SMART Modular Technologies F1Q09 (Quarter End 11/28/08) Earnings Transcript

SMART Modular Technologies (SMOD)

F1Q09 Earnings Call

December 18, 2008 4:30 pm ET

Executives

Suzanne Craig – The Blueshirt Group for SMART

Iain MacKenzie – President and Chief Executive Officer, Director

Barry Zwarenstein – Chief Financial Officer, Senior Vice President – Finance

Analysts

Timothy Luke – Barclays Capital

Gary Hsueh – Oppenheimer & Co.

Jim Suva – Citigroup

Edwin Mok – Needham and Co.

Betsy Van Hees – Caris & Company

Bob Gujavarty - Deutsche Bank Securities

Tony Venturino – Federated Investors

Presentation

Operator

Welcome to the SMART Modular Technologies first quarter fiscal 2009 conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions)

I will now turn the conference over to Ms. Suzanne Craig.

Suzanne Craig

Good afternoon and thanks to everyone for joining us on today’s earnings conference call to discuss SMART Modular Technologies’ first quarter fiscal 2009 financial results. Iain MacKenzie, President and Chief Executive Officer and Barry Zwarenstein, Senior Vice President and Chief Financial Officer join me on today’s call.

Before we begin, I would like to make the following safe harbor statement. During the course of this conference call Iain or Barry may make projections or other forward-looking statements regarding future conditions or events concerning our future business, our current and new products and services and our performance, the size and strength of our market and/or the future financial performance and outlook of the company.

These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. You should review the management’s discussion and analysis and related risk factors affecting future results contained in the forms and reports filed with the Securities and Exchange Commission. We caution you that such statements are just projections. Accordingly, our future results may differ materially from such projections. These forward-looking statements are made as of today and SMART does not currently intend and has no obligation to update or revise any forward-looking statements.

The first quarter of fiscal 2009 earnings press release is available on the company’s website at www.smartm.com or you may call our Investor Relations office at [phone] and we will fax you a copy.

Please note that non-GAAP financial results presented equity charges related to stock based compensation, restructuring costs and goodwill impairment charges. Please refer to the non-GAAP information section of our earnings press release for further details.

Our agenda for the call today is as follows: Iain MacKenzie will discus key highlights from the quarter then Barry Zwarenstein will review the quarter from a financial perspective and provide forward-looking guidance. Our live question-and-answer session will follow.

An audio replay of this call will be available for two weeks by accessing the Investor Relations page at www.Smartm.com or by dialing [phone] and using the pass code SMART.

Now I would like to introduce Iain MacKenzie, President and CEO of SMART Modular Technologies.

Iain MacKenzie

Thanks Suzanne and welcome to everyone on the call. Within the context of the continued challenges facing the world’s economy and the memory industry we are very pleased with our results for the first quarter of fiscal 2009. The key metrics that we focused on most closely are the gross profit dollars and earnings per share met and even exceeded our guidance, illustrating the strength of our business model.

While it is no surprise that our net sales were impacted by the decline in DRAM ASP’s, our global customer base and technology leadership combined with our prudent financial management helped us continue our track record of profitability. With that, let me summarize our results for the first quarter of fiscal 2009.

We reported net sales of approximately $141 million, gross profit of about $26 million and net income on a non-GAAP basis of $0.05 per share. As we stated on the last conference call the restructuring plan we announced last quarter helped to increase our earnings by a combination of cost reduction measures and the reallocation of resources of higher growth businesses.

We continue to monitor macro economic conditions and are mindful of remaining proactively ahead of the curve in terms of actions necessary to position ourselves appropriately. That said, we continue to see the results of our investments in Brazil, our expanding family of high value SSD products and growing embedded display business as one of the industry’s broadest portfolios of specialized DRAM modules for OEM customers around the globe.

Turning to each of our business areas, let me first share with you what we are currently seeing in the DRAM market and how we see the impact on our business. As we expected, we continued to face challenges due to significant over supply in the DRAM market. However, when the industry stabilizes and the economy returns to more normalized conditions many drivers for renewed growth should be apparent.

In addition to continued big growth, we are seeing evidence of semiconductor capacity coming offline, capital expenditures being dramatically reduced and even talk of DRAM rescue plans. As these factors play out they should assist our, and the industry’s, eventual recovery. In combination of these external developments, we are focusing internally on preparing ourselves to take full advantage of the inevitable market trend in developing leading products and strengthening our long-term customer relationships.

For example, our complete offering of DDR3 registered bins support Intel’s [naval] based server platform including an industry unique 8gb, 1.333 GHz ultra low profile DIMM for [ATCA] platforms in the telecom networking and embedded computing applications. We believe this server platform remains on track for release in early calendar 2009.

We are also expecting the AMD Shanghai platform to ramp in the first calendar quarter which should increase demand for high density; 800 MHz registered DIMM’s. Until these new systems fully emerge, we continue to support current platforms with a broad spectrum of low cost, high density and small foreign low power fully buffered and registered DIMM’s.

Turning to SMART Brazil, we had another good quarter where unit growth continued to reflect the strength of this economic region. We have independent wins of continued PC and server market growth which dovetails into robust DRAM bit growth. According to our calculations the megabytes per system should more than double from the 2007 levels of approximately 600 megabytes per system to over 1.2 GB per system next year.

Our long-term plan to gain market share continues. We are cognizant of the global memory market dynamics and the potential impact on our Brazilian business. We will remain focused on cost efficiencies and operational improvements in this environment. That said, we believe we have a winning business strategy in Brazil which we intend to leverage as we explore other product opportunities.

Turning to our non-DRAM businesses we are enthusiastic about our progress particularly in the area of embedded and fixed industrial grade solid-state drive offerings. During the quarter we announced the 32, 64 and 128 GB Excel-10, 2.5” SATA flash solid-state drives, the first in a new family of SSD’s designed for the enterprise and commercial systems market. The Excel family is optimized for random, small block IOPS performance typical of business applications and offers higher performance, higher reliability, lower power requirements and lower total cost of ownership as compared to hard disc drives.

We also continued the expansion of our Xceed embedded SSD product line with two new product announcements. The first, our iSATA embedded flash drive improves data transfer speeds as compared to other embedded modules and our XCeed iSATA SSD is the first embedded drive available in the market with SATA two interface and four channel technology. It is well suited for a wide range of applications including data communications, embedded computing, medical and industrial.

We have also expanded our relationship with Intel with our new ZU130 embedded USB, a drop in replacement for the OEM customers currently using this product and this value SSD. We have extensive experience with embedded USB drives so we feel well positioned to provide future product enhancements and seamless support to Intel’s customers going forward.

According to IDC the enterprise market for SSD is in its early stages but on track for steady growth. It projects the market will grow from $75 million in 2008 to more than $158 million in 2009 and we are expected to offer our Excel 10 SSD to capitalize on opportunities associated with this market.

On the display and embedded side of our business we have continued to execute on our production, release and sampling programs. In the first fiscal quarter we released a TouchScape family of display products and have commenced shipment. In addition we have received the first volume production purchase orders for mobile information and transaction applications that will utilize both our display and embedded PC systems. The production shipments for this first deployment which is valued at over $1.5 million are scheduled over the next two quarters.

While the economic climate certainly dampens discretionary kiosk deployments, we continue to see robust design activity on transactional units that can demonstrate a very positive ROI for their owners. In this environment the value proposition we have established with our XCeed PC and TouchScape products become even more critical to our customers.

So while the overall economic situation continues to be challenging, we are moving forward with our various initiatives, positioning us for the eventual recovery in the market.

I will now turn the call over to Barry Zwarenstein, our CFO, for a closer look at the financials and for our go-forward guidance.

Barry Zwarenstein

Thank you Iain. Let me walk you through the details of our income statement and balance sheet and then review our guidance.

For the quarter net sales totaled $141.3 million, down 12% from last quarter’s $160.7 million and down 20% from the year-ago quarter. This decline, as Iain mentioned earlier, is not surprising due to the drop in DRAM ASP’s which more than offset the favorable impact of unit growth.

Taking a look at our net sales by geography for the first quarter, the breakdown is as follows:

U.S. 42%

Other Americas 29%

Asia 17%

Europe 12%

In terms of our sales by end market, the breakdown is as follows:

Servers 34%

Desktop PC 24%

Network and telecom 20%

Logistics 9%

Storage 6%

Industrial 4%

Printers 3%

HP continues to be our largest customer representing 34% of revenues this quarter which is essentially flat with the percentage last quarter. However, on a dollar basis sales to HP were lower by approximately 12% compared to the last quarter due to the drop in ASP’s which more than offset the increasing units. Partially mitigating this and perhaps not surprisingly, we are seeing stronger unit demand for server upgrades by our customers wanting to minimize capital outlays. As we mentioned in the past, our relationship with HP is a very long-term and encompasses many different types of memory products and services.

Cisco remained our second largest customer during the quarter representing 12% of our revenues versus 13% last quarter.

Moving to the rest of our income statement, gross profit for the first quarter was $26.3 million, up 6% from last quarter’s $23.9 million and topping the high end of our guidance range as we benefited from our logistics business and the strength from our business in Brazil. First quarter non-GAAP operating expenses of $18.5 million were down slightly from the $18.8 million reported in the prior quarter and included R&D expense of $5 million and SG&A of $13.5 million.

As Iain alluded to earlier, we are pleased with our progress in the SSD market. However, FAS142 rules required us to recognize a $7.2 million charge for goodwill impairment related to our Adtron acquisition because the deterioration of the macro economic conditions and the broad downward movement in equity valuations since the acquisition in March 2008.

Non-GAAP adjustments net of tax for the first quarter of fiscal 2009 included $7.2 million in goodwill impairments, $1.8 million of stock based compensation expense and $0.9 million of restructuring charges.

GAAP net loss for the first quarter of fiscal 2009 was $6.6 million or $0.11 per share compared to a net loss of $3.5 million or $0.06 per share for the fourth quarter of fiscal 2008 and net income of $12.1 million or $0.19 per share for the first quarter of fiscal 2008. Non-GAAP net income for the first quarter of fiscal 2009 was $3.3 million or $0.05 per share compared with $3.4 million or $0.05 per share in the fourth quarter and exceeded our guidance for the quarter due to our strong gross profit dollars and tight expense control.

Turning now to the balance sheet, accounts receivable totaled $149.8 million at the end of the quarter, down $44 million from the prior quarter. Day sales outstanding were at 42 days this quarter compared with 47 days last quarter, primarily because shipments in our first quarter were more front end loaded.

Net inventory was $78.5 million at the end of the quarter, up from $62.4 million at the end of the last quarter. This increase was due to the timing of a logistics deal that bridged over quarter end. This inventory has since shipped. Inventory turns were 15x for Q1 but excluding the impact of this logistics deal inventory turns were 20x versus 23x for the fourth quarter.

As we move forward with increased flash, SSD and display and embedded product sales we expect our inventory turnover will be in the high teens due to many more unique materials associated with these types of products. As a reminder, accounts receivable and inventory turnover are calculated on a gross sales and cost of goods sold basis which total $327.5 million and $301.2 million respectively for the first quarter of 2009.

Cash and cash equivalents totaled $137.3 million at the end of November up from $116 million at the end of last quarter. Cash flow from operations was $28.6 million for the first quarter of fiscal 2009, driven in large part by a reduction in receivables. Depreciation and amortization expense totaled $3.3 million in the first quarter. Capital expenditures totaled $3.8 million in the first quarter compared to $1.9 million last quarter with a majority of the increase due to investments in SMART Brazil capacity and building expansion in Malaysia.

Looking at our capital structure, note that our $81.3 million of notes are not due until 2012. Also, during the first fiscal quarter we amended our working capital revolving line of credit which matured in 2010, relaxed the EBITDA related covenants. We are pleased with the resulting $35 million line of credit with Wells Fargo bank with whom we have enjoyed an excellent long-term relationship. Note that we have rarely had to tap into this revolving line of credit and it is currently undrawn.

Now let me turn to our guidance. As a reminder, our second fiscal quarter which ends in February is our seasonally low quarter due to fewer business days in the quarter because of the holidays observed around the globe. For the second quarter of fiscal 2009 we estimate net sales will be in a range of $120-130 million, gross profit in the range of $21-23 million and net loss per share will be in the range of $0.02 to $0.01 on a GAAP basis.

On a non-GAAP basis excluding charges relating to stock based compensation we expect net income per diluted share will be between $0.00 and $0.01. Please refer to the non-GAAP information section of our earnings release for further details. The shares used in computing net income per diluted share are estimated to be approximately 64 million.

That concludes my remarks. Now I will turn the call back to Iain.

Iain MacKenzie

Thanks Barry. In summary, we are pleased with our solid performance in the first fiscal quarter of 2009 amidst the turbulent times in the DRAM market and the global economy. We are not immune to these challenges but as we look ahead to the remainder of fiscal 2009 we are confident that our business model will remain intact and together with our balance sheet will thereby enable us to remain focused on strong execution, profitability and our diversification strategy.

Operator, we are now ready to take questions.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Timothy Luke – Barclays Capital.

Timothy Luke – Barclays Capital

With respect to the cash from operations, how should we think about that trending in the February and I was also wondering if you can talk about some of the factors you see impacting the gross margin as you move into February and through the year? Then if you could give us some color on how you see the different segments performing in 2009 in terms of service, printers, desktop, etc. that would be very helpful.

Barry Zwarenstein

I’ll start with the cash flow. The operating cash flow is driven by the operating income and by the changes in working capital. Particularly, the sources of funds from the income statement ran in the mid single digits in terms of millions of dollars this quarter plus or minus one or two. That is fairly static and has been for the recent past. What is volatile, of course, is the working capital changes and that is certainly [existed] materially in this past quarter. While we don’t give a specific cash flow forecast or working capital forecast we continue to expect that the controls that we have over inventory, receivables and payables will allow us to gain further modest improvement in working capital and hence in operating cash flow.

Timothy Luke – Barclays Capital

So you are saying you will have improvement in your cash flow?

Barry Zwarenstein

That will depend on the timing of the deals during the quarter, the key things that happen in any business, the mix between the various types and repayment terms, receivable terms and others, but it could be positive. It could be slightly negative. We are not going to give a specific cash flow forecast though.

Iain MacKenzie

Of course the ASP outlook is at a very low level as you continue to report yourself so we are anticipating no correction during this quarter. We won’t be funding working capital up a hill. You asked a second question about gross margin and I continue to kind of indicate that normalized gross margins for this business have been 17-18%. Any other changes, you see them going up as the revenue in the ASP fall. If that corrects you see the gross margin percentage going down. So again, it is focused towards the gross profit dollars.

Brazil will be impacted, you asked for some color and flavor. Brazil will continue to be a growth engine. Of course there is the ASP reduction that impacts it equally at this moment in time so that is mostly desktop although we had some good server orders last quarter. This quarter or fiscal Q1 in particular. Printers should continue to decay and decline as I have said in the past 2-3 years. The interesting thing on servers was we had in the call last time I said this should normalize to 34% and indeed it did so 34% assumes the ASP declines equally in the server business to the desktop business.

Really, this mix is significant will make that change perhaps by Q4 the PC desktop could be a little bit stronger with the units in Brazil assuming that some of this corporate American and other economies of the world are going to continue to struggle through our fiscal year, because our fiscal year ends in the obvious time scale. But I think that is as much as we can say about the year really.

Timothy Luke – Barclays Capital

On the landscape, could you talk about how you see the potential for consolidation in Taiwan to impact the DRAM market or what you have been hearing with respect to that and the impact on potentially stabilizing some of the price trends in the market?

Iain MacKenzie

I think [inaudible] would be consolidating with some of the readings of research reports and I can remain hopeful about consolidation and hopeful that any consolidation or funding or help outside to within the industry as opposed to from governments, etc. which will put some false views. Happy to see the reduction in capacities from Toshiba, Scandisk have all been announced for this holiday season and in fact came under so I am happy to see taking the opportunity to take some capacity off line across the board both DRAM but as for enough and quick enough we certainly need some confidence back in the market.

I saw your report of this week which talks about it extensively.

Operator

The next question comes from Gary Hsueh – Oppenheimer & Co.

Gary Hsueh – Oppenheimer & Co.

A few quick questions on gross margin. It looks like you obviously did a great job there. You talked about logistics in Brazil but I didn’t hear anything about cost reduction and restructuring there on the cost line. How much of gross margin improvement did the restructuring drive in the first quarter?

Barry Zwarenstein

It helped. But frankly, the more important contributor besides logistics in Brazil is that it was really, I know this sounds trite but it nevertheless doesn’t mean it is less valid, there was really excellent execution by the supply chain and manufacturing teams to make sure they availed themselves of every single opportunity and every single product line working with the sales people to get as good of deals as they can. It is a lot of little items rather than one big item.

Gary Hsueh – Oppenheimer & Co.

Are we then to expect basically another chunk of cost coming out of the model in the February quarter related to the cost restructuring or is that kind of all sort of built in right now in Q1?

Iain MacKenzie

Q1 was actually part of the transitional quarter because we announced it in September. So Q2 should see the better impact of the actions we took in Q1.

Gary Hsueh – Oppenheimer & Co.

And the G&A numbers should start going down below a $3.3 million?

Barry Zwarenstein

Not materially, no. There was some that was the exit from the Dominican Republic and improvements but nothing material. You should remember that as we mentioned in the call we invested a fair amount of money including the rebuild in Malaysia this last quarter.

Gary Hsueh – Oppenheimer & Co.

You talked a lot about DDR3 in the past. Can you give us a sense of where we think the high density DDR3 kind of business is headed in the server market next year and how that is going to play out quarter-to-quarter or half over half next year?

Iain MacKenzie

I think quite simply there is certainly tension in the environment at the moment that semi’s want to be paid more for DDR upgrades. It is a larger chip. It is tougher to manufacture. It is a new process. So there is some reluctance to launch in these depressed market conditions. The server manufacturers are looking forward to the 1333 and above performance. So we think it is going to be a slower adoption with the early movers in the first half and most of it focused towards March-May type timescale and then more adoption in the second half that will lead to robust demand for it. So we don’t see a switch over happening within 2009 to DDR3. We currently have it at like 25-35% by the end of the year and I think the contingency has been for that to be declining as conditions worsen.

Gary Hsueh – Oppenheimer & Co.

So just to summarize, at these prices you see pretty robust or early demand or adoption for DDR3 but on the supply side given the pricing and the margins the chip makers are just reluctant to do so? Is that the idea?

Iain MacKenzie

That is correct.

Gary Hsueh – Oppenheimer & Co.

You talked about inevitable market turns here. I wonder if that might be, you guys serve a pretty broad set of customers…which customer base and which vertical do you think turns first and what is your margin structure there?

Iain MacKenzie

We still feel that the turning points are the desktop and industrial server and main enterprise server being first and networking and then consumer and PC market would be the sequence. But I would say inevitably and clearly with the balance sheet and lack of [inaudible] that we are very fortunate to be able to say we are going to be here in two years time or whenever that does happen. The margin percentage is very dependent upon that ASP. But gross profit dollars will continue to see growth in Brazil, growth in display and embedded, growth in SSD and then as the server network comes on then we’ll see growth in DRAM and be well positioned for it. So we are just keeping our heads down and working towards those same goals.

Gary Hsueh – Oppenheimer & Co.

You talked about the Excel SSD series with random small block access rates, what is the status of your design activity there? Have you got any design wins on the enterprise side and generally speaking what is the timeline there?

Iain MacKenzie

The product is launched. The product is shipping. A couple of early wins but as with many of them we are getting design wins and not huge adoption so it is more environment and multiple people are being designed in readiness. The place we have been most successful are in small, individual, industrial medical companies who can make this decision and move on inside their own system and their own capacity. I would say good news, working.

Operator

The next question comes from Jim Suva – Citigroup.

Jim Suva – Citigroup

A quick question on gross profit dollars, the outlook for next quarter. The mid point of the gross profit dollar outlook is down a little bit more than the mid point of your revenue range. I was wondering if you could just talk a little bit about the dynamics there. Is that utilization, mix? Can you talk a little bit about the pricing value add you are getting on your portion at this point?

Iain MacKenzie

First of all, the seasonality…we are shutting down the same as many other companies for more days with Christmas and New Year landing on the Thursdays. It is helping many, many companies to shut down right through and maximize the vacation days in each of our geographies and then you have seen some writing about the Chinese New Year in the January time frame. So, the revenue is already depressed through the ASP and many people are saying this can’t continue for too much longer and how can it go any further below cost? So I will leave that there to say the revenue is going to struggle to go down by another 10% and really stabilizing. Gross profit dollars then certainly that would be unit demand and showing unit demand around the world being down on top of our seasonality and our normal low quarter. Just a couple of points down below normal seasonality.

Jim Suva – Citigroup

Anything on the go-forward quarter related to better mix generally speaking than other quarters that might impact either positively or negatively the GP dollars generally speaking?

Iain MacKenzie

Nothing for this quarter and certainly still watching what is happening in the world. There is no real driver of government orders or anything through the time. A little bit in our Adtron SSD high end business of military defense and aerospace but just a little bit of the year-end there.

Jim Suva – Citigroup

Going back to the landscape in Brazil, can you talk a little bit about who your biggest customers there are at this point and how consolidation of the PC industry in Brazil might impact your business there?

Iain MacKenzie

Sure. Our top customers include our well-recognized global accounts of HP, Toshiba, Dell, Toshiba SIM. Our local customers are Positivo who you have seen in the news because I think Dell was the latest to acquire them after 80% reduction in valuation in the Brazilian stock exchange. So we do have at this moment a fairly unique position in having assembly and test of the IC’s in Brazil and we are growing towards 40% area market share this year. So by the local content and offsetting some duties we continue to put equipment down there which in the last quarter had reached over 90% utilization and we have added further capEx this quarter. We continue to be kind of sold out but at the same time the pricing pressures are definitely significant because the 12% of a smaller number is a smaller number of dollars to bridge to import versus manufacturing locally. So it sees the same pressures but consolidation because we are serving only the Brazilian market and it is all in-house I am not too sure it is really important as to who the customer is. So I think we will continue to be sold out in unit terms regardless of consolidation.

Jim Suva – Citigroup

Can you talk a little bit about what is embedded in guidance for SG&A dollars and R&D dollars and how that mix is going to play out over the next quarter?

Barry Zwarenstein

There is no dramatic change in R&D, sales and marketing. There may be some modest reductions especially on the SG&A side as the cost reductions play through and as we trim expenses wherever we can. I wouldn’t look for any dramatic changes for the rest of the year.

Operator

The next question comes from Edwin Mok – Needham and Co.

Edwin Mok – Needham and Co.

On your guidance I was wondering how do you look at the tax in the coming quarter as well as for the rest of the year.

Barry Zwarenstein

On the tax, let me first give you the full year numbers to use for your model. Let me start with the first quarter and give you the two tax rates. If you look at the GAAP tax without the $7.2 million hit for the write off on payments of the Adtron goodwill the range was 78%. If you look at cash rate it was 67%. Now, going forward for the full year we would see that the GAAP rate would average out for the full year excluding the Adtron write off somewhere in the order of 150% or 140% thereabouts. For the cash rate, we anticipate that it will remain at the 60’s. These are, understand, very high rates and the reason that they are so high is a mix of where we pay taxes by country. We primarily pay taxes in some of our foreign countries like Brazil, U.K., Puerto Rico and Malaysia.

Edwin Mok – Needham and Co.

One question I have one the restructuring plan, last quarter when you announced you were analyzing the $100 million by the end of this year, it seems to be it isn’t coming down that much in the November quarter because it just started and on your guidance you imply your February quarter opportunities are not that much. I was wondering how much of that savings comes from opEx versus gross margin or the cost of goods sold line and when can we expect to see that comp of a $3 million run rate?

Iain MacKenzie

We actually said it would be $11.8 million annualized savings, I think $1 million of which was due to happen within FY09 and the majority of the action would be taken in Q1. But also if you notice what we said is we said we would actually use a lot of that savings to fund other businesses at [inaudible], SSD and Brazil. So actually we said there would be very low to zero net effect in FY09 on the last call. We have seen a little bit of it coming through as we are prudently not adding back as quickly as planned, but you shouldn’t be waiting for a millions of dollars reduction per quarter.

Edwin Mok – Needham and Co.

One of your competitors recently gave an announcement which seemed to imply a reduction in the [inaudible] by Cisco. I’m just wondering if you have any comments on that? I think they probably sell through you guys anyway. Any color on that would be helpful.

Iain MacKenzie

Thank you for trying to draw me in but I think I will leave Cisco’s announcements and their competitor’s announcements to them. Suffice to say we still plan our networking business at about 20% of our business for next quarter.

Edwin Mok – Needham and Co.

Regarding DDR3, some of the chipmakers of the 2 GB product and some of them have quite aggressive plans for DDR3, much more aggressive than I think the consensus view there is. I was wondering if you view the 2 GB chip as a threat for the high-density area you guys are targeting and also the companies, Samsung announced a 1.35-volt chips which will probably be able to drive a lower power memory module. I’m wondering if that can cannibalize your advantage in those areas as well?

Iain MacKenzie

We do have a couple of competitive designs in that area. Remember, we do exercise the [inaudible] technology which does allow the monolithic type [inaudible] solution so we do have a couple of designs that make us cost effective because we have neither the high cost 2gb monolithic price nor do we have the DDP type charges because we can man that on the [inaudible]. However, the 2 GB chip is still expensive. So it comes to be a particularly low power problematic area within a data center to make that cost efficiency come in. But these are the normal costs. I think the 2 GB is probably still in excess of that $15 as the monolithic level versus the well-written 1 GB chips below $1 or whatever stacking or density charges we have. So I think there are still performance, power and price patterns there but sure someone will need it and quite often we could still be the conduit for that by purchasing the 2gb chips from the semi’s and making those module solutions also.

Operator

The next question comes from Betsy Van Hees – Caris & Company.

Betsy Van Hees – Caris & Company

I was wondering if we can go back to the quarter you just completed and your revenue declined really moderately compared to what we are seeing happening in the industry in general. Can you give us some type of color? Are you gaining market share? Unit growth must have been pretty substantial when you look at how dramatic the ASP decline were in DRAM so can you help us understand how you are sort of out performing the market?

Iain MacKenzie

We’re not too sure how much that is. Clearly the competition within the semi’s themselves are making announcements and we are doing particularly well. I think are sure we do have the size, the scale, the balance sheet and confidence that SMART Module is going to be here for the long-term so for the large OEM’s who we serve and perhaps we are getting a little bit of preferential treatment. Remember, market share typically we have ourselves and someone else who have many of the platforms we supply and we make a business out of designing on each of the platforms. So, there might be a little bit of market share there definitely in the last quarter plus some strength in the logistics business and more units going in there as people try to put more content in their current box without putting out to buy new hardware. So I think there is a few more units to try and resolve the ASP reduction and then lastly I think we see the ASP reduction a little bit earlier because there is no inventory in this industry. So I think we tend to be a little bit ahead of that curve. So perhaps more of our ASP reduction was built into the preceding quarter as opposed to this one.

We do see it continuing.

Betsy Van Hees – Caris & Company

You talked about the logistics business which had a great performance in the quarter. It was up sequentially 32%. We also saw similar growth in storage also at 32%. Can you give us some color as to what is happening in that business and where you are seeing substantial growth?

Iain MacKenzie

I think that the logistics business is definitely content driven. It is after market. It is more of the repairs and spares and keeping things going and getting the most out of what you currently have behind the upgrades behind the logistics business. So, I think in itself that deferred the larger scale capital and then in the storage, which is a focus area for us a little bit ahead of plan but we are sending out significant samples of all types of flash drives into the market both at the individual level and [CR] format and embedded format and open format with our Excel-10 and Xceed SSD format. So that is the storage and industrial areas where you are going to see continued growth in the future.

Operator

The next question comes from Bob Gujavarty - Deutsche Bank Securities.

Bob Gujavarty - Deutsche Bank Securities

I want to explore the embedded SSD business you are taking over for Intel. Clearly there are some design wins that are shipping now. Do you have any idea how big that business could be potentially given the existing customers for that and how you are going to take over those existing slots?

Iain MacKenzie

It is such a tough question to answer. I don’t mean to be deliberately evasive but flash prices, ASP flash down current customers, end of life, new designs, think of new designs and people at SMART and Intel still connecting through Intel’s website straight over to ourselves so at this moment in time the same as we did with the Strata Flash I’d rather look at this as a continuing SMART portfolio and product offering relationship with Intel, high end OEM’s and really just another portion of our business and not look for it to climb out and be a noticeable entity in its own right.

Bob Gujavarty - Deutsche Bank Securities

For comparison sake, I think one of your competitors is doing one customer in that market with that SSD on a PCI express card and they are making margins in the 20-25% range. Do you think you can do something similar? Can it be 20-25% margin type profits?

Iain MacKenzie

I think absolutely yes. Of course if the ASP reduces then the value added percent actually gets higher.

Bob Gujavarty - Deutsche Bank Securities

Also in terms of just what you are seeing in terms of the next generation server platforms, given that there are a lot of holidays and those kinds of issues do you see most of that ramp coming in the back half of the calendar 1Q and maybe even calendar 2Q? Is that how you see it progressing?

Iain MacKenzie

Yes. Calendar 2Q. I think that April-June timescale we will see the server companies that are driving through for the speed and utilization capacity up and get that increase versus the reluctant release from the semi’s of the transition into DDR3. I think calendar Q1 will continue to be qualification and very early adopters, first shipment but really volume shipments trailing into calendar 2Q.

Operator

The final question comes from the line of Tony Venturino – Federated Investors.

Tony Venturino – Federated Investors

You were talking about Brazil. That is kind of what I wanted to get into. Before I get to that, let me get one quick clarification. The non-DRAM you have been giving the percentage in the past. Did you give that out in the prepared comments?

Iain MacKenzie

I’m not too sure. 16% is the answer.

Tony Venturino – Federated Investors

16%. That was 19% last quarter?

Iain MacKenzie

17% last quarter. 19% the quarter before that and then 12%. I had said it would be a little bit up and down as you ship samples and ship new products and get the design wins and then you ship a new one. So, yes it is 16%.

Tony Venturino – Federated Investors

Onto Brazil. With everything that is happening down there could you maybe give a little bit more color on what you saw in the October-November time frame? Was there a big drop off in November? A lot of people were saying November was pretty dismal. Did you see that in unit growth or unit demand that month?

Iain MacKenzie

Yes. Remember this does get a little bit strange. Let me answer it in a couple of ways. The answer is yes. We certainly saw it. All round about people were reluctant to buy materials. We had the foreign exchange rate and currency changes happening. People had just been recovering from a 30% swing in the currency. It was the ASP’s of the DRAM were dropping significantly so people did not want to buy so there was deferred spending. So we saw that.

Now SMART Modular was sold out. Again, it is because we are a local supplier so we do have the advantage of the packaging, assembly and test so we do offer a cheaper solution with better back end taxes through the local content to our customers. But we were getting the reports from our President and from our operations there constantly of people trying to back off the demand. So we potentially sold some more parts to the next level customers who were waiting for us to continually increase our capacity to get on that demand profile.

Tony Venturino – Federated Investors

You said you made some investments there and last quarter I believe you were at full capacity, 100%? You said you were at 90% this quarter?

Iain MacKenzie

That’s correct, and by the end of the quarter we hope to be below 85% utilization by the end of 2Q. When you are sold out that is tough on a utilization point of view but it means we can flex that portion to make sure all of the controls, maintenance all happens along with our new products and our new roll through’s. It gets kind of quite complex then.

Tony Venturino – Federated Investors

Then you had said when we were up in New York you were forecasting 25% growth. Was that the number?

Iain MacKenzie

It was greater than 20% growth.

Tony Venturino – Federated Investors

Are you still seeing that or are you still believing that? Was that more of a 3-5 year number?

Iain MacKenzie

No, 20% growth rate in our fiscal 2009 is still on plan. If you take that from a unit point of view, we don’t believe the ASP’s could ever go this low perhaps from a revenue viewpoint but from a unit point and hence contribution to the GP dollars.

Tony Venturino – Federated Investors

So that is still on track then?

Iain MacKenzie

That is correct.

Operator

That does conclude our question-and-answer session. I would like to hand the call to Mr. MacKenzie for any closing remarks.

Iain MacKenzie

Thanks to everyone on the call and for your continued interest in SMART. We certainly had a good Q1 and really at this time of year and especially with this Scottish accent I hope you all managed to get a few days of break through this season to recharge some batteries and spend some time with friends and family. I guess in the best way for me is good health and good cheer and we look forward to talking to you in the New Year. Thank you very much and we hope to talk to you next year.

Operator

Ladies and gentlemen this concludes the SMART Modular Technologies first quarter fiscal 2009 conference call. (Operator Instructions)

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