Q1 2023 SMART Global Holdings Inc. Earnings Call
Good afternoon. Thank you for attending the S. G. H first quarter fiscal 2023 earnings call. My name is Matt and I'll be your moderator for today's call all lines will be muted during the presentation portion of the call up an opportunity for questions and answers at the end if you'd like to ask a question. Please press star followed by one.
One on your telephone keypad.
I'd now like to pass the conference over to our host Suzanne Schmidt.
Dan. Please go ahead. Thank you operator, good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss <unk> first quarter fiscal 2023 result.
On the call 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 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.
I would also like to remind everybody can read the use of forward looking statements notes 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 Thanks, Suzanne and thank you all for joining us today.
I Hope you all had a nice holiday.
Over the past two plus years we've.
We have been on a journey to transform SDH from a memory module company.
Into a more diversified set of specialty businesses spanning compute.
The lighting and memory, while each line of business is unique.
S G H benefits from what they all have in common.
First they all developed advanced technology solutions at the system or subsystem level in order to address specific customer requirements.
And second.
They are all built on <unk> core competencies in engineering design and World class manufacturing.
S G H its diversified business model.
That's driven higher quality revenue with more attractive gross margins.
Our diversity has helped us perform steadily and a challenging macroeconomic environment.
For example, in our Q1 earnings our enterprise related businesses, we're able to offset declines in our more consumer facing businesses.
In the first quarter of our fiscal 2023 revenues totaled $465 million.
Which exceeded the midpoint of our guidance range.
We also achieved record non-GAAP gross margins.
27, 8% and non-GAAP earnings per share of <unk> 79.
Both of which came in above the high end of our guidance range.
I also want to highlight that with the integration of Stratus technologies into intelligent platform solutions or Ips.
The services portion of our Q1 business now represents approximately 16% of overall SDH revenues and.
And 32% of Ips revenues, a record achievement and a clear demonstration of the increasing value we are providing our customers now.
Now, let me turn to a brief review of each of our businesses.
Starting with Ips.
Our Ips group designs and delivers complete hardware software and services for high performance computing or HBC and artificial intelligence or AI applications from the data center to the cloud and at the edge.
In Q1, Ips brands, Penguin computing, and Stratus technologies formed well.
And Ips revenue came in at a record $211 million for the first quarter up 46% sequentially.
78% compared to our Q1 fiscal 'twenty two.
Ips represented 45% of total <unk> revenue the largest component of our business in Q1.
As we've indicated on previous calls we.
We see the Ips business stronger in the first half of fiscal 2023, driven by large customer hardware installations in particular heading into our second fiscal quarter ending in February .
We are seeing strong continued demand driven primarily by installations at some of our hyperscale and federal customers.
As you've been hearing from other technology companies of late though.
<unk> visibility for demand out into calendar 2023 remains uncertain.
In November .
Penguin solutions participated in the supercomputer 2022 show the annual International Supercomputing Conference, where we demonstrated our strength in HBC and AI enabled solutions.
We made several key announcements including.
The launch of Penguins, new skilled cloud central control plane, which provides management and orchestration across an organization is on premise and cloud based resources to create flexible hybrid H B C and AI environments.
Our partnership with Google Cloud that gives our customers more choices for rapid cluster deployments with Penguin services pay as you go model and point and click integration with dozens of common HBC and AI applications tools and libraries.
And the acquisition of Colorado code craft, a small private company specializing in safeguarded remote work and collaboration software solutions.
The addition of Colorado code craft solutions is expected to enhance penguins virtual desktop infrastructure or VDI capabilities and expand our IP portfolio.
The integration of Stratus technologies into Ips remains on track.
With the addition of Stratus Ips has a comprehensive portfolio of edge.
<unk> and cloud solutions and services to meet the end to end needs of an even broader customer base.
Penguin, our Stratus are now actively working together to identify new business opportunities and revenue synergies.
In addition, one of our top priorities is to increase our recurring services businesses as a larger component of the solutions, we offer our customers.
Now turning to our led solutions group, which produces application optimize leds for products like specialty lighting video screens gaming displays outdoor and architectural lighting.
Cree Leds face continued headwinds in China with Covid related policies contributing to supply chain constraints.
And impacting demand for the entire industry.
In addition to continuing softening in China, We're also seeing demand weakness in the U S and in Europe .
Yeah.
For the first quarter of fiscal 2023 led solutions revenues totaled $63 million.
In Q2, we expect revenue to be lower driven by declining demand and further channel inventory reductions.
Given this challenging macroeconomic environment for the led business, we have been proactively containing cost and adjusting our ongoing operating expenses accordingly, while optimizing our business for the current environment.
We continue to invest in developing innovative technologies for Cree Leds key target markets of specialty high value applications, including entertainment and horticulture premium video applications, such as fine pitch outdoor lighting designs and high performance general lighting applications such as <unk>.
Architectural and street lighting.
During the first quarter the team launched spectrum optimized photo fill leds across.
Hi, and mid power platforms.
For horticultural applications and introduced a new X lamp CMV product family with higher power higher performance B or chip on board devices.
Cree Leds remains a technology and brand leader with strong intellectual property and we remain confident in our long term operating performance of the led business once macroeconomic headwinds recede.
And our memory solutions group revenue came in at $192 million or 41% of total SBA sales.
As expected sales decline from Q4 fiscal 'twenty two levels, primarily due to a reduction in the worldwide memory pricing and softening demand our core specialty memory business, which is focused on enterprise end markets remains relatively stable.
Demand remained solid in the networking and telecom segments.
On the technology front, we continue to see growing interest in smarts, new family of Dura Flash Pcie, Nvme and SATA products across various form factors.
Longer term, we remain focused on expanding our memory business into enterprise compute applications to meet the growing demand within the data center and in the cloud for AI and machine learning capabilities.
Customer interest in our compute express link or CSL products continues to grow as we have multiple designs underway in order to support memory expansion and acceleration for datacenter and cloud service provider applications.
We also expanded our DDR five module lineup for played storage and computing applications and recently introduced a new family of data Center Ssds for Hyperscale or hyper converged enterprise and edge computing data center applications. The.
The global weakness in Pcs, and mobile phones impacted our business in Brazil.
Looking into Q2, we expect further softening, which has historically also seasonally lower demand quarter.
As one of the largest memory companies in Brazil, we continued to invest for the long term.
Our <unk> factory has completed a number of key product certifications and we see ongoing demand in Brazil for locally produced ssds with customers preparing to move to latest Gen. Four products in calendar year 2023.
We are also seeing initial shipments of memory for <unk> mobile phones with the expectation of increasing market adoption in calendar year 2023.
I'll stop here and hand, it over to Ken for a more detailed review of our Q1 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, let me turn to our first quarter fiscal 'twenty three results.
Despite the macroeconomic headwinds we reported a strong quarter in fiscal Q1 helped by the diversification of our business strong execution and the strength of our Ips segment, which includes our recent acquisition of Stratus.
Net sales were $465 million and non-GAAP gross margin came in at a record 27, 8% above the high end of our guidance.
non-GAAP diluted earnings per share were <unk> 79 for the first quarter also above the high end of our guidance.
In addition, beginning in the first quarter of 2023, we will be disclosing our overall SG&A to revenue and cost of sales by product and services or.
Our services revenue and includes longer term services as well as point in time services, such as logistics and implementation services.
With the addition of Stratus in the first quarter of 2023, our overall service revenues reached $75 million up from the $33 million in the year ago quarter.
First quarter revenue by product and services were as follows product revenues were $390 million in service revenues were $75 million.
First quarter revenue by business unit was as follows Ips had a record $211 million led.
$3 million in memory $192 million.
This translates into a sales mix of approximately 45% Ips, 13% led and 41% memory.
non-GAAP gross margin per S. GH in the first quarter of 2023 was a record 27, 8%.
Up from 27% in the year ago quarter helped by the inclusion of Stratus within Ips, but offset by lower sales from non-GAAP operating expenses for the first quarter were $74 $4 million.
From 61 $1 million in.
In the fourth quarter of 2022 and from $57 9 million in the year ago quarter.
Operating expenses were up primarily due to the inclusion of stratus, which accounted for $18 7 million of our operating expenses in the first quarter.
Operating expenses also benefited in the first quarter of 2023 from $2 6 million in financial credits in Brazil, which was up from $2 million in the fourth quarter of fiscal 'twenty, two but down from $5 9 million in the year ago quarter.
This credit is expected to provide approximately $1 million to $2 million of benefit in our second quarter of fiscal 2023.
non-GAAP diluted earnings per share for the first quarter of 2023 was <unk> 79 per share compared with the dollar and <unk> <unk> per share in the year ago quarter.
Adjusted EBITDA for the first quarter of 2023 was $63 million.
Or 14% of sales compared to $77 million or 16% of sale in the year ago quarter.
And now turning to working capital our net accounts receivable totaled $306 million compared with $410 million last quarter Dave.
Days sales outstanding came in at 33 days down from 14 days last quarter, primarily due to the timing of collections or Ips.
Inventory totaled $416 million at the end of the first quarter.
Up from $323 million at the end of the prior quarter.
This increase outlined during our last earnings call was driven primarily by inventory required to support our Ips revenue in the second quarter.
We would expect inventory to come down significantly by the end of the second quarter.
Inventory turns were seven times in the first quarter versus eight five times in the prior quarter.
And consistent with past practice net accounts receivables days outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $843 million and $725 million respectively for the first quarter.
And as a reminder, the difference between gross revenue and net sales is related to our logistics services.
Which is accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as net sales cash and cash equivalents totaled $325 million.
At the end of the first quarter compared with $363 million at the end of the prior quarter.
First quarter cash flow used in operations totaled $74 million compared with cash provided by operations of $20 9 million in the prior quarter.
The primary reason for this was the prepayment of the $101 $8 million earn out note from the Cree led the acquisition we accounted for a majority of this prepayment in our operating cash flow given it was a contingent consideration.
In addition in the first quarter, we increased overall inventories to support expected demand for Ips in the second quarter of fiscal 2023.
In the first quarter, we repurchased 182000 shares spending $2 $8 million during the quarter.
In aggregate, we have spent approximately $53 million under our $75 million share repurchase authorization through the first quarter repurchasing approximately two 8 million shares.
For those of you tracking capital expenditures and depreciation capital expenditures were $11 6 million in the first quarter and depreciation was $8 $9 million.
In the first quarter of 2023.
In conjunction with the acquisition of Stratus, We also expanded our existing term loan credit facilities by $300 million.
We used the net proceeds to retire the $101 8 million outstanding Cree led the earn out note.
And along with cash on hand paid for the $225 million purchase of Stratus.
The term loan a facility bears an interest at sofa plus to two 5% based on a total leverage grid.
For the second quarter, we would expect our total cash net interest expense to be approximately $8 million based on current so far right.
Turning to our second quarter 2023 guidance.
We expect that net sales for the second quarter of fiscal 2023 will range from approximately $410 million to $460 million or approximately $435 million at the midpoint.
Our guidance for this next quarter incorporates the continued strong demand in our Ips business offset by lower demand in our memory and LNG businesses.
Our GAAP gross margin for the second quarter is expected to be approximately 25% to 27%.
non-GAAP gross margin for the second quarter is expected to be approximately 26% to 28%.
Our non-GAAP operating expenses for the second quarter are expected to be approximately $75 million, plus or minus $3 million and up slightly from the first quarter in part due to the timing of nonrecurring engineering costs to support our Ips business.
GAAP diluted earnings per share for the second quarter is expected to be approximately 13 <unk>.
Or minus 15 cents.
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 <unk> 15.
This also includes the benefit of approximately $3 million from an asset sale accounted for in non operating income.
Our GAAP and non-GAAP diluted share count for the second quarter is expected to be approximately 50 million shares based on our current stock price cash capital expenditures for the second quarter are expected to be in the range of $12 million to $15 million in part due to expenditures to migrate Cree Leds.
Into its own U S facility.
We continue to manage our operations in a prudent manner as we navigate a challenging environment, while also continuing to invest in our long term growth.
Our forecast for the second quarter of fiscal 2023 is based on the current environment, which contemplates the global macroeconomic headwinds and continued supply chain constraints.
Please refer to our non-GAAP financial information section and reconciliation of GAAP to non-GAAP measures tables in our earnings release for further details.
Now, let me turn it over to Mark for a few remarks prior to Q&A.
Thanks, Ken.
We remain very excited about the future of SDH.
As we've mentioned our fiscal 'twenty three is front end loaded with some large ips installations.
And like many technology companies we.
We have limited visibility into the demand environment in the second half of our fiscal 2023.
With that in mind.
I want to reiterate our commitment to our shareholders that we will remain vigilant in how we operate the company in the near term.
Investing for long term success.
I do want to highlight that this quarter, despite the macroeconomic headwinds, whether China's COVID-19 environment weakening consumer demand or increasing interest rates our team.
Complex record non-GAAP gross margins.
We credit our Capex light model.
Our diverse set of businesses and our continued focus on delivering value added differentiated products and services that enabled our solid operating performance in these challenging times.
Operator, we're now ready for Q&A.
Absolutely if you will.
To ask a question. Please press star followed by one on your telephone keypad.
Any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one.
As a reminder, if you're using a speaker phone. Please remember to pick up your handset before asking your question. We will close here briefly is questions registered.
Yeah.
The first question is from the line of Brian Chin from Stifel. Your line is now open.
Hi, good afternoon, thanks for letting us ask some questions and congratulations on the results.
Maybe first question Mark.
Like do you expect mix in the February quarter to be fairly consistent with the November quarter.
And margins down a little bit is that just sort of on service versus hardware mix within Ips or is there another consideration there.
And then I have a follow up question.
Yes, let me take the first part of the question, which is around just relative.
<unk> of the business.
As we go into our second quarter.
Obviously, we have a very consumer.
<unk> focused businesses are facing business in the Brazil.
Mobile phone and PC business.
Which has historically been a little bit softer in the quarter anyway, and then the led business is demonstrating very similar similar characteristics. So the overall trend line of the business from Q1 to Q2 is kind of on a on the same trajectory relative to mix and margins I'll, let Ken chime in and Brian . Thanks for the call Yeah, If we look at.
The trajectory from Q1's acute to theirs.
There's very little movement in the margin profile, but it says Marc highlighted that's a couple of factors one being we're expecting the OLED business to be down slightly in Q1 to Q2 and margins will come down given the fixed cost on the backend.
And then too.
You hit it earlier, which is on the services piece.
We have some of the services that are more onetime in nature. So we would expect services revenue overall for the company to be down slightly and so those are both a mix related items are based on the revenue profile.
Okay. Thanks, that's helpful and then for the follow up.
Are you at all surprised or are you anticipating the softer memory prices and kind of your pass through to customers. Do you think that will have become more of a headwind in either February or may quarters.
And the memory solutions business and also.
I know you've alluded to consistently that the fiscal first half is stronger for Ips basing the way some of those projects are sort of setting up.
I know, it's kind of hard to make a firm commitment here, but do you think sort of that first half second half mix could be something like a 55% revenue first half versus 45% second half just trying to get some idea of sort of how severe that first half second half dynamic could be.
So I'll take the first part relative to the memory market.
As you can see from.
The pure semi players in the memory space the pricing environments.
Pretty challenging and we see that in Brazil, we see it both in terms of.
The top line revenue and also the overall.
Demand environment.
So just from a broader macro so it's kind of a it's a very challenging and a consumer facing business like that in the specialty business.
Actually we have seen some of the pricing pressures you are referring to but less so.
More stability not not perfect, but more stability in the pricing in memory versus consumer.
When you look at the specialty pricing.
Our margins actually are pretty good in the specialty memory business gross margins are pretty good.
As it's our pricing.
Revenue kind of stabilizes the gross margin contribution for our services that we provide the value add we provide actually drive gross margin slightly.
Up in the in that sense, and so I would say.
<unk> pricing.
It doesn't feel great right now in the memory space, if I just listened to the larger semi people in their reports.
But it but in our business is less less impactful in the specialty business has been more stable.
Yeah, Brian in terms of.
The Ips break out it's still a little bit too early to call the second half but.
If you if you ask me today, it's probably in that 50, 545, or 60 40 range.
As we see it today, but as I mentioned, we don't have clear visibility as we look out two quarters and we have pretty good visibility into Q2 and pretty good visibility into Q3, and we're still building the backlog and the bookings as we head out into Q4 into 2024 as well.
But I guess in terms of component availability. If you did have kind of quote unquote turns business you'd probably be in better position to fulfill that now than six months ago.
Yeah, that's right I would say if you looked at the supply chain today.
The supply chain today is much better than it was six months ago, there's still some components out there.
And shortages within specific semiconductor and other parts, but definitely much better today.
And then it was six months ago.
Great. Thank you.
Yeah.
Thank you for your question.
The next question is from the line of Kevin Cassidy with Rosenblatt Securities. Your line is now open.
Yes, Thanks for taking my question and congratulations on the great results.
Hum.
Stay on the Ips and visibility of the second half of the year.
Can you give us a little more description of maybe what you're seeing as far as RF Skus go in from both the public and private sector.
And then also are there service contracts that are up for renewal.
As you go out into the second half of the year.
Hey, thanks, Thanks for the questions Kevin.
I think the way I would suggest is that the RF queue process.
<unk> is fairly stable I wouldn't say, it's increasing but fairly stable.
Where I think the visibility gets challenge.
Both in federal and commercial is.
The implementation of the project are.
Schedules that we just can't see and we're just trying to be careful and cautious on a better understanding that three quarters out so.
We're giving you some guidance on Q2 here, but we're just trying to trying to be careful and in this environment.
To make sure that this the deliveries that we have and we're looking at in the back half will go off as planned and so we're just monitoring monitoring that no kind of week to week month to month, that's the kind of game we're in right now.
As it relates to the service piece of the business.
A lot of the services, we have not all but a lot of them are.
Kinda on schedules I'll, let Ken talk to that in a second but they are on schedules and that's where we get a little bit more color on predictability.
On the recurring nature of those services and that's really a strength of the business that we're continuing to look to build.
So Kevin Thanks, Thanks for the call is if we look at the services component and you look at those that have higher visibility and I would exclude things like implementation services or logistics services that come in but it can come in in any periods in a different size.
It's probably in the neighborhood I'd say in that $15 million range, plus or minus that are more on an annual recurring basis. When we have better visibility, even looking out to a year or so I think that's one of the things that we've highlighted over the last.
Year, and a half years trying to build.
More recurring revenue base.
And with Stratus, along with what the team at Ips and even within the memory business has been doing we we have a lot more services, which hopefully provides more stickiness and more value and demonstrates the value, we're providing to our customer base.
Okay. Thanks for the color.
Maybe turning to the specialty memory.
Our two exciting things happening in the memory market with DDR five.
And also see X L R.
Are you still thing as a custom solutions for those those products is that correct first and then what do you see as activity.
For custom versions of the DDR five Andy I think Seattle.
Look I think Kevin the.
The long term view of specialty memory for us is really really pretty positive.
Obviously.
All of us have seen the cyclicality in the broader memory markets and we're kind of in that place.
Place today, where there's just a lot of oversupply.
Pretty much demand driven and then the capacity and the memory players are adjusting accordingly.
In the short term again as we said.
<unk> will be a challenge demand in the consumer space will be a challenge.
But as you've noted there's a number of trends that speak to a positive demand over over a longer term horizon and that being.
Five G in mobile that being enterprise and high performance specialty computing.
Driven by AI and machine learning.
And then just broader need for high performance memory high bandwidth memory, enabling compute.
The challenges that are out there in terms of even high performance computing that we get pretty good exposure with the Penguin business, we see the demands on memory and as you're referring to controller based memory compute express lengths EXL like applications.
A lot of the DDR five CSL five G. The demands are good automotive are all of those will be long term tailwind on the demand side.
But right now we're in a in a market that just as a.
Oversupplied and then it's kind of if they're not able to call. The turn so to speak and so we're gonna be careful on how we see it in the short term, but we like the specialty business. We think it's performed much better over the last couple of years under Jack's leadership, and we're pretty positive about that in terms of the long term prognosis justice.
The market conditions, we're in are hard to call.
Okay.
Okay. Thanks.
Okay.
Thank you Scott.
Thank you for your question. The next question is from the line of Rajeev <unk> with Needham <unk> Company. Your line is now open.
Yeah, Thank you and congrats again and happy new year.
Just a question on the.
The good progression in the services revenue.
I think based on my numbers the service revenue.
We've really grown almost probably doubled.
Tripled over the last several quarters and now you're starting to break it out.
Can you talk a little bit about how stratus is helping.
Contributing to that and then.
Ken you mentioned kind of two components of the services.
The long term service contracts and then you have the point in time I believe is what you mentioned can you maybe elaborate further on kind of what youre seeing within the mix of services and how youre kind of catering the business on a go forward basis.
Well. Thanks, Thanks for the question Ravi I'll answer the first part I'll, let Ken talk to the back half of the question.
Stratasys business are the value add has been they're their ability to maintain.
High availability fault tolerant type of availability the industry calls it five nines, which is 990, 959% above time and they do that through.
A lot of remote monitoring proactive a system management.
Capabilities that they have and they also have a pretty good software platform for doing so and so.
We are definitely evaluating how we can take advantage of that to scale.
Beyond just their their platform at stratus into more Ips specific.
Customer environments and so.
The combination of two.
Put us in a really good position to drive.
Continued value added services relative to the the nature of these agreements I'll, let Ken comment, yes. So I think you've mentioned and if we look back at the <unk>.
Transcript now a year ago, we had about $33 million of services.
And in this quarter, it's closer to $75 million.
And within that there are what I would say longer term contracts those can be.
Up to a year, sometimes even longer than that.
We're providing a variety of services for our customers.
Which mark has mentioned just be just before.
And that's the number I provided to Kevin just a few minutes ago, that's probably those longer term services.
Probably in that $45 million to $50 million range a quarter and then there are more kind of one time or a point in time type of services.
That can occur every quarter and so that's a rough split.
The services component, but it just shows or hopefully showcases the value that we continue to provide.
Customers, it's beyond the hardware.
And those services really provide some stickiness with our customer base.
Yeah.
No I appreciate that and for my follow up.
On the gross margin.
The gross margins I believe kind of close to a record.
Given the strong mix of services at nearly 28% and you got a 27%.
I know that.
The Ips segment is lumpy.
And therefore, the margins associated with that revenue stream are often lumpy.
But when we go into May in the August quarter in the November quarter.
Are there potential offsets to that Ips Lumpiness, you talked about obviously more longer term services revenue or should we be kind of modeling more seasonality in the margins.
In the second half given kind of a drop off in Ips.
Kind of curious literally time thank.
Thank you.
Sure. So Roger I think as you look at the <unk>.
<unk> from.
From Q1 to Q2 part of that is the mix that I mentioned around services overall, and we expect the overall services component to come down a bit.
Q1 to Q2 and the other piece that we highlighted on the on the transcript was that.
The led business is expected to be down a bit and therefore, given some of the fixed costs. We have on the back end side, even though we have no front end manufacturing we have some fixed costs in the back end side. So we would expect margins for that business to come down.
As revenues come down into Q2 and that is what is driving the margin profile down a bit Q1 to Q2, but still if you look back even a couple of years ago. This business was doing 19, 20% gross margins and in Q2 were guiding to 27% on a non-GAAP basis.
And so very healthy margins much different business today.
It has been in the past as we look out in time, there will still be some lumpiness.
Penis.
As it relates to Ips I think we've talked about that on a number of our calls based on how much hardware. We have how much services, we have which can be point in time for that business as well.
But you know I feel like we are hopefully at a much.
Much healthier state in terms of the margin profile.
Just based on the guidance for Q2, which is as I mentioned, 27% plus or minus a point.
Got it and just if I could just squeeze one more and then ill step back in mature.
The challenges in the Brazil business.
And it looks like I know you don't break out the Brazil business anymore.
Respected specialty, but looks like Brazil is coming down 40, 50% something in that range and more pressure on the PC consumer.
I'm curious you know you did then also talk about some trends.
<unk> and other areas.
Uh huh.
How are you thinking about the Brazil.
Market consumer or we do you think we're approaching a bottom as the inventory kind of cleared out there and then we're going to have a little bit of a rebuild in more of a secular push to five G. Renewable catches up to the rest of the world and I'm curious, how you're thinking about the Brazil. Thanks again, yes, I think.
I think the way we look at it is.
The consumer memory business is most aligned with the challenges in the broader memory supply and demand dynamics, just given the end markets and the amount of memory those markets consume in terms of the overall.
Industry supply and so we think that as we sit here today.
As the supply and demand balance.
Hopefully normalizes that business will recover in addition to we think we're pretty well positioned down there yes.
You looked at the the memory.
Competitors are the suppliers of the memory semiconductors and their revenues down.
Significantly and you'll see that in our consumer business.
But the dynamics of us with five G.
Ssds coming on in Manassas, and starting to.
To be able to build that business up as Pcs and servers get back into into a positive demand.
It's kind of hard for us to say that you know.
This next quarter is the bottom, but coming through the holidays and to your point about inventory.
Just say, we're hoping that we're bouncing around the bottom here and hoping that Q3 is where we start to see an uptick it's but the visibility for us is as tough as it is for the pure memory guys.
Okay.
Okay. Thanks Ravi.
Next question.
Thank you for your question as a reminder, it is star one on your telephone keypad to ask a question.
The next question is from the line those Sidney Ho with Deutsche Bank. Your line is now open.
Great. Thanks for taking my question.
Maybe start off with a clarification one how much this stratus contribute to revenue in fiscal Q1 first just your expectation of 35 to 40, it looks like the organic business performed better than you expected and I'll ask a few more questions on that.
Sure that revenue.
Came in closer to that $45 million number for Q.
For Q1.
Okay great.
And the margins were but I would just I would just also comment Sidney.
We've got two parts of the business that we've talked about in the past one of the data center, which is primarily service driven in and there are some upgrades along the way and then there's an edge business and the.
Growth Ken just highlighted there in his response the growth really came from upsizing their edge business, which is something more broadly we're really encouraged about that.
As a long term play and the fault tolerant.
Hi availability edge products.
Great maybe just double click on the entire Ips revenue.
Revenue was $211 million for Q1 can you give us a rough breakdown by end market between federal spending versus hyperscale customers versus commercial and are you seeing different trends between these end markets in terms of the ordering patterns.
I'd say, we're not going to break out as you asked at that level, but we can give you the.
That's the second part of your question more on the trends.
I think it goes back to what we're seeing stable demand.
As far as we can see but.
Certainly, we've given ken's, giving guidance for Q2.
And in the kind of.
Building of our funnel has been relatively stable again I might comment still holds my earlier clip from the earlier question.
That and in these types of market conditions, it's more around customer project management in terms of what they do in their budget process and do they push things out do they move things and what have you.
We see a.
Our continued investment across the commercial enterprises and not breaking those out in any particular format.
And the government.
Which.
Had been somewhat muted a little bit during the COVID-19 the highest point of Covid over the last couple of years. We think this year. It has been it will be positive in the first half maybe even into Q3.
But again, it's really hard to see what's going to happen.
And so it has to do with really our customer environments, and how theyre going to play their capital dollars and in their investments.
Okay. That's helpful. Maybe switching gears to the <unk> business, you talk about the business being impacted by headwinds in China, and maybe in the USA and Europe as well how do you expect the reopening of China going to impact that this is positive for me I guess when will you start seeing the benefit in the February quarter, a boy in the May quarter and did you.
Touch on the profitability of the business what are you doing to contain costs that would be great.
Yeah well.
As we've talked about we're not calling the bottom to.
To show up here in February quarter.
We've kind of guided that this that this is actually because of the holidays and Chinese new year is in the same quarter given our fiscal quarters.
We're not.
Not seeing a bounce in this quarter, so I would be muted a little bit in terms of our are calling the bottom here in the quarter, we'd like we think that.
With distribution.
Burning a fair amount of inventory in Q1 and still in the Q2.
And as you said, China, starting to open up a little bit we could see some of that.
Hopefully in our third quarter.
And then as far as.
That's the things we're doing are two two to manage our costs.
Head count freeze that type of thing.
When we've looked at that type of support we have in our in our backend facilities and maybe we're optimizing around the number of lines were running.
<unk> was running their capital are looking at capital deployment and then how we can move that out.
And with the market dynamics in just a number of things.
It's actually been a pretty meaningful number but as you highlighted and that people highlight on the call. The led business has gotten hit very similarly to Brazil. So.
We're balancing out.
Good efforts on the cost containment with not trying to hurt the business for the long term because we do think it will bounce back at some point here.
Okay, maybe one last one for me.
Given the high interest rate, how should we think about interest expense going forward and what portion of your debt is hedged at this point. Thank you.
Yes, so I'll answer that but if you look at our net.
Interest expense.
In the formal script, we'd expect that to be at about $8 million. So that's both the interest expense and interest income on a cash basis about $8 million.
And that's based on today's sofa right. So one of the things that we can't predict is.
Those rates will go.
But what we have been doing a good job is with the cash on hand, getting better and better interest income over time, but for now I would assume it's at that $8 million range of cash net interest expense.
Per quarter.
And that can fluctuate depending on what the fed does.
If you look at the kind of floating versus fixed on the debt, it's about 70% floating.
And 30% fixed the biggest piece of the fixed is that convertible note that set fixed rate of 2.25%.
And then R. T L. A which is about 570 billion in size that's it so for <unk>.
Plus 2.25%.
Okay, great. Thank you.
Thank you for your question.
There are no additional questions waiting at this time.
Pass the conference back to Mark Adams CEO for any closing remarks.
Well again, thank you for joining us today I'd like to thank all of our employees worldwide for a great.
First quarter, especially in these market conditions I'd like to thank all of you for attending today and look forward to seeing you.
At various conferences and for those of you will see a C. Yes, we will see you then have a great day. Thank you.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.