Q1 2022 Smart Global Holdings Inc Earnings Call

Good afternoon, My name is Emma and I will be your conference operator today.

At this time I would like to welcome everyone to the S. G. H first quarter fiscal 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

Would like to withdraw your question again press to Starwood. Thank you Suzanne Schmidt you may begin your conference.

Thank you operator, good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss F. G. H S first quarter fiscal 2022 results.

Joining me on the call today are Mark Adams, Chief Executive Officer.

Jack Pacheco, Chief operating Officer, and Congress, the Chief Financial Officer.

You can find the accompanying slide presentation and earnings press release for this call on the Investor Relations section of our website.

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 attend.

I would also like to remind everyone to read the use of forward looking statements note 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 that 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 was the CFO will review the financials and forward guidance after which we will take questions Mark.

Thank you Suzanne.

We hope all of you had a nice holiday and I appreciate you joining us today.

We are off to a strong start to our fiscal 2022.

Let me share some of the highlights from our first quarter results.

We had record quarterly revenue.

$470 million.

Record non-GAAP gross margins of 27% and non-GAAP earnings per share of $2 16.

Which was at the upper end of our guidance range with excellent performance across all of our businesses.

Common to each of our businesses intelligent platform solutions memory solutions and the Leds solutions.

Is the focus on delivering operational excellence that leverages, our SDH operating system.

S. C. H is an engineering driven set of businesses that delivers advanced technology solutions at the system or subsystem level.

Dressing that unique or specialty requirements of our customers, helping them compete in the markets. They serve.

I continue to be extremely proud of our team's execution.

Especially in light of the unprecedented challenges stemming from operating during the Covid pandemic era midst microelectronics supply chain shortages.

I am excited to share some of the successes from each of our three businesses.

Starting with the intelligent platform solutions group, where Ips, which turned in another record quarter with revenue of approximately 119 million, 80% higher than the same quarter of last year.

And more than 20% higher compared to the prior quarter, our Q4 'twenty one.

Expanding customer engagements and ultra scale government.

Oil and gas end markets contributed to the strength in sales in Q1.

Our managed services growth initiative is progressing well with revenues almost doubling in Q1 fiscal 'twenty two as compared to Q1 fiscal 'twenty one.

Okay.

Software and services for Ips overall represented approximately.

17% of total Ips Q1 fiscal 'twenty two revenue.

What I believe is still underappreciated in the world of high performance computing is.

As the complexity of integrating a myriad of technology components, and subsystems, including Gpus and Cpus.

Advanced memory solutions enterprise storage networking systems cooling systems.

Along with software and optimizing them workloads within the data center.

There are a few companies capable of both designing and delivering complete hardware infrastructure and software based solutions, while offering best in class support services to the extent, we do at Penguin.

With AI and machine learning.

In their infancy, we.

We are well positioned to capitalize on this growing trend.

Our 20 years of experience in HBC enables us to design and manufacture best in class systems.

<unk> for our customers workloads implement the systems up <unk> systems for commercial scalable performance and maintain the system for maximum availability.

Another strategic priority for our business is enhancing capabilities to service our customers via the cloud.

At supercomputers 'twenty, one which took place this past November.

And when computing announced the launch of its Scott HBC AI cloud solution.

A man high performance secure environment that supports AI traditional HBC and containerized workflows.

We continue to invest in offerings, such as the <unk> pod HBC AI cloud solution to address our customers' future needs for them.

As a service offering in a secure environment.

The success of our unique workloads centric approach to solving our customers' HBC and AI challenges God.

<unk> increasing industry recognition.

In November.

Purion research declared the Penguin computing was the fastest growing major HBC solution provider for 2021.

This is a testament to our team and the trust our customers have placed with us to help them maximize their compute network and storage infrastructure to solve complex problems.

Now turning to Leds solutions group, which had another strong quarter of operating performance.

Revenues were $112 million in Q1, which is in line with our expectations and up substantially when compared with Q1 fiscal 2021.

When this business was still part of Cree Wolf speed.

Revenue growth was driven by customer wins with our high brightness products into the video architectural and landscape specialty lighting markets.

We continue to execute on our manufacturing transformation plan.

The transition from Silicon carbide Sapphire wafers.

And from a captive manufacturing model to an outsourced capital light model.

<unk> our cost competitiveness in the markets we serve.

On the product front team is focused on delivering innovative application optimized leds, enabling a variety of lighting designs, while achieving the best overall system value.

Recent highlight these efforts include the launch of three new products and our extreme high power product line, which deliver improved brightness and efficiency.

Securing new design wins of our CD 94, D products, which are optimized for video display markets, such as Billboard and traffic signs and.

Expanding our roadmap with exciting new products that leverage our cutting edge packaging technology addressing both the high power and test the mid power lighting spaces.

These products target high value color mixing applications, which will enable Cree led to deliver the next generation of premier lighting products for architectural horticulture medical stays lighting applications.

We believe the increased focus on innovation.

Industry, leading intellectual property and application level differentiation will result in.

An improved traction in our targeted market segments.

And our memory solutions group operating under the Smart modular brand name.

Revenues grew by 6% to $239 million in fiscal Q1 of 2022 versus the same quarter a year ago.

On an apples to apples basis revenues were actually up approximately 20% from.

From the year ago quarter, when adjusted for the impact of customer revenue recognition that we reclassified beginning in our third quarter of fiscal 2021.

Driving this strong year over year performance has been an increased sales of our core specialty solutions, such as DDR, three DVR for and flash products to our tier one networking and telecom customers.

We are also beginning to see the benefits of the investments we've made in our memory product roadmap targeting new verticals, such as data center and cloud.

One example is our open Kathy <unk> products, which are now ramping at a leading data center customer.

And on the SSD front.

We remain on plan and expect to ramp production in Brazil during Q4 of the fiscal year.

The team has also made great progress on developing solutions targeted for the upcoming DDR five transition.

We are actively engaged with several tier one customers on next generation <unk>.

They are in design of the CSL DDR five memory module or system validation to address the industry's need for additional memory in both data center and cloud applications.

We are developing the industry's first DDR five very low profile or DLP R&M for industrial security and networking applications.

These DLP modules for new DDR, five one <unk> blade computing and storage applications help customers maximize density and minimize system Board space.

We are excited about the opportunities ahead of us our memory business and feel uniquely positioned to serve the needs of our expanding customer base.

Our 30, plus years of design engineering, and manufacturing Knowhow, providing custom solutions that incorporate hardware.

Marin software as well as our expertise in controller based memory products.

Positions us for success.

Particularly as memory has taken a much more integral role in the overall compute ecosystem.

In the past I have discussed our goal of becoming a more independently governed public company.

And in mid December.

We announced that as of our upcoming annual shareholder meeting on February 11th.

Our board will be entirely independent with the exception of myself and more diversified with one third of the board comprised of female directors.

I also wanted to note. The board has approved a two for one share split.

We anticipate this being completed in our current quarter.

This is intended to further improve our liquidity and to broaden our shareholder base.

Dan will provide more detail in his commentary.

We are off to a strong start in fiscal 2022 and remain focused on operational excellence across all of our businesses.

We will continue to drive growth and diversification strive to expand margins and efficiently run the company to deliver improved financial performance and increased value for our shareholders.

At this time I'll hand, it over to Ken for a more detailed review of the financials and our guidance for next quarter.

Ken.

Thanks, Mark the first quarter of 2022 is the seventh consecutive quarter of year over year growth for SG H and demonstrates how our strategy is continuing to play out with strong performance across all three of our businesses.

Year ago close to 80% of our net sales came from memory solutions and nearly 90% of our operating income.

Today in the first quarter of 2022 memory solutions represents approximately 50% of our overall net sales and operating income.

We see tremendous opportunities ahead for <unk> in 2022 and beyond to deliver advanced technology solutions for our customers across all three of our businesses.

Let me turn to our fiscal first quarter 2022 results.

I will focus my remarks on our non-GAAP results, which are reconciled to GAAP in our earnings release tables.

We reported another strong quarter in fiscal Q1 net sales for the first quarter were 470 million another record for the company and an increase of 61% on a year over year basis from the first quarter of fiscal 2021.

And up slightly from Q4.

In addition, non-GAAP gross margin came in at a record, 27% and non-GAAP diluted earnings per share was $2 16 for the first quarter both at the higher end of our guidance ranges.

On a year over year basis S. G H revenue growth of 61%.

It was helped by the incorporation of Cree led into S. G H.

Excluding <unk>.

Our revenues grew approximately 23% on a year over year basis, mainly driven by Ips, which grew 80% and memory solutions, which grew 6%.

For the first quarter Ips had revenues of approximately 119 million another record for that business.

As we have discussed in our previous earnings call.

The Ips business will continue to have quarter to quarter variability in revenue and gross margins based on the timing of hardware.

Software and managed services in any given quarter.

Our led solutions group had revenues of $112 million in the first quarter.

This was in line with our commentary last quarter.

As we head into the second quarter of fiscal 2022.

We anticipate revenues for led solutions to come down sequentially, primarily due to seasonality in the second fiscal quarter.

We continue to migrate towards a fab light structure.

Enabling a more flexible operational model to better manage fluctuations of demand and supply.

Our memory solutions group had revenues of $239 million in the first quarter.

Revenue grew year over year from growth in both our specialty memory, and Brazil business and overall by approximately 20% when adjusted for the impact of the customer revenue reclassification from a gross to net basis that we discussed a few.

Two quarters ago.

non-GAAP gross margin for <unk> in the first quarter was a record 27%.

Up from 26, 4% in the prior quarter and up from 18, 6% in the first fiscal quarter of 2021.

Gross margins for SG, H or helped by stronger margin performance from our memory solutions group and gross margins from both LCD solutions group and Ips also remained relatively strong.

Our Ips segment continued to benefit from higher margin managed services and software mix in the first 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 managed services and software.

Operating expenses for the first quarter were approximately $57 9 million.

From $30 4 million in the first quarter of 2021.

Operating expenses were up primarily due to the inclusion of led solutions.

Continued investments in our memory solutions in Ips businesses.

In addition, <unk>.

Operating expenses benefited in the first fiscal quarter of 2022 from approximately $5 9 million.

In financial credits in Brazil.

This helped offset our Brazil, R&D spending which is required to realize this credit.

As we have previously indicated.

The law, enabling this credit is currently set to expire in January of 2022.

non-GAAP diluted earnings per share for the first quarter of fiscal 2022 was $2 16 per share equal.

Equal to the record $2 16.

Achieved in the prior quarter and up 177% from 78 per share in the year ago quarter.

Adjusted EBITDA for the first fiscal quarter of fiscal 2022 was $76 7 million or.

Or 16, 3% of sales compared to $29 5 million.

Or 10, 1% of sales in the first quarter of 2021.

Our breakdown of net sales by end market.

For the first fiscal quarter of 2022 was as follows.

Mobile and Pcs was 21% net.

Network and telecom was 10%.

Servers and storage was 12%.

AI data analytics and machine learning was 15%.

Advanced lighting was 24%.

And industrial defense and other was 18%.

Now turning to working capital.

Our net accounts receivable totaled $344 million compared with $313 million last quarter.

Days sales outstanding came in at 39 days.

That was the last quarter on a days basis.

Inventory totaled $318 million at the end of the first quarter.

Down from $364 million at the end of the prior quarter.

This reduction was driven by lower inventory for memory solutions and Ips.

Inventory turns were eight six times in the first quarter.

Versus six eight 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 $806 million and $684 million.

Respectively for the first quarter.

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

Meaning that we only recognize the net profit.

On a supply chain services transaction as net sales.

Cash and equivalents totaled $233 million at the end of the first quarter compared with $223 million in the prior quarter.

First quarter cash flow from operations totaled $15 1 million compared with $48 million in the prior quarter.

During the quarter, given the timing of our November quarter end as well as the constraints and the overall global electronics supply chain more of our capital was tied up in working capital to help ensure we continue to meet the needs of our customers.

For those of you tracking capex and depreciation.

Capex was $12 8 million for the first quarter and depreciation was $9 5 million.

Before turning to our guidance.

I wanted to highlight that the company is announcing a two for one share split in the form of a share dividend of one ordinary share per one outstanding ordinary share.

The share split is a significant milestone for the company and intended to improve our liquidity is broaden our shareholder base.

The additional shares are expected to be distributed on February one 2022 to shareholders of record as of January 25th 2022.

The dividend will.

<unk> doubled the number of outstanding ordinary shares.

Note that ordinary shares and per share data in this call and in our earnings release have not been adjusted for the impact of the share split.

Also our guidance does not incorporate the impact from this share split.

Now turning to our fiscal second quarter 2022 guidance.

We expect that net sales for the second quarter of 2022 will range from approximately $415 million to $455 million.

Lower than the first quarter, primarily due to seasonality from our led business as well as the expected quarter to quarter variability of our Ips business.

Our GAAP gross margin for the second quarter of 2022 is expected to be between 23 and 25%.

non-GAAP gross margin for the second quarter of 2022 is expected to be approximately 24% to 26% driven primarily by lower overall sequential sales and lower mix from sales in our led and Ips businesses.

Our non-GAAP operating expenses are expected to be in the range of $55 million to $62 million in the second quarter of 2022.

GAAP diluted earnings per share is expected to be approximately 70.

Plus or minus 15.

On a non-GAAP basis.

Excluding share based compensation expense.

Intangible asset amortization expense.

And available debt discount and other adjustments, we expect non-GAAP diluted earnings per share will be approximately $1 45.

Plus or minus <unk> 15.

Again, our second quarter EPS guidance does not include the impact from our share split announcement, which is expected to be effective the beginning of February.

Cash capital expenditures for the second fiscal quarter are expected to be in the range of $12 million to $15 million.

Our GAAP diluted share count for the second quarter of fiscal 'twenty. Two is expected to be approximately 29 million shares based on our current stock price.

Our non-GAAP diluted share count for the second quarter of fiscal 2022 is expected to be approximately 28 million shares.

And it includes the benefit of our convertible note capped calls.

Our share count guidance does not incorporate the share split which will be effective from the beginning of February.

Our forecast for the second fiscal quarter is based on the current environment.

Which contemplates the constraints in the global supply chain.

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

non-GAAP measure tables in our earnings 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.

Thanks to all of you for your support.

We look forward to meeting with you in the coming months virtually or in person.

And updating you as we continue to execute on our growth and diversification strategy.

We appreciate all of you for joining today's call.

Operator, please open the lines for Q&A.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Your first question comes from the line of Tom O'malley with Barclays. Your line is now open.

Good afternoon, guys and thanks for taking my questions and congrats on the nice results. My first question was just about the performance during the quarter it looked like the Ips business.

Far exceed your expectations I know you said it was up I think it was up greater than 20% you had previously talked on some calls about some U S government awards totaling almost $70 million is the timing of those awards. The difference there or was there some traction with new customers that kind of led to the upside any color there would be helpful.

Sure.

The award that you are referring too close to it was actually $68 million.

<unk>.

As more likely a second half Q.

Q3 Q4 timing.

So that's not contemplated in our results today.

Today was.

A little bit of.

The increase.

The increase in some of the business opportunities at our existing customers as well as some new development accounts that have registered some revenue opportunities for us.

Helpful. And then you mentioned in the preamble.

Your efforts for the SSD business are going to ramp in Q4 during the fiscal year could you just give us some perspective on what you think the size of that opportunity is.

How big can that be for you guys. Obviously, it's a little bit later this year. So a little further out but just over time, what could that look like for your business.

Okay, just roughly and Ken can hold me.

To this the Brazil business is somewhere in the $4 50 $475 million range.

From a scale perspective.

Kind of a backwards looking kind of.

Last 12 months pace and if you look at that we think the SSD business is something that could ramp up in the short term over the next.

Starting from Q4 out on a 12 month basis, roughly in the $40 million to $45 million range, and we expect to hit a run rate.

Quarterly run rate of roughly $10 million by Q4 now let me qualify also that.

This is an area that we have seen some constraints on the <unk>.

Chronic supply chain shortage some of the components. There are are ones that could be in our way of getting there, but we feel pretty good about it today as we sit here in Q1.

And overall, we like our position relative to the market and our manufacturing of Ssds in country.

To be at the pace I said, roughly again think about Q4 target roughly $10 million on a run rate business of about $40 million to $45 million.

Great. That's helpful. Congrats on the nice results guys.

Thanks, John.

Your next question comes from the line of Brian Chin with Stifel. Your line is now open.

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

Maybe my first question actually.

Thanks, Mike.

My first question.

About the financial credits in Brazil.

To R&D.

So I guess based on our understanding there's been some progress there towards a possible extension of the.

The program that underlies those credits that you benefited from and so going forward there may not be such an increase in your opex as you've talked to here in the past. So I'm curious do you share that view that theres, a high probability of an extension into.

What would your EPS guide for the February February quarter be assuming that that program is extended.

Let me take the front half of that and then I'll ask Ken maybe to quantify any hypothetical changes.

Could be pending.

As you know, we Ken and I both.

Have articulated what the current law says and Thats the exploration of these tax credits and.

In January of 'twenty two.

Needless to say in the background.

Been working with the government.

As the largest.

Memory manufacturer in country.

I have pretty good presence as a matter of fact, the president of our Brazil business.

The head of what their semiconductor association in Brazil.

So we've been lobbying pretty hard and I think the government.

Has recently.

The contemplated.

The impact of things like the supply constraints in the industry and they understand the value and so we.

We think there is a.

A probability that they will extend.

Tax credits in some way shape or form.

Albeit it has not been done.

<unk> of our call today.

So.

We think theres been a lot of progress, especially over the last 30 days.

We're very much part of the lobbing to the government for these tax credits to be extended.

We will certainly keep you posted Ken maybe you can.

Just kind of give us a sense on what that might look like in Q2.

Yes, so Brian in Q2, there is an impact.

For us even if that law gets extended and it's just based on the timing of our quarter end for the Brazil business. It's actually one month ahead of our.

Quarter end.

For our other businesses Thats outlined in our Q. So there is no impact here in Q2.

If it does get extended in Q3 Q4, it's still a bit TBD.

Depending on.

What the specific law would look like so for now I think what we've outlined to the.

The analysts into the street on our last call.

On the current law.

Just keep it as is in terms of.

That credit going away as we look at Q3 and Q4, if things change obviously.

We can have an update after the la.

Law changes.

Okay, Alright fair enough I appreciate it.

Color I guess, we'll stay tuned on that probably in the near term.

Maybe kind of more broadly.

I'll focus a little bit on the Ips business, specifically, but clearly there are some challenges out there you alluded to that in terms of labor and hardware availability and cost.

And I guess, specifically again, the Ips business can you give us an idea and quantify what those headwinds to growth and our operating margin expansion might be that youre.

Facing right now where over the duration of the fiscal year.

Because youre, putting a bid results, but obviously this is something that you are having to work through and your inventory obviously went down a lot on higher revenue, but also maybe even want that to be a little bit higher in this environment.

Yes, I think you also.

Specific to the inventory you should go back and say what was the right level kind of pre all of this because.

As we mentioned.

We mentioned on our last call from an inventory perspective.

We had.

A holdover shipment that went out earlier in Q1, so I wouldn't read too much into the inventory movement per se.

I think we're acknowledging that.

The supply chain constraints are real having said that it's a record quarter and this is a business I think as I mentioned before like Bruce.

Grew substantially in Q2.

'twenty, one and we're pretty bullish on 'twenty two so I don't look at it like a headwind per se I think.

That the complexity of the systems just the depth of the technology that we integrate into these finished goods systems.

And then the overlying software and services all of that has to come together with the.

Yes.

The timing of deliveries and we're just working with the constraints that everybody else is under I mean Nvidia.

Andy until a number of different suppliers or are tight on lead times and we're working on that having said that.

Really hasnt had a massive impact on our business.

We expect a strong growth year in and Ips.

I think that out of the gate with a record quarter here. So we are.

We're just cautious to the sense that the world's operating in these <unk>.

Certain times of constraints and we just want to call that out.

Okay Fair enough I appreciate all the color. Thanks, so much.

Thank you.

Thanks, Brian.

Your next question comes from the line of Rajiv Gill with Needham <unk> Company. Your line is now open.

Yes, Thank you and I'll Echo my congratulations on really good results and momentum.

On the Ips segment, the the Lumpiness in that.

Obviously, there's a very strong quarter November youre looking for it to be down.

In February.

Is there a way to think about.

The seasonality on a quarter by quarter basis.

At least on the topline and.

With respect to the gross margin for Ips.

You mentioned, 70% of the revenue is coming from from services.

That also is very volatile.

Is there a goal to increase the percentage of Ips that come from services and if so.

How do you intend to do that.

And and what are the steps.

Let me start with the back part of that question and I'll, let Ken talk to some of the seasonality and how you may want to model that or think about that.

On the service side I think we have targeted over the next three years, we'd like to get this business some.

We're in the neighborhood of 25% plus or minus.

Now mind you.

This is growing last year over 30% and we consider this to be a still a very strong growth business for us in the 'twenty two and beyond.

Your services are doing well just to keep up with the impressive revenue growth that we see at the top line, but.

Part of what we're doing as we think about the growth opportunities as being a little bit selective in.

The engagements we're participating in this can be a very low gross margin business. If its only hardware and those are not the type of opportunities, we want to be and as I talked about in my commentary.

We get a lot of value.

Creation with our customers from the design side of the business upfront and the in the system design optimize around the workloads of each of our customers specific to their needs and so it starts with that.

Actual integration services deployment services and post sale maintenance break fixed services.

These are all part of the elements that we're emphasizing in our proposals upfront.

And each customers are little bit different so it's hard for us to give you.

Exact kind of precise measurement.

How each customer will engage with us but.

Weather.

Whether we bid upfront.

On certain transactions is really driven by the full engagement model that we have with these customers, we're not going to be.

Our hardware only shop now I'll, just before I hand, it to Ken on this I'll just I'll just mentioned to you that this lumpiness and mix issue shows up because in certain quarters, we're installing these systems and.

Some of the larger deployments can dominate a specific quarter hardware wise or services wise, depending on which quarter.

As we've mentioned that our Q4 call we had the benefit of.

A number of services that helped our mix in our gross margin as they did in Q1 and so we will do our best to guide to that but there will be quarters that are very service rich and there'll be some quarters that were the hardware deployment is the beginning of a new installation and services.

We will follow on.

And do quarters, so Ken maybe it would be okay, you could just talk a little bit about the.

Quarter by quarter overall trend line of our business.

Yes, so rajeev. Thanks for the question as we look at this business. We tried to highlight that there is variability quarter to quarter.

And the business overall.

Has grown dramatically, we talked about 80% type of growth year over year, and even as we look at the pipeline into the second half of the year.

That still remains very strong so while we do expect.

No.

A little bit of a downtick in sales Q1 to Q2 based on the variability.

Our expectations are that as we head into the back half of the year.

Should see some growth through continued growth in this business in the back half of the fiscal year now, we're not going to provide any specifics, but I would say the pipeline does look good as we head into Q3.

In Q4.

For the back half of 2022.

Very good and for my follow up on the LGD.

Our business.

In the presentation you mentioned.

The shift over to <unk>.

Fire in a fab light model can be completed the end of calendar 'twenty two once that happens what's the kind of the normalized.

Gross margins on a go forward basis.

Are there other levers that you can you can pull to drive the led margins above and beyond that or is that kind of a level you want to maintain that business at once you achieve the manufacturing transition.

Well I think.

Again, Ken will jump in on the numbers side.

Philosophically speaking.

We've got some we've got a little room to go on.

The transition itself and then.

Some of this has to do with how we design the future products for new customer environments, and which products get used as the base platform. So we think that this cost competitiveness, we have achieved will not only.

Benefit us as we finished out the transition, but will allow us to use some of this new technology and newer market opportunities. Ken maybe you saw in the back half, yes, Yes, and then in terms of the margin profile I mean, one of the things that we've done here is <unk>.

Focus on the three segments in aggregate Sth margin, which we've outlined for this business I would expect that the margin profile is in that low to mid 30% range over time.

But we won't give specifics on any given quarter.

Yeah.

Thank you that's helpful. And then just one more question on the margin and then ill step back.

In the court in November quarter. The overall margins were 27% you mentioned that a lot of that was driven by stronger margin from memory.

Wondering if you could describe what's going on in memory.

Independent obviously of the led manufacturing transition and independent of the Ips.

Given the percentage of the services.

What are the steps you've taken to improve the margins in specialty memory and kind of Brazil memory. Thank you.

Well I think it's similar to how we are treating Ips.

And really all of our businesses Led's has done a great job on this as well is really looking at business opportunities, where we can.

Got it create some additional value and drive a better mix.

We saw better end market opportunities and memory.

Specialty.

And then also I would say.

Our mix towards flash was a little stronger in Q1 than it was in prior quarters and so our custom flash business.

Sure.

Is one that's a little bit more attractive given the configuration.

The controller and products overall from a solution standpoint.

Bit more specialty in nature differentiated.

So that mix can help.

And so when you combine kind of the market opportunity we're going after in terms of the end markets and allocating kind of limited resources in terms of inventory.

Right after mark products.

I think it's a mix issue that you are identifying and.

And really the end market segments that we're prioritizing in terms of development away from kind of the commodity side of the business.

Whether it be.

Standard products to more differentiated specialty products.

Got it congratulations again.

Thanks Chip.

Okay.

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

Thanks, and thanks for taking my question.

A couple of questions on the memory solutions business in your prepared remarks, you talked about ramping up this open copy them at a leading data customer is that a new opportunity for you or does it replace an existing product that you're already offers and maybe can you help us understand how big this opportunity could be.

Sure. It's a really good example to the question that.

<unk> was asking.

Basically this is a new customer socket opportunity. This is not a replacement and.

The <unk> application that we've described.

Is one that we stepped in we provided a value add in terms of engineering and test and reliability.

As well as kind of engineering design.

And it started out to be in low single digits millions of dollars in the prior quarter.

And we think that this can growth in fiscal year 'twenty two in the range of 10% to 15% of the specialty memory business, so somewhere in the 40% to $50 million range.

And that type of engagement in Sydney.

One that the company Hasnt really done soon.

Super well on the.

Custom side.

And the newer application environments of late Jack and the team has done a great job this year out cultivating new opportunities and we're starting to see the benefit of some of these data center cloud.

And even the high performance compute.

That's helpful. Thanks.

My next question is last quarter, you talked about part of the increase in inventory was driven by your supply chain business, where you are not the risk taker I assume they may be worried about component shortages or whatnot.

Has there been any changes in your conversations with those customers in terms of their procurement strategy.

No.

On that Brian.

I would say that the supply chain is still really tight I think it's no different than probably what youre hearing from other folks that are supplying to the global electronic.

Industry.

So it's tight on various components and our customers are doing it to us and we're doing it to our suppliers and so we're just navigating through that.

And Youll see some ebbs and flows as we move through this year.

I think like all companies.

Our we believe our supply chain team is doing a great job in terms of ensuring that we can get the components, we need to service our customers.

And so we're navigating and like everybody else, but it's a tight supply chain overall.

Okay, maybe one last one from me if I may I. Appreciate you guys start providing operating margin by business segment in your last annual report with data going back for a few years can you talk about how we should think about operating margin targets by segment going forward I know in the past you talk about gross margin by <unk>.

But just trying to figure out now that the new disclosures operating margins. So just trying to think about how to think about it going forward.

Yeah, we haven't outlined specific targets.

By each of the business segments I think in aggregate we've talked about.

Just a while ago at least achieving in this kind of 12, 13, 14, and 15% EBITDA target.

Which is where we're at.

Today, So I think over the course of the next 12 months or so.

Can outline some higher targets, but in aggregate.

We feel like the business is operating very well.

With the current EBITDA or edit starting levels.

We've been able to achieve I think one of the things that we've outlined on the prepared remarks, and Q&A is that there will be variability specifically as it relates to the Ips business and the margin profile quarter to quarter.

You've seen that as we've migrated from Q1 and towards our guidance Q2.

But there is some variability in the overall gross margins, which then impacts the operating margins, but overall businesses tremendously healthy. If you look at where we are today versus just 12 months ago in terms of both the gross margin profile and the operating margin profile of the business. We are just so different today.

As a company than 12 months ago.

Great. Thank you very much.

Okay.

Your next question comes from the line of Kevin Cassidy with Rosenblatt. Your line is now open.

Thank you and congratulations also on the great results.

The Gov pod or the <unk>.

England on demand.

Interesting.

Product line.

To me anyway.

Can you give us a little more description of what that is and how many agencies, you're addressing and would there be a commercial version of this.

Besides just the public sector or private sector sure. Good question. Thanks, Kevin.

Yes, Todd for US is really an extension of our partnerships that we have with the government and our and our clients in the government.

Because what's happening is we're seeing in high performance compute you have mentioned this on prior calls is that we don't think this is kind of binary. We think this is a hybrid model thats evolving.

And this extension of our on premise.

Relationships with these clients is that they want to utilize and benefit from the economics and just the flexibility.

Operating in an as a service model for certain applications.

And so this extension really is for our existing customers and potentially new customers to use this platform sometimes early on the development of testing our applications and sometimes because these applications are not ones that are frequently used or the overhead is it doesn't work.

Arent.

A full on Prem system.

So from that perspective.

It works in the government yet and it works we also have.

Our platform called Penguin on demand just pod.

<unk>.

And that is one that we've got that's up and running today.

Again, very small in terms of the revenue contribution I want to say a couple of million dollars a quarter.

And the business and.

But it's something that we're trying to cultivate more and more as.

As our clients want to have the flexibility for future development as well as new customers that we can target.

That just quite frankly arent going to go out and make a <unk>.

<unk> and their own data center implementation of high performance compute AI. So it is an opportunity for us it's early going.

And we're investing in it.

And so as you look at the <unk>.

Paying what on a go forward basis Youll hear more about that.

Our efforts to drive a hybrid model both on Prem.

And in the cloud.

Okay, great. Thanks for that explanation and then what do you see as a competitive landscape for this or are you seeing your competitors coming in with similar products or are you ahead of the.

The competition.

Well I think theres kind of two parts of that question. One is our current on Prem customers.

Our looking at elements of this strategy.

And they are investing.

And then there's obviously the cloud service providers.

Sales, who are developing a high.

High performance compute approach number one the latter of the cloud service providers.

Three or four of those parties are potential partners of ours actually Dave.

We're in discussions with those type of providers, where we can provide design and.

System utilization advisory capabilities to our customers in a cloud environment. So.

At the end of the day this vertical that we operate in.

We're kind of a trusted advisor and I think youll see elements of our own on demand as a service as well as potentially utilizing some of these cloud providers as a back end to our to our offerings. So its pretty good flexibility.

<unk> that we're developing here relative to customer engagements, while we while we strike this at the core.

Okay, great. Thank you.

Thank you.

There are no further questions at this time, Mr. Mark Adams I turn the call back over to you.

Well again I'd like to thank everyone for joining our call today.

The team did a great job in Q1 with record revenue non-GAAP record gross margins of 27%.

And an EPS of $2 16, tying the record we just set in Q4 'twenty one feel like we have a lot of momentum and look forward to reporting on our future growth and success.

With that the call will end.

This concludes today's conference call. Thank you for attending you may now disconnect.

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