just talk about why youre. So confident in growing that into the beginning of the next fiscal year.
Sure So Tom just to clarify when we in our prepared remarks, the inventory grew.
Two reasons one as.
As you highlighted in the Ips segment.
Did grow inventory.
Essentially too.
And be able to ship orders early in our fiscal Q1 2022. So we had to have that inventory on hand.
It amounted to about half of the inventory growth.
Q3 to Q4, the other has a big portion of that was related to the overall memory solutions group and within there.
Say about two thirds of that growth was related to our supply chain business.
As we highlighted we are not the risk taker to carry that inventory on our balance sheet, but we are not the risk taker for it and so those are the two drivers you will see that inventory balance overall for the company.
Come down as we move from Q4 into Q1 and the only other comment Tom I would make.
In support of what Ken just said is that we're all aware of the <unk>.
There are certain supply chain constraints.
<unk>.
We are in growth mode in our business as we talked about top line revenue growth.
We're in growth mode in newer business opportunities and we're vigilant in how we're looking at it but we're also taking advantage of the sourcing opportunity to be able to take advantage of these opportunities across all three businesses.
Thanks, guys.
Thank you.
Yeah.
And your next question is from Brian Chin with Stifel.
Please go ahead there.
Thanks, Good afternoon.
Gratulation as on the really strong margin performance.
Excellent I will ask a few questions maybe just to stay with gross margins here, which clearly is a big positive here.
On the results and outlook.
I think it was the analyst day that long ago, where you talked about sort of mid twenties on the growth low teens on the op margin is a long term target right and maybe you meant to say year end target because we're kind of there.
Now, but you know Joe jokes aside can you sort of decompose again.
The things that are materializing.
Faster here in some of those may not be fully sustainable right and it could be.
The big positives on the mix for example.
Some of those initiatives cooley around sort of durable.
Hardware versus software on the Ips.
Yes, some of the other pruning and optimization of our product lines or businesses.
Theyre going to take place over a longer horizon. So just trying to kind of get a sense of sort of what that what that baseline should be and maybe you could also calibrate.
Ken sort of what that positive benefit to gross margins is in terms of the.
Selling of previously reserved inventory.
Well it can get to the to the treatment.
The numbers, specifically I would just say that.
Yeah, Youre humor has taken well that we did have a.
Longer term guide to get to where we are today.
Of course, we continue to look for new business opportunities that are driving and taking advantage of the capabilities. We have in the certain value add that we're trying to drive.
On a go forward basis and so.
As we think about our business.
Tremendous execution on the led side with this manufacturing transformation just.
When we bought the business back in.
The transaction closed in March of 2021, just seven months ago.
Couldnt had envisioned any better execution, Michael and his team.
In addition to that the demand environment is certainly stable and more favorable than we probably thought of as we went into the back half of the year on the Ips side, we've talked about some of the puts and takes around the deployment schedule and it doesn't always lineup to our 90 day quarter. So to speak and then as we.
Think about hardware versus managed services and software per se. It is going to do some variability into.
The gross margins.
All in all.
As we continue to focus on our specialty memory business as well.
We'd like to think that we're going to continue to drive margins in this range there will be times due to the lumpiness of this business that margins might might not be in the upper end of the range I think Ken will probably keep me honest, but I'm thinking that the range somewhere in the $47.0 in the bottom in 'twenty six plus on the top.
That's how I look at the business today now as I mentioned in my opening comments, it's about 700 basis points on the high end better than we were just 12 months ago, and so I think we're making a lot of progress our job as a management team over the next 12 to 24 to 36 months is to continue to strengthen our funnel and we are confident that strengthen our funnel to increase.
Our mix to strike that our margin.
And maintain a growth.
Direction that we're we're we're signaling today in our forecast we are very confident.
But I understand the question and we will be driving our behaviors to drive value and mix accordingly to strengthen the margins on a go forward basis, Ken Yes, and on the tactical item if you look.
On the OLED piece it helps.
Overall margins in terms of the sale of some previously reserved parts by about 50 basis points or so.
Okay got it okay, and you expect that it would be similar in the November quarter.
Well, we don't expect to sell.
Reserve part so that is part of the reason why.
When you look at our guidance at the midpoint, we're at around that 26% versus 26 or in Q4, okay.
Fair enough.
Maybe just one more on gross margin I'll, just close on growth again, but.
When did you I may have missed it but did you give the segment breakdowns by gross margins and then just to kind of stress the memory margins, there's concerns about sort of the choppy pricing in terms of DRAM.
And you sort of reemphasize a couple of times about sort of how you don't take on that risk per se, but just in terms of more choppiness on DRAM, how does that sort of flow through in terms of <unk>.
Maybe that your margin so much but yes in terms of your demand profile in terms of those engagements.
Yeah, I would say that.
Let me just take the last part and I'll hand, it over to Ken.
On the DRAM and broader memory market environments.
Yes, we have stressed.
Prior calls that.
Given the specialty nature of our business and the fact that we're not sitting on.
The capital risk.
Pure play memory semiconductor accompanying our exposures certainly.
Lighter and then address your question more specifically.
We don't see the memory business.
A byproduct of the lack of demand from our customers as a matter of fact.
We think the demand of the business.
We remained stable.
We think that our ability to provide kind of custom solutions and by the way parts that are really profitable for these memory companies. These are legacy parts or early to ramp technology products, both of which are of interest to any semiconductor company and I think our ability to add value on these.
More strategic.
<unk> technologies.
Also helps strengthen our balance in the business so.
We're not here talking about a weaker memory business today, we're actually very excited about the memory business and demand remains pretty strong.
And then to answer the first part of your question as of Q4, So Youll see this in our 10-K or Phil.
Fiscal 2021 is we've migrated.
To those three segments, we talked about at the analyst day in terms of how we're running our business. We have three presidents for each of those three segments and so we will be reporting.
Under Ips under led solutions under memory solutions and will report the revenues and you will see in our K and our Qs going forward the operating margin percent, but we will only be guiding to.
<unk> gross margins on a go forward basis.
Okay. Okay got that and then just closing on gross growth with fastest.
Commercial has been strong throughout this fiscal year and into the current you talked about the D. O D win at a good base against the current fiscal year.
With all these in mind does this give you the confidence now that fiscal 'twenty is going to be a double digit growth year for Ips or.
Is there some risk there or maybe not even so much as demand, but just in terms of that sort of inventory effect, where you kind of need to buy forward on processors. Other key components just to ensure you can ship.
Yeah, I got to tell you.
We're we're we like this business and I remember on my first earnings call just 12 months ago.
It wasn't very well understood the potential of this business in the back half of the year the team under <unk> guidance and leadership has done a fantastic job and.
As I mentioned early on in my process. The funnel has not been Super strong. We are now more and more encouraged about the go forward funnel, yes, it will be lumpy and when it's when it's going to be lumpy, we're going to tell you and guide you a proper properly but.
The potential for this business, we remain very bullish on.
We're going to stop short of giving a guidance for the year, Although I would just tell you that.
There's nothing that's happened in.
In Q4 that would change our optimism around the business.
Great. Thank you guys.
Okay. Thank you.
Yeah.
And our next question is from Kevin Cassidy with Rosenblatt Securities.
Yes, Thanks for taking my question and congratulations on the great results.
And maybe sticking with the theme on Ips.
Hey.
O D contracts, what is the timing of that $68 million was that ship all at once I think it was early it needs to be deployed by early 2022.
Yeah. So our expectations were that Kevin is that it will.
Flow in in our Q2 and Q3, our fiscal Q2 fiscal Q3 in terms of the timing.
Okay great.
And also I think there were services tied to that.
What percentage would be services or is that just the ongoing revenue stream for four years.
Yes, so in terms of the services piece that should be kind of in the neighborhood of about 10% to 15%.
And that will that will be over time, we won't give you specifics on how long but over time.
Okay.
Alright, great.
You also you also mentioned the Brazil credit.
Ending in calendar 2022 is that can you reapply for that credit or.
A little more details around that.
Sure Kevin So on that one that is actually.
The law in Brazil so.
It's nothing specific to <unk>, but it is current law that law has that credit going away in January of 2022.
So what you can expect as we get a benefit from spending R&D dollars locally in Brazil that will go away and we will have the effect of increasing our opex in.
In Q3 and Q4.
All things being the same.
Okay.
Any any gauge of how much that would be.
I would say that should be in the neighborhood I mean based on where the credits are.
Expect to be.
In Q1, I would say up to that $6 million range or so.
Look at Q3 and Q4.
Okay, great. Thanks for clearing that up thank you no problem.
Yeah.
Your next question is from Roger Gill with Needham <unk> Company.
Yes, Thank you and Echo my congratulations on the margins just sticking to the margins.
Once again Ken.
The gross margins based on the math.
And the mix of the revenue for August implies that the led business is getting to kind of early thirties gross margin and Ips is in kind of a similar range.
We know on the Leidy, there was a 50 basis point impact.
So previous inventory, but excluding that we're still kind of in this kind of early thirty's range.
And on the Ips and the quarter before was 23% that's been seen.
Seems like its early 30 this quarter very well.
Volatile.
But I wanted to get a better understanding of the baseline margins I know, you're giving kind of the two.
23%, 24% range on the low end and 26% on the high end, but that's a wide range.
So any clarity there and how to think about the <unk>.
Margins on a quarter by quarter basis four.
Particularly for Ips when is managed services is going to be light versus previous quarters.
And then secondarily, what's the baseline for led margins is there more room for expansion as we shift all of the manufacturing there too.
Yeah.
Let me take let me take that and break it into two.
On the Ips side. Unfortunately, when we're growing like we're growing rajeev, it's really tough to do.
To break down into quarters.
At the level that we're deploying these systems.
And the future growth, we are projecting that the timing of the mix and how it is going to be.
Shifting back and forth from more hardware orientation to managed services and software so.
I'm not sure we can give you any better color than we're doing today relative to Q1 per se.
Again, we think we're very bullish as I commented earlier, but.
Try to give you some color around.
Where the margin is going to spike and not spike too far out is just is something that is just really challenging for us in the <unk>.
Lumpiness of the business and quite frankly, some of our bigger competitors have the same issue and so.
We will do our best.
Intra quarter.
Quarter to two but at this point.
Just got to be really careful because again as youre seeing where we are.
We're executing.
Executing properly and we're getting everything we talked about in terms of the mix. It's just the timing issue and it helps us in some quarters and it might be.
Again at the lower end of our guidance range.
On a go forward basis. These are the led margin expansion.
We just again as I said earlier very pleased with the execution.
We're about 70% to 75% done I think the last 25% done will be in the next.
Our fiscal year, so to speak and so.
Holding things constant there is potential for improved margins, but again remember where we bought this we bought the company at 22% gross margin and 21% gross margin somewhere in that range and as we commented on it.
It's 30% and north of 30.
As we see the business today and.
No.
We're very pleased and are optimistic about the future potential for some upside but.
So both of those have resulted in what you see now is again think about this in 12 months of 700 basis points improvement Q4 over Q4.
Okay.
Sure.
Okay, great. Thank you for that information and then just on the seasonality of the business. The revenue is guided to be down sequentially.
We do have that extra week you mentioned in August.
Mentioned led being.
Being down sequentially.
Wondering about the other pieces of the business and how to think about that as we go into the November quarter.
And just sticking on the on the top line with respect to.
Memory in the past you had broken it down or provided more.
Related to specialty versus Brazil in PC, and slash mobile within Brazil wondering any any kind of color commentary on those individual segments. What are we seeing in Brazil.
What's the expectation as we kind of progressed throughout the fiscal year 'twenty, two for Brazil, and likewise, the specialty memory.
<unk>.
Got it so let me try to address a couple of the items.
Talked about so one of the things we highlighted was for Leds solutions. We had an extra we had 12 weeks in Q3 versus a normal 13 weeks in Q4. So that did help the revenue growth that we saw for led solutions Q3 to Q4 as.
As we look at Q4 to Q1.
I think you saw our guidance $64.0 at the midpoint, plus or minus $20 million, so essentially close to flat quarter on quarter.
With some moving pieces amongst the three businesses.
When you asked also I guess going to your third part of your question in terms of seasonality.
I would say that as normal.
For Q1.
And even though we have a.
Our unique environment in the world today, but we would expect that to be within the normal seasonally as we head into Q2, we talked about this on our last earnings call. We would for instance for the led business you do see it seasonally down.
Due to the fact that you have Chinese new year.
Our fiscal Q2.
And also for the memory business in Brazil, you do see some seasonal downtick Q1 to Q2, so you do see seasonality there.
The fourth part of your question if I, if I remember correctly was around some of the color and breakout.
The memory business. So as we've talked about now pulled these businesses together.
And we're looking at memory solutions overall.
Brazil being a component of the overall memory solutions business.
Less than 50% of the revenue per memory solutions in Q4.
The mix has not changed substantially.
I would say quarter to quarter, we did see within Brazil.
Better.
We see demand in Q4 versus Q3.
And that drove.
The relatively flat revenues quarter on quarter with mobile being down a bit within Brazil.
I appreciate it thank you.
Thank you.
Yes.
Your next question is from Sidney Ho with Deutsche Bank.
Thanks for taking my question I'll say I'll save you some of that gross margin questions later on but a couple of questions on the supply constraint Ken when you talked about in the guidance that is contemplating some supply constraints in the supply.
Supply chain can you give us an update on what youre seeing within your own supply chain as well as maybe your customer supply chain.
Compared to maybe what three months ago can look like.
Sure I would say in general we are still seeing constraints around specific parts of our overall solution sale. So there are still constraints.
Think like other players within the electronic supply chain, if we had.
More parts, we would be able to do.
More revenue.
But as we look at our guidance as we look at where we are or our fiscal Q1.
We have contemplated what we're seeing in the overall supply chain.
Which is specific to certain components.
There are shortages in the lead times are long, but despite that callout, our supply chain team overall, they've done a fantastic job in terms of being able to source supply and enable us to ensure that we hit the guidance.
And the numbers that we've put out there. So so as we talked about on the earnings call in the prepared prepared remarks.
Yeah, there are constraints, but we're managing through it and that is incorporated into our overall guidance.
Okay.
Helpful. Maybe you can kind of relate to that previous question one of the memory suppliers talk about supply shortages of non memory component, causing some Oems.
<unk> that memory inventory, especially in the PC market are you seeing any of that impacting your business, both in Brazil, and specialty mentally ill maybe ask differently. How do you think about memory inventory level at your customers when compared to their build plans.
I would just suggest that first of all as we've talked about in the past.
We don't have a high exposure to PC.
Our specialty business has no exposure to PC virtually none and our Brazil business does have some exposure to Pcs, albeit within a confined environment, where we are the largest supplier.
As well as mobile and ssds, so when I think about our exposure to the PC business is kind of muted relative to broader macroeconomic <unk>.
Supply conditions at our customers we have heard the same thing on the memory side, but our exposure so little of it is not material to our business.
Yeah.
Tell me if I may ask another question journey.
Hey, Ed product that you guys didn't talk about on this call, but in the past you talk about SSD products using our internally developed controller is that 40 specialty memory business or is that also for the Brazil memory business. Clearly clearly there was some margin in the equation that is using your own controller and also you talked about SSP plants kind of on.
Tracking the past curious if you can share any revenue targets for both SSD in the specialty memory in Brazil. Thanks.
Yes, I would just say that the.
On the way to think about specialty and SSB is it's very similar to every other product that we do there which is a design and custom SSD implementation again, we're not selling client ssds.
And retailer distribution thats not our business. So it's very.
Custom in nature, and our NAND overall business is think of our NAND business and SSD is about in the maybe 20% of overall specialty memory on an annual basis.
And Brazil as I've talked about in prior calls.
We're just ramping SSP SSD production in Brazil and.
We anticipate by the second half of this year will be kind of up and running and volume.
For the Brazil market and all of that will be.
PC driven at the client on the client side and so we will again have some exposure to the PC business, but we are coming from zero today and I've commented that we expect to exit our fiscal year 'twenty two somewhere in the $40 million run rate so to speak so.
We are encouraged were up and running we're doing the test as I mentioned in my script.
And so that will be coming from zero to what we believe is somewhere around a $40 million run rate in Brazil.
Today think of hour.
Our specialty SSD business and.
Specialty.
Segment to be somewhere about 20% of our overall business.
Yeah.
Great. Thank you.
Thank you.
And our final question comes from Mark <unk> with Jefferies. Please go ahead.
Hi, great. Thanks for taking my questions.
Two questions.
First one Ken I appreciate that Youre contemplating some supply chain tightness.
But I had I had a question on how that might manifest for you guys.
From a different angle and that is from your customers. So.
Imagine when the supply chain as tight you hear stories about how your customers may not be able to have full complete kits and in order to produce whatever their product is and so I imagine to you guys that might manifest in one of two ways one either they call you guys up and say Hey can you just hold.
Onto that staff.
In fact, pushing out the order until they get a complete kit or two they might take.
The the memory module from you and put it into their own inventories and so I guess my question is are you are you seeing any are you seeing any differences in order activity like push outs or are.
Is any of your own investigations, suggesting your customers might be building inventory and then maybe as a second parts of the question.
Maybe maybe Marc and Ken for both of you guys because I know you've lived through a lot of cycles. When you have this kind of tightness and disruptions in the supply chain, where do you where do your antenna go up and where do you where do your management cycles kind of get focused to make sure that.
You don't get burned you don't misread, a signal or or.
You're executing as you will you hope to thank you very much.
I appreciate it good question one thing I just wanted to kind of remind everybody of the questions that are asking around the inventory kind of imply.
Memory cycles, and certainly the broader.
Microelectronic constraints in the mix of all that.
Ken commented that some of this was actually inventory we bought for early shipment in Q1.
Relative to our Ips business so.
It's not like these are all memory products are sitting in inventory, we're actually pretty comfortable with our.
Business on the supply and demand balance that we have at <unk>.
Jack has navigated that.
Commitments from the customers. We most of these are firm commitments that we have for the inventory we are buying given the market conditions. So.
I appreciate all of the implications on are we exposed.
Our sense is we're doing pretty well on this end.
Led side very similarly feel pretty good about our inventory position there.
Some of the upside as I mentioned was for opportunistic buying to be able to serve our customers in each of these segments, specifically Ips, but also in the memory and LCD space now to your last the last second part of your question.
What should we be looking for I think you are saying the rate you're implying that what should we noticed right now you can see by our guidance, we're pretty bullish on Q1.
And we're excited about the opportunity.
And Thats reflected in what Ken shared with you for Q1 guidance now what would we be looking for certainly changing behavior pushing out of orders we've seen none of that at this point.
And again, because it's different markets, even the memory.
Industry.
Kind of a supply and demand.
Conditions in the market today, it's not across all memory products as a matter of fact I think the.
The products that are most important to our specialty business be it the legacy parts for a longstanding customer solutions as well as some of the early technologies. We're in a pretty good supply environment, there and we're able to meet our customer needs, which you can see again from our guidance. So all in all we will look forward were on it were what.
<unk> customer.
Signals, but as we sit here today, we have not seen any major shifts in demand signals from our customers and our inventory position allows us to serve as this.
Demand appropriately to drive our business results again, the ones that we forecasted for Q1.
Great color. Thank you very much.
Yeah.
So operator before we close I'd, just like to close with some comments.
First of all at our analyst day.
The theme of the analyst day was more than a memory company and today in Q4, we reported results that memory, which was roughly 77% of the business. In Q4 2020 is now down to 53%.
Furthermore, <unk>.
Operating income, which at the time Q4, 2020, just 12 months ago was roughly 85% of our operating income.
Today is slightly below 40%.
About that in 12 months, our operating income and memory is 40% slightly below 40%.
And as strong as the fiscal year 2021 was in terms of overall performance.
We're even more excited about fiscal year 2022.
We're developing and attracting outstanding talent.
We're investing in new capabilities to provide more value add for our customers.
And we are targeting growth market segments, such as AI machine learning data analytics in memory compute edge computing and advanced led lighting.
Lighting technologies.
Clearly our future at SDH is bright we couldnt be more excited.
So we thank you for your time on the call today, and we look forward to future communications.
Thank you.
Thank you again for joining US today. This does conclude today's conference call you may now disconnect.
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