Penguin Solutions Inc (PENG) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to SMART Global Holdings First Quarter of Fiscal 2018 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Suzanne Schmidt, Investor Relations. Ma'am, please go ahead.

Thank you, operator. Good afternoon, and thank you for joining us on today's earnings conference call to discuss SMART Global Holdings First Quarter Fiscal 2018 Results.

Iain MacKenzie, President and CEO, will begin the call with a discussion of the market and the business; followed by Jack Pacheco, Chief Operating and Financial Officer, who will review the financial results in more detail and provide the forward guidance. We will then open the call to your questions.

As a reminder, our earnings press release and the replay of today's call can be accessed under the Investor Relations section of SMART's website at smartgh.com.

We encourage you to go to our website throughout the quarter for the most current information on the company, including information on the various financial conferences we will be attending.

Before we begin the call, I would like to note that today's remarks and the answers to questions may include forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections and future market conditions, is a forward-looking statement. Actual results may differ materially from those expressed from these forward-looking statements. For more information, please refer to the risk factors discussed in documents we file from time-to-time with the SEC, including our most recent Form S-1, which was filed in conjunction with the company's recently completed secondary offering. We assume no obligation to update these forward-looking statements, which speak as of today.

Additionally, during this call, non-GAAP financial measures will be discussed. Reconciliation for those directly comparable GAAP financial measures are included in today's earnings press release.

And now, I'd like to turn the call over to Iain MacKenzie.

Thanks, Suzanne. Welcome to everyone on the call.

Our fiscal 2018 got off to an excellent start, with Q1 net sales of $265.4 million and non-GAAP diluted earnings per share of $1.05. This performance reflects the strength of our growing portfolio of differentiated products and services and to healthy customer demand and the improving financial leverage in our operating model.

The economy in Brazil continues to recover and the ongoing positive dynamics in the global memory market are providing tailwinds to our business momentum. Outside of Brazil, both storage and network telecom markets remain areas of strength for our Specialty Memory business, as the competitive landscape remains in our favor with our focus on these solutions with long product life cycles.

Now for a few comments on the overall memory market. A number of industry reports point to the continuation of a more balanced supply-demand dynamic for the DRAM market. Demand continues to be robust from servers and smartphones at the same time, as net wafer capacity addition remains limited due to the fab conversions.

As for NAND, demand is expected to continue to outpace supply despite new capacity ramping in 2018 and yields improving on the capacity that was added and committed in 2017. This demand is predominantly being driven from both enterprise storage and smartphone memory needs. At this time, we expect normal price declines for calendar 2018 as additional supply comes online. However, NAND price declines may result in some unit increases through elasticity of demand.

Turning to SMART Brazil. We just completed our ninth consecutive quarter of growth. We're benefiting from our unique position as the only player of scale in Brazil DRAM and the only provider of semiconductor packaging, programming and test for eMCP components for the mobile memory market in Brazil.

We've continued to strengthen our long-term strategic wafer supply and technology partnership, providing us with access to stable and competitively priced wafers. Additionally, the macro environment continues to improve. Not only do we expect the unit demand for our products to increase, but as the memory densities are growing ahead of expectations, our ASPs are being positively impacted.

As customer are pulling in product deliveries to meet their calendar year 2017 local requirements, we continue to step up our manufacturing capacity for mobile smartphone memory in calendar 2018. And beyond 2018, we expect to continue to benefit, as the local requirements continue to expand and we evaluate entry into new end markets such as wireless communication modules. We believe there is significant runway for future growth ahead of us.

As for our Specialty Memory business, we see growth ahead in both DRAM and Flash, as we have increasingly diversified our business and products. We have a 30-year history of delivering innovation in specialty Flash and DRAM products to meet the needs of our OEM customers. The long design end cycles of our products with deep engineering collaboration result in sticky customer engagements to support the product life cycles that can span up to 10 years or longer. Our differentiated position results in a long-term strategic relationship with our customers and provides a relatively predictable revenue stream.

So now I'll hand you over to Jack to discuss the financials in more detail.

Great. Thank you, Iain. As Iain mentioned, we just completed our ninth quarter in a row of growth in Brazil. Now the Brazilian economy is beginning to grow as well. GDP growth is expected to be close to 1% this year and over 2.5% next year. Inflation is dropping as well. And the Brazilian central bank has also lowered its overnight rate called the Selic to 7%. This was over 12% a year ago. All these signs point to an economy on the rebound, and we're seeing that in our results.

Gross revenue for the first fiscal quarter was $494 million. Our net sales were $265.4 million. The difference between gross revenue and net sales is related to our Supply Chain Services business, which are accounted for an agency basis, meaning that we only recognize as net sales the net profit on the Supply Chain Services transactions. Net sales increased 19% over the previous quarter, as unit sales increased and the average selling prices remained favorable.

First fiscal quarter 2018 net sales were broken down by geography as follows: Brazil, 60%; Asia, 19%; U.S., 17%; other Americas, 2%; Europe, 2%. Our breakdown of net sales by end market for the first fiscal quarter was as follows: mobile and PCs, 56%; network and telecom, 18%; service and storage, 17%; industrial, aerospace, defense and other, 9%.

Moving to the rest of the income statement. Non-GAAP gross profit for the first quarter was $58.1 million, up 20.5% as compared with the last quarter's $48.2 million. Non-GAAP operating expenses increased 2.6% quarter-over-quarter to $23.4 million, as we maintained our expense discipline during the quarter. Non-GAAP net income for the first fiscal quarter was $23.8 million or $1.05 per diluted share compared to $17.4 million or $0.79 per diluted share in the prior year quarter. Adjusted EBITDA increased 18% to $36.9 million in the first fiscal quarter.

Turning to working capital. Our net accounts receivable increased to $236.2 million from $183.3 million last quarter. And our days sales outstanding was 42.5 days for this quarter compared with 38 days last quarter. The Thanksgiving holiday caused some of our collections to fall into Q2, as our quarter ended on Friday of Thanksgiving week.

Inventory increased slightly to $128.2 million from $127.1 million in the prior quarter, while inventory turns of 13.6x was up 11% from last quarter's 12.3x, which is an outstanding performance in the current memory environment.

Consistent with past practice, accounts receivable and inventory turnover are calculated on a gross sales and cost of goods sold basis, which totaled $494 million and $436.1 million, respectively, for the first fiscal quarter of 2018.

Cash and cash equivalents totaled $22.5 million at the end of the first quarter. First quarter cash flow from operations was $14.3 million compared with $6 million in the prior quarter.

Now let me turn you over to our guidance. While we previously indicated we expected our second quarter to be in line with our first fiscal quarter, we now believe that our second fiscal quarter will be ahead of what we accomplished in the first quarter of fiscal 2018. SMART estimates that our second quarter fiscal 2018 net sales will be in the range of $280 million to $300 million and gross margin for the quarter will be approximately 21% to 23%. GAAP earnings per diluted share is expected to be between $1.18 to $1.24 on a non-GAAP basis. Excluding stock-based compensation expense and intangible amortization expense, we expect non-GAAP earnings per diluted share will be in the range of $1.30 to $1.36. The guidance for the second fiscal quarter includes an income tax provision expected to be in the range of 14% to 18%.

The number of shares used in computing earnings per diluted share was 23 million. Capital expenditures for the second fiscal quarter are expected to be in the range of $14 million to $16 million.

Finally, a quick note on tax reform. We're still evaluating its impact, but we do not believe it will have a significant impact to our FY '18 tax rate. As further clarity around this legislation develops, we will provide appropriate updates. Please refer to the non-GAAP financial information section and the reconciliation of non-GAAP financial measures to GAAP results and the reconciliation of GAAP net income-loss to adjusted EBITDA tables in the earnings press release for further details.

That concludes my remarks. Operator, we're now ready for questions.

(Operator Instructions) Our first question comes from the line of Sidney Ho with Deutsche Bank.

Well, given the tight supply-demand, how do you monitor the level of double-ordering that you may have received? And on the flip side, do you see any of your segments that suggest supply could be easing for that? I mean, DRAM versus NAND versus non-Brazil or by end market?

Sidney, we're seeing no evidence of inventory building type to be -- our own inventory was particularly light at the end of that quarter. Seeing nothing in our customers that suggests a build at all.

No, no, our customers are still screaming for parts. I mean, you saw inventory numbers are low. So we're shipping as fast as we can build parts to the customer base. So there's no evidence of double-ordering at all from them.

And then supply, we have a particular dynamic. So DRAM continues to be tight and has a small single-digit price increase into this quarter. So that continues. And actually on NAND, we're going to buck the trend a little bit, Sidney, because most of the press you're hearing is on 3D NAND. And in fact, we don't plan in the first 6 months of this calendar year to really use any 3D NAND, (inaudible) versus planar, which actually had the capacities and the supply is reducing. So we think we're likely to see a slightly different dynamic from the headline.

Okay, great. That's helpful. Well, with regards to your guidance for next quarter, do you think the midpoint is plus 9% quarter-over-quarter, and that's a lot better than what typically the February quarter would be. How should we -- I think part of it has to do with maybe not as much shutdown, the factory shutdown that you used to do. How should we think about your growth in the May quarter relative to normal seasonality?

Yes. Let me clarify, so normally, the May quarter would be the step-up, right? That would be the first step-up, again, year-on-year into calendar year in local content requirements in Brazil. So it would be the step-up. And actual fact what has happened here from last quarter's $0.79 is we pulled in December, it was particularly, particularly busy. So we're shipping over to (inaudible) as people try and maximize their local content requirements for 2017. And then immediately in January, we'll send to people, because we're capacity restricted and supply restricted, you need to be more linear with your demand. So we are starting out January at full strength. So actually -- and actually at this time, we've seen the step-up having majority happened in this Q2, and then it will continue with that as we go forward. So that's why you're seeing the strength in the numbers.

Okay. That's helpful. If I can squeeze in one more. Your guidance suggests your gross margins' slightly higher than your target range of 20% to 23%, I think, in midpoint. But your offering margin is already at the high end. Do you think you will continue to run 200, 300 basis points above your offering margin target? Or will OpEx normalize sometime in the future?

I think for the near term, even I don't -- we will continue to get leverage in the model. But I don't see any reason why our OpEx should increase and knock operating margins down. So the operating margins should stay high.

Our next question comes from the line of Blayne Curtis with Barclays.

I was wondering maybe, guys, if you'd just walk us through from the preannouncement to now, obviously, the current quarter was higher, and then obviously, you thought flat and then are seeing growth. Maybe just from a very high level if you walk through, or were you just being conservative at the time? Or have things continued to improve?

Well, I mean, clearly, we preannounced, yes. And believe me, it would still have some room. However, the walk through really is density. Density moved forward in the quarter, I mean, by much more. We were planning and looking at 20% year-over-year. I remember saying that we had at the last year of $19.80, and we're looking towards $24. But I think we're almost there at $24 in this quarter. So if that continues, then that would be the surprise. So we have some units and certainly a strong mix. So I would say it's mix and ASP. But now in Q2, we'll step-up the number of units to supply to the market to meet the next step in local content requirements.

Also we saw really strong shipments from specialty in the last weeks of the quarter. So in the earlier question, the double-ordering, I mean, the customers are pulling parts very strongly, which means -- it shows that they're not double-ordering. So the strength of Specialty also helped contribute to kind of this overall performance versus the guidance that we had preannounced.

Great. And then maybe just following up on that, you had a specific issue in specialty. It came back quite strong in November. And maybe just overall, your perspective into February between the 2 segments, Brazil and Specialty and then maybe just a little color as to what drove the strength in specialty.

Yes. I mean, specialty, we thought -- we said that Q4 was a down quarter in Specialty. We thought it would come roaring back, and it came roaring back here in Q1. And it was really due to the strength in -- the server storage markets are very strong for us in Q1 and we expect to see -- continue to see that strength into Q2 for Specialty as well. And so that helped drive the growth in the Specialty. It really came out of that server storage area. And we think we'll see -- continue to see the demand. We've been talking about the all-flash array since we're seeing the demand from people in the all-flash array area, and good overall demand from server and storage customers. So compute is doing very well for us.

Our next question comes from the line of Kevin Cassidy with Stifel.

Well, Iain, you mentioned that you already have $24 of content in smartphone. Is that -- will that be constant through 2018 and we have to wait for next generation of smartphones to be designed? Or what do we would look at going forward?

It doesn't appear that way, Kevin. It appears that since it's really a fixed cost per bit in the NAND space, then we'll say this is continuing to grow. And the step function, especially in NAND, from 16 gigabytes to 32 is such a big jump that it's taking as opposed to be in the old last couple of years 8 gigs to 16. So 16 to 32 static cost per bit. So I would think we're still going to see through 2018 further growth of the expected 20%. This really has been a very strong point, and we're going to start to ship more units.

Great. And these are all planar. So is there any concern for supply of planar as the manufacturers are moving towards 3D, moving more of their output to 3D?

Yes, yes, I think so. However for 2018, we have contracted our volume. And what we've proven over the years with this relationship is that when we contract our volumes, then that's what comes. If the market [releases] slightly, then we can get more then we can always do more. So I don't know to where we're getting our [planned] bits, and hence, meeting and beating of overall numbers. But I think the overall situation is that we really do need someone to create a 32-gigabyte 3D NAND product so that we can use that and begin to introduce that into the compute side, the processing side of smartphones.

Our next question comes from the line of Suji Desilva with Roth Capital.

In the quarter here that we had -- saw both Specialty Memory and Brazil mobile grow by the similar pace. Looking ahead to February, what do you think? Are they both going to be as strong? Or is one going to be favored there?

So we're seeing growth in both, but clearly, Specialty is back to -- it recovered. It's back to -- it's high single-digit growth. But here because of the density growth on top of a unit growth, then Brazil is going to grow more. So I think even though we are reporting 60%, 40% Brazil to Specialty. So -- and hence, Suji, that's why we had the discussion about should we look to add something on the Specialty side as a company to maintain some more of that balance.

Got it. So a double-positive whammy for Brazil there. And then on the Specialty Memory, a very strong growth here. I'm wondering how the NVDIMM part of the business is doing. I think you gave an expectation of $20 million there. Is that something you want to revise at this point? Or is that tracking to prior expectations?

Doing very well right now. Probably we're on our way to that path. I don't want to give too much of an annual indication. But yes, lots of qualifications and lots of -- in place. And competitive landscape not changing. So it doesn't look like this is ever going to go mainstream. So yes, it looks solid.

Okay. And then real quick on the Brazil PC market. The DRAM strength there, pricing is obviously a factor. What's going on in the underlying units there in PC and demand, just to understand the price unit dynamic there?

Yes, that's what we mentioned. We have an overall growth in unit demand by the market getting better, so the economy getting better. So we've seen forecasts increase by as much as 10% of the units going up. So every quarter, the research companies are increasing that forecast for annual units.

Yes. In fact, in the quarter, Suji, our ASP in the PC DRAM side is flat to down. And so all our growth really came from units. It was in the growth from an ASP on the DRAM side.

(Operator Instructions) Our next question comes from the line of Robert Mertens with Needham & Company.

Just as a follow-up for the Specialty Memory business, you spoke towards strength in the telecom and networking markets. Could you still elaborate what you're seeing there and any sort of products that are outgrowing in that business? And as a follow-up, do you break Specialty Memory down by all the different end markets?

We don't break them out separately. But I mean, it's -- if you think about it, right, I mean, Specialty -- if you think about the non-Brazil piece of the business being 40% of the business and Specialty was -- telecom server was roughly about 18% of the whole business, then you can kind of come to what it is at Specialty.

Yes. We don't have too much networking and telecom in Brazil.

Yes. So I mean, all of that -- all of the networking, telecom that you're seeing, all of that is Specialty, a little bit -- most of the server storage as well as all Specialty. But -- I mean, the strength -- networking, telecom great in the quarter, strength across most of the customer base. I mean, just -- we sell thousands of products into that space. And so we've got products in most of the major players in networking, telecom. And so for us, they continue to do well. Our products are continuing to get qualified, and so we're growing that business.

Great. If I can just squeeze in another question in. Brazilian DRAM, it looks like the quarterly growth stepped down a little bit compared to fourth quarter 2017, which I know came in better than expected due to some of the smart TV revenue and strong unit sales growth. How should we think about that business going forward? Obviously, you showed that ASPs are flat to down this quarter. Should we expect those to decline throughout the year or you're estimating those to be flat and the big driver being unit growth and just overall recovery in the Brazilian [economy].

Yes, units will continue to grow. I think it's a flattish kind of business, as units grow, whatever ASPs decline, go down, be taken up by the unit growth in the PC DRAM. So when we looked at that business, we've always kind of said that business looks kind of a flat business this year for us.

Plus, you do have a little bit of mix of what goes into the PC at these prices in Brazil that can have an impact on a quarter-over-quarter basis. So I think this is just the natural variance.

Yes.

And I'm not showing any further questions in queue at this time. I'd like to turn the call back to Mr. MacKenzie for any closing remarks.

Thanks, Liz. So we're certainly off to a very strong start in 2018. It's a strong foundation, and we're stepping up from here. Improving business conditions in Brazil, overall memory market combined with our unique competitive position is -- and our constant execution is helping as well. So we're looking forward to a bright year ahead of us. And I finish by wishing you all very happy holiday season. Hope you get a break with family and friends. And we'll talk to you in the new year. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.