Penguin Solutions Inc (PENG) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience.

You've joined the Q2 Fiscal 2018 SMART Global Holdings Conference Call.

(Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Ms. Suzanne Schmidt, Investor Relations.

Ma'am, you may begin.

Thank you, operator.

Good afternoon, everyone, and thank you for joining us on today's earnings conference call to discuss SMART Global Holdings second quarter fiscal 2018 results.

Iain MacKenzie, President and Co-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, and then we will hear a few words from the company's recently announced successor CEO, Ajay Shah.

We will then open the call to your questions.

As a reminder, our earnings press release and a 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 the documents we file from time to time with the SEC, including our most recently -- 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.

Reconciliations 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.

Thank you, Suzanne, and welcome to everyone to this call.

We are very pleased to report another quarter of excellent financial results with net sales of $314 million and non-GAAP diluted earnings per share of $1.73.

We continue to benefit from 3 main growth drivers: ongoing strength in the global memory market, favorable dynamics in Brazil and strong demand for SMART's Specialty Memory solutions.

We are in an exciting period for our company as we surpass $1 billion of net sales on a trailing 12-month basis and continue to execute on our growth strategy.

Our unique competitive position in Brazil as the only scale provider of mobile memory products in the country, our 30-year track record of providing specialized Flash and DRAM-based solutions to OEMs outside of Brazil and our capital-efficient business model that offers significant operating leverage all position us for continued success.

Additionally, the announcement of Ajay Shah coming on board as President and CEO ensures an expedient and orderly transition.

Now a few comments on the overall memory market.

We continue to see favorable supply/demand dynamic with robust demand drivers coupled with orderly supply expansion.

Consumption of DRAM and Flash continues to increase as OEMs find more end user applications for these products.

In particular, cloud and data center demand across the compute storage and networking end markets are well -- as well as smartphones are driving higher-than-average DRAM and NAND bit demand.

This is leading industry experts to comment that the memory industry is evolving into a less cyclical industry as we accelerate the move to a more data-intensive economy.

Turning to SMART Brazil.

In the second fiscal quarter, Brazil mobile memory performed exceptionally well, with net sales rising 33% driven by rising unit shipments, increasing average memory densities and favorable ASP trends.

I'd like to remind you that SMART uses 2D NAND in Brazil mobile memory, and 2D NAND ASPs have remained relatively stable due to the limited capacity as the memory industry is ramping 3D NAND production.

Additionally, the benefits from local manufacturing increased as of January 1.

Beyond mobile memory in Brazil, we're also seeing rising forecasts for PC shipments benefiting our DRAM business in Brazil, which rose by 30% in the quarter.

Looking ahead, we continue to evaluate new end markets beyond mobile memory and DRAM such as wireless communication modules.

We have proven our ability to execute in Brazil, having been in this market for 15 years, and believe there is substantial potential for growth ahead of us as we leverage our established position, our in-country manufacturing know-how and the benefits of having local manufacturing.

Turning to our Specialty Memory business.

We had another strong quarter with net sales coming in once again over $100 million in total.

Looking ahead, we remain positive about our prospects for growth fueled by several dynamics in the Specialty Memory business.

First, technology transitions tend to benefit us, and with the transition underway from DDR3 to DDR4, we have a meaningful portion of our customer base that still requires specialized solutions using DDR3 and even DDR2 memory.

Second, newer non-volatile NVDIMM solutions are being introduced in the growing trend towards the use of all-flash arrays within servers leads to increased demand for our Flash and DRAM products.

As a management team, we've been in the memory business for a very long time and we understand it well.

Our established track record of delivering innovative solutions in Flash and DRAM over long design-in periods for a very long product life cycle gives us confidence in our ability to drive sustainable and predictable growth in this part of our business going forward.

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

Great.

Thank you, Iain.

As Iain mentioned, top line strength in this quarter was primarily driven by our results in Brazil along with a robust global memory market.

The Brazilian economy is improving every quarter, which is helping to drive our end unit demand.

In addition, we saw yields in our Brazil memory business continue to improve.

Overall gross revenue for the second fiscal quarter was $542.2 million while net sales were $314 million.

And as a reminder, the difference in gross revenue and net sales is related to our supply chain services business, which are accounted for in an agency basis, meaning that we only recognize as net sales net profit on the supply chain services transactions.

Net sales increased 18.3% over the previous quarter as unit sales increased and average selling prices remained favorable.

Second quarter fiscal 2018 net sales were out broken by geography as follows: Brazil, 67%; Asia, 17%; U.S., 12%; other Americas, 2%; and Europe, 2%.

Our breakdown of net sales by end market for the second fiscal quarter was as follows: Mobile and PCs, 57%; network and telecom, 17%; servers and storage, 17%; industrial, aerospace, defense and other, 9%.

Moving to the rest of the income statement.

Non-GAAP gross profit for the second quarter was $73.2 million, up 26.2% as compared with last quarter's $58.1 million.

Non-GAAP operating expenses increased 5.6% quarter-over-quarter to $24.7 million as our R&D expenses increased from the prior quarter as we drive spend to meet our Brazilian R&D requirements.

Remember, we need to spend 3% to 4% of our revenues in Brazil on R&D to insure our PPP and PADIS tax benefits.

Non-GAAP net income for the second fiscal quarter was $39.9 million or $1.73 per diluted share compared to $23.8 million or $1.05 per diluted share in the prior quarter.

Included in these results for the second fiscal quarter are FX-related gains that contributed approximately $2.4 million or 0.10 -- or $0.10 per share compared to last quarter's FX-related loss of $2.7 million or $0.12 per share.

Adjusted EBITDA increased 52.2% to $56.2 million in the second fiscal quarter compared to $36.9 million in the prior quarter.

Turning to working capital.

Our net accounts receivables declined to $223.5 million from $236.2 million last quarter as our days sales outstanding decreased to 37.5 days for this quarter compared with 43.5 days last quarter.

Inventory increased to $140.6 million from $120.2 million in the prior quarter, while our inventory turns were 12.6x compared with last quarter's 13.6x.

The increase in inventory is due to the support of our increased sales activity.

Consistent with past practice, accounts receivable and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $542 million and $469.2 million, respectively, for our second fiscal quarter of 2018.

Cash and cash equivalents totaled $51.8 million at the end of the second fiscal quarter.

Second quarter cash flow from operations was $34.8 million compared with $14.3 million in the prior quarter.

Now let me turn to our guidance.

We currently estimate that our third quarter fiscal 2018 net sales will be the range of $320 million to $340 million, and gross margin for the quarter will be approximately 21% to 23%.

GAAP earnings per diluted share is expected to be between $1.61 to $1.69.

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 $1.74 to $1.82.

The guidance for the third quarter does not include any view on foreign exchange gains or losses and 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 for the third fiscal quarter was 23.2.

Capital expenditures for the third fiscal quarter are expected to be in the range of $10 million to $15 million.

On December 22, 2017, new U.S. federal tax legislation commonly known as the Tax Act and Jobs Act (sic) [Tax Cuts and Jobs Act] was signed into law.

Certain key changes introduced by the Tax Act that would impact the company in the current fiscal year include the reduction of the U.S. federal corporate tax rate from 35% to 21%, acceleration of expensing of certain business assets and the elimination of the alternative minimum tax system for corporations.

We do not expect a material impact to the company's quarterly and annual consolidated financial statements because of these changes.

Please refer to the non-GAAP financial information section and reconciliation of non-GAAP financial measures to GAAP results and reconciliation of GAAP net income loss to adjusted EBITDA tables on our earnings press release for further details.

That concludes my remarks.

I will now turn the call over to our new incoming CEO, Ajay Shah, for some additional comments.

Thank you, Jack, and thank you, Iain.

As is evident from these results, you both and the rest of the team here at SMART have done an outstanding job at driving tremendous achievements.

SMART is truly a world-class organization.

So looking ahead, I'm excited about the opportunity at SMART to further leverage on a strong execution capability that is demonstrated so well, to target additional lines of business and achieve growth and to diversify our business over time.

I will be transitioning into the role fully over the next few months, and look forward to speaking with all of you in the future.

Operator, we are ready to take questions.

Thank you.

(Operator Instructions) Our first question comes from the line of Blayne Curtis of Barclays.

Maybe just from a high level, you just talked about the guidance for May.

Is there any difference between segments?

And then if you can just talk about -- you mentioned the diversification efforts.

Obviously, with the strength you've seen in Brazil, that's proving quite difficult.

So just kind of thoughts about organic versus inorganic diversification.

So the Q3 guidance by segment, I mean, I think we're continuing to see growth.

Brazil will continue to grow.

Our Specialty business, you'll see some -- they'll grow -- this has been growing, but Brazil will continue to outgrow the specialty business as we go into Q3.

On the diversification front, Blayne, then, as we've said, we have been working diligently in this area.

It takes a while to get that started and get up to speed.

But yes, we do plan to make inorganic efforts to keep the company nicely balanced.

And then maybe just one follow-up.

In Brazil, it's been a big content story.

I was wondering if you can just about the strength you saw in February, unit versus content?

Yes.

Blayne, I think in the last conference call, we've mentioned that at the end of last year, end of 2017 calendar, we had an increase in units as people tried to finish up their year and get to the local content, and that continued into the start of this year.

So units in particular, and then of course, local content, [WAN] changing increased units by almost 20% in January alone from January 1. So in this case, we had over 10% increase in ASP because of the density increase of over 10% also and the fixed price per bit.

And then we saw more sales go into the higher-end phones, so with the higher density selling through, and then clearly, the units were strong as people finished off the year.

So really, in all 3 there and hence, the result.

And our next question comes from Rajvindra Gill of Needham & Company.

I'm wondering, Iain and Ajay, if you could maybe talk a little bit about what are the ASPs that you are seeing right now?

Kind of on the dollar side, what's the dollar amount?

And how do you see them increasing throughout the year and going into calendar '19?

So on the last call, we had mentioned that they're in the $20, $23 range, and certainly, by the end of calendar year, we were headed towards $30.

So I think that's there.

So -- and just over 10% in this quarter in ASP growth.

It's -- look, and we just introduced the 32 gigabyte of Flash and 24-gigabit of LPDRAM in the same package, so clearly, the average density is growing now to about -- just over 1.5 of LP, and I think it's 16 gigabytes of Flash.

So getting -- I'll leave it there.

I think there's a pretty smooth curve or smooth line to the end of the year.

Now on the Specialty Memory side, it was down a little bit sequentially, maybe a little bit of seasonality.

But can you talk a little bit about the drivers of that business this year versus, say, last year?

Yes.

Nothing really there.

I mean, you're looking at a strong -- very strong first half.

So I mean, the fact that -- or clearer quarter end.

And in fact, we're still constrained by supply, so the -- and especially the timing of supply, so when we will get our parts for the month.

But if they come in on the 20th of the month, and then it's tough to catch up.

Just a really -- in fact, that gives us over $210 million for the first half.

So we're seeing that as particularly strong.

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

On Specialty Memory, maybe can you help us get a better understanding of your design win pipeline?

How many -- I guess, how much of your revenue was from designs that were, say, 2 years old versus more than 5 years old?

I think you've said in the past that the Specialty Memory has a very long design cycle or production cycles.

Can you just let us understand how that pipeline is filling up?

And can we expect growth for the next many years?

Sure.

Kevin, I mean, we don't track as much by current design wins versus past design wins from revenue because we ship so many different products into Specialty, but we continue to get wins.

We continue to increase product into our customer base, so we would expect Specialty business to continue to grow over time as we continue to get these wins.

I mean, we've -- revenue over the last 6 months was -- nice growth over the last 6 months of fiscal year '17, so we're seeing great growth in the Specialty business, and there's no reason that with our pipeline, our wins, we won't continue to see growth in that business.

Okay.

Maybe turning over to the wireless communication modules that you've mentioned.

When do you think you'll be qualified for shipments on those?

And maybe can you give us an idea on what the average selling price would be for those?

Yes, I think we mentioned before, average selling price is $5.

Be careful of this year.

Remember, the initiative is to have a miniaturized wafer-based solution in our FY '20.

So -- and be careful about getting carried away with this one.

We have qualified, Kevin, 3, I believe, customers with the current module.

But really, this is just to -- for us a means to an end for us to show capability, develop the design skill, develop the test skills, and then get the license agreements, which I'm happy to say that it's slightly ahead of where we expected to be by this time.

And it's going well in already sales, but I don't know if the sales number will probably be less than $5 million at the moment.

Our next question comes from the line of Sidney Ho of Deutsche Bank.

Welcome, Ajay.

My question is on the mobile DRAM side.

Can you update us your road map and time line for using 3D NAND and eMCPs?

And how should we think about the impact on pricing and content going -- when you start making that transition?

Right.

So we -- as you well know, we've been asking and have noticed in new orders, very timely that you ask the question because our supplier has just put a 32-gigabyte 3D NAND on the road map.

Before this, there was never a 256-gigabit component in 3D.

So that is planned to qualify in the third quarter of this calendar year, so we've got long time to go.

The 2D NAND capacity, reportedly, as we see it, is down to -- by 50%.

So that's going to bring stability there.

Once we transition, it looks like the continual growth of what we're hearing, and perhaps you heard Micron say, are going towards 6 gigabytes in the high-end phone, then we are currently reporting 1.6 gigabytes average.

So I think we lag that point slightly, so I think we have a long way to go.

So our density growth, we expect to outpace any price reduction, but the LPDRAM continues also with no price reduction.

So overall, the ASP of our eMCP, we forecast to grow.

That's helpful.

And then the next question I have is, in terms of feasibility, Jack, I know like 6 months ago, you have suggested DRAM pricing is likely to go up for -- through the first half of this year, which looks like you're right on track.

How would you characterize your feasibility today?

Is it better or worse?

And how do you see the pricing going forward in the next, call it, the next 2 to 3 quarters?

I mean, I think our visibility on pricing is it was -- same as it was about 6 months ago.

I mean, we have our forecast, and we're talking with the semiconductor companies out kind of trying to see where it's coming from.

But I think our view today on DRAM pricing is it's probably going to be maybe flat.

Maybe it goes up a little bit, but we're not seeing any sharp declines or increases in pricing, I think, over the next couple of quarters.

Okay, maybe I can squeeze in one more question.

On the Specialty Memory side, I think last quarter, you suggested server and storage were strong.

I guess, maybe quarter-over-quarter may not be the right way to think about it.

How should we think about the different segments, which one is stronger than others?

Well, I mean, by far the networking telecom's our strongest segment in Specialty, right?

I mean, we've talked about that.

It's the largest segment in Specialty.

We talked about the server/storage segment being the growing portion of Specialty, right?

So I think in the quarter, we had a very good performance from the -- both sectors.

I mean, revenue for the first 6 -- if you look at the 6 months of this year versus 6 months of last year, we're up almost 14% on revenue, right, which shows very strong growth.

If you look at it 6-months-by-6-months it's what we talked about last -- in Q4 was to look at Specialty in these 6-month buckets.

So I think Specialty -- I guess just telecom networking had a very strong quarter.

Servers/storage had a good quarter.

But as Iain mentioned earlier, we're a little bit supply constrained and it might have impacted some of the revenues in the storage and server segment.

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

In the prepared remarks, I believe you mentioned Brazil.

Smartphone you saw a mix to the -- a mix shift to the high end.

Was that a temporal affect there?

Or any color there?

Do you expect that to continue?

Or was it onetime?

Yes, Suji, we're kind of -- the good news is that the same wafers go into all of the end products.

So it's a different mix of structure, so you don't have an inventory issue.

And we really just respond to what gets pulled through.

Last quarter, we had said it was very well balanced 1/3, 1/3 and 1/3 between high, middle and low.

But this time, an actual fight.

Most of the growth -- while the meddle and low stayed the same, almost 60% growth came from -- came into the high end.

I think that is what we're seeing.

I think that's why the ASPs continued to surprise us a little bit because that density in the higher end is what brings the performance.

Okay, that's helpful color there.

And then just in seasonality for Specialty Memory, is there any notable seasonality there as we go into the second half of the fiscal year into August?

No.

Just -- no, there's nothing until Christmas time or December time, so steady as she goes.

Okay, and then last question.

On NVDIMM, I know it's an early segment here, but is that tracking to your expectations or perhaps tracking ahead?

Yes, perfectly on track.

We have said that the calendar year would be about $20 million and we're getting good news.

We have DDR3 design wins.

We've got DDR4 design wins now on the table.

As we've mentioned, it takes a long time to design-in and make sure that these are robust solutions for our customers.

But yes, definitely, we see more adoption.

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

(Operator Instructions)

And gentlemen, there appear to be no further questions.

I'd like to turn the call back over to Iain MacKenzie for any closing remarks.

Thanks, Steve.

Our business conditions continue in our favor, and we'll work hard to provide our customers with these differentiated solutions they require.

Our business model also continues to improve, and we look forward to the next chapter of the company's evolution and to reporting on our progress on the next quarter.

So thank you all for joining us today.

Bye-bye.

Ladies and gentlemen, that does conclude your program.

Thank you for your participation.

Have a wonderful day.