Good afternoon. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the SGH First Quarter Fiscal 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remark there will be a question-and-answer session. [Operator Instructions] Thank you. Suzanne Schmidt, you may begin your conference.

Thank you, operator. Good afternoon and thank you for joining us on today's earnings conference call and webcast to discuss SGH's first quarter fiscal 2022 results. Joining me on the call today are Mark Adams, Chief Executive Officer; Jack Pacheco, Chief Operating Officer; and Ken Rizvi, Chief Financial Officer. You can find the accompanying slide presentation and earnings 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, including information on the various financial conferences we will attend. I would also like to remind everyone to read the use of forward-looking statements note that we have included in the earnings 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 our present expectations and that actual events or results may differ materially. We 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 GAAP to non-GAAP measures is included in today's press release. We will begin the call with CEO, Mark Adams, who will provide a business update; and then Ken Rizvi, CFO, will review the financials and forward guidance; after which we will take questions. Mark?

Thank you, Suzanne. We hope all of you had a nice holiday and appreciate you joining us today. We are off to a strong start to our fiscal 2022. Let me share some of the highlights from our first quarter results. We had record quarterly revenue of $470 million, record non-GAAP gross margins of 27%, and non-GAAP earnings per share of $2.16, which was at the upper end of our guidance range, with excellent performance across all of our businesses. Common to each of our businesses, Intelligent Platform Solutions, Memory Solutions, and LED Solutions, is the focus on delivering operational excellence that leverages our SGH operating system. SGH is an engineering-driven set of businesses that delivers advanced technology solutions at the system or subsystem level addressing the unique or specialty requirements of our customers, helping them compete in the markets they serve. I continue to be extremely proud of our team's execution, especially in light of the unprecedented challenges stemming from operating during the COVID pandemic era, amidst microelectronics supply chain shortages. I'm excited to share some of the successes from each of our three businesses. Starting with the Intelligent Platform Solutions Group, or IPS which turned in another record quarter with revenue of approximately $119 million, 80% higher than the same quarter last year and more than 20% higher compared to the prior quarter, our Q4 '21. Expanding customer engagements in ultra-scale, government, and the oil and gas end markets contributed to the strength in sales in Q1. Our managed services growth initiative is progressing well with revenues almost doubling in Q1 fiscal '22 as compared to Q1 fiscal '21. Software and services for IPS overall represented approximately 17% of total IPS Q1 fiscal '22 revenue. What I believe is still underappreciated in the world of high-performance computing is…

Thanks, Mark. The first quarter of 2022 is the seventh consecutive quarter of year-over-year growth for SGH and demonstrates how our strategy is continuing to play out with strong performance across all three of our businesses. A year ago, close to 80% of our net sales came from Memory Solutions and nearly 90% of our operating income. Today, in the first quarter of 2022, Memory Solutions represents approximately 50% of our overall net sales and operating income. We see tremendous opportunities ahead for SGH in 2022 and beyond to deliver advanced technology solutions for our customers across all three of our businesses. Let me turn to our fiscal first quarter 2022 results. I will focus my remarks on our non-GAAP results which are reconciled to GAAP in our earnings release tables. We reported another strong quarter in fiscal Q1. Net sales for the first quarter were $470 million, another record for the company and an increase of 61% on a year-over-year basis from the first quarter of fiscal 2021 and up slightly from Q4. In addition, non-GAAP gross margin came in at a record 27% and non-GAAP diluted earnings per share was $2.16 for the first quarter, both at the higher end of our guidance ranges. On a year-over-year basis, SGH revenue growth of 61% was helped by the incorporation of Cree LED into SGH. Excluding Cree LED, our revenues grew approximately 23% on a year-over-year basis, mainly driven by IPS which grew 80% and Memory Solutions which grew 6%. For the first quarter, IPS had revenues of approximately $119 million, another record for that business. As we have discussed in our previous earnings call, the IPS business will continue to have quarter-to-quarter variability in revenue and gross margins based on the timing of hardware, software and managed services in…

Thanks, Ken. And thanks to all of you for your support. We look forward to meeting with you in the coming months, virtually or in person and updating you as we continue to execute on our growth and diversification strategy. We appreciate all of you for joining today's call. Operator, please open the lines for Q&A.

[Operator Instructions] Your first question comes from the line of Tom O'Malley with Barclays. Your line is now open.

Good afternoon, guys, and thanks for taking my questions and congrats on the nice results. My first question was just about the performance during the quarter. It looked like the IPS business far exceeds your expectations. I don’t know -- you said it was up -- I think it was up greater than 20%. You had previously talked in some calls about some U.S. government awards totaling almost $70 million. Is the timing of those awards the difference there or was there some traction with new customers that kind of led to the upside? Any color there would be helpful.

Sure. The award that you're referring to, close to -- it was actually $68 million, Tom, it is more likely a second half Q3, Q4 timing, so that's not contemplated in our results today. Today was a little bit of increase in some of the business opportunities at our existing customers as well as some new development accounts that have registered some revenue opportunities for us.

Helpful. And then you mentioned in the preamble that your efforts for the SSD business are going to ramp in Q4 during the fiscal year. Could you just give us some perspective on what you think the size of that opportunity is? How big can that be for you guys? Obviously, it's a little bit later this year, so a little further out. But just over time, what could that look like for your business?

Well, okay, just roughly -- and Ken can hold me to this, the Brazil business is somewhere in the $450 million, $475 million range from a scale perspective on a -- on kind of a backwards looking kind of last 12 months pace. And if you look at that, we think the SSD business is something that could ramp up in the short term over the next -- starting from Q4 out on a 12-month basis, roughly in the $40 million, $45 million range. And we expect to hit a run rate of -- a quarterly run rate of roughly $10 million by Q4. Now, let me qualify also that this is an area that we have seen some constraints on the electronic supply chain shortage. Some of the components there are ones that could be in our way of getting there, but we feel pretty good about it today as we sit here in Q1. And overall, we like our position relative to the market and our manufacturing of SSDs in country to be at the pace I said, roughly -- again, think about Q4 target roughly $10 million and a run rate business of about $40 million, $45 million.

Great, that's helpful. Congrats on the nice results guys.

Thanks, Tom.

Your next question comes from the line of Brian Chin with Stifel. Your line is now open.

Maybe my first question, actually -- thanks. My first question is about the financial credits in Brazil tied to R&D. And so -- I guess based on our understanding, there's been some progress there towards a possible extension of the program that underlies those credits that you benefit from. And so going forward, there may not be such an increase in your OpEx as you've talked to here in the past. So, I'm curious, do you share that view that there's a high probability of an extension? And two, what would your EPS guide for the February quarter be assuming that, that program is extended?

Let me take the front half of that and I'll ask Ken maybe to quantify any hypothetical changes that could be pending. As you know, we -- Ken and I both have articulated what the current law says and that's the expiration of these tax credits in January of '22. Needless to say, in the background, we've been working with the government and as the largest memory manufacturer in country have a pretty good presence. As a matter of fact, the President of our Brazil business is the head of what -- their Semiconductor Association in Brazil. And so, we've been lobbying pretty hard. And I think the government has recently contemplated the impact of things like the supply constraints in the industry and they understand the value. And so, we think there is a probability that they will extend these tax credits in some way, shape, or form, albeit it has not been done at the timing of our call today. So, we think there's been a lot of progress, especially over the last 30 days. We're very much part of the lobbying to the government for these tax credits to be extended and we'll certainly keep you posted. Ken, maybe you can just kind of give us a sense on what that might look like in Q2.

Yes. So Brian, in Q2, there isn't an impact for us even if that law gets extended. And it's just based on the timing of our quarter end for the Brazil business, it's actually one month ahead of our quarter end for our other businesses that's outlined in our Q. So, there is no impact here in Q2. If it does get extended in Q3, Q4, it's still a bit TBD depending on what the specific law would look like. So for now, I think what we've outlined to the analysts and to the Street on our last call, based on the current law, I would just keep it as is in terms of that credit going away as we look at Q3 and Q4. If things change, obviously, we can have an update after that law changes.

Okay. All right, fair enough. Appreciate the color. I guess we'll stay tuned on that probably in the near term. Maybe kind of more broadly and I'll focus just a little bit on the IPS business specifically but clearly, there are some challenges out there. You alluded to them in terms of labor and hardware availability and cost. And I guess specifically, again, in IPS business, can you give us an idea and quantify what those headwinds of growth and our operating margin expansion might be that you're facing right now over the duration of the fiscal year? Because you probably had good results but obviously, this is something that you're having to work through in your inventory. It obviously went down a lot on higher revenue but also maybe you even want that to be a little bit higher in this environment.

Yes. I think it also is -- specific to the inventory, you should go back and say, "What was the right level, kind of, pre- all this?" Because as we mentioned on our last call, from an inventory perspective, we had a holdover on a shipment that went out earlier in Q1. So, I wouldn't read too much into the inventory movement per se. I think we're acknowledging that the supply chain constraints are real. Having said that, it's a record quarter and this is a business, I think, as I mentioned before, that grew substantially in '21. And we're pretty bullish on '22. So, I don't look at it like a headwind per se. I think that the complexity of the systems, just the depth of the technology that we integrate into these finished goods systems and the overlying software and services, all of that has to come together with the timing of deliveries. And we're just working with the constraints that everybody else is under. I mean NVIDIA, AMD, Intel, a number of different suppliers are tight on lead times and we're working on that. Having said that, it really hasn't had a massive impact on our business and we expect a strong growth year in IPS and I think got out of the gates with a record quarter here. So we're just cautious to the sense that the world is operating in these certain times of constraints and we just want to call that out.

Okay, fair enough. I appreciate all the color. Thanks so much.

Thank you.

Thanks, Brian.

Your next question comes from the line of Raji Gill with Needham & Company. Your line is now open.

Yes, thank you and I echo my congratulations on really good results and momentum. Just on the IPS segment, the lumpiness in that; obviously, it was a very strong quarter in November, you're looking for it to be down in February. Is there a way to think about the seasonality on a quarter-by-quarter basis at least on the top line. And with respect to the gross margin for IPS, you mentioned 17% of our revenue is coming from services. That also is very volatile. Is there a goal to increase the percentage of IPS that come from services? And if so, how do you intend to do that? And what are the steps?

Let me start with the back part of that question. I'll let Ken talk to some of the seasonality and how you might want to model that or think about that. But on the service side, I think we've targeted over the next three years, we'd like to get this business somewhere in the neighborhood of 25%, plus or minus. Now mind you, when a business is growing last year over 30% and we consider this to be a -- still a very strong growth business for us into '22 and beyond, your services are doing well just to keep up with the impressive revenue growth that we see at the top line. But the -- part of what we're doing, as we think about the growth opportunities is being a little bit selective in the engagements we're participating in. This can be a very low gross margin business if it's only hardware. And those are not the type of opportunities we want to be in. As I talked about in my commentary, we get a lot of value creation with our customers from the design side of the business upfront and the system design to optimize around the workloads of each of our customers, specific to their needs. And so it starts with that, the actual integration services, deployment services and post-sale maintenance, break/fix services. These are all part of the elements that we're emphasizing in our proposals upfront. And each customer is a little bit different, so it's hard for us to give you an exact -- kind of precise measurement on how each customer will engage with us. But whether we did upfront on certain transactions is really driven by the full engagement model that we have with these customers. We're not going to be a hardware-only shop. Now -- also, before I hand it to Ken on this, I'll just mention to you that this lumpiness and mix issue shows up because in certain quarters, we're installing these systems and some of the larger deployments can dominate a specific quarter hardware-wise or services-wise, depending on which quarter. As we've mentioned on our Q4 call, we had the benefit of a number of services that helped our mix and our gross margin as they did in Q1. And so we will do our best to guide to that. But there will be quarters that are very service-rich and there will be quarters that -- where the hardware deployment is the beginning of a new installation and services will follow on in due quarters. So Ken, maybe if it would be okay, if you could just talk a little bit about the quarter-by-quarter overall trend line of business.

Yes. So Raji, thanks for the question. As we look at this business, we've tried to highlight that there is variability quarter-to-quarter. And the business overall, though, has grown dramatically. We talked about 80% type of growth year-over-year. And even as we look at the pipeline into the second half of the year, that still remains very strong. So while we do expect a little bit of a downtick in sales Q1 to Q2 based on the variability, our expectations are that as we head into the back half of the year, we should see some growth or continued growth for this business in the back half of the fiscal year. Now we're not going to provide any specifics but I would say the pipeline does look good as we head into Q3 and Q4 for the back half of 2022.

Very good. And for my follow-up, on the LED business, in the presentation, you mentioned the shift over to the sapphire and fab-lite models can be completed within this calendar '22. Once that happens, what's the -- kind of the normalized LED gross margins on a go-forward basis? Are there other levers that you could pull to drive the LED margins above and beyond that? Or is that kind of the level you want to maintain that business at once you achieve the manufacturing transition?

I think -- again, Ken will jump in on the numbers side. Let me just -- philosophically speaking, we've got some -- we've got a little room to go on the transition itself. And then some of this has to do with how we design future products for new customer environments and which products get used as the base platform. So we think that this cost competitiveness we have achieved will not only benefit us as we finish out the transition but will allow us to use some of this new technology and newer market opportunities. Ken, maybe you can follow on the back half.

Yes, yes. And then in terms of the margin profile, I mean, one of the things that we've done here is focused on the three segments in aggregate SGH margin which we've outlined. So for this business, I would expect that the margin profile is in that low to mid-30% range over time but we won't give specifics on any given quarter.

That's helpful. And then just one more question on the margin and then I'll step back. In the November quarter, the overall margins were 27%. You mentioned that a lot of that was driven by stronger margins from Memory. I'm wondering if you could describe what's going on in Memory. That's independent, obviously, of the LED manufacturing transition and it's independent of the IPS, given the percentage of the services. But what are the steps you've taken to improve the margins in Specialty Memory and kind of Brazil Memory?

Well, I think similar to how we're treating IPS and really all of our businesses, LED has done a great job on this as well, is really looking at business opportunities where we can kind of create some additional value and drive a better mix. We saw better end market opportunities in Memory in the Specialty. And then also, I would say, our mix towards Flash was a little stronger in Q1 than it was in prior quarters. And so our custom Flash business is one that's a little bit more attractive given the configuration of the controller and products overall from a solution standpoint. And it's a little bit more, yes, specialty in nature, differentiated. And so that mix can help. And so when you combine kind of the market opportunities we're going after in terms of the end markets and allocating kind of limited resources in terms of inventory to the right app to mark products, all in all, I think it's a mix issue that you're identifying. And really, the end market segments that we're prioritizing in terms of development away from kind of the commodity side of the business, whether it be standard products to more differentiated specialty products.

Got it. Congratulations, again.

Thanks.

Your next question comes from the line of Sidney Ho with Deutsche Bank. Your line is now open.

Thanks, everyone. Thanks for taking my questions. So I have a couple of questions on the Memory Solutions business. In your prepared remarks, you talked about ramping up this OpenCAPI DDIMM at a leading customer. Is that a new opportunity for you? Or does it replace an existing product that you already offered? And maybe can you help us understand how big this opportunity could be?

Sure. It's a really good example to the question that Raji was asking. Basically, this is a new customer socket opportunity. This is not a replacement. And the DDIMM application that we've described is one that we stepped in, we provided a value-add in terms of engineering and testing reliability as well as kind of engineering design. And it started out to be in low single digits, millions of dollars in the prior quarter. And we think that this could grow in fiscal year '22 in the range of 10% to 15% of the Specialty Memory business, so somewhere in the $40 million to $50 million range. And that type of engagement, Sidney, is one that the company hasn't really done super well on the custom side in the newer application environments of late. Jack and the team have done a great job this year, out cultivating new opportunities. And we're starting to see the benefit of some of these in data center, cloud and even the high-performance compute.

That's helpful. My next question is last quarter, you talked about part of the increase in your inventory was driven by your Supply Chain business where you are not the risk taker. I assume they may be worried about component shortages or whatnot. Has your -- has there been any changes in your conversations with those customers in terms of their procurement strategy?

So I will -- Sidney, on that -- for -- I would say that the supply chain is still really tight. I think it's no different than probably what you're hearing from other folks that are supplying to the global electronic industry. And so it's tight on various components and our customers are doing it to us and we're doing it to our suppliers. And so we're just navigating through that and you'll see some ebbs and flows as we move through this year. I think like all companies are -- we believe our supply chain team is doing a great job in terms of ensuring that we can get the components we need to service our customers. And so we're navigating it like everybody else but it's a tight supply chain overall.

Okay. Maybe one last one for me, if I may. Appreciate you guys start providing operating margin by business segment in your last annual report with data going back for a few years. Can you talk about how we should think about operating margin targets by segment going forward? I know in the past, you talked about the gross margin by segment but just trying to figure out now that the new disclosure is operating margins. So just trying to think about how to think about it going forward.

Yes. We haven't outlined specific targets by each of the business segments. I think in aggregate, we've talked about, just a while ago at least, achieving in this kind of 12%, 13%, 14%, 15% EBIT target which is where we're at today. So, I think over the course of the next 12 months or so, we can outline some higher targets. But in aggregate, we feel like the business is operating very well with the current EBITDA -- or EBIT, sorry, levels that we've been able to achieve. I think one of the things that we've outlined on the prepared remarks and via Q&A is that there will be variability, specifically as it relates to the IPS business and the margin profile quarter-to-quarter. You've seen that as we've migrated from Q1 and towards our guide in Q2, that there is some variability in the overall gross margins which then impact the operating margins. But overall, business is tremendously healthy if you look at where we are today versus just 12 months ago in terms of both the gross margin profile and the operating margin profile of the business; we're just so different today as a company than 12 months ago.

Great. Thank you very much.

Your next question comes from the line of Kevin Cassidy with Rosenblatt. Your line is now open.

Thank you and congratulations also on the great results. The GovPOD or the Penguin-On-Demand is an interesting product line, to me anyway. And can you give us a little more description of what that is and how many agencies you're addressing? And would there be a commercial version of this, something besides just the public sector or private sector?

Sure. Good question. Thanks, Kevin. Yes, GovPOD for us is really an extension of our partnerships that we have with the government and our clients in the government. Because really what's happening is we're seeing in high-performance compute, I mentioned this on prior calls, is that we don't think this is kind of binary. We think this is a hybrid model that's evolving. And this extension of our on-premise relationship with these clients is that they want to utilize and benefit from the economics and just the flexibility of operating in an as-a-service model for certain applications. And so this extension really is for our existing customers and potentially new customers to use this platform, sometimes early on in the development of testing out applications and sometimes because these applications are not ones that are frequently used or the overhead doesn't warrant a full on-prem system. So from that perspective, it works in the government, yes and it works -- we also have a platform called Penguin-On-Demand, just POD, P-O-D. And that is one that we've got that's up and running today. Again, very small in terms of the revenue contribution, I want to say a couple of million dollars a quarter in the business. And -- but it's something that we're trying to cultivate more and more as our clients want to have the flexibility for future development as well as new customers that we can target that just, quite frankly, aren't going to go out and make an investment in their own data center implementation of high-performance compute AI. So, it is an opportunity for us; it's early going and we're investing in it. And so as you look at Penguin on a go-forward basis, you'll hear more about that in our efforts to drive a hybrid model both on-prem and in the cloud.

Okay, great. And what do you see as the competitive landscape for this? Are you seeing your competitors coming in with similar products? Or are you ahead of the competition?

Well, I think there's kind of two parts of that question. One is our current on-prem customers are looking at elements of the strategy and they're investing. And then there's obviously the cloud service providers themselves who are developing a high-performance compute approach. Now, the one that -- the latter of the cloud service providers, the top three or four of those parties, are potential partners of ours. Actually, they were in discussions with those type of providers where we can provide design and system utilization, advisory capabilities to our customers in a cloud environment. And so at the end of the day, this vertical that we operate in, we're kind of a trusted adviser. And I think you'll see elements of our own on-demand as a service as well as potentially utilizing some of these cloud providers as a back end to our offerings. So, it's pretty good flexibility that we're developing here relative to customer engagements while we strike this with the quarter [ph].

Okay, great. Thank you.

Thank you.

There are no further questions at this time. Mr. Mark Adams, I turn the call back over to you.

Well, again, I'd like to thank everyone for joining our call today. The team did a great job in Q1 with record revenue, non-GAAP record gross margins of 27% and an EPS of $2.16, tying the record we just set in Q4 of '21. We feel like we have a lot of momentum and look forward to reporting on our future growth and success. With that, the call will end. Thank you.

This concludes today's conference call. Thank you for attending. You may now disconnect.