Q4 2022 SMART Global Holdings Inc. Earnings 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 I would also like to remind everyone to read the use of forward looking statements. Note that is included in the 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 the company's present expectations and that actual events or results may differ materially.
We will also discuss both GAAP and non-GAAP financial measures.
non-GAAP measures should not be considered in isolation from as a substitute for or superior to our GAAP results.
We encourage you to consider all measures when analyzing our performance.
A reconciliation of the GAAP to non-GAAP measures is included in today's press release and with that let me turn the call over to Mark Adams CEO Mark <unk>.
Suzanne.
Throughout fiscal 2022, we continue to transform <unk> into a diversified profitable company committed to growth.
<unk> long term shareholder returns.
During our FY 'twenty, two we achieved strong results.
And accomplished a number of key milestones.
By a challenging macroeconomic climate.
Our fiscal 'twenty two achievements included record annual revenues of $1 8 billion.
Record gross margins of 24, 9% on a GAAP basis.
And 25, 9% on a non-GAAP basis.
Record annual adjusted EBITDA of $263 million and record annual non-GAAP earnings of $3 62.
For sure.
And now looking back over the past two years.
We have grown the topline by over 60%.
<unk> non-GAAP gross margins by 610 basis points.
Increased adjusted EBITDA by over 150% and growing non-GAAP earnings per share by over 175%.
In addition.
We completed our acquisition of Stratus technologies, just after our fiscal year end.
Positioning the Ips group for continued growth in the years ahead.
Now, let me turn to the fourth quarter.
Sch concluded fiscal 2022 with fourth quarter key financial metrics at or above the midpoint of our guidance.
Fourth quarter revenues totaled $438 million.
And non-GAAP gross margins came in at 24, 6%.
These results combined with strong operating discipline.
And our share repurchase program resulted in non-GAAP earnings of <unk> 80 per share.
Which exceeded the upper end of our guidance range.
Let me turn to a brief review of each of our businesses.
Starting with Ips.
Revenue came in at a record of $145 million for the fourth quarter up 52% sequentially and up 48% from the year ago quarter.
New project Rollouts were a major contributor to our revenue growth in the quarter.
Despite the increased hardware shipments from these new installations.
Service revenues were up 11% in Q4, when compared to Q4 fiscal year 'twenty one.
On a year over year basis services grew 59% in fiscal year 2022, when compared to FY 'twenty one.
Services continues to be an exciting growth area for <unk>.
Yes.
After designing and implementing an <unk> solution.
Ips offers additional value added services to meet our customers' individualized needs including system management.
Development and operations for Dev ops, and HTC AI optimization.
These offerings demonstrates the differentiated value proposition, we offer to our customers.
What's more.
A large portion of our services revenues.
Penguin are based on longer term multi year engagements that deliver more predictable revenue and higher margins.
The market has taken notice of IVF success, and we continue to garner industry recognition.
This past quarter scientific computing World highlighted Penguin computing cloud technology practice as part of the feature on cloud technologies available to researchers that use HBC.
Heading into our first half of the year, we see continued strong demand across our Ips customer base.
As we have mentioned on prior calls.
Ips has traditionally been a somewhat lumpy business and as a result, we will continue to monitor customer demand signals as we look further out into Q1 and into Q2.
With the addition of Stratus Ips is equipped with advanced high availability and fault tolerant capabilities that will expand our future Ips offerings and allow us to more comprehensively address our customers' needs.
Now turning to our led solutions group.
Three led face strong headwinds in China, with Covid related policies contributing to supply chain constraints and impacting demand.
Revenue totaled $83 million in the fourth quarter.
Our business continues to be soft in China.
And we are also seeing demand weakness in the U S and Europe .
As such we expect to see a sequential decrease in the led business in Q1.
The key target markets for our led business remains specialty high value applications, such as entertainment and horticulture.
Premium video applications, such as fine pitch outdoor lighting designs.
In high performance general lighting applications, such as architectural and street lighting.
Three remains a technology and brand leader in the high performance led space and we are confident in our long term operating performance of the led business as macro headwinds subside.
And our memory solutions group operating under the Smart modular brand.
Revenue came in at $210 million.
We saw strong demand for our core specialty memory offerings, such as DDR, three DVR for and flash memory products from OEM customers and networking telecom enterprise computing and storage segments.
In the networking and storage markets, we are seeing an increased level of activity for our pcie Nvme SSD products.
In particular design ends are increasing for our SATA Ssds. We are also seeing strong design activity for specialty DRAM products spanning legacy technologies, such as DDR three.
And DDR for.
To newer technologies, such as <unk> and.
In compute express link commonly referred to as CSL Adil.
Additionally, on the <unk> front.
We are seeing strong customer interest for specialty form factors.
The strength, especially memory, partially offset continued headwinds in Brazil.
Brazilian smartphone and PC consumer markets were weaker in the fourth quarter as anticipated and communicated on our last call.
That said, we remain disciplined in our approach to introducing new products that meet the market demand such as <unk> Mcps DDR.
<unk> modules and Jen for Ssds, while managing our operating expenses and capital expenditures.
In order to continue generating positive free cash flows from our Brazil operations.
Longer term market trends remain favorable to our memory business overall with data center proliferation, supporting AI and machine learning application growth.
Industry migration to DDR, five and then increasing SSD attach rate and our Brazil business, all providing us with the foundation for longer term growth as we capitalize on our core competencies of engineering.
Manufacturing and service to develop differentiated solutions for our valued customers.
Now I'd like to take a step back and share some corporate level news with you as we look ahead into fiscal 2023.
First I would like to officially welcome the Stratus team, who joined US when the acquisition closed at the end of August .
In fact, we are conducting this earnings call from a stratus headquarters and Maynard, Massachusetts to celebrate this important milestone with the team in person.
I'd also like to welcome Mark Papermaster.
<unk> technology officer at AMD with.
Joined our board of directors on August 23.
Thrilled to have mark join the <unk> Board.
With the 35 plus years of engineering and technology industry experience Mark will be instrumental in helping to guide <unk> as we continue our transformation and growth in the key markets such as AI machine learning data analytics cloud and high performance computing.
Finally, I'm very proud to announce sch his commitment to achieving net zero scope, one and two emissions by 2030.
You can read about this commitment as well as other environmental social and governance efforts in our second annual ESG report.
It will be available on our website in the coming weeks.
And now I'll hand, it over to Ken.
For a more detailed review of our Q4 financial performance.
And our guidance for next quarter.
Ken.
Thanks, Mark I'll focus my remarks on our non-GAAP results, which are reconciled to GAAP in our earnings release tables now.
Now, let me turn to our results for our fiscal 2022 full year and fourth quarter results as Mark shared earlier, we had another strong year performance overall revenues for fiscal 2022 were up 21% to a record 182 billion.
Driven by strong execution across all of our businesses.
Intelligent platform solutions grew by 28% on a year over year basis to a record $441 million.
This is on top of the 30% sequential growth in the previous fiscal year <unk>.
Memory solutions grew by approximately 5% on a year over year basis to $975 million drip.
Driven by strong growth in our <unk>.
Specialty memory business.
And <unk> solutions contributed approximately $403 million in sale during our fiscal 2022, our first full year result, with this business.
non-GAAP gross margin in fiscal 2022 was up approximately 370 basis points to 25, 9% from 22, 2% in the prior year driven by margin improvements across all three of our segments.
For fiscal 2022, non-GAAP diluted earnings per share were a record $3 62.
Up from $2 61 in.
In fiscal 2021.
And adjusted EBITDA was a record $263 million.
$188 million in fiscal 2021.
In addition, we exited the year with a strong balance sheet, including year end cash balance of $363 million as well as prudent leverage.
Now, let me turn to our fourth quarter results.
Despite the macroeconomic headwinds, we reported a strong quarter of results.
By the diversification of our business and the strength of our Ips segment.
Net sales were $438 million.
non-GAAP gross margin came in at 24, 6% at the midpoint of our guidance range and non-GAAP diluted earnings per share were <unk> 80 for.
For the fourth quarter above the high end of our guidance range.
Our earnings per share were higher than the midpoint of our guidance in part due to better operating expense management lower taxes, and lower shares held by our share repurchases during the quarter.
Fourth quarter revenue by business unit was as follows.
Ips at $145 million in sale led at $83 million in sale and memory had $210 million in sales.
This translates into a sales mix of 33% for IPF.
19% for led and.
48% for memory.
non-GAAP gross margin for <unk> in the fourth quarter of 2022 with 24, 6% down from 26, 4% in the year ago quarter, primarily driven by lower sales from LCD.
non-GAAP operating expenses for the fourth quarter were $61 $1 million.
Up from $57 million in the fourth quarter of 2021.
Operating expenses were up primarily due to the continued investments in our businesses as well as a reduction from financial credits in Brazil.
Operating expenses benefited in the fourth quarter of 2022 from $2 million in financial credits in Brazil, which was down from $3 3 million in the third quarter and $7 8 million in the fourth quarter of 2021.
This credit is expected to provide approximately $2 million of benefit in our first quarter of fiscal 2023.
non-GAAP diluted earnings per share for the fourth quarter of 2022 was <unk> 80 per share compared with $1 eight per share in the year ago quarter.
And adjusted EBITDA for the fourth quarter was $56 million or 13% of sales compared to $76 million or 16% of sales in the year ago quarter.
And now turning to working capital, our net accounts receivable totaled $410 million compared with $357 million last quarter.
<unk> sales outstanding came in at 47 days up 16 days from the last quarter, primarily due to the timing of Ips shipments.
And inventory totaled $323 million at the end of the fourth quarter down from $365 million.
At the end of the prior quarter.
This decline was primarily driven by lower inventory for IPF.
We would expect an increase in inventories in the first quarter due to the timing of builds to support.
Second quarter Ips revenues.
Inventory turns were eight five times in the fourth quarter versus $10, one time in the prior quarter.
And consistent with past practice accounts receivable days sales outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $789 million and $685 million, respectively for the fourth 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.
Cash and equivalents totaled $363 million at the end of the fourth quarter compared with $387 million at the end of the prior quarter.
Fourth quarter cash flow from operations totaled $29 million.
Compared with $36 7 million in the prior quarter in.
In the fourth quarter, we repurchased two 2 million shares spending approximately $40 million during the quarter under our $75 million share repurchase authorization.
And for those of you attracting capital expenditures and depreciation capital expenditures were $8 9 million in the fourth quarter and depreciation was $10 8 million.
For 2022, we spent approximately $38 million and capital expenditures.
Our overall capital allocation strategy is as follows first and foremost we will continue to invest in our business as we see significant opportunities for further organic growth in each of our three business segments, while maintaining a strong balance sheet and prudent leverage.
We will continue to review and seek acquisition opportunities such as Stratus for further scale and diversification in a disciplined manner.
Third capital return via share repurchases provides us flexibility to return capital in an opportunistic and price sensitive manner.
For 2023, and additional focus area will be to use excess cash flow to retire debt.
Prior to turning to our first quarter guidance, Let me update you on our recently closed acquisition of Stratus, a global provider of high availability fault tolerant solutions for the data center and at the edge.
The acquisition expands our capabilities and aligns with our growth and diversification strategy.
We closed the acquisition in the beginning of our fiscal 2023 for $225 million and we will incorporate the results from the first quarter of fiscal 2023.
From a financial standpoint, Stratus fits well within our acquisition framework. It is expected to add more than $150 million of annual revenues improves our overall non-GAAP gross margins and is immediately accretive to our non-GAAP EPS.
In conjunction with the acquisition, we also expanded our existing term loan credit facility by $300 million.
We used the net proceeds to retire the $101 8 million outstanding under the <unk> earn out notes.
And along with cash on hand paid for the $225 million purchase of Stratus.
The term loan a facility bears an interest of silk or plus 2% based on the total leverage grid.
With this larger facility and inclusive of our convertible notes.
We would expect our total net interest to be approximately $8 million a quarter based on current sofa rates.
Now, let me turn to our first quarter 2023 guidance.
We expect that net sales for the first quarter of fiscal 2023 will range from approximately $425 million.
To $475 million.
Or approximately $450 million at the midpoint.
Our guidance incorporates the continued strong demand in our Ics business.
Including approximately $35 million to $40 million of revenue.
<unk> from Stratus, but is offset by macroeconomic headwinds impacting our led business and our memory business in Brazil.
Our GAAP gross margin for the first quarter is expected to be approximately 24, 5% to 26, 5%.
non-GAAP gross margin for the first quarter is expected to be approximately 25, 5% to 27.5.
5%.
Up sequentially, primarily due to the incorporation of stratus.
Our non-GAAP operating expenses for the first quarter are expected to be approximately $75 million.
Plus or minus $3 million and up approximately $14 million sequentially, primarily due to the incorporation of stratus.
GAAP diluted earnings per share for the first quarter is expected to be approximately 14.
<unk> or minus 15.
On a non-GAAP basis, excluding share based compensation expense intangible asset amortization expense debt discount and other adjustments.
We expect diluted earnings per share will be approximately 60.
Plus or minus 15.
Our GAAP and non-GAAP diluted share count for the first quarter is expected to be approximately 51 million shares based on our current stock price.
Cash capital expenditures for the first quarter are expected to be in the range of $12 million to $15 million.
And approximately $50 million to $60 million for fiscal 2023.
In part due to the migration accrete into its own facilities.
Our outlook incorporates the effects of the company's recent acquisition of Stratus. However.
We have not completed our purchase accounting and assessment of the fair values of the assets and liabilities and therefore, our GAAP outlook does not reflect this impact.
In addition, I wanted to share an expected change to our upcoming reporting.
Which will result in an expected $2 million per quarter benefit for fiscal 2023, and this is incorporated into our guidance.
We periodically evaluate plan technology transitions capital spending and reuse rates for our assets in September 2022, we completed a preliminary assessment of our manufacturing equipment and based on that assessment, we anticipate increasing the estimated useful lives.
With such equipment for five to eight years, beginning in the first quarter of fiscal 2023.
Our forecast for the first quarter of fiscal 2023 is based on the current environment, which contemplate the global macro economic headwinds and continued supply chain constraints. Please.
Please refer to the non-GAAP financial information section and reconciliation of GAAP to non-GAAP measures table.
Earnings release for further detail.
Now, let me turn it over to Mark for a few remarks prior to Q&A.
Thanks, Ken.
As we enter fiscal year 2023, I remain excited about the long term future at <unk>.
We are well positioned to excel in our key focus areas of AI machine learning data analytics, HBC datacenter cloud and advanced lighting solutions.
Our commitment to strong execution combined with our capital light model.
Give me confidence that we will be able to navigate that broader market headwinds that most if not all companies are facing.
The short term, we will manage our spending appropriately.
Maximizing free cash flow generation.
The secular demand for our differentiated solutions continue to grow.
And we remain committed to developing innovative solutions for our customers and creating long term value for our shareholders.
Operator, we are now ready for Q&A.
Okay.
Thank you Sir.
If you would like to ask a question. It is star one on your telephone keypad. If for any reason you might to remove that question in a star to again to ask a question in the star one and as a reminder, if you are using a speakerphone. Please pick up your handset before asking your question.
Our first question comes from the line of one Brian Chin with Stifel.
Your line is now open.
Hi, there good afternoon.
Thanks for letting us ask the question congratulations on the August quarter results in this tough environment.
Maybe since I'm buying lead off first question I guess I'm obliged to ask sort of in your November quarter guidance.
It's sort of the implicit.
Guide.
By segments sort of maybe like a mid single digit decline in memory, maybe flat to down Ips.
Prior to the acquisition and then lead down kind of 10% is that sort of.
Right apples to apples way to think about.
Yeah. So Brian Thanks for the question and thanks for your comments I would say if we look at Q1 and implicit in our guidance is actually we're expecting to see a bit more decline in our <unk> business and that's a result of the current macro headwinds we're seeing in China.
And also a little bit slower to band here in the U S and in Europe . In addition, I would say for the led business our expectation is.
That the distributors distributors will be burning through some inventory so our sell in will be lower.
Then the sell through at this season and that's part of the reason for the decline so I would actually anticipate that business being down.
Potentially 20% or a bit more sequentially from Q4, and then you can gauge what the other businesses are doing.
Got it got it.
I guess, maybe that's.
The place to follow up.
Since you since you acquired this out of Cree.
Then probably this has been the first dip <unk> seen in terms of revenue.
In that business.
Or is the breakeven revenue on a quarterly or annualized basis for the led business I imagine, maybe youre kind of touching it.
In the November quarter, and I guess to that end I mean, you are trying to we're trying to clean up the inventory I guess, then maybe had accumulated.
And the channel there.
Many quarters do you expect that to take place and any visibility in terms of when.
The sell through the shipping can match sort of sell out and whether sellouts also stabilizing.
Yes, so maybe a couple of questions in there Brian So let me let me see if I have addressed I can address them all so.
I would say first and foremost if you looked at the disk inventory I wouldn't say, it's as much of the buildup of inventory that occurred but what we are seeing with some of our <unk> customers as they are trying to lean on the working capital and lean out their inventories given the macro.
So uncertainty.
And.
Question number two.
When is that going to clear up it's a little uncertain given the visibility we have but I would expect base.
Based on today in today's environment.
As we move through Q2 and into Q3, we should be clear in the shipments and should start to equal the shipments out but early to tell that for certainty and obviously, we'll provide you more color as we move through the quarters.
If we looked from an overall profitability standpoint, you are correct as we look at Q1 that businesses is close to breakeven on an op income basis. Although if you include the Dod it's still profitable to us and that's where we'll look to see how.
We can optimize some of the <unk>.
<unk> is there to make sure that in the near term, we generate positive cash flow.
And then as that business recovers because this is very much macro driven versus any specific product concerns. So as the macro returns hopefully as we move into the back half of this fiscal year.
And if the fiscal 'twenty four then it should start to return to a more profitable state.
Towards the OLED business.
Got it.
Get away from this topic.
I hop off just on Stratus, given the closing of the deal.
Is it fair to say that there is between the two companies. There is a low degree of customer overlap, but a high degree of vertical market overlap and also given the earlier close of that acquisition and the necessary integration process. How long six months 12 months do you foresee before you start to see.
A positive impact in terms of cross selling synergies.
Hey, Brian This is mark I think you sized it up correctly.
Not a lot of overlapping existing customers today, which we think is the strength and potential revenue synergies out into the future.
Some overlap in terms of the vertical markets that we address and you think about what's interesting right now is that the data center business.
For Ips is driving a lot of the growth.
And with Stratus, it's actually edge, that's driving a lot of the growth so.
Not a lot of.
Overlap there in terms of.
Revenues going away. So we think from a model standpoint.
It's pretty good.
Relative to impact on the business and potential upsides from revenue synergies and some of the cost.
Opportunities we have we stated in our last call that they can deliver we're thinking somewhere in the 12 to 18 month range. We may see some small wins in the short term.
I think a majority of the impact will be a 12 to 18 months.
From time to close around the middle of our.
Fiscal year 'twenty four.
Okay, great. Thanks, Thanks, Mark Thanks again.
Thanks Brent.
Okay.
Thank you for your question Sir Our next question comes from the line of one Tom O'malley with Barclays. Your line is now open.
Hey, good afternoon, guys and thanks for taking my question I just had a just a follow up on the gross margin profile in the August quarter, I think you had called out previously.
There may be lower software contribution in the quarter, which may have been muting. The Ips gross margins, but could you just walk through the puts and takes on each of the segments margin contribution in the quarter just because.
You saw a strong Ips, which should help your mix, but you saw gross margins down.
Any color on gross margins by segment would be helpful. In August .
Sure happy to talk through that.
At a high level.
So if we looked at the overall memory business, if we look sequentially the.
The margins or reasonably flat I would say Ips as we've talked about given the growth from Q3 to Q4.
When we outlined on our last call that the there'll be more hardware centric and therefore the margin percent is down a bit from Q3 levels for Ips.
And then for <unk> given the reduction in sales from Q3 to Q4 and some of the fixed costs on the back and the margins are down in that business. So those are the puts and takes which drove the margins to that 24, 6% level in Q4.
Okay, and then and then I just wanted to revisit a prior question you gave the vector for the led business in the November quarter.
From an organic perspective is the Ips business up in the November quarter.
Yeah, So I would expect that Ips business be organically. So that's excluding the stratus business should be flat to up a bit here into our Q1 from Q4.
And then you can see what the memory business is flattish flat to down a little bit, but flattish in Q1 as well.
Okay. That's helpful. And then just just one more let me sneak in really quick.
You did the OLED acquisition I think early on you guys had talked about $350 million to $400 million a year.
There was an effort to improve the gross margin structure and the operating structure of the business clearly there is a headwind in China, but outside of just the implications that you're seeing from an inventory perspective in China.
Is there a change in customer behavior.
As a results too competitive perspective are you seeing customers go in a different direction or is it really just market weakness given what youre seeing from a COVID-19 and supply chain issue in that region.
Hey, Tom It's Mark Adams.
The latter to what you talked to relative to the demand profile.
As you might be aware, if you've looked at.
<unk> seen some of the industry structural activity.
Across the board.
Start with consumer devices led.
In that world.
Getting impacted by mobile phone.
Decline globally.
Certainly.
<unk>.
Construction builds and the likes it's also down.
There was a major competitor who announced a restructuring in the quarter.
Just a lots going on and I think.
Korea is actually very well positioned.
For our scale and continued growth.
As we kind of dance around the bottom here.
And the market I think.
Really good gross margin profile in the business.
This type of exercise will get us more efficient as we prepare to go back up and.
I'm pretty confident in this in this business given what's going on with the rest of the market.
Yeah, and Tom just to highlight as well when we look at that business right now what we're seeing is that <unk>.
Distributors are burning through some inventory and trying to lean out given the macro uncertainty. So the end demand is higher than the revenues we are guiding to.
<unk> lead in Q1.
Obviously in this type of environment that visibility is a bit uncertain.
As we look out into Q2 Q3, but if we look at history.
These.
Periods in terms of inventory Burns, usually lasts one to three quarters or so so as we look into Q2 or into Q3.
We would hope that this is behind us and our sell in will start to match our sellout.
Thank you.
Thank you for your question Sir.
Our next question comes from the line of wine <unk> Gill with Needham <unk> company.
Your line is now open.
Thank you and thanks for taking my questions I appreciate it.
Just a follow up on the guide for November specifically around the gross margin.
So just wanted to get a sense of what the gross margin organically ex the stratus.
Trending quarter over quarter.
Do we think about the inputs the puts and takes there by the different sub segments.
Yeah, So maybe I'll give it to urology and aggregate. So what we said historically is that the stratus acquisition adds.
North of 150 basis points on an annual basis to our gross margins on a non-GAAP basis, I would say given where sales levels are for Q1.
Probably closer to that 200 basis points or even a little bit more there, but in that 200 basis points range here in Q1.
Given the current sales levels.
So you can you can subtract the 200 basis points to get to where the base business sales.
And it would be similar as I outlined earlier.
Brian if we looked at the segments.
I would expect the only change is we look at the segments are the primary change would be.
Gross margins are expected to be down a little bit here from Q4 to Q1, just because of the fixed cost nature of the backend.
And the lower sales volume.
Got it appreciate that and then just on the November guide with respect to the to the revenue.
So it's Leds down 20% plus sequentially and then you indicated that Ips extra stratus will be kind of flat to up.
And implies memory overall memory will be.
Down.
Something in the order of kind of 4% or so 4% to 5%.
So the question I have is if we kind of split that between specialty memory in Brazil memory wondering if you could elaborate some of the trends that are going on within each of those segments.
Should we expect Brazil to continue to be under pressure given the economy. There are we seeing any any kind of.
Any impact on specialty memory with respect to the overall drop in memory pricing and any clarity on those.
Segment.
Hey, Roger It's Mark Let me, let me take the first part of that and I'll, let Ken piggyback.
Relative to the memory market itself.
As we guided on our last call.
Brazil has some pretty strong headwinds in the consumer.
Facing mobile phones and notebook desktop notebook market.
And that played out as we had suggested in thought.
On our last call now what I would say also as we talked about.
A specific customer.
Purchasing.
Dynamic in that quarter, as well and what we're starting to see as kind of a bottom there and bounce from the bottom we think it's probably.
Stronger slightly stronger maybe Q1 in Brazil.
And on the enterprise side of the memory the specialty memory business.
<unk> been pretty stable quarter over quarter I'll, let Ken give you the particulars with the demand profile is pretty good now.
Honestly you can.
Analyze the announcements from the memory guys in the market.
A lot of fluctuation in memory pricing, we don't tend to get hit very hard on the margin side of the memory pricing.
Because our.
Products are priced on a kind of service level model if you will.
But I would also suggest that.
Units can offset some revenue, but I think especially be kind of flattish in the quarter.
I'll, let Ken jump in and give you some kind of more particulars.
Yes, so I would say Roger if we looked at that business overall.
We have a range on our guidance as you know.
But.
It can be flat to down.
At that midpoint level down a little bit at the midpoint I want as Mark mentioned I think if we look at the Brazil business.
It did come down here in Q4 is kind of balancing that those levels here and I think the hope is as we move into Q2 and beyond we start to see a recovery in demand.
And then in the specialty business as Mark highlighted.
That's been.
Essentially at a very similar level as we look back to Q4 versus Q1.
Very helpful and just last question, Ken if I can on the Opex, the opex going up a bit.
You had mentioned $14 million sequentially, which include Stratus.
So is that kind of the opex run rate on a go forward basis, 75 odd million a quarter and should we expect synergies.
On the Opex side any clarity there would be helpful. Thanks. So much yes, so I think as Mark mentioned I would assume that for modeling purpose.
That's the run rate of the business, because we're incorporating stratus as Mark mentioned.
As we look at the combined business and all of the businesses one of the areas that we're looking at is making sure. We're prudent on the cost structure and our overall cost but from a modeling purpose I think thats fair to model in that range as you move through the year for the year.
Thank you.
Yeah.
Thank you for your question.
Our next question comes from the line of Wimax Sidney Ho with Deutsche Bank. Your line is now open.
Hi, Thanks for taking my question.
First question is on the Ips side, I think last quarter, you talked about demand trends into the first half of 'twenty three it looks pretty good and then your backlog was close to $500 million, which is three to four times. Your quarterly run rate can you give us an update on how much visibility do you have now are you seeing any kind of demand driven push hello cancellation.
And maybe directionally, how the backlog has done that I guess excluding status.
Sure.
Sidney This is Marc let me just talk to the first part of that which is the demand trend for our first half of the year.
I would say that nothing has changed since we last talked on the earnings call in Q3.
The backlog.
<unk> remains very strong and.
The implicit guide.
In Q1.
Suggest that it's still very strong for us so generally still very bullish on Ips now.
Can we see out in the Q2 again something pushed into Q2.
Sure, we haven't seen that yet, but I would also say that.
My belief is that the type of systems.
We're.
Implementing with our customers are very strategic in nature and.
Our belief is that.
Over time these systems.
Not about short term cost cutting.
<unk> and these larger enterprises, we serve.
Belief that people will invest through the cycle and these are the types of systems that were installing these AI and machine learning.
Systems for Tomorrow's enterprise so to speak so.
We are optimistic that'll play out that way.
We haven't seen an ounce of any reduction in orders or backlog relative to the front half of our year.
And I, just can't call Q3 and beyond at this point.
Okay. That's helpful. Maybe staying with the Ips if you look at the services if my math is right.
I understand it's up 11% year over year.
59% for the full year.
But it is down quite a bit from the Q3 level.
If my math is right, it's somewhere in the 15% range.
<unk> services for the quarter, just curious why that in absolute dollars that that number could actually go down so.
In other words, its fiscal Q3 more like an anomaly where fiscal <unk> is kind of right the right run rate going forward.
Yeah. So it's.
A good question Sidney so when we talked about last quarter.
We did say there were some.
Quarter specific.
Implementation and other services.
Occurred in quarter and this ties to the nature of the overall business, there's some lumpiness and variability quarter to quarter and so we tried to outline that on our last call.
That we had some items that were specific to that quarter in terms of implementation and other specific services.
That we generated with our customers if you look at this quarter.
And in Q4.
<unk> talked about.
Kind of low twenties.
The services and I think what is important in that number. However is that there is a larger portion of those services that are based on longer term engagements. So we have visibility as we look out.
12, 12 months on a quarterly basis, we have visibility and I think that's where I know theory, and the and the Penguin team in the Ips team are driving is to have further engagement better visibility more long term visibility and that complements very much what stratasys.
Doing with their services business.
I think as we look into 2023, and we're going to have a very good services year, especially inclusive of stratas business.
My guess is.
That services component for both businesses on a combined basis should be well north of $150 million.
Which is good news in terms of visibility goodness in terms of margin.
Good Miss in terms of cash flows or the overall business.
That's super helpful and if I can.
One more just a housekeeping one given how the specialty memory versus Brazil memory. They have different trends over the last couple of quarters, what portion of the memory solutions business is now coming from our specialty memory and Thats. It from me. Thanks.
Yes, we didn't break that out.
Specifically, but but if I look at the specialty business.
It is it is much larger than the Brazil business today, if I looked at both Q4 and I looked at what we're expecting here.
In Q1 so.
Overall, we've talked about that business doing about $210 million.
Q4.
And if you looked at what it did in Q3 call. It 266, the vast majority of that Delta from Q3 to Q4 was around the Brazil business.
The specialty business did come down a little bit, but now it's kind of flattening out at that level. So so Brazil has been the largest headwind.
In the memory side.
Alright, thank you.
Yeah.
Thank you for your question.
As a reminder.
Participants, who would like to ask a question to the team and a star one on your telephone keypad.
Our next question comes from the line of one Kevin Cassidy Rosemont Securities. Your line is now open.
Yes, thanks for taking my question.
My question is more around the number of RF Skus youre getting for the Ips business.
Has there been a change since all this discussion around the.
Recession coming or maybe here already.
Are you seeing any companies pulling back on their capex or.
Even comments around both private and public side as far as new RF Skus coming out.
Hey, Kevin this is mark.
At this point, we have not seen anything noticeable in terms of the activity the funnel building.
At Ics.
Actually I would say that we're seeing more opportunities remember by the way. These cycles are six to 12 months at a minimum in terms of declines in our Q2 getting a commitment in some cases and so.
It's not surprising that we haven't seen that actually our funnel.
<unk> continues to grow.
And we're also as I've talked about on prior calls we're not in a hardware only business at Ips.
So we're pretty selective in terms of the types of opportunities we want to bid on because we want to make sure. We're.
Getting paid for the value we create in the services and the overall integration of hardware software and services.
It's something that we're just going to stay disciplined to so even in that.
In that sense.
Bill or seeing a lot of.
Healthy.
Funnel building activities and.
And I would say.
The commercial side has been.
Relatively strong and then.
At the federal side, we just haven't seen anything pulled back because actually when you think about the federal piece of the business.
Commitments on this year are kind of pretty much.
Locked up and shipments are already scheduled in that part of the business and so next year people are business as usual. They don't know what the next year's spending will or will not be to the federal side is still very active as well.
Okay, great. Thanks for that explanation.
How about the supply chain for Ips in a few quarters ago. There was all types of bottlenecks.
Can you give some comments on what youre seeing in the supply chain.
Yes, I think.
We're not out of the woods yet.
Our supply chain now what's interesting is and I think I've talked about this on a prior call. We are seeing sectors and the supply chain that are demand driven recovery, which is not exactly what we want IV memory.
And yet there's other.
Other parts of.
The ecosystem other technologies that we integrate and manufacturer our systems with that are still tight so it's a bit of a hybrid or a mix, where some industries have loosened up a bit and some have not.
And we're still day to day and of course that's.
Like the least common denominator, we needed all of that kind of lineup and so our teams are working diligently to make sure we're able to navigate that and our guide implies that but.
Build out other words animal supply chain.
Okay. Thank you.
Thank you for your question.
And with that we have we have exhausted all questions in the queue. So now I would like to pass Congress over to Mark Adams CEO for any closing remarks.
Thank you operator, and thank you all again for joining today.
After a record fiscal year 2022.
We are excited about our future at SDH with a mindful eye on the current market headwinds.
We will remain vigilant in how we operate the company to balance our investment for long term success.
While being prudent spending in the near term.
And with that we will conclude.
Today's <unk> fourth quarter fiscal 2022 earnings call.
You for your participation you may now disconnect your lines.