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SMART Modular Technologies Inc. (NASDAQ:SMOD)

F3Q10 (Qtr End 05/28/10) Earnings Call Transcript

June 17, 2010 4:30 pm ET

Executives

Suzanne Craig – IR, The Blueshirt Group

Iain MacKenzie – President and CEO

Barry Zwarenstein – SVP of Finance and CFO

Analysts

Tim Luke – Barclays Capital

Gary Hsueh – Oppenheimer & Company

Jim Suva – Citigroup

Rich Kugele – Needham & Company

Kevin Cassidy – Thomas Weisel Partners

Operator

Welcome to the SMART Modular Technologies third quarter 2010 earnings 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)

The conference is being recorded today, Thursday, June 17, 2010. I would now like to turn the conference over to our host, Ms. Suzanne Craig, Investor Relations.

Suzanne Craig

Thank you, operator. Good afternoon everyone and thanks to everyone for joining us on today's earnings conference call to discuss SMART Modular Technologies third quarter fiscal 2010 financial results. Iain MacKenzie, President and Chief Executive Officer, and Barry Zwarenstein, Chief Financial Officer joined 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, 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, the size and strength of our markets and/or the future 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 annual report on Form 10-K for fiscal year 2009, and the quarterly reports on Form 10-Q for the first and second quarters of fiscal 2010.

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 undue reliance on any forward-looking statements. These forward-looking statements are made as of today and SMART does not intend and has no obligation to update or revise any forward-looking statements.

The third quarter fiscal 2010 earnings press release is available on the company's website at smartm.com or you may call our Investor Relations office at area code 415 217-7722, and we will fax you a copy.

Please note that non-GAAP financial results presented exclude stock-based compensation expense, restructuring charges, goodwill impairment charges, net gain on repurchase of notes, gains from a legal settlement and other infrequent or unusual items.

Please refer to the non-GAAP information section and the reconciliation of non-GAAP financial measures table 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 page at smartm.com or by dialing area code 303 590-3030, and using the passcode 4313196. Now, I would like to introduce Iain MacKenzie, President and CEO of SMART Modular.

Iain MacKenzie

Thanks, Suzanne and welcome to everyone on the call. We had another good quarter with better than expected results, driven primarily by strong demand from US multi-national OEMs. Third quarter net sales increased 26% sequentially to $201.2 million, and gross profit totaled $45.5 million, up 8% sequentially.

Non-GAAP net income grew to $0.26 per diluted share, compared with $0.23 last quarter and $0.01 per share in the year-ago quarter. To put this improvement into sharper perspective, the cumulative net revenues for the three quarters ending with Q4 of our fiscal 2010 are expected to be $566 million, using the midpoint of our guidance for our fourth fiscal quarter. If achieved, this would represent a growth in net revenues of almost 80%, versus the $350 million for three quarters ending with and including Q1 of this fiscal year, which is about [ph] when the economy began to improve and end user demand started to return.

Additionally, our adjusted EBITDA has grown from a range of 5 to $10 million per quarter during fiscal 2009, to over $25 million per quarter so far in fiscal 2010. Thus we have clearly seen a step function improvement in our business. Although we continue to discuss our business largely in the context of DRAM versus non-DRAM, actually within DRAM there are two distinct parts. First, is our core specialty DRAM and logistics business; and second, is the portions we have in Brazil (inaudible) grade package and tested DRAM ICs as well as DRAM module manufacturing business.

Our non-DRAM business is also made up of two parts, namely the solid state storage and secondly our latest development of Flash-based consumer products in Brazil.

Based on our latest quarterly results, our core DRAM logistics business comprised approximately 42% of our overall net revenues. The core DRAM business outperformed our expectations with stronger than anticipated end user demand, particularly from the network and telecom end markets which grew 15% sequentially. This strength in end user demand for our specialty customized modules was a key factor for the success of this business.

High density module volumes continue to track well along with the continued ramp of Intel and MDDDR3 enabled server platforms. We have seen more demand for our high density variable profile DDR3 CoolFlex modules which incorporate IP that we acquired or licensed several years ago and provide a very cost competitive solution for blade applications.

We're also seeing increased demand for small form factor DDR3 modules as telecom and networking customers start to transition from the qualification stage to early production. And lastly, we're seeing continued growth in our specialty screened modules for harsh and military environments.

We have introduced the capability to perform system level burn-in on DDR3 modules for mission-critical applications and have a number of customers place significant orders for these premium high-reliability modules.

In addition, our logistics business in the quarter reflected strength in the PC server upgrade cycle globally and outperformed our expectations. In terms of the overall DRAM market, as expected, we have seen flat to generally declining prices and certain shortages.

Turning now to Brazil, one of the fastest growing economies in the world, for the third fiscal quarter revenues from our business in Brazil represented approximately 44% of total sales. While this business is memory related, this market enjoys several additional dimensions. In particular, in response to market opportunities and government financial and tax programs over the last five years, we have invested approximately $60 million in fixed assets.

We have built an extremely competent team and we have leveraged worldwide design quality and manufacturing capabilities to become the only indigenous packager of DRAM ICs in Brazil.

In our third fiscal quarter, demand remained robust which has translated to another exceptional quarter, continuing our track record of greater than 25% CAGR going back to 2005. The capital expansion that we discussed last quarter is now resulting in delivery of expanded capacity and capability.

Now for the non-DRAM part of our business; solid state storage and our pending launch of Flash in Brazil. As many of have may have heard us explain before, we believe that our extensive history of serving Tier 1 customers in combination with the technology and products we are developing provides us with credentials to be a major player in the solid state storage market.

Additionally because of our conservative financial management over these recent turbulent times, we are in an excellent position to be available to invest prudently and appropriately to grow our storage business.

During the third fiscal quarter we had a healthy increase in solid state storage revenues as a result of a meaningful win from a defense customer for our Xcel-10 industrial temp drive that we mentioned last quarter. This has ramped and is doing well. As a result of this order, and the continued strength in our established embedded business, we have reached an annual storage revenue run rate this quarter of only – of over $100 million with margins above our corporate average.

We are also making excellent progress with enterprise XceedIOPS products. Our engagement with the Tier 1 OEMs that we have mentioned in prior quarters remains on track. We expect to be production-ready and to secure initial volume order from this customer later this calendar year. We are also pleased to report that we've been awarded the opportunity by a second major OEM to participate in a qualification process with our enterprise XceedIOPS product.

To support future growth in this important area, we intend to continue building upon this foundation for success. We have attracted additional talents during recent months with over 150 years of combined enterprise storage experience and are continuing to expand our team of talented professionals to strengthen our ability to better serve our customer base with these products.

Overall, we remain very excited about the traction we have achieved and look forward to a promising future as we build upon our well established embedded and defense business to secure a share of the larger and growing IOPS enterprise market.

This growth will be further augmented by our diversification into Flash consumer products in Brazil which leverages our existing investment and our relationships with our semiconductor supply base. We remain on track with our plan and anticipate Flash shipments to commence in the first part of our next fiscal year.

Just before we move to the financials, I would like to take this opportunity to thank Dr. CS Park who is resigning from our Board of Directors. We greatly appreciate the many contributions that Dr. Park has made to our company. During his six years as serving as a director, SMART has successfully undergone a transformation through very challenging times. Dr. Park has provided us with important perspective and solid business advice along the way and helped to position SMART for continued success in the future. We thank him for many years of dedicated service.

Now let me turn the call over to Barry Zwarenstein who will review the financials and our forward guidance. Barry?

Barry Zwarenstein

Thank you, Iain. Third quarter net sales of $201.2 million were broken down by geography as follows: US, 25%; Other Americas, 51%; Asia, 19%; Europe, 5%.

Our breakdown of sales by end market for the third quarter were as follows

PC, 44%; Network and telecom, 21%; Servers, 18%; Storage, 8%; Logistics, 5%; Industrial, 4%.

Compared to the second quarter of fiscal 2010, PC related sales grew 32%, networking and telecom grew 15%, and servers grew 12%.

HP continues to be our largest customer, representing 21% of net sales, of sales this quarter. Cisco and Dell each represented approximately 15% of sales.

Moving to the rest of the income statement, gross profit for the third fiscal quarter was $45.5 million, up approximately 8% from last quarter's $42 million. This higher gross profit was driven by improved demand and a better mix of specialty products and logistics.

Our third fiscal quarter non-GAAP operating expenses were $20.8 million, 16% higher than the prior quarter. Excluded from the non-GAAP Opex was a $0.5 million loss due to the divestiture during the quarter of our display business, as well as stock-based compensation expenses of $1.7 million.

Non-GAAP R&D expenses increased to $6.3 million in the third quarter, versus $4.8 million in the prior quarter, due to the investment in enterprise SSD as Iain discussed earlier. Non-GAAP SG&A expenses totaled $14.5 million, versus $13.1 million in the prior quarter, with the increase being driven mainly by increased commissions on the higher sales.

GAAP net income for the third quarter of fiscal 2010 was $14.9 million, or $0.23 per diluted share, compared to $16.1 million or $0.25 per diluted share in the prior quarter and a net loss of $2.4 million or $0.04 per share for the third quarter a year ago.

Included in the second quarter fiscal 2010 GAAP net income and not in non-GAAP net income was a $3 million one-time – $3 million one-time gain, net of tax, related to the legal settlement which is outlined in the GAAP to non-GAAP reconciliation table included in our press release.

Non-GAAP net income for the third quarter of fiscal 2010 was $17.3 million or $0.26 per diluted share, up from $14.9 million or approximately $0.23 per diluted share in the second quarter of fiscal 2010 and compared to $0.9 million or $0.01 per diluted share for the third quarter of fiscal 2009.

As Iain alluded to earlier, we had another great quarter in terms of adjusted EBITDA, generating $29.8 million during the third quarter, the second consecutive record quarter of adjusted EBITDA for SMART. This followed a $28.4 million of adjusted EBITDA generated in the second quarter.

We remained very pleased with our strong balance sheet and working capital metrics. Our net accounts receivable increased to $212.4 million, from $181.5 million last quarter, due to the higher sales while our days sales outstanding came down this quarter to 42 days from the 45 days in the second fiscal quarter.

Inventory was $110.2 million at the end of the quarter, up from $90.4 million at the end of the previous quarter. This increase was due in part to our positioning for the stronger demand across the board and to accommodate the volume ramp and technology shift to DDR3 in Brazil.

Our inventory turns increased to 15.1 times for the third quarter, versus 14.6 times for the second quarter.

As expected, in the third fiscal quarter we increased our inventory for logistic services, approximately 38% of our third quarter inventory was in support of our logistics business. It is important to remember as pointed out before, that we have limited liability for our logistics inventory.

Consistent with past practice, accounts receivable and inventory turnover are calculated on a gross sales and costs of goods sold basis which totaled $460.5 million, and $415 million respectively, for the third quarter of fiscal 2010.

Cash and cash equivalents totaled $106 million at the end of the quarter, down from $118.7 million last quarter, primarily due to the $31.8 million increase in net working capital as a result of our business growth.

Our estimated range for capital expenditures for the full fiscal year 2010 is now 26 million to $28 million, a reduction from the previous guidance of 28 to $32 million, reflecting the timing of equipment delivery.

As we discussed last quarter, the main driver for our capital spending is approximately $21 million investment in Brazil which is increasing capacity, accommodating the faster than anticipated transition to DDR3, and will help assure the targeted launch of our Flash based consumer business in the first part of fiscal 2011.

As we mentioned last quarter, our capital expenditures are also intended at alleviating capacity bottlenecks and further improving efficiency in our Malaysian operations.

And now let me turn to our guidance. For the fourth quarter of fiscal 2010, SMART estimates that net sales will be in the range of 200 million to $210 million. We expect gross profit to be in the range of 44 to $47 million.

On a GAAP basis, net income is estimated to be in the range of $0.19 to $0.21 per diluted share. On a non-GAAP basis, excluding charges relating to stock-based compensation and other non-recurring items, we expect net income will be in the range of $0.22 to $0.24 per diluted share.

This guidance includes an income tax provision estimated in the range of $8 million to $8.4 million. The shares used in computing net income per diluted share are estimated to be 66 million shares.

Please refer to the non-GAAP financial information section and the reconciliation of non-GAAP financial measures table in our earnings press release for further detail.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions) and our first question comes from the line of Tim Luke with Barclays Capital. Please go ahead.

Tim Luke – Barclays Capital

Thank you. And well done on your results. I was wondering, guys, if Iain, you might be able to give some perspectives on how you see the pricing outlook and supply demand equilibrium as you move further out into the year and maybe give some sense of where you have seen in the memory side, different regional demand trends, given some of the macro clouds in Europe, for example. Also, as you move forward, can you give us some sense of on the expense side, how we should think about modeling some of the R&D and SG&A levels from here? Thank you so much.

Iain MacKenzie

All right, thanks, Tim. Let's take the pricing and demand. As we have mentioned a few times through the call, the end user demand is particularly strong. We do see that going through. In fact, it could well pick up towards the latter part of our next quarter, which is June, July and ending at the end of August as we're going to back-to-school and start the Christmas ramp on the PC. So I think Brazil will see a PC impact.

The servers, we mentioned – actually telecom and networking has been very strong through this season. We think that demand continues. Supply, I think as you published in June, then I think supply is – the prices came down single digits. We have individual and certain shortages of particular parts for supply, DDR 2 going out and DDR3 certainly under a lot of demand.

So in that complex kind of transitional and supply, we think and the semis are still indicating that they are overall in an undersupply situation to the demand. And we see that little bit when we ask for upside [ph] we are because of our relationships, though, getting a good supply for our forecasted and contracted volumes.

So the regional – I would say that Europe has minimal impact. You will see from our results that only 5% ships to Europe and of that 5%, then it's really American multi-national companies and it's more towards the global and the upgrade cycle. So for SMART Modular, Europe wouldn't particularly have an impact.

And then Barry will cover expenses for R&D and G&A.

Tim Luke – Barclays Capital

And it is on the theme of despecing [ph] in the industry, do you see that being – having a material impact at all? Do you see that trend that is material?

Iain MacKenzie

It certainly wouldn't hit SMART and it will take a time to flow through. Now, we have – we’ve seen and heard a lot about despecing but I haven't really seen the evidence. I was looking at Intel numbers and density per systems in US. Brazil certainly sees no impact of it whatsoever.

Tim Luke – Barclays Capital

Thank you.

Barry Zwarenstein

With respect to the expenses, let me first start with SG&A. It should be fairly flat. The only change of note would be as revenue increases, there would be incremental commissions with relate to that, but overall very steady. Different story on the R&D side, where for the strategic initiatives and to assure our place with the solid state enterprise market, we're going to be continuing to invest very heavily.

Could see a scenario where each quarter there's a ramp in order of $1 million to a $1.5 million, and by the end of the next fiscal year, R&D expenditures could easily be double what they are this past quarter.

Tim Luke – Barclays Capital

Okay. And on the gross margin, lastly, if you have a sense of where you see that trending going forward?

Barry Zwarenstein

So we have a long-term model that has the gross margin, gross profit percentage in the 22 to 24% range. We were toward the bottom end of that range. We see little reason for that to be outside of the range going forward, 22 to 24%.

Tim Luke – Barclays Capital

Thank you, guys.

Iain MacKenzie

Thank you.

Operator

Thank you. And our next question comes from the line of Gary Hsueh with Oppenheimer & Company. Please go ahead.

Gary Hsueh – Oppenheimer & Company

Yeah, hi. Thanks for taking my question. Thanks for taking my question. Iain, just a quick question for you here, just trying to read the tea leaves, looking at a little bit lower tax provision, was that at all indicative of maybe a little bit lower in terms of sell-through in Brazil? And B, given that Brazil is more balanced in terms of driving growth and fighting inflation, what's your sense in terms of the consumer market in Brazil and how sensitive that might be to kind of future interest rate hikes in Brazil? And I've got a few more follow-ups.

Iain MacKenzie

Hey, Gary. I'm going to pass that over to Barry here, because the taxation accounting is wonderful and needs to be balanced throughout the year and this is our fourth fiscal quarter. So Barry –

Barry Zwarenstein

Okay. So Gary, there's two reasons, a major and a minor one for the decline in the tax in the third quarter. You touched indirectly on one, which is that it's not that Brazil has been not meeting its targets, it has. But our non-Brazilian business where we also pay taxes in Malaysia and other places has done better and they have a lower tax rate. And that resulted in a slightly lower full year forecast for taxes, and of course the year-to-date, slight favorable adjustment.

The second of the two reasons is that every so often you have discrete in-quarter events. With the new legislation allowing five year carry-backs, we had a minor pickup in the third quarter as well.

Gary Hsueh – Oppenheimer & Company

Okay. Okay. Great. That answers it. And Barry, while I have you here on the line, if I look at guidance it seems to suggest here that there's going to be continued, I would say, or mild continued gross margin pressure. I don't want to make too much of a deal of it but maybe this is conservatism but is there anything in the product mix that would start to suggest you would need to continually see lower and lower bar in terms of gross margin, is there anything in terms of the mix? Speaking about mix, when do you think we could reasonably expect the high performance computing side of the server market to start to really take off?

Barry Zwarenstein

Let me address the first part of that question and the short answer is no. By way of elaboration, within the 22 to 24% range, at last quarter if you do different midpoints, the high end, the low end, you will find a similar pattern to what we had in this past quarter, and we do not foresee any decline of any note.

And I'm not sure that I'm well-positioned, frankly, to answer the question on the high performance computing. I'll turn it over to Iain.

Iain MacKenzie

The Flash in Brazil will be a drag to the 22 to 24%; the solid state storage will be an enhancer. The telecom networking will be an enhancer. The servers will be a little bit of a drag. So we continue to model this mix. I think you'll see us vary as much as 22 to 24% on a quarterly basis, based on the demand and mix of all the product portfolio that goes through, Gary.

Gary Hsueh – Oppenheimer & Company

Okay. Perfect. Thank you, Iain.

Iain MacKenzie

Thanks.

Operator

Thank you. And our next question comes from the line of Jim Suva with Citigroup. Please go ahead.

Jim Suva – Citigroup

Thank you and congratulations, gentlemen, on a great quarter and outlook. When we look at the potential to see tremendous opportunity for growth for you guys with your solid state expansion, it sounds like definitely we need to start thinking about some more R&D, which I think Barry had mentioned in a year from now, if I heard it right, could be double what it is now.

Could you just confirm, was that the right comment to take away? But more importantly, maybe a question for Iain, is Iain, when should we start to see the gross margins really materially pick up from that effort? I don't know if it's in harmony of the same quarters or if there's a little bit of – you got to put forth the cost now to then a couple quarters later to see the benefits. Then I'll have a couple follow-ups.

Iain MacKenzie

All right. So Jim, and I certainly saw in some of your pre-note as well, the recognition that you have to invest in the future, I understand, it's heavy, heavy R&D right now, we're attracting some great skills. So you're spot on there. So, the R&D will continue through now and the end of next year. We have it planned.

On the gross margin, we are planning to have the production orders for solid state storage at the same time as the shipments for our Flash in Brazil. So we think these are – if these go in concert, then we really do have some balancing happening there to get the enhancer and the drag at the same time.

So that's why we have given a long-term model, as we modeled this through. Because both of those businesses we have said at different points in time over the longer term we will track towards over $200 million. So the $200 million of each, if they were to grow at the same rate and they are releasing [ph] in the same quarters, then it's reasonable to say that we will hold in this 22 to 24% range.

Jim Suva – Citigroup

Okay. And then I know most people view solid state as potentially being gross margins of 30 to 35%, even though some of the competitors are 35 to 40, but knowing that time is going to roll forward and 35 to 40 could come lower, are those the types of margins that you're looking for, potentially in that 30% for the solid state?

Iain MacKenzie

That would position SMART extremely well and you've seen over the long term our G&A model getting leverage. We don't really see any need to increase G&A. So really, yes, we have to increment R&D and perhaps R&D settles out at 10% of sales, but therefore anything over 30% is bringing more GP dollars to the bottom EPS line as in our current product. So yes, it's definitely enhancing going forward.

Jim Suva – Citigroup

Great. That sounds like a good strategy. And just so Barry doesn't get off the hook easy, Barry can you let us know the 486 charge for the divestment of the display business, was that in the other income line? I assume it might have been there, just so we can pro forma your results to make them equal to apples-to-apples basis? And then finally the difference between GAAP and pro forma going forward, is it merely stock comp or are there anything else that we should think about?

Barry Zwarenstein

Jim, that was your best shot? On the display business, excuse me, the G&A, it's in the G&A, the $500,000. For clarification, it's not in other income, in deductions.

Jim Suva – Citigroup

It's in SG&A? Okay, and then –

Barry Zwarenstein

Yes. And then indeed you said it exactly right. The only GAAP to non-GAAP adjustment that we see is the stock-based compensation.

Jim Suva – Citigroup

Okay, well then since you kind of got off pretty easy on that, the follow-up is if it wasn't in other income and that other income line seems to bounce around quite a bit, is there something in there we should model going forward. It was $600,000 and before it was $200,000, or pretty minor de minimis, what's going on with that line?

Barry Zwarenstein

Yes. The biggest single component, Jim, of that line is the foreign exchange gains and losses, which in the normal course of business is going to go up and down every single quarter. This past quarter, it was favorable, approximately $400,000.

There was also some other minor credits from customer write-offs and taxes and so on. It's very difficult to forecast that precisely but if you look at the track record, it seldom goes over above, say, $500,000, $600,000 a quarter, either way.

Jim Suva – Citigroup

Great. Thank you very much; congratulations to you guys.

Iain MacKenzie

Thank you.

Barry Zwarenstein

Thanks, Jim.

Operator

Thank you. And our next question comes from the line of Rich Kugele with Needham & Company. Please go ahead.

Rich Kugele – Needham & Company

Thank you. Good afternoon. I would like to focus on two areas. One, the SSD side and then the other on the Brazilian DDR3 transition. I guess first on Brazil, how long do you think it will take them to fully transition to DDR3 relative to the rest of the world?

Iain MacKenzie

Actually going pretty fast there, Rich, so probably three quarters we will be pretty much done. As mentioned in our script, some of the inventory is to do with transitioning, some of the buying up of DDR2 and trying to bring about – not qualifying an extra array of dies. So I think within about three quarters, apart from anyone who contracts us to keep some stock for them for longer.

Rich Kugele – Needham & Company

Okay. And you're already staging some inventory for that in advance?

Iain MacKenzie

That's correct.

Rich Kugele – Needham & Company

Okay. And then I want to spend a few minutes here on the SSD side because as you become more relevant in the space, people are going to make obvious comparisons to some of the other more vocal companies. So your new qual [ph] customer or customer that's looking for qual units, how long do you expect that type of qual to take and are you seeing a shift versus the types of customers they saw which are primarily on the storage side, are you seeing a shift towards more server based customers as we have been seeing?

Iain MacKenzie

Yes. So first of all, we're doing great against our plan for both the first OEM who now have hundreds and probably over a thousand drives in different platforms now under test and we're doing our own DVDs, MRRs and releases to make sure we get to our quality levels.

The second one, yeah, you get it right, we don't know how to classify some of these customers anymore who traditionally have been server customers or storage customer or data com – telecom customers who are now using SSDs and qualifying them into their system. So (inaudible) is easiest one to see into those, but we now have this SSD qualification swap in plus a non-traditional storage company.

Rich Kugele – Needham & Company

Okay. And then lastly, when you get to full production volumes with these companies, do you expect to have a (inaudible) hub model with them or will you be shipping directly to them to avoid some of the problems others have had?

Iain MacKenzie

We always operated our build to order model. It continues. In fact, you see it best with this defense customer also, where what we do is we build a thousand. We stick them to their hub. As they pool them we've offered a seven day replacement. So we manufacture and replace and ship replacements within seven days. We feel that that's a particular strength. We're well-known for it.

And these customers are the same customers we deal with today, so they have a trust that we're going to get them into the hubs and into their manufacturing partners on time.

This past week or past last two weeks, one of those OEMs spent four days in our Penang manufacturing facility qualifying and prequalifying many aspects of it and that visit went incredibly well.

Rich Kugele – Needham & Company

Very good. Thanks a lot, Iain. Take care.

Iain MacKenzie

Thanks, Rich.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Kevin Cassidy with Thomas Weisel Partners. Please go ahead.

Kevin Cassidy – Thomas Weisel Partners

Thanks for taking my question. I was just wondering about the timing of the equipment being delivered. Is that slowing any of your capacity expansion or maybe what I'm getting to is your guidance constrained capacity?

Iain MacKenzie

Actually, that's a good question, Kevin. We had a little bit of – weeks are weeks so we planned on the equivalent being commissioned within this quarter and it will just slip by a few weeks, so there's about $3 million worth of equipment.

And so no, we already have to – obviously the commitment for capital happens some six months before the capital arrives. So it's a pure timing of commissioning and that's a related forecast of getting people into our facility, just to get it up, running, commissioned and released usually from an accounting point of view, the equipment should almost be physically arrived in our facilities.

Kevin Cassidy – Thomas Weisel Partners

Okay. And as you build out the Flash capacity, is that going to be I guess enough capacity for $200 million in revenue immediately or are those at ramp-up, do you add in capacity as you go?

Iain MacKenzie

We certainly add in capacity as we (inaudible). This would give us capacity for somewhere between $50 million and $75 million worth. But it's nonlinear because 60% of our current equipment is common and then with transitioning technology of DRAM IC packaging away from wire bonding, then the wire bonding will transition to Flash. So a fairly complex transition plan, so not directly proportional to volume but certainly gets us to the $50 million to $75 million level.

Kevin Cassidy – Thomas Weisel Partners

Okay. And maybe just to understand the SSD, you had said last quarter that you expected it to be in the low millions maybe of revenue this quarter, meaning the May ending quarter. Did that happen or is – how is that tracking?

Iain MacKenzie

It did happen. We tend not to count our repetitive production orders. Clearly, the defense business is in there and has ramped and we're now up to $25 million worth of Flash sales, as I said, at $100 million run rate. So that's a great step forward and clearly 100 million company is a good company to build.

So yes, a few millions of dollars of stuff did sell but still not yet on a repetitive constant basis and that's why we continue to say we will more report on the pull-through rather than forecast the pull-through to the order that's maybe in backlog.

Kevin Cassidy – Thomas Weisel Partners

Okay, great. Thanks for taking my questions.

Iain MacKenzie

Thanks, Kevin.

Operator

Thank you. And Mr. Iain MacKenzie, there are no further questions at this time. Please continue with any closing remarks you may have.

Iain MacKenzie

Fine, thank you, operator. So, this quarter's results have shown that we remain well positioned to continue to grow across the various markets, as we have described to you in today's call, end user demand remains strong, driving our DRAM business in US multi-nationals and in Brazil and we're making great progress in solid state storage and our Flash business.

As always, we will maintain our traditional disciplines and focused execution. I remain optimistic about SMART’s future and appreciate your interest and support.

In addition, I would like to take this opportunity to mention this year's annual Analyst Day for SMART Modular which will take place on Tuesday, October 12th in New York City. We will be sending more information on that event just shortly in the coming months. And we hope to see you there and then.

So, thank you very much until next time.

Operator

That does conclude today's SMART Modular third quarter fiscal year 2010 earnings conference call. If you would like to listen to a replay of today's conference please dial 1-800-406-7325 and for international participants please dial 1-303-590-3030 and enter the access code 431-3196 followed by the pound key. The replay will be available until July 1st, 2010.

Thank you for your participation. You may now disconnect.

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Source: SMART Modular Technologies Inc. F3Q10 (Qtr End 05/28/10) Earnings Call Transcript
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