Q2 2022 SMART Global Holdings Inc. Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the F. G. H second 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. Please press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again that Starwood. Thank you Susanne.
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 S. G H as second quarter fiscal 2022 results.
Joining me today are Mark Adams, Chief Executive Officer, Jack Pacheco, Chief operating Officer, and Ken <unk>, 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 Richie DSO will review the financials and forward guidance after which we will take questions Mark.
Thank you Suzanne.
And thank you to all who have joined us today.
We delivered another strong operating quarter S. G H.
Total second quarter revenues of $449 million.
Above the midpoint of our guidance range non-GAAP gross margins at the high end of our guidance range at 26%.
And non-GAAP earnings of 87 cents per share.
Which also came in well above the mid point of our guidance.
As a reminder, these per share results reflect the two for one share split that became effective at the beginning of February .
In addition, we made progress in the following areas during the quarter, we strengthened our balance sheet.
The term loan refinancing.
Greasing, our liquidity and extending our overall debt maturities.
We announced a $75 million share repurchase authorization today, demonstrating confidence in our business.
And the growth opportunities that we see over the long term and we continue to improve our corporate governance with the appointment of Penny Hirscher as chair of our board of directors.
And we now have a fully independent board.
Step for me in my role as CEO .
Each one of our businesses Intel.
Intelligent platform solutions memory solutions and <unk>.
Led solutions.
Solid results, despite the continuing macroeconomic challenges, including the supply chain constraints and all companies.
The impact of operating and Covid times.
Of course, the conflict in eastern Europe .
As many of our peers have also reported.
Supply chain challenges remain with us and if anything have heightened from a few months ago.
That said I am very proud of the operational focus and tireless work of our supply chain teams.
S J Park, and importantly places us in a position to drive continued support for our customers as well as enabling us to deliver strong results for our shareholders.
Let me turn to a review of each of our businesses.
Starting with intelligent platform solutions group or Ips.
Where revenue came in at $82 million for the second quarter.
As we've stated in the past.
The quarterly level of business can vary due to the timing of deployments of various projects and this was the case in Q2.
That said.
They're performing very well with the first half fiscal 'twenty, two Ips revenue of just over $200 million.
Which is up 33%.
Compared with the first half of fiscal 'twenty one.
An important part of this growth is our investment in services.
Second quarter services revenue grew by 41% compared with Q2 of the prior fiscal year.
Overall services represented approximately 26%.
Of Ips revenue in Q2.
Ips continues to expand customer engagements across the ultra scale government and oil and gas market segments.
Specifically ultra scale market Penguin computing announced its role in providing both AI optimized architecture and managed services for meadows cutting edge AI supercomputer called the AI research supercluster or RSC.
And its final build out expected for mid 2022.
The RSC is expected to utilize more than 16000 Nvidia Gpus.
And one extra byte of storage.
Its meta believes will make it the fastest and largest.
AI supercomputer in the world.
The RSC platform was designed to ensure performance availability data integrity and managed security all critical elements.
Of an AI optimized infrastructure.
This engagement with meta that's been developed over several years.
And as a testament to penguins ability to address the unique needs of significant high performance and AI compute application environments.
Highlighting our ability to provide a comprehensive solution of optimized hardware software and ongoing services.
We also continue to invest in the edge are.
Our strategic segment of our business, where we have experienced success in the telecommunications market as.
As well as the government sector.
We will continue to evolve and grow this business as part of our overall Ibs strategy.
As we think about our third quarter.
Component level supply chain constraints are moving a portion of our expected delivery dates out from fiscal Q3.
In the fiscal Q4.
And in certain cases into our fiscal 2023.
As these constraints are industry wide.
This revenue shift as more of a timing issue.
Not reflected in our customer demand or loss revenue.
This will be contemplated as part of our guidance for Q3 that Kevin will provide.
We also recently announced a new umbrella brand for Ips called Penguin solutions.
Our customers will now identify all aspects.
The Ips under the single brand name.
And we will leverage this new brand to showcase the full breadth of our capabilities.
We will continue to use the name Penguin computing when referring.
HBC products, including servers.
<unk> and.
In our data center support.
When we use the Penguin ads name to refer to the new edge related solutions.
Legacy embedded and wireless products.
The new Penguin solution brand also reflects the direction, you're taking to innovate.
Our offerings delivering solutions.
And services that span the continuum of edge.
Sure.
Sure.
Overall, we see growth in our new business funnel.
Both in terms of commercial and medical business by expanding existing.
Agents and focus you got new customer acquisitions.
We are expecting a strong second half of fiscal 2022.
Continuing momentum as we head into 2023.
Now turning to led solutions.
Our OLED solutions group.
Which operates under the Cree led brand had another strong quarter of operating performance.
Revenues were $107 million in Q2.
With product revenues up approximately 5% when compared with Q2 fiscal 2021. When this business was still part of Wolf speak year.
Year over year revenue growth.
Being driven by customer wins with our high brightness products into the video architectural and landscape specialty lighting markets.
We continued to execute on our manufacturing transformation plan, which includes the transition from silicon carbide.
Sapphire wafers.
And from a captive manufacturing model.
Outsource capital light model.
We expect this transition to be largely completed by calendar fourth quarter.
On the product front.
Team is delivering innovative application optimize leds, enabling a variety of lighting designs, while achieving the best overall system value.
We are seeing good traction with our CV 94 D products and the video display market as.
As well as new design wins for the horticultural market indoor sports lighting and road signage applications.
Each representing.
The areas of focus where our technology and product offerings differentiate us versus our competitors.
It has now been one year since the acquisition of <unk>.
Continue to be impressed.
With the team's focus and ability to drive improvements in their product roadmaps customer engagement.
And operational excellence.
With Cree Leds long history of innovation and continuously improving technology and our focus of high powered general lighting mid power general lighting.
Specialty and video we believe the led solutions group.
Deliver continued strong results in the coming year.
And our memory solutions group.
Operating under the smart modular brand name.
Revenues totaled $260 million, which was up 9% compared with the prior quarter and up.
Up 19% compared with Q2 of the prior fiscal year.
This growth was driven by sales of our core specialty memory offerings, such as DDR three.
DDR four and flash.
Products to our customers in the networking telecom and storage end markets.
As well as a favorable mix of higher density products.
Such as our <unk> product the high end server market.
While we continue to support our customers with legacy DDR, three and DDR four based products.
We are positioning ourselves to offer next generation products optimized for DDR five and.
And next generation Flash based controller based memory solutions.
We are working closely with our key customers and the development of new products for data center and cloud applications.
Such as NV CSL.
And CSL add in card solutions.
We were recently selected as a validation partner.
For our CX L E <unk> dot <unk> memory module by a major semiconductor company for their next generation CPU, another proof point and the investments, we're making in advanced memory solutions.
For applications at the edge of the network, we are seeing opportunities for specialization in terms of readiness low power and smaller form factors all of which play to our strengths of high mix low volume differentiated solutions.
Our custom encrypted setup product.
Our USB form factor is expected to ramp from fiscal 'twenty, three and expands our flash storage capabilities targeted for network infrastructure equipment and systems.
In Brazil.
We have completed the transition to our <unk> facility, where we assemble our system level products.
Including our new SSD product line.
Which we expect to ramp by the end of this fiscal year.
Our results for the second quarter, clearly demonstrate the benefits of our diversification strategy.
And while we continue to see supply chain constraints similar to other businesses and the electronic supply chain.
We continue to meet the expectations of our customers and are optimistic about our ability to not only expand our footprint with existing customers.
But also to grow our business with new customers across all three lines of our business.
At this time.
Hand, it over to Ken for a more detailed review of the financials.
And our guidance for next quarter.
Ken.
Thanks, Mark I'll focus my remarks on non-GAAP results, which are reconciled to GAAP in our earnings release tables. In addition, my commentary reflects the two for one share split in the form of a dividend that took effect in February of 2022.
The second fiscal quarter of 2022.
Consecutive quarter of year over year growth for S. G H, demonstrating how our strategy continues to yield positive results.
A year ago, our Q2 sales were just over $300 million.
And our non-GAAP gross margin was 19, 5%.
In the second quarter of 2022 sales came in at $449 million and non-GAAP gross margin was 26%.
We see tremendous opportunities ahead for <unk> to deliver advanced technology solutions for our customers across all three of our businesses.
Now, let me turn to our detailed results for the second fiscal quarter of 2022.
We reported another strong quarter net sales were $449 million.
A 48% increase year over year for the second quarter of fiscal 2021.
In addition, non-GAAP gross margin came in at 26% at the high end of our guidance range and non-GAAP diluted earnings per share was <unk> 87.
For the second quarter above the high end of our guidance range.
Our 48% year over year <unk> revenue growth was helped by the incorporation of Cree led into SDH.
Excluding Korea led our revenues grew 13% year over year, driven by strength in our memory solutions business.
For the second quarter Ips had revenues of $82 million.
As we have discussed in our previous earnings calls the Ips business will continue to have quarter to quarter variability in revenue and gross margin based on the timing of hardware services and software in any given quarter.
That being said the first half of 2022 for Ips was very strong with sales over $200 million and.
We had a growth of 33% from the same period a year ago.
Our led solutions group had revenues of $107 million in the second quarter, which was in line with our expectations from last quarter.
<unk> sales were up approximately 5% when compared to the year ago quarter. When this business was still a part of <unk>.
Our memory solutions group had revenues of $260 million.
In the second quarter, 19% higher than the second quarter of the previous fiscal year and was higher both for our specialty memory and Brazil businesses.
non-GAAP gross margin for <unk> in the second quarter was 26%.
Up from 19, 5% in the second quarter of fiscal 2021.
non-GAAP operating expenses for the second quarter were $59 5 million up approximately $32 million.
In the second quarter 2021.
Operating expenses were up primarily due to the inclusion of <unk> solutions and continued investments in our memory solutions and Ips businesses.
In addition, operating expenses benefited in the second quarter of 2022 from $6 million in financial credits in Brazil.
This helped offset our Brazil, R&D spending which is required to realize this credit.
This credit was set to expire in January of 2022, but the law, enabling this credit was extended through 2026.
We do however expect the benefits from this credit to be reduced going forward in part due to some of our production moving to our <unk> facility.
As a result, we currently anticipate approximately $2 million to $3 million of credits benefiting us in our fiscal third quarter.
non-GAAP diluted earnings per share for the second quarter of 2022 was <unk> 87 per share up approximately 100% through <unk> 44 per share in the year ago quarter.
Adjusted EBITDA for the second quarter of 2022 was $66 million or 14, 7% of sales compared to $31 billion or 10, 2% of sales in the second quarter of 2021.
Our breakdown of net sales by end market for the second quarter of 2022 was as follows.
Mobile and Pcs was 23% network and telecom, 11%.
Servers and storage 15%.
AI data analytics and machine learning, 12% advanced lighting, 24% and industrial defense and other 15%.
Turning to working capital our net accounts receivable totaled $386 million.
Compared with $344 million last.
Last quarter.
Days sales outstanding came in at 45 days up six days from last quarter.
Inventory totaled $334 million.
At the end of the second quarter.
Up from $318 million at the end of the prior quarter.
This growth was driven primarily by higher inventory for Ips as we prepare for builds in the second half of the year.
Inventory turns were.
One times in the second quarter versus eight six times in the prior quarter.
And consistent with past practice.
<unk> receivables days outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $789 million and $676 million respectively for the second quarter.
As a reminder, the difference between gross revenue and net sales is related to our logistics services business, which is accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as net sales.
During the second quarter, we also completed a refinancing to strengthen our balance sheet extend our debt maturities and add to our liquidity.
The refinancing was completed via $275 million.
Term loan a facility and a $250 million revolving credit facility.
With the net proceeds from the term loan used to retire approximately $160 million of debt, including the seller notes, where the Cree led acquisition and the outstanding amounts under our ABL.
Cash and equivalents totaled $366 million at the end of the second quarter.
Compared with $233 million.
At the end of the prior quarter.
Second quarter cash flow from operations totaled $32 $2 million compared with $15 1 million in the prior quarter.
With the continued global electronic supply chain constraints more of our capital has been tied up in working capital over the past year.
For those of you tracking capex and depreciation Capex was $7 4 million in the second quarter and depreciation was $10 2 million.
Before turning to our guidance I wanted to discuss the $75 million share repurchase authorization, we announced today.
This capital allocation decision reflects our strong balance sheet and our expectations for continued cash flow growth.
First and foremost we will continue to invest in our businesses as we see significant opportunities for further organic growth in each of our three business segments.
We will continue to review and seek acquisition opportunities for further scale and diversification in a disciplined manner, which.
Which we believe can provide strong shareholder returns as we have seen with our most recent acquisition of Cree led.
And finally, the share repurchase authorization provides us flexibility to return capital to our shareholders in an opportunistic and price sensitive manner and to utilize the volatility we have seen in the markets and the potential to capture value. If there is further divergence.
Between our share price and financial results.
Turning to our fiscal third quarter 2022 guidance.
We expect that net sales for the third quarter of 2022.
Will range from approximately 435 million to 475 billion.
Up slightly at the midpoint from the second quarter and impacted by some of the supply chain constraints, we highlighted earlier.
Our GAAP gross margin for the third quarter is expected to be between 23 and 25%.
non-GAAP gross margin for the third quarter is expected to be approximately 24% to 26%.
Our non-GAAP operating expenses for the third quarter are expected to be in the range of 60 million to $66 million.
GAAP diluted earnings per share for the third quarter is expected to be approximately 35.
Plus or minus eight.
On a non-GAAP basis, excluding share based compensation expense intangible asset amortization expense debt discount and other adjustments, we expect non-GAAP diluted earnings per share will be approximately 75.
Plus or minus eight.
Cash capital expenditures for the third quarter are expected to be in the range of $12 million to $16 million.
Our GAAP diluted share count for the third quarter is expected to be approximately 57 million shares.
Based on our current stock price.
Our non-GAAP diluted share count is expected to be approximately 54 million shares as it includes the benefit of our convertible note capped calls.
Our forecast for the third fiscal quarter of 2022 is based on the current environment, which contemplates the current constraints in the global supply chain.
Please refer to the non-GAAP financial information section and the reconciliation of GAAP to non-GAAP measures tables in our earnings release for further details operator, we are now ready for questions.
At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from the line of Brian Chin with Stifel. Your line is open.
Hi, there good afternoon, thanks for letting us ask a few questions.
Maybe to kick things off.
Can you.
Provide what your fiscal third quarter revenue guide would have been.
We're not sure the constraints and can you also relay sort of which businesses are most affected and which.
Which are the revenues and what kinds of revenues are impacted all the way out there kind of fiscal <unk>.
Sure. Thanks for the question this is Ken.
Yes, I think similar to other companies in the supply chain, we are impacted by the constraints.
Folks within the electronic supply chain are seeing so if you look at our business specifically, let's say, we're seeing that within our overall Ips segment.
Some of the constraints have pushed out sales as we've talked about into Q3 into Q4 and even into 2023 in certain instances now I'd just remind you a lot of the business that we do for Ips is very custom nature. So it's not a loss of sales, it's just merely a push.
<unk>.
A future quarter now specific to one we've talked about in the past around.
Some government orders, which totaled about.
The $68 million in size, we announced that.
Several months ago that specific order as an example, instead of happening in that Q3, and Q4 timeframe is now more likely to happen in the Q4 and into Q1 time frame.
Albeit we still need to lock down some of the components related to that product. So that is an example, Brian of movement that can occur given the constraints we're seeing.
Okay, I think I'll just got it.
So Brian I would add this is mark I would add also that.
That's an example that Ken used.
I think we've seen a less dramatic but still noticeable impact across the other businesses.
And that's reflected in Ken's guidance.
The team did a great job.
And kind of supporting our customers.
You got it you got to assess the scale.
What could have been had we had clear selling yes that being said I mean, we had a great quarter. Great Q2, if you look at the performance.
Across overall SGA and if you look at the guide for Q3.
We're happy given the constraints, we've talked about the backlog overall as we look out into Q4 and even into 2023 and it looks good. So we're very excited about the business and where we are today.
Got it got it.
Understood and just.
Relative to the overall guide and the business is it right to kind of rank order the segments.
Maybe some growth.
The highest growth in memory.
Some growth in <unk>, and then Ips sort of flattish maybe down a little bit is that sort of the right way to think about sequentially.
Sequentially, maybe but.
But overall growth opportunity.
I wouldn't read too much into that trend either because I think.
Our funnel and Ips continues to remain robust.
And memory has been a pleasant surprise.
At the rate is growing we thought it was a.
Growth in the kind of mid to high single single digit center as Ken highlighted memory was up 19% versus the same quarter of 'twenty. One we continue to find new application wins designs that are in the memory space and the led business as we highlighted is is up year over year.
So I think if you're looking about growth rates per se.
I think promote just a broad market opportunity. This is probably the grower at the highest rate in terms of market opportunity followed by memory followed by OLED.
Sure sure Okay that makes a lot of it maybe lastly, just close out with Ken and this is more of a financial model question.
The extension of the R&D credit 6 million benefit in fiscal <unk>, you're talking $2 million to $3 million benefit.
In fiscal <unk>.
It is the right way to think about that then sort of a $3 million to $4 million sequential increase in R&D or.
Some of that budget.
Ryan.
The way to think about that and thats embedded in our Opex guidance and part of the reason that you see that our guide for Opex is in that $60 million to $66 million range was.
<unk> of lower credit.
In Brazil for R&D.
Yes, I was going to ask Ken is there another offset youre getting somewhere else in the P&L of the sort of.
Cap counterbalanced sort of the increase sequential increase in the R&D.
All of that is embedded in the guidance that we gave Brian . So if you look at Q3 that is factored in there are some benefits in terms of being able to manufacture in <unk> that is a free trade zone. So there are some benefits there some of that.
On the Cogs side, but all of that's baked into our overall guide as we look at Q3.
Okay, great. Thanks for the help.
Thanks, Brian .
Your next question comes from the line of Tom O'malley with Barclays. Your line is open.
Good afternoon, guys. Thanks for taking my question I, just wanted to dive a little bit more into the outperformance.
And the memory solutions you noted on the call.
Our sequential revenue higher for both specialty in Brazil, but could you dive in a little more there about where you saw the strength of that did come in a bit stronger than you expected.
Yes, so Tom great Great call out so if we look at our overall memory business as Mark highlighted and I highlighted earlier, we saw very strong sequential growth quarter on quarter.
That growth was in that 19% range.
Overall, and then actually if I look sequentially for both of the businesses meeting the Brazil business and the specialty business both had very strong.
Growth quarter on quarter as well so they were in a very similar range. If I look at the sequential growth Q1 to Q2 of this year.
Helpful. And then obviously in the environment. We're in right now you have inflation moving higher consumer discretionary spend may be at risk in certain areas could you just talk about how you're handicapping that Brazil business. When you look out embedded in your model and what you said at the analyst day is there anything different about the way you thought.
About that business as a long term grower in the memory solutions group just with the change in the macro particularly in Brazil.
Nothing that I would suggest is a radical change.
I think as Youre aware we.
We have a brand new product category in Brazil.
Launching by the end of our fiscal year and solid state drives.
We continue to be the largest player in broad memory semiconductor solutions in Brazil.
Of course, if macroeconomic wins.
Go go sideways from here.
Be an impact but.
We were looking more at kind of how to grow these solutions and opportunities that was there were a lot of the basis for our move to <unk>.
And.
We think there is a good growth from here. So sure if there's a massive demand shock to the system, we will have to think differently, but we havent seen <unk>.
Significant headwind yet in our business and we're not anticipating that in the short term.
Helpful. And then just if I could sneak one more in I think Brian asked the question Mark you talked about the longer term growth rates, but you guys had been helpful. Given color in the past on sequential growth rates could you just offer any detail on the sequential growth for each of your three businesses into the next quarter. Thank you.
Let me, let Ken take the actual numbers I can just comment on a little bit as I said.
Ken gave an example of.
And some of the supply chain impact on our Q2, Q3 numbers and that certainly impacts kind of sequential growth rates. My commentary was around the demand piece of that equation.
From a from a upside growth from here, we continue to remain very bullish and Ips.
And seeing strong.
And the memory solutions piece as well and just great overall operating performance and gross margin expansion in <unk>. It's just been a good recipe for outstanding results and so I'll, let Ken talk about the actual data behind that but pretty bullish about the business as we see it yes. So as we look at our guide.
It is the midpoint up.
<unk> from Q2 levels to that $4 55 range at mid point and the way to think about that would be the memory business overall relatively flat plus or minus a bit versus Q2.
If we think about the led business. It's also relatively flat and we would expect that that Ips business can grow a bit here in Q2 Q3.
Thanks, a lot guys.
Thank you.
Your next question comes from the line of Kevin Cassidy with Rosenblatt. Your line is open.
Thank you for letting me ask a question and congratulations on the great results.
Just as we're talking about Ips and Mark I think you mentioned that.
The opportunity funnel is growing.
You say.
Can you compare it to last year and that gives it up.
The opportunity is up 20%, 50% or whats driving demand I guess.
The Best Index I can give you is what we just completed.
And just that's just some data this is factual that we.
First half fiscal 'twenty two is up I think it was 33% year over year and again, we continue to see not only new opportunities but.
Growth and existing customer relationships and why that's important because I think I explained.
In the past that.
The transition from a development platform to a production platform.
As significant in terms of the scale of relationships and the overall size of the business opportunity.
With our customers and that's that's going to be meaningful as we kind of continue to expand this business and as Ken highlighted.
We remain.
I'm very confident in our opportunity to deliver growth.
And I would say that some of these supply chain issues are more timing in nature and by the way we've talked about that in terms of the timing of deployments. So.
We're very happy with the growth in the first half and we're very bullish about the opportunity.
And Ips.
As we head into the second half.
Okay great.
There's a lot of questions I get from investors about inventory building.
And customers in the channel.
You are showing great growth in your memory business, and especially specialty memory okay.
That's custom but would any of your customers build be building inventory for custom products.
Yes, I think.
We're very careful with that and I understand the question. It's a really good question. It's probably just a good question across all of our businesses really.
It's less of an issue in Ips given the nature of our agreements and the custom nature of the products developed for that segment.
And specialty memory very similarly in a lot of times not all of them, but many cases, we're sole sourced on a product design not necessarily at the customer but sole source on a specific design.
So theres not much double ordering that we're seeing and we're kind of working with the customers on this and quite frankly I think.
It's a different this this is much different than a memory cycle in the past. This is a broad electronics cycle.
Across the whole supply chain. So I think people are more willing to be in longer supply commitments.
And not have a lot of cases. These are these business. These orders are noncancelable.
I think we're in pretty good shape on the memory side of the house.
And of course led.
The foundry model outsource capital light model, we're in pretty.
Pretty good shape, there, we're continuing to watch channel inventories as well, what you're seeing on our balance sheet and Ken can comment on this as well as that.
Given our supply side challenges, we're being strategic and trying to.
<unk> ourselves so we can deliver and continue to grow the business as we have in the past yeah. So Kevin on that when you think about some of the Dizzy.
Design wins or even the demand.
Specific to the Ips segment.
These are large system orders that can be 234 or $5 million to $10 million plus in size and so from a supply chain standpoint, we just need to be able to order all of those components and parts that make up that system and so that's where we are as mark just highlighted being a bit strategic just to make sure.
Sure that we can continue to meet the customer demands and the timelines we're committing to.
To our customers.
Okay. Thanks for that clarification.
Thanks, Kevin Thanks, Kevin.
Your next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open.
Thanks for taking my question, maybe one more question on the Ips side, Ips down 30% quarter over quarter was a lot lower than we expected I hear you that you were supply constrained, but what will it be without dose kind of strained globally in your expectation and then maybe.
I know you talked about Ips, probably going a little bit in the next quarter, how youre thinking about the growth rates for the full year calendar 'twenty, two especially given that some of the contracts some of them like the government contracts got pushed out from Q3 Q4 Q2 basically the second half of 2022 what is the right number to think about for the year.
Yes fair enough. So I think a couple of things so even as we look at Q2 and Q3.
Yes, there has there were some push outs we talked about.
What was the specific number it is in that neighborhood and I would say $15 million to $20 million of movement.
That move from Q2 into Q3 in reality is some of that just because of the constraints can move into Q4 I highlighted one of one example.
Of that where it's a large order that has pushed out not not because of anything except for being able to get all of the components together for that complete system. So I mean, that's a reality that we're in we've got a call. It how it is.
But as we've talked about that Ips business good demand.
Good backlog as we look out into back back into Q4, and even into the beginning of next year.
And so hopefully we can the supply chain will ease a bit and we will be able to fulfill those demand trends.
Okay, maybe as my follow up question is on the gross margin side I know you don't get you don't get.
The gross margin by segment anymore, but can you give us some qualitative comments as to how gross margin by segment has done in the quarter on a sequential basis and if you put that mix of software services side, which is seeing the most impact from higher logistics cost or input costs and are you able to offset that with any kind of price increases.
So if we are correct. So we do not provide the gross margin specifics.
Order to quarter, but if I look kind of Q1 to Q2.
I would say memory did.
Come down a little bit in terms of the margins Ips.
<unk> was flat to up a bit in led.
Pretty flat quarter to quarter overall for the margins, but we don't provide the specifics in terms of an actual gross margin percent.
Sorry, the second part of that.
Sure.
Yes, it's more about which business is impacted most from whether the higher logistics costs are high.
Cost and are you able to offset that with any kind of price increases.
Yeah. So on some of the products actually we don't bear those costs in terms of the logistics. So those are pass through costs.
Essentially so all of that when we think about our guidance, we have baked that into Q3 in terms of our overall guidance both.
On the on the margin side and on the Cogs side to get to a gross margin. So those have been baked into our outlook here for Q3.
Okay. Thank you.
Your next question comes from the line of <unk> Gill with Needham <unk> Company. Your line is open.
Yes, Thank you and congrats on the recent momentum.
Question on the gross margin on the guidance.
So Ken you mentioned the guidance is 25%.
If I look at the incremental revenue that's about $6 million and then implies that the gross profit will be down about $3 million.
The fact that revenue is going up by about $6 million.
So I know you mentioned kind of Lumpiness in Ips in terms with respect to the software service component.
But wondering if you could kind of give some clarity on on kind of the mix of the mix effect that youre seeing in the gross margin in the may quarter.
Yes, no problem. So good question. So if we look at the the margins from Q2 to Q3, there's a couple of factors one.
I would say there is some margin impact on the memory side, albeit very small and then even within in Ips, you've you've already highlighted it and we've talked about it before and even within the led business. There's some geographic mix so depending on where our sales are geographically throughout the world there.
Be some.
Some mixed benefits or headwinds.
This quarter in Q3 based on the geographic mix, there will be a little bit of a headwind and that gets us to that 25% plus or minus one point on margins.
Great. That's helpful. We're looking you talked about.
Expectations for a strong fiscal second half.
Particularly around the Ips.
But then you talked about $15 million to $20 million worth of kind of sales that were being pushed into the second quarter and then to the third quarter.
And beyond and you kind of lifted a little bit vague thing.
For the next fiscal year.
So I guess my question is how confident are you in terms of securing certain amount of component.
In order to meet this.
Demand in this funnel, particularly around these kind of large government orders.
And Kevin maybe if you could provide a little more detail on where the constraints are with respect to your your positioning what specific components are you seeing the most acute constraints.
Yes, so if we look at we I won't give you specific components.
But I would say some of these are around the semiconductor supply chain. So I won't name names, but I think you've seen it through others in the electronics industry, where there are some shortages of specific semiconductor chipsets.
That along with even things like power cords and the like.
That have impacted when we can ship out these large system. So.
I'm talking about small components in the scheme of an overall system.
But.
Those still have an impact when youre looking to ship out these large large scale systems overall.
So I guess the only other comment I would add is that.
Some of this is also just due to the sequential nature of a deployment and so if something moves from Q3 into Q4.
That might be the beginning of a push for the next quarter only because we are deploying a system that has to get validated until we go added incremental capacity or technology beyond that and so these.
These deployments are not just necessarily within a quarter or a one time event.
And the growth of potentially adding capacity to our system.
Might lead a Q3 push to Q4 impacting Q4 shipping.
The way I, just want to make sure everyone understands.
All of this was contemplated in Ken's guidance and B the business continues to be robust.
We're not able to call Q4, yet as we are still working on getting the components lined up for finishing our fiscal year, but the commentary you're hearing is pretty bullish and so.
We're just being transparent about the supply chain challenges and we're also being transparent that the demand side looks pretty good.
Got it great. Thank you.
There are no further questions I'll turn the call back to Mark Adams for closing remarks.
Thank you operator, and thanks to all of you for your continued interest and support.
When I started less than two years ago, we committed to delivering on our growth and diversification strategy by focusing on operational excellence.
Our top line continues to grow and we've expanded gross margins from less than 20% in fiscal year 2020.
To the mid 20% range today up some 600 to 700 basis points, all of which allows us to deliver strong earnings per share results to our shareholders.
In addition.
We are delivering on our goal to operate as a best in class company from an ESG perspective.
Last fall, we delivered our first ever ESG report.
Highlighting our performance to date and future goals.
We've also made great strides in the area of corporate governance, including shifting to an independent board of directors and the naming a penny as our chair.
Our commitment to our shareholders as to make continuous progress and operate SDH as a best in class public company.
We appreciate all of you for joining today's call.
This concludes today's conference call. Thank you for joining you may now disconnect.
[music].
Sure.
Okay.
[music].
Okay.
[music].