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SMART Modular Technologies (WWH), Inc. (NASDAQ:SMOD)

F2Q10 (Qtr End 02/26/10) Earnings Call Transcript

March 25, 2010 4:30 pm ET

Executives

Suzanne Craig – IR, The Blueshirt Group

Iain MacKenzie – President and CEO

Barry Zwarenstein – SVP, Finance and CFO

Analysts

Jim Suva – Citi

Wenge Yang – Oppenheimer &Co.

Tim Luke – Barclays Capital

Kevin Cassidy – Thomas Weisel Partners Group

Betsy Van Hees – Wedbush Securities

Tony Venturino – Federated Investors

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the SMART Modular second quarter fiscal year 2010 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, Thursday, March 25, 2010.

I would now like to turn the conference over to our host, Ms. Suzanne Craig with Investor Relations for SMART Modular. Please go ahead, ma'am.

Suzanne Craig

Good afternoon, and thanks to everyone for joining us today on today's earnings conference call to discuss SMART Modular Technologies second quarter, fiscal 2010 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 statements. During the course of this conference call, Ian 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, 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 27 A of the Securities Act of 1933 and Section 21 E of the Securities and Exchange Act of 1934. You should review 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, including the company's recently filed Annual Reports on Form 10-K for fiscal year 2009, and the quarterly report on Form 10-Q for the first quarter of fiscal 2010, which ended on November 28, 2009.

We caution you that such statements are just projections. Accordingly, our future results may differ materially from such projections and investors are cautioned not to place any undue reliance on any forward-looking statements. 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 second quarter of fiscal 2010 earnings press release is available on the company’s website at smartm.com or you may call our Investor Relations office at 415-217-7722 and we will fax you a copy. Please note that non-GAAP financial results presented excludes stock-based compensation expense, restructuring charges, goodwill impairment charges, net gain on the repurchase of notes, and net gains from our legal settlements and other infrequent or unusual items. Please refer to the non-GAAP information section of our earnings press release for further detail and for a reconciliation of such items to GAAP. An audio replay of this call will be available for two weeks, by accessing the Investor Relations at smartm.com, or by dialing 303-590-3030 and using the pass-code 4250622.

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

Iain MacKenzie

Thank you, Suzanne. And welcome to everyone on the call. Simply stated, for our fiscal second quarter, we enjoyed improved DRAM demand from multinational companies around the world, which coupled with our operating leverage and efficient cost structure is driving better financial performance. At the same time, the core business is recovering, we are investing to address the growing enterprise Solid State storage market to increase module capacity and to launch Flash packaging in Brazil. We expect to see meaningful traction from these initiatives later this calendar year.

Turning now to specifics, we had another good quarter with a continuation of positive forces behind our upwardly-revised guidance. It appears that business conditions are indeed improving. Higher DRAM pricing, strength in end-user demand, accelerated technology transitions, and the increased supply are all helping to increase revenue and margins.

Second quarter fiscal 2010 net sales of $160.1 million increased 30% sequentially over the $123.1 million reported in the previous quarter. Gross profit totaled $42 million, a 46% sequential increase, and non-GAAP net income reached $0.23 per diluted share, a significant sequential increase over the $0.08 per diluted share reported in the first quarter of fiscal 2010.

Our core DRAM business has represented 89% of net sales in the second quarter, so considerable strength in our desktop PC business in Brazil, and in network and telecom. Additionally, as expected, we saw a reversal of the persistent sequential server revenue declines we had previously been experiencing.

In Brazil, the continued strength in the PC industry and growing local economy drove our strongest quarter ever for us in that region. This robust demand, including a faster-than-anticipated transition to DDR3-based DRAM modules has challenged our supply chain and our production capacity. To address these challenges, we have increased our inventory, and as Barry will elaborate upon later, we are further increasing our capital investments. As a result, we believe that we will be able to ramp output to meet the growing demand during this fiscal third quarter.

In the server space, we are pleased to report the first sequential revenue growth in some time, with a number of factors playing the role. The biggest tailwind was a slow but continued improvement in the economy, which has driven IT spending across the board. In addition, multi-core CPUs from Intel's Nehalem-EX and Westmere; and AMD's Magny Cours are driving demand for DDR3 modules, especially the higher-density Registered DIMMs. More cores per CPU typically translates into more GB per processor node to achieve optimum performance. Continued price declines on the 2GB DDR3 device have resulted in the increased volumes of higher-priced 8GB 2-rank Registered DIMMs. We expect this trend to accelerate as the 2 GB DDR device reaches price per bit parity with the 1GB part sometime toward the end of this calendar year or early next year. Also, there has been increased interest from a number of customers for a specialty-tested or screen models for ultra-high reliability applications. The technical expertise, specialized equipment, and logistics associated with these products continues to leverage the core OEM value proposition of SMART.

Turning now to Solid State storage, I am pleased to report that we are making good progress. Last quarter, we indicated that several defense customers were evaluating our Xcel-10 SATA 2.6 iTemp drive. We have recently been awarded a meaningful contract for this product. Our customer indicated that SMART solution was chosen over other competitors primarily due to its performance and rugged design. We expect to commence shipments this fiscal third quarter. We are starting to see more testing of these SSDs in ground-based military applications, many of which tend to drive significantly greater volumes than sea and air-based applications.

Also, on January 5, we announced our XceedIOPS SATA SSD based on MEMLC technology. This further demonstrates our belief that MLC for Enterprise is a game-changer that will allow wider acceptance and growth of SSD solutions. We believe this to be the case, because MLC is just over half the cost of SLC, doubles the overall SSD capacity, and still meets the required enterprise specifications of greater than five years of life under worst-case conditions.

As you may recall, last quarter, we mentioned that we received our first evaluation order for this product from a major OEM, and we remain on track to begin shipping against that order during this fiscal third quarter. This customer has since awarded a second evaluation order. We continue to expect that we will ultimately achieve production release status for this SATA drive in the next few months. In addition, we are now engaged at several major OEMs with this product.

We are also making good progress on the PCI Express beta testing in Tier-I OEM customers, and continue to expect to be production-ready and to gain our initial volume order later this year. Overall, our Solid State growth strategy continues to make progress. John Scaramuzzo, who I introduced to you last quarter has been building on our established baseline and leading this key strategic initiative. He has already managed to hire several storage veterans in firmware, customer engineering, and program management with a focus on best-in-class customer support. We are very excited about our prospects for growth in this new and growing market.

Barry Zwarenstein will give you a review of the financials, and our forward guidance. Barry?

Barry Zwarenstein

Thank you, Iain. Second quarter sales of $160.1 million were broken down by geography as follows

U.S., 25%; other Americas, 50%; Asia, 19%; Europe 6%. Our breakdown of sales by end-markets for the second quarter were as follows

PC, 42%; network and telecom, 23%; service, 20%; logistics, 6%; industrial, 4%; storage, 4%; printers, 1%. Compared with the first quarter of fiscal 2010, PC and notebook sales grew 37%, networking and telecom grew 38%, and service grew 33%.

HP continues to be our largest customer, representing 22% of net sales this quarter, essentially flat on a percentage basis relative to last quarter. On an absolute dollar basis, net sales to HP grew by 21% sequentially, and were driven by increased PC and notebook sales and logistics. Cisco remained our second largest customer during the quarter, representing 18% of net sales, also flat on a percentage basis versus the prior quarter. On an absolute dollar basis, net sales to Cisco grew by 30% sequentially, due to the stronger end user demand. DELL remained our third largest customer, representing 13% of our net sales, compared with 12% last quarter. This continued strength at our largest customers reflects the extensive multifaceted relationships with these and many other key customers over the last decade or more through up and down cycles. We continue to leverage these valued relationships to seek new business as we broaden our product portfolio.

Moving to the rest of the income statement, gross profit for the second fiscal quarter was $42 million, up 46% from last quarter's $28.8 million. This improvement in gross profit was again driven by strong performance in Brazil, along with increased demand from U.S. multinational customers, and higher market pricing for both DRAM and Flash. Gross profit also increased due to having previously positioned inventory, which in times of shortages in the DRAM market provided our customers with crucial continuity of supply.

Our second fiscal quarter non-GAAP operating expenses were $17.9 million, 2% higher than the prior quarter. Second quarter non-GAAP R&D expenses totaled $4.8 million versus $5.4 million in the prior quarter, due to NREs in the first quarter that did not recur in the second quarter. Non-GAAP SG&A expenses totaled $13.1 million, versus $12.2 million in the prior quarter. The increase was due to several factors, including expenses associated with our Solid State storage RAM, and the restoration at the start of January of previous cuts in the U.S. employees' base salaries.

Non-GAAP adjustments, net of tax, for the second quarter of fiscal 2010 included a $3 million one-time gain related to a legal settlement, partially offset by $1.8 million of stock-based compensation expense. GAAP net income for the second quarter of fiscal 2010 was $16.1 million or approximately $0.25 per diluted share, compared to net income of $4.6 million or approximately $0.07 per diluted share for the first fiscal quarter of 2010. Non-GAAP net income for the second quarter of fiscal 2010 was $14.9 million or $0.23 per diluted share, compared to $5.4 million or $0.08 per diluted share for the first quarter of fiscal 2010.

We remain pleased with our strong balance sheet and working capital metrics. Our net accounts receivables increased to $181 million from $127 million last quarter, mainly due to higher sales. Days sales outstanding were 45 days, up slightly from the 42 days in the first fiscal quarter, but in line with prior quarters. Corrections in the second quarter was slowed in part by February Chinese New Year celebrations.

Inventory was $90.4 million at the end of the quarter, up from $78.7 million at the end of last quarter. This increase was due to our positioning for both stronger demand across the board, and in part to mitigate anticipated shortages. Inventory turns were 14.6 times for the second quarter versus 12.6 times in the prior quarter. Approximately one-third of our second quarter inventory was in support of our logistics services. It is important to remember that we have limited liability for our logistics inventory. In this fiscal third quarter, we expect to further increase inventory for logistics services, as we look to position ourselves ahead of the continued strong demand and shortages of both DDR2 and DDR3.

Consistent with past records, accounts receivable and inventory turnover are calculated on a gross sales on a cost of goods sold basis, which totaled $371.5 million and $329.5 million respectively for the second quarter of fiscal 2010.

Cash and cash equivalents totaled $118.7 million at the end of February, down from $129.1 million reported at the end of last quarter, primarily due to $7.1 million of capital expenditures incurred during the quarter.

Cash flow from operations was $2.8 million for the second quarter of fiscal 2010. While we continued to consistently generate operating cash flow from the income statement, reaching $21.2 million in the second fiscal quarter, we experienced a $24 million net increase in working capital, mainly due to the increase in accounts receivable.

We are again increasing our estimated range for capital expenditures for the full fiscal year of 2010 to $28 million to $32 million from the $19 million to $22 million provided previously. The main driver is an additional $8 million to $9 million in Brazil. The increased capacity accommodates a faster-than-anticipated transition to DDR3, and assure the targeted launch of our Flash card business in the first half of fiscal 2011.

We are also increasing our investment in Malaysia by between $1 million and $2 million to alleviate capacity bottlenecks and further improve efficiency. Over half the total capital expenditures for Brazil and Malaysia have been committed.

And now, let me turn to our guidance. For the third quarter of fiscal 2010, SMART estimates that net sales will be in the range of $175 million to $185 million. We expect gross profit to be roughly flat sequentially, and to be in the range of $38 million to $42 million. On a GAAP basis, net income is estimated to be in the range of $0.15 to $0.19 per diluted share. On a non-GAAP basis, excluding charges relating to stock-based compensation, the company expects net income will be in the range of $0.18 to $0.22 per diluted share. This earnings guidance includes an income tax provision, estimated in the range of $7.8 million to $8.4 million. The shares used in computing net income per diluted share are estimated to be 65.5 million shares. Please refer to the non-GAAP financial information section in our earnings press release for further details.

That concludes my remarks. Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator instructions)

Our first question comes from the line of Jim Suva with Citi. Please go ahead.

Jim Suva – Citi

Hey, guys. Thanks to you, and congratulations. Quick question on the outlook, specifically on the gross margin line, and maybe I missed a little bit and didn't catch on the conference call, but I guess I am a little surprised that the gross income line for the May quarter outlook isn't a little bit higher. If I take that – and here is the math I am doing, the high end of your guidance, you know, or the midpoint of your guidance compared to the high end of your gross profit outlook, or even the low end of your sales and the high end of gross profit, it still looks like there is a stepped down gross profit. Can you help me better understand that for the May quarter?

Iain MacKenzie

Yes, certainly, Jim. The midpoint that you see is 22% of that outlook. Simply, the DRAM prices were moving very fast through last quarter, so we had quite a lot of inventory movement from purchase to sale, and noticeably the difference of that going back to being a stable high price. And secondly, that rate at the end of the quarter in that last month of the quarter as the logistics business came and very strong, and logistics, as you know, is a higher margin, and that dealt with a pent-up backlog of parts that were waiting for availability. So, the OEMs will prioritize the system shipments and then their aftermarket and component parts thereafter. So those are the two reasons.

Jim Suva – Citi

Okay. So as a going-forward basis in a normal steady state, more linear quarter, if there ever is such a thing, would you know kind of 23% and gradually as SSD ramps, gradually increase that over time? Is that a better way to think about modeling?

Iain MacKenzie

Yes, we have the midpoint at 22, Jim, but yes, and then the – a gradual increase from there as solid state comes in, correct. Our target model, remember, still is in this range, – so the 22% to 24% range.

Jim Suva – Citi

And then, a last question. With your capacity expansions in Brazil, can you maybe help me understand how much that is, either from a output in units percent increase or sales increase, or how we should think about that expansion of how small or large that is?

Iain MacKenzie

It is a difficult one to give you, because the test for DDR3 is actually a big portion of it, and as Barry mentioned in the commentary there, DDR3 has transitioned to more than 50% of the demand much earlier than we had forecast. So I would think, I don't know of an exact number, but I think half of this is really for technology and for the test. Another 50% would be to give us – to assure the capacity, and a little bit more towards the Flash cards of equipment that we still needed to add. And so, there's maybe 10% to 15% capacity, but we are already overstretched. So –

Jim Suva – Citi

Great. Thank you, gentlemen. Really spectacular results and a great outlook and it is glad to see the deliverables you are putting up. Thank you.

Iain MacKenzie

Thanks, Jim.

Operator

Our next question comes from the line of Gary Hsueh with Oppenheimer &Co. Please go ahead.

Wenge Yang – Oppenheimer &Co.

This is Wenge for Gary. Thank you for taking my questions. Recently, we have a heard a lot of talk about DRAM supply constraints and ASP hike. I just want to know, how do you secure your DRAM supply and what kind of ASP of your inventory versus the sales price you can enjoy and is the GAAP going to be close in the coming quarters due to the supply constraints and higher ASP for your inventory buys?

Iain MacKenzie

I will try and keep it – try to make sense, feel free to ask a secondary question. We are assuming in our outlook that the DRAM remains a little bit constrained under these high prices. So really current prices would hold through. Remember, a fair bit of our business is also legacy business. So, you know, be careful in modeling our total business. That in itself will mean that the gross margin and the revenue, the inventory will be much more stable, right?

Wenge Yang – Oppenheimer &Co.

Okay.

Barry Zwarenstein

What about the second part of the question?

Wenge Yang – Oppenheimer &Co.

Yes.

Iain MacKenzie

So that means the ASPs remain kind of essentially similar to the –, but not growing as they were in last quarter.

Wenge Yang – Oppenheimer &Co.

Okay, just to follow up on that, is it okay to assume that due to higher DRAM ASPs, your gross margin is coming down due to your higher cost of goods?

Iain MacKenzie

Right, that is correct.

Wenge Yang – Oppenheimer &Co.

Okay. Just a secondary question regarding your NAND product launch in Brazil. Can you update us on the current status of the NAND product launch?

Iain MacKenzie

Yes. (inaudible) most of the equipment has already been ordered and it is coming in, getting through customs and arriving on our floor, as we just outpaces them, we have increased our CapEx, and to bring in more of the test and equipment required. So, and not fully assembled yet, but getting very close. So within Q3, we should have the full assembly and the first parts for us to enter qualification with. Certainly not a fiscal year 2010 revenue driver.

Wenge Yang – Oppenheimer &Co.

Okay, that is helpful. Last question, for Barry. Just the tax rate guidance for the next quarter and how do we model tax looking forward?

Barry Zwarenstein

So, for the full year, we are expecting on a GAAP basis to have a 40% rate, on a non-GAAP basis, 38%. We do the explicit dollar amounts for the third quarter in our guidance, when we mentioned the $7.8 million to $8.4 million, and for longer terms, we are pursuing different tax strategies in our international operations, and we would hope to bring down those respectively 40% and 38%. The amounts of that yet cannot be quantified.

Wenge Yang – Oppenheimer &Co.

Okay, thank you.

Operator

Our next question comes from the line of Tim Luke with Barclays Capital. Please go ahead.

Tim Luke – Barclays Capital

Thanks. And congratulations on your numbers. Iain, I was wondering how you are thinking about the shape of the DRAM pricing now through the year. Do you expect that it is going to remain kind of flattish for a few quarters? Going forward, how do you expect the variance to develop between DDR3 and DDR2. And separately, I was just wondering if you could just sort of recap that, what you see as the milestone, and maybe a bit on the competitive landscape in the SSD business. Thank you.

Iain MacKenzie

So Tim, in order, with a lot of input from many and also reading your reports, et cetera, we think that DRAM is now showing definite signs of instable, all the way through this calendar year. So we think having lived through this May quarter, and seeing the backlog and seeing the cycle then, PC demand seems to be staying strong. I saw a report that said that Hynix was only able to supply 80% of its requirements. I saw a report from Samsung that says that they will be in under-supply through the balance of year. So, we believe that today's reasonably high and profitable prices from the semi's have all stayed all the way through to the October timescale.

On DDR3 from DDR2, we still have a lot of our business being held back in DDR2, because as you know, the Taiwanese certainly have DDR2 supply, DDR3 is still restricted. Again, those big suppliers have Micron, Hynix, Samsung, have the lion's share of that and transitioning to probably over 75% of their output in the third calendar quarter. And so we are seeing the demand request in the PC business already being at the 75% level, but clearly some of the white box and regional customers having to remain on DDR2, due to the supply.

Solid state storage, very briefly, something is going ahead, some customer engagements, getting those to change our priorities and we are responding to that. The competitive landscape, you see the PCI Express major competitor and that has been out looking for funding for working capital and so, no major change there. We saw the Seagate and LSI announcement, SEC, so no real new players to the scene, and I think all of us just working very hard to get the product ready, and now beginning to see signs certainly of traction, and we did mention a major new contract win, so in this third quarter, as we were now in, we will be shipping, you know, in millions of dollars worth of new solid state storage products. So that is good to see.

Tim Luke – Barclays Capital

Right. Maybe one last thing if I may. Just on the – as the revenue now has sort of ramped, how are you thinking about how the OpEx may trend as you move through the year, Barry, are you going to have to say either incremental R&D or SG&A spending, as you move through the back half of the year?

Barry Zwarenstein

So I will take them in inverse order. In terms of SG&A, Tim, we will see considerable leverage there, and there will some increases, but fairly small. You will however see meaningful increases in R&D, starting this quarter and continuing as we invest in the solid state storage across the board.

Iain MacKenzie

In addition, Tim, to that question, we are going to have the costs, we are doing lots of qualification samples, so we need to buy a lot of our own materials to do that. So I would think we will be in the about the $6 million run rate by the end of our fiscal year and per quarter.

Tim Luke – Barclays Capital

Thank you guys and good luck.

Iain MacKenzie

Thanks.

Operator

Our next question comes from the line of Kevin Cassidy with Thomas Weisel Partners Group. Please go ahead.

Kevin Cassidy – Thomas Weisel Partners Group

Thanks for taking my question. On the DDR3 and DDR2, are you going to break out of what is (inaudible).

Iain MacKenzie

You have speaker going off in the background.

Kevin Cassidy – Thomas Weisel Partners Group

I am sorry. As I said, what is the split between DDR3 and DDR2?

Iain MacKenzie

The DDR2 versus DDR3 transition, we just mentioned that the PC space would look like the demand is up to 75% and our business, probably excluding that PC demand, which is some 42% of our business, then we think the balance is predominantly DDR1 and DDR2 and legacy products. So really, it is really the PC business and a little bit desirable business. Clearly, our logistics business is trending DDR3. You don't see that in the net sales number.

Kevin Cassidy – Thomas Weisel Partners Group

Okay. How about – when it comes to the SATA SSD versus PCI Express SSD, which one do you think you will see revenue from first?

Iain MacKenzie

Well, I guess that has already shown, the one that we announced the contract on is an SSD and not a PCI-e. PCI-e is still at the final beta testing with a Tier-1. So we are seeing more traction on the SATA drives and we have sales of SATA drives right now, including that second evaluation order, which is significant for our SATA drive.

Kevin Cassidy – Thomas Weisel Partners Group

Okay, and it is just one customer interested in the PCI Express, there are no other interests?

Iain MacKenzie

Actually, we have decided to focus lots and lots of interest, but we have decided to focus on one good qualification first, prior to more widely offering that product, so it is just an approval.

Kevin Cassidy – Thomas Weisel Partners Group

Okay, thank you very much.

Iain MacKenzie

Thanks, Kevin.

Operator

Our next question comes from the line of Betsy Van Hees with Wedbush Securities. Please go ahead.

Betsy Van Hees – Wedbush Securities

Well, thank you. Well, first and foremost, congratulations on the quarter, and equally or actually significantly better (inaudible). I wanted to ask a couple of questions on the SSD business. And I kind of wanted to follow on to the one that was just asked. Why is that you are seeing more traction in SATA versus PCI Express?

Iain MacKenzie

I think the PCI-e slot has been there for a long time, and it is an accelerator for high-transactional business. But the SSD, the SATA drive, is a replacement or is an enhancement into an overall storage and server structure. So storage, server, and telecom networking can only make use of SATA conversion solid state drive. So now, really as we talk about the Tier-0 level memory, you can replace some base with a SATA drive. PCI-e requires you to design its specs into the system, and then also, if it is a drive that is RAID-able or whether it is a pure accelerator sitting right next to the processor. So, I think that are totally different applications.

Betsy Van Hees – Wedbush Securities

Thanks very much; that's very helpful. When you are looking at the guidance for the fiscal Q3 quarter and you are looking at modeling by segment, should we be kind of using the same distribution that you had in terms of revenue for the fiscal Q2 quarter?

Iain MacKenzie

Yes, I think so. Just a little bit less; the logistics were just a little bit strong in Q2. That was a bit abnormal. But otherwise, then yes. Yes, I think so. I don't see anything significantly changing in that landscape.

Betsy Van Hees – Wedbush Securities

Okay. And then, if I go back to your positive pre-announcement on February 1, you guys guided for revenues at that time to be flat quarter-on-quarter and you said that there was stabilization in end markets (inaudible) of DDR2, and that you were going to see DRAM pricing moderate. So the guidance of course was significantly higher than that. What's really the big driving factor behind the big change in your guidance?

Iain MacKenzie

It says only for the quarter gone by. So for Q2, from our pre-announced guidance to the end of the quarter, really the change was that the DRAM did not stabilize. In fact, the DRAM continued to increase and hence the end market price continued to increase, and we clearly had some inventory, so some benefits off that. And then there was an extremely strong finish on all OEMs, the American multinational OEMs, and as I mentioned, down where a strong financial on higher margin logistics, which just wasn't planned and wasn't particularly visible as the OEMs decided to change their orders from systems into components. So, really it is a very, very strong U.S. multinational order environment with the DRAM price going up that we did not expect. Brazil was finished by the time we gave our pre-announcement, so none of it was Brazil piece [ph].

Betsy Van Hees – Wedbush Securities

Thank you so much for the color; that's very helpful. And then, so it sounds like – I mean your business is mostly turns business, I mean your visibility is limited. Is that a correct statement here?

Iain MacKenzie

Yes, that's correct. That's probably we turn things very quickly and it is a built-to-order business, correct.

Betsy Van Hees – Wedbush Securities

So, would you say that we are in today that your visibility has significantly increased, and it has given you the confidence level to go out and procure this inventory and bring it in?

Iain MacKenzie

Yes, it's a very unusual word here in SMART, but there is a thing called backlog and we don't – normally if that's three or four days, we are lucky and now, the planning group would tell me that's the highest backlog that we've seen actually at all.

Betsy Van Hees – Wedbush Securities

Okay, great. Thank you so much. And then, I just had one more question on the SSD win. Congratulations on the military win. You said millions of dollars; can you give us an idea of how many millions of dollars that is? And we should be modeling that going forward?

And then, one more question that goes with that is, in terms of the corporate gross margin is that how much above can we expect that business to be?

Iain MacKenzie

No, I'd rather wait until the end of the quarter to show the percentage of sales. I really – we have gone a long way not to predict traction in this market and we are just building to (inaudible). So we clearly know it is millions of dollars and I'd rather report the actuals as opposed to predict the future. So, I'd rather not do that.

As for corporate margin, I'd say the overall gross margin will come down because that logistics and the lack of the DRAM pricing. So you wouldn't see the impact of it, sort of it fits into the total mix and it won't be moving the total GM at $40 million.

Betsy Van Hees – Wedbush Securities

Okay, great. And once again, congratulations.

Iain MacKenzie

Thanks a lot, Betsy.

Operator

(Operator instructions) Our next question comes from the line of Tony Venturino with Federated Investors. Please go ahead.

Tony Venturino – Federated Investors

Hey, guys. How are you doing today?

Iain MacKenzie

Hey, Tony. Doing good, thanks.

Tony Venturino – Federated Investors

Just real quick, have you given 2010 sales number?

Iain MacKenzie

We have not given a 2010 sales number. I can say though, we don't expect anything radically different from Q3 than Q4.

Tony Venturino – Federated Investors

Okay. All right; that's it then, thanks.

Iain MacKenzie

Thanks, Tony.

Operator

(Operator instructions) Management, I show there are no further questions at this time. Please continue with any closing remarks.

Iain MacKenzie

Well, thank you operator. As you can see, the current marketing conditions are very favorable to our business and thanks to our continued disciplined approach and focused execution. I think we are well positioned to grow across the various markets that we described during our call. The core DRAM business remains strong, making good progress and so is the storage. Look forward to reporting that next quarter and the Flash card business in Brazil. So, extremely excited about the future and appreciate your continued interest and support. Thank you very much; till next time.

Operator

Ladies and gentlemen, this concludes the SMART Modular second quarter fiscal year 2010 earnings conference call. This conference will be available for replay after 3:30 Pacific Standard Time today through April 8, 2010 at midnight Pacific Standard Time. You may access the replay system at any time by dialing 1-800-406-7325 or 303-590-3030 and entering the access code 4250622#. Thank you for your participation; you may now disconnect.

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Source: SMART Modular Technologies (WWH), Inc. F2Q10 (Qtr End 02/26/10) Earnings Call Transcript
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