Good day ladies and gentlemen and welcome to SMART Global Holding Inc. Fourth Quarter Fiscal 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Suzanne Schmidt, Investor Relations. You may begin, ma'am.

Thank you, operator. Good afternoon everyone and thank you for joining us on today's earnings conference call to discuss SMART Global Holdings fourth quarter fiscal 2018 results. Ajay Shah, Chairman and Chief Executive Officer, will begin the call with a discussion of the market and the business followed by Jack Pacheco, Chief Operating and Financial Officer, who'll review the financial results in more detail and provide the forward guidance, after which we will 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 recent Form 10-K. 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 Ajay Shah.

Thank you, Suzanne, and welcome to everyone on the call. I'm very pleased to report that we finished our fiscal 2018, which was our first full year as a public company. We went public in May 2017. We finished the year with record net sales and non-GAAP earnings of $1.3 billion in revenue and at $6.36 per share in EPS. These exceptional results reflect the ongoing dedication and hard work of our employees around the world, and of course, the trust and support of our customers. We also delivered strong fiscal Q4 results with net sales of $374 million, which was 68% higher than the year ago quarter and the non-GAAP gross profit of $84.4 million or 73% higher than last year's fourth quarter, which I think demonstrates the operating leverage we've been able to derive from our business model and from our execution. Non-GAAP earnings for the quarter totaled $1.72 per share, which was meaningfully ahead of expectations. Importantly, we have completed the acquisition and begun the integration of Penguin Computing, which represents the cornerstone of our new business unit, Specialty Compute and Storage, which I will review in more detail later in this presentation. Turning first to our Specialty Memory business, we had a great quarter. Net sales grew by over 20% sequentially to reach $122.8 million. We continue to be a key supplier to our major OEM customers that require application-specific DRAM and flash-based memory products. The proliferation of all-flash arrays within server and storage applications continues to be a strong driver for this business. Behind this growth, our application such as artificial intelligence that utilize in-memory compute and all-flash arrays for data access, flash is also becoming more prominent in industrial applications, which require more application-specific solutions. It's estimated by Gartner that the worldwide market for…

Great. Thank you, Ajay. Overall, gross revenue for the fourth fiscal quarter was $672.5 million while net sales were $374 million. As a reminder, the difference between gross revenue and net sales is related to our supply chain services business, which has 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 by 11% over the previous quarter and by 68% over the year ago quarter. Our breakdown of net sales by end market for the fourth fiscal quarter was as follows: Mobile and PCs, 48%; network and telecom, 19%; servers and storage, 11%; industrial, aerospace, defense and other, 22%. Now, moving to the rest of the income statement. Non-GAAP gross profit for the fourth quarter was $83.8 million, up 7% as compared with last quarter's $78.5 million, while non-GAAP operating expenses were $32 million, up $7.3 million from last quarter due primarily to the addition of Penguin Computing. Non-GAAP net income for the fourth fiscal quarter was $40 million or $1.72 per diluted share compared to $43 million or $1.84 per diluted share in the prior quarter and $16.5 million or $0.75 per diluted share in the year ago quarter. Adjusted EBITDA was $51 million in the fourth fiscal quarter, down $0.5 million from the prior quarter and up from $31.3 million in the year ago quarter. Included in the fourth quarter GAAP fiscal 2018 results are FX-related losses of approximately $6 million compared with FX-related losses of $6.9 million last quarter and FX-related gains of $1 million in the year ago quarter. We also have acquisition-related expenses of $0.5 million in the fourth quarter. For the full year of fiscal 2018, net sales totaled $1.3 billion, an increase of 69% from fiscal year…

Thank you. [Operator Instructions] And our first question comes from Blayne Curtis from Barclays. Your line is now open.

Hey guys, thanks for taking my question. I want to apologize if I missed this, but I thought you used to breakout PC and mobile within Brazil, that one, I didn't know if you had that color or maybe directionally? And then, obviously, you said, down as expected, obviously, I might have been modeling a little different, but I'm just kind of curious, versus normal seasonal, how does it compare?

Okay. On the first question, if you talk about the breakout, [DRAM] [ph] mobile, DRAM in the quarter was about $67 million of revenue and then the -- in DRAM, remember that includes PC DRAM, server DRAM, the Wi-Fi cards we’re doing and the DRAM that goes into smart TVs. And then, mobile is around $131 million in the quarter.

Okay. And then the trends, obviously, it was down substantial double digits. I'm just kind of curious you said, that was expected --

Yes, remember, last quarter, we just -- we had talked about we expected the Q4 to be down from Q3 just due to the fact that our customers are getting shut down in July for a couple of weeks. So, just -- there's less days for them to take products, so we came in kind of where we thought we're going to be after their taking into account their shutdowns.

Thanks. And then, just in the November, I'm just curious, overall business is growing. You called out that computing storage is a big contributor. Is it -- should I think about the other segments being down, just directionally?

No, I mean, Specialty had a great Q4. Specialty continues to do well. So, I think you'll see all the business should do fairly well herein in our Q1.

Okay. Yes, and I mean, you highlighted that it would be -- Brazil would be up on an annual basis year-over-year. I guess I'm just kind of curious about that comment. I was just talking on a sequential basis whether--

I understand sequential basis and I think -- I know that we made the comment there. Yes, we expect a good quarter, especially in compute and storage as well, but I think, if you look at where we expect revenue could be at the high end of the guide, I think all of the businesses will be up over in the quarter.

Okay. And then just finally, I was just curious on the mobile side in terms of the content for phone. That was a big driver for you guys. I'm just kind of curious as you look out in the growth in Brazil for the upcoming year. Kind of maybe just talk about the broad stroke, so what's driving that? Is it still content for a phone? Any perspective on unit growth with the environment?

Yes. Well, a couple of things. One, if you look at Brazil, we should -- we expect in the back half of the year, getting Q3 the -- another increase in the local content role, so we should get a step up in available units to start it in Q3. And if you look at just where densities are around the world, Brazil still lags the world pretty considerably in the densities for the smartphones. I mean, the highest -- the biggest density we're putting in smartphones today is 32 gigabytes of Flash and probably two gigabytes of LPDRAM. And you've got phones, I mean, Micron came out with, they're putting a 120 gigabytes of Flash and eight gigabytes of LPDRAM in phones. And so Brazil still lags the world, so we'd expect over the course of the year to start producing higher density memory products in Brazil.

Okay. Thanks Jack.

Thank you.

Thank you. Our next question comes from Mark Lipacis from Jefferies. Your line is now open.

Hi. Thanks for taking my questions. On the Penguin Computing business, I was interested to hear about the comments on the networking side. Can you give us a sense how Penguin is kind of broken out between kind of computing solutions versus the networking solutions? I mean, kind of what they -- where's the growth coming from? Is it coming more from one area or the other?

Hi, this is Ajay. Just to be clear, we don't sell -- we sell them all integrated. So, at the end of the day, we are selling a integrated system as opposed to components of networking or -- of compute. So, we sell that a full-size cluster, including the networking components in it. Is that your question?

Yes, but it sounded -- and I may have misunderstood this, but it sounded like there is growth driven on the networking side. But I guess, what you're explaining is that this is just one -- it's kind of like a one big solution and there's elements of both in everything and it's not necessarily driven by one or the other.

Yes, but what we are saying when we say we've introduced five new Ethernet switches, what we're saying is that effectively we have additional components that we can use for configuring and that results in additional growth. But as such, yes, we do not sell these as components. We sell them integrated into systems.

Okay, that's very helpful. And then, on the polymer battery business in Brazil, how should we think about how that ramps over time? Where are we in that product cycle?

So, we expect this quarter to have our first production shipments. This quarter being Q1. We are optimistic that it'll ramp over the year. We have indications from customers that that's exactly what they want to see. So, it'll be small in the first quarters, but it'll start to be meaningful towards the back half of the year.

Remember, Mark, these batteries only go into higher end cellphones that use the new battery technology, right. So, as more phones come out that could take the technology, our market will broaden. So, the more of them get introduced in Brazil we'll get more penetration and the revenue will grow as they introduce these new phones.

Fair enough, that's helpful. And then, Jack, on the hedging process for you on Forex, could you just review the mechanics of what you're going to start doing? And how that impacts the -- how are you managing that exposure?

Sure. So, if you think about -- remember our Forex exposure in Brazil is on the invoices that we -- when we receive our semiconductor wafers we have invoices in dollars. And in Brazil, you're not allowed to hold dollars. We have to convert all the invoice to real and then we go to pay the invoice. We then have to go buy dollars from real. So, really the hedging is just -- two, when we get that fixed contracts in, we can fix kind of what that rate is to the dollar, so when we go to pay the bill, we're going to paying in at that fixed rate of what we get the invoice in, trying to minimize the swing in the invoices.

Okay, that's helpful. And then, does that -- can you give us a sense of how that impacts the cost?

Yes, I mean, the cost should be -- I mean, right now, if we look at -- we're just starting to do some initial contracts, but I don't think the cost is going to be material in the quarter. I mean, maybe it's going to cost us $0.5 million or so or we haven't really -- depends on -- it really depends on how many of these we do in the quarter and to roll them out, but I wouldn't expect a cost of more than $0.5 million for that.

Okay. Thank you. That's helpful. That's all I had. Thanks.

Thank you. Our next question comes from Kevin Cassidy from Stifel. Your line is now open.

Thanks for taking my question and congratulations on a great year. Before the Specialty Compute business, you named quite a few different end markets and getting a lot of contracts. Can you talk about the visibility that you have? Are these contracts set for a year? And do you know when the deployment is? Or is it just -- maybe just give a little more color about the contracts?

Sure. So, the way these contracts typically work is there is a contracting authority that effectively generates a BOA, an intention. And then this sort of pricing and all of that, that's in there. But then individual releases against those contracts are done by different contracting or specific purchase orders that come in through that. And so those purchase orders, as anyone that deals with the government's business will tell you, tend to be clustered around the governments' year end. And so the year end tends to be a very busy time. This is about the government's year end right now. And it typically drops off significantly post that year end, and then, again, picks back up. So, there is a certain rhythm or seasonality to that federal business particularly. Having said that, if you don't have the overall contracts then, obviously, you don't get the business. So, for us, it does not necessarily give us a very specific release. What I shouldn't say, I should say that the large contract wins that we have don't necessarily give you a specific release, but then we continue to get specific releases against those. I don't know if that explains it better.

Yes, it helps quite a bit. Thank you. And then, also on the memories, there was obviously -- you described that you are on the trailing edge with DDR3 and maybe SLC and MLC products. Is there any concern as the industry keeps moving forward with 3D NAND that you'll be at short of supply of some of the legacy or trailing edge products?

Actually, No. In fact, that's an area that has improved. What has happened is that these new processes that are required for a 64-layer and 96-layer 3D NAND type products, typically, have gone into new wafer fabs. I mean, you've probably seen new wafer fab announcements from recently from Hionix, from Toshiba, from Samsung. And so these are how we tend to -- they've effectively opened up some space in the products that we're more interested in right now. So, no, in fact, if anything, it actually helps the supply situation for what we are buying. And as prices there, as we've said before, tend to not be quite as volatile. And for the major memory producers, that tends to be in a pretty attractive business, right, because, obviously, it generates pretty stable margins and while the heat of the 3D NAND or DDR4 businesses probably got more natural growth in it. These businesses tend to be quite stable and have a long lifecycle.

Okay, great. And If I could just ask one other question about the way you describe the contracts with the Specialty Compute? And then also Brazil's second -- your second quarter -- your fiscal second quarter, that would be a seasonally weaker quarter, is it--

That's correct.

Yes, Jack. I don't know if there's anything you would add though.

No, just -- we talked about it, Kevin. It's a weaker quarter just -- if you think about it, in Brazil, you've got the Christmas buying season and since we have a lot of consumer devices, right, they tend to buy those early in the quarter, and so December is very, very weak in Brazil. And then, we talked that the Penguin is set to get a lot of the government contract this quarter, so next quarter tends to slow down for them.

Okay, great. Thank you.

Thank you. Our next question comes from Sidney Ho from Deutsche Bank. Your line is now open.

Great. Thank you very much for taking my question. My first one is, clearly the market is concerned about memory pricing, it will continue to decline from here. And you guys just talked about you're not as impacted by memory price declines. I understand price is basically a pass-through for you guys and we can make our own assumptions for memory components. But can you talk about some of the trends in content growth per system and may be price elasticity that you have served or you expect in both mobile and PC as well as in DRAM and NAND?

Yes, I think we can both try that question. Content growth is very market dependent, so we were just talking about smartphones and the memory content in smartphones. We, as you know, primarily are focused on the Brazilian smartphone market. And in the Brazilian smartphone market, their typical smartphone is shipping with far less memory than many other parts of the world, including, say, China. So, we see that as availability and new models come out -- as availability of memory improves and new models come out, they're now moving towards, so we have one or two customers who are starting to adopt 3D NAND based higher density products. That'll happen in first, second calendar quarter of 2019. And so in that segment, clearly, the improvements in pricing are driving significant increases in overall memory consumption. This -- in our Specialty Memory business, I can't say that the content sort of follows memory pricing because there it's more driven by the application, right. If you have a boot drive going into a storage system or into a network switch, that tends to not necessarily ratchet up memory content just based on lower pricing, so the two segments behave quite differently. And that's mostly for flash and DRAM has its own pattern. In servers, DRAM consumption ratchets up very quickly with price coming down. We haven't seen, by the way, as much price decline in DRAM. But in many of the other segments, I don't think DRAM is quite as price elastic. Jack, anything else?

No, on the Specialty side, Ajay touched on Flash, but as we roll out the 3D NAND products -- I mean, the density is so much higher that you're enabled to start producing higher density products. If the price comes down--

Price would be at -- yes.

If it come down, our average ASP will either stay the same or go [Indiscernible] we're getting these 3D NAND products, so we shouldn't see an ASP decline as we move into the 3D NAND products.

Okay, great. Maybe my follow-up question is on the Penguin side of things. How much did Penguin contribute to gross margin and the EPS in the August quarter? And do you have a feel about how it's going to be accretive in 2019? And maybe lastly, I know you don't talk about probability by segment, but can you talk about when do you expect Penguin or the SCSS segment to be comparable to the rest of your business?

In the first quarter, the Penguin did not contribute to EPS in Q1. I mean it's the first quarter that we had them. We only had them for part of the quarter. We're kind of getting them integrated in and so it was, let's say, a neutral quarter in Q1. We talked that Penguin would be accretive in the first full year of us having them, and so we expect them to be start contributing to EPS as we go in here and into calendar year 2019. But that, I mean, is -- roughly it's half the size of Specialty. So, -- and we talked about it in the last summer call that its gross margins were lower than Specialty, right. And so we have work to do to get the gross margins up, and so let's say you get the gross margin to be same as Specialty, you have to go double the revenue to make it the same contribution from Specialty roughly.

We do have a plan that drives us towards gross margins that are pretty well aligned with the rest of the business and to bring us in -- we have some great growth opportunities, so that will help as well. And with our much improved balance sheet and supply chain management and operations, we have a plan for how we get there, and make it quite accretive for the -- it's been two and a half months.

All right. Thank you very much.

Thank you. And our next question comes from Rajvindra Gill from Needham & Co. Your line is now open.

Yes, thanks for taking my questions. Can you remind us, again, how much the local content rules are going to increase starting in, you said, your fiscal 3Q, so that's May of next year, can you remind us where it goes to?

It should go about 10%.

Yes, it's supposed to go up 10% in January, starting January.

From what to what again?

40% to 50%, but actually, let me give you a confusing answer because it's confusing in Brazil. The current stake is at 50% going to 60%. However, the government -- thanks to an election that happens, by the way, this Sunday, is a little bit, should we say, frozen in terms of how things are being done. So, we hear that once they're back up, they will reduce the PPBs to 40% for this year and 50% for next year based on our ability to supply through the year, not just in this fourth quarter. So, that's kind of the lay of the land right now, but we have -- so we've been assured that it will step-up by 10% next year. So that's probably the simple part of the answer.

And with respect to seasonality, if I look back at least for the couple -- last couple of years, February was actually up for you. And I know, obviously, Penguin is going to be down, but you mentioned that Brazil would be down in February. But if I look at February of 2018, it was -- the overall revenue was up and same thing for February of 2017. Can you just help me understand that? And is it going to be down kind of double-digits, single-digits, kind of -- what's kind of the thought process there?

Yes, I know, I mean -- yes, last year, I think, we talked on the call that we were very surprised by the demand in 2018. In fact, we had talked about we typically shut down our factory as well, and all of a sudden demand came and so strong, we never shut down in 2018, but that's because the cellphone guys were really behind in trying to make the PPB in 2017. With the supply kind of issues between DRAM, Flash and stuff like that, we weren't able to produce all the parts that these guys needed. And so they needed to buy and make their numbers, and so Q2 of last year was really, really strong, as they were trying to catch up. So, this year, they bought early, right, so we had a really good quarter here. We talked about Q3 being a really good quarter, as they bought a lot of parts and stuff in the Q4. So, our view is, we're not going to see that same effect this year. They're all on -- they're much more on track to getting their parts they need for the local content. In Q2, it should go back to be in a more normal quarter where they were going to shut down their factories. We will probably do the same, and so we expect lower demand in Brazil.

At this point, just to be clear, it's all forecasts, right. I mean, we're prepared for whatever comes around. In the middle of all this, we have a number of new models coming out in January, right. So, -- and then as I was explaining a little bit earlier, you have this exchange rate question mark as to what that does. And we're told that at least enterprise demand is a little bit bottled up as people are waiting on most CapEx items for the election to sort of get clearer. I don't think the election get clearer till middle of November or at least end of October. The first round is this Sunday, and then, there's almost certainly going to be a second round, which is on the 28th, I believe. So, I guess, just -- there is uncertainty and we've decided to take a view around that that says, it'll probably be a lighter quarter in Brazil and we'll see what the reality is.

That's helpful. As Penguin, you said, it's down February, can you characterize how much is it down usually?

In the typical year, 30%, 40% quarter-over-quarter between the high season of the -- remember, our quarters are different from Penguin used to work on a calendar quarter. And we have our amazingly engineered August year end. So what I'm getting at is that the comparison are not easy because we are talking about months as opposed to quarters. But having said that, most federal business at least tends to have like a 2x quarterly peak compared to the following quarter that comes after it. But we're not only federal; we have enterprise as well, so we probably won't see that kind of a variation.

And Jack, how do we look at the capital structure? How you look at kind of the deleveraging going forward?

I mean right now, we've consumed our cash help with our bills in Brazil. But I mean, going forward, we will continue to amortize and pay down debt slowly as we go, right. I mean, with the excess cash, I wouldn't expect the capital structure to change with the current business much.

And last question for me, on the kind of gross margin profile. Obviously, the Penguin acquisition is little bit dilutive on the margin front, but you also mentioned that you would be incurring some upfront cost on the battery side, but then you would want to get a revenue that would offset it. Can we -- can you give us a sense of what the overall margin profile? How we should be thinking about that few quarters out?

Yes. I mean, we've talked about that. Our margins tend to stay in the low 20s, right 22%, 23%, so I wouldn't expect us to dramatically change from where we start to where we've been, right I mean this quarter we did 22%. So, I would expect us to sit -- somewhere stay in that 22%, 23% range over time continue in that range.

All right, great. Thank you and congrats.

Thank you.

Thank you. [Operator Instructions] And our next question comes from Suji Desilva from Roth Capital. Your line is now open.

Hi Ajay, hi Jack. Congrats on the strong quarter here. You've given a lot of color on Penguin. I just want to understand the quarterly perturbations you've talked about, but what kind of annual growth rate do you think you can expect in the next year or two versus what it's been doing because I know it's been growing fairly strong recently?

Yes, are you referring to SGH, overall?

Correct. No. SCSS, the segment. Ajay.

Just Penguin?

Yes.

Well, it's fairly consistent with our overall growth plans. So I think I can answer the question more broadly, and I think, it will apply as much to the answer you're looking for, which is we're looking for 20% to 25% annualized revenue growth. And our plans for this year are no different. Of course, last year at 68% was, Jack and Iain hitting the ball out of the park. And so that's going to be a tough compare, but we're looking for 20%, 25% revenue growth, and we are -- we've built our plans around that.

Okay, great, that helps. And then, trying to peel into the synergies--

Forget I said [Indiscernible], this year, 20%.

20%. All right, okay. And then, trying to peel into the synergies between Penguin and the SGH business. We talked about incorporating SGH memory modules into SCSS. I'm curious what the financial impact of doing that. Is it kind of cross-selling synergies for more module sales? Or is it improving the cost profile of the Penguin products you put out? Any color there would be helpful?

Absolutely, yes, there's two types. One is more in the shorter horizon, which is supply chain, which is operational costs. At Penguin, all costs run at 10-plus percent of revenue, what we call low costs, which is the nonmaterial costs. So, all of those kinds of costs, we have plans to significantly improve. And that'll take that sort of -- our front-end of the synergies that we expect to see. And then, separately, we have engineering teams that are working to define other more revenue-oriented and product synergies. And we're very excited about those, but those will not happen in the very short-term. Those take longer to -- in terms of time to market, in terms of product definition et cetera. So, that's been our view on where the synergies will come from. Ultimately, the Penguin management team and the SMART management team are very aligned on what those synergies can and should be, and we have details around how we get there.

Okay, appreciate the color. Thanks guys.

Thank you. And I am showing no further questions at this time. I would now like to turn the call back to management for any further remarks.

Thank you for your questions and thank you operator. Thank you all for joining us on the call this afternoon. We look forward to seeing many of you out on the road in the coming months and to continuing our engagements and reporting on our progress next quarter. Good bye.

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