SMART Global Holdings, Inc. (SGH) CEO Ajay Shah on Q4 2019 - Earnings Call Transcript

Oct. 03, 2019 10:31 PM ETSMART Global Holdings, Inc. (SGH)
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SMART Global Holdings, Inc. (NASDAQ:SGH) Q4 2019 Earnings Conference Call October 3, 2019 4:30 PM ET

Corporate Participants

Suzanne Schmidt - Investor Relations

Ajay Shah - Chairman, President and Chief Executive Officer

Jack Pacheco - Executive Vice President, Chief Operating and Chief Financial Officer

Conference Call Participants

Rajvi Gill - Needham & Company

Tom O'Malley - Barclays

Sidney Ho - Deutsche Bank

Suji Desilva - ROTH Capital


Good afternoon ladies and gentlemen and welcome to the SMART Global Holdings Fourth Quarter Fiscal 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at the time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host Ms. Suzanne Schmidt. You may begin the call ma'am.

Suzanne Schmidt

Thank you, operator. Good afternoon and thank you for joining us on today's earnings conference call to discuss SMART Global Holdings fourth quarter and full year fiscal 2019 results. Ajay Shah, Chairman and Chief Executive Officer will begin the call with a discussion of the market and the business followed by Jack Pacheco, Chief Operating and Financial Officer, who will review the financial results in more detail and provide the forward guidance after which we will open the call to your questions.

As a reminder, our earnings press release and a replay of today's call can be accessed under the Investor Relations section of SMART's Web site We encourage you to go to our Web site throughout the quarter for the most current information on the company, including information on the various financial conferences we will be attending.

Before we begin the call, I would like to note that today's remarks and the answers to questions may include forward-looking statements. Any statement that refers to expectations, projections, or other characterizations of future events including financial projections and future market conditions is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information, please refer to the risk factors discussed in the documents we filed from time to time with the SEC, including our most recent Form 10-K and Form 10-Q. We assume no obligation to update these forward-looking statements which speak as of today.

Additionally, during this call, our non-GAAP financial measures will be discussed reconciliations for those directly comparable GAAP financial measures are included in today's earnings press release.

With that, I will now turn the call over to Chairman and CEO, Ajay Shah.

Ajay Shah

Thank you, Suzanne, and welcome to everyone on the call.

Fiscal 2019 ending August 31st was an amazing year on the journey of transformation for SMART Global Holdings. We're making great progress since we started fiscal 2019 as a predominantly memory products company with 62% of fiscal 2018 revenue generated primarily from sales of standard memory products in Brazil. In contrast, today, we are more balanced company with 32% of revenue from Brazil, 30% of our revenues coming from a new vertical called specialty computing and storage systems, while 38% of our revenues are generated from our specialty memory products business during our fiscal Q4 that we just concluded.

Along the way, we faced down a turbulent market, especially in the second half of fiscal 2019 as commodity memory component prices fell by over 60%, significantly affecting our Brazil memory products selling prices. We also faced other macro economic headwinds related to trade and capital spending affecting our overall business conditions in all business areas.

Finally, changes in the way local manufacturing regulations are implemented in Brazil, created uncertainties for our customers early in calendar 2019. However, since then, we've been able to navigate through these and we emerged much stronger with a clear long-term business model.

Outstanding efforts by our team at SMART have resulted by year end in a broad portfolio of businesses, much larger served markets, and a revenue decline of only 6% year-over-year, which is considerably better than the overall memory and semiconductor markets. We also completed two key acquisitions and are on our way to integrating them to drive growth, profitability, and diversification away from commodity memory products and from our business in Brazil.

We accomplished all of this while reducing total debt, adding 67 million in cash to our balance sheet and having paid $75 million approximately in cash from operations towards both of these acquisitions that we made in the last quarter.

During the fourth fiscal quarter of 2019, we completed the acquisitions of both Artesyn Embedded Computing and Inforce Computing. We achieved non-GAAP operating profit 36% higher than the previous quarter and non-GAAP earnings per share of $0.50, which was 47% higher than the previous quarter.

Importantly, we generated significant operating cash flow of almost 50 million, as we further reduced inventories by another 11% in the quarter and ended the quarter with 98 million in cash and short-term investments. Our balance sheet is strong, and we remain well positioned to continue to execute on our growth strategy.

Let me now comment on the main factors impacting our financial results in the fourth fiscal quarter. Our supply chain services business, which we report under specialty memory products, came in well below expectations. Late in the quarter, we saw this business impacted because of the weakness in some of our OEM customers resulting from adjustments to their inventory positions. We believe that our supply chain businesses bottomed out and are currently anticipating a modest improvement in the first fiscal quarter.

Now, let me turn to review each of our three main lines of business for the fourth quarter. Beginning with our specialty computing and storage business, which represented 30% of our net revenue in the quarter, up from 15% in the prior quarter and totaled approximately $84.6 million. Earlier in the quarter, as mentioned, we completed these two acquisitions of Artesyn and Inforce Computing. The Inforce business which we renamed as our wireless computing line of products had sales of roughly 15 million in the trailing 12 months pre-acquisition and is expected to more than double in fiscal 2020, benefiting from synergies in the SMART's OEM sales force and its operation strength.

In addition, we saw our Penguin high performance computing business grow strongly from the prior quarter as the fourth fiscal quarter is the seasonally strongest quarter in the government segment. We are excited about the prospects for continued growth in this area driven by robust backlog and pipeline for new business across our targeted markets.

We're making excellent progress with the integrations of both Artesyn Embedded Computing and Inforce Computing, improving margins and operating metrics. As we have previously said, these acquisitions will both be accretive immediately in the first full quarter of operation, which is Q1 the quarter we currently are in.

Turning now to our specialty memory products business which represented 38% of net revenues and approximately 104.6 million in revenue. The business performed well as revenues were higher than prior quarter despite the weakness of our supply chain services business that I had referred to earlier. On a full year basis, net sales were 5% higher than the previous fiscal year, while the markets suffered significant price declines.

In addition to our outstanding set of tier one customers, we've been investing in more channels through which to sell a greater variety of products and we continue to execute well on this strategy.

Looking ahead, while the majority of the inventory corrections appear to be behind us, the overall environment is still cautious, and customers are trying to maintain minimum inventories and ordering with short lead times.

Moving on finally to our Brazil line of business, which represented 32% of total company revenues in the Q4 period compared to 43% in the quarter prior and totaled approximately $89 million compared to a 101 million in the previous quarter due to memory component prices continuing to decline, although at a slower pace in the past quarter.

As we indicated last quarter, falling memory prices impacted our business, while unit volumes have continued to increase. The new rules regarding local manufacturing based on a point system became effective on July 1 this year. And I would like to discuss our Brazil business in more detail and give you our perspective on the market dynamics in that region. Let me focus you on three key points. First, the Brazilian government remains very much in favor of local manufacturing given that it supports over a 100,000 jobs in the Brazilian IT industry and it's a long-term policy objective.

Our Brazil business remains solid and we continue to maintain our leadership position in the memory market. As we said on our last quarterly announcement, there is no change in our business expectations in Brazil. And secondly, the new point system gives both our customers and ourselves flexibility in the way we run our businesses. While the old system required customers to purchase a fixed amount of each type of component locally, the new rules allow customers to mix and match different locally manufactured components to meet the minimum requirements for their tax benefits.

Under the new rules, memory provides by far the highest amount of points to our customers in mobile phones, desktops, and notebooks, which are our largest target markets in Brazil. As we see it, these new rules are a positive that now allow us to run our Brazil business as we would any other line of business.

And third, since the uncertainty over the new rules has been lifted, our customers are now giving us increased visibility into their requirements. We're seeing higher bookings, and for fiscal Q1, which is the first full quarter under the new regulations, we're confident our Brazil business will grow sequentially over Q4. As our customers evaluate their choices, our analysis shows that memory products offer some of the lowest cost per point towards meeting their local manufacturing requirements as compared to other locally sourced components.

Jack will go into more details on our expectations going forward. So, let me turn this call over to Jack for review of our financials and our guidance. Jack?

Jack Pacheco

Great. Thank you, Ajay.

Overall, gross revenue for the fourth fiscal quarter was $422 million, while net sales were 278 million. As a reminder, the difference between gross revenue and net sales is related to our supply chain services business, which is accounted for on an agency basis, meaning that we only recognize the net sales, the net profit on a supply chain services transaction.

Our breakdown of net sales by end market for the fourth fiscal quarter was as follows, mobile and PCs 28%, network and telecom 22%, servers and storage 11%, industrial aerospace defense and other 39%.

Now moving to the rest of the income statement, non-GAAP gross profit for the fourth quarter was 53.4 million compared with last quarter's 43.7 million due primarily to higher sales and specialty memory along with specialty compute and storage products. Non-GAAP operating expenses were 35.4 million compared with 30.5 million in the previous quarter. The increase was primarily due to the recent acquisitions. Non-GAAP net income for the fourth fiscal quarter was 11.9 million or $0.50 per diluted share compared with 7.9 million or $0.34 per diluted share in the previous quarter. Adjusted EBITDA totaled 25.2 million compared with 19.2 million in the prior quarter.

For the full year of fiscal 2019, net sales totaled 1.2 billion compared with 1.3 billion in the prior year. Gross profit on a non-GAAP basis for fiscal year 2019 totaled 240.6 million compared with 293.6 million in the prior year. Non-GAAP net income for fiscal year 2019 was 78.3 million or $3.34 per diluted share compared with the 147 million or $6.36 per diluted share in the prior year.

Turning to working capital, our net accounts receivables increased to 233.4 million from 230.2 million last quarter and our day sales outstanding increased to 50 days for this quarter compared to 47 days last quarter. Inventory levels continue to decline in total 119 million at the end of the fourth fiscal quarter compared with 133 million at the end of the third fiscal quarter.

Inventory turns remained approximately the same as the previous quarter at 12.5x. Consistent with past practice accounts receivable, days outstanding, and inventory turnover are calculated on a gross sales and costs of goods sold basis, which are 422 million and 370 million respectively for the fourth fiscal quarter of 2019.

After using 76 million in cash for the two acquisitions in the quarter, we ended the quarter with $98 million of cash and cash equivalents compared with the 126 million at the end of the third quarter and 31 million at the end of the prior year. Fourth quarter cash flow from operations increased to 49 million compared with 46 million in the prior quarter.

And now let me touch on some of the financial dynamics. For specialty compute and storage, we continue to make excellent progress in the transformation of Penguin to more value as supplier as we exit the year with gross margins over 19%. In line with our expectations, Penguin is accretive to our EPS in the fourth quarter. Integration activities are ongoing for both Embedded Computing and Inforce. We will have Inforce transition to our SAP system this month and Embedded Computing by the end of this year.

We are also in the process of migrating manufacturing from China to Malaysia for Embedded Computing and expect to have that completed by the end of this fiscal quarter. We will make our first production shipments for Embedded Computing from Malaysia during this quarter.

For specialty memory, as Ajay mentioned earlier, the product side of this business significantly outperform this quarter driven by a broad portfolio of products that we ship every quarter, which again tops 600 different unique SKUs. Regarding our supply chain services business, I'd like to take a few moments to discuss this in more detail.

Remember, this is not a product business, it is a fulfillment business, which can be impacted by memory pricing as we transact more standard commodity memory products in this business. Our customers are continuing to work through their inventory issues that in turn impacted our financial results for the quarter. We source product from multiple suppliers based upon our customer specific sourcing strategy and we manage their inventory across all of their different facilities, contract manufacturers and configuration centers. And we have been doing this successfully for over 20 years. This is the business that drives our gross revenue, which was down by $20 million from Q4, even though our net sales grew by 42.7 million from the previous quarter.

With that as a backdrop, let me now turn to our guidance for the first quarter of fiscal 2020. We currently estimate that our first quarter fiscal 20 net sales will be in the range of 275 million to 285 million. We expect mobile memory units to increase by greater than 20% for Brazil leading to an increase in revenue by the mid single digits from Q4.

Specialty computing also increased in Q1 as we'll have the full impact of Embedded Computing and Inforce for a full quarter. Gross margin for the quarter is estimated to be approximately 22% plus or minus 1%, up 3% from Q4. This increase in gross margins is being led by our new acquisitions.

GAAP earnings per diluted share is expected to be between $0.30 to $0.40. On an non-GAAP basis excluding share-based compensation expense, acquisition-related expense and intangible asset amortization expense, we expect non-GAAP earnings per diluted share will be in the range of $0.68 to $0.78.

The guidance for the first fiscal quarter does not include any view on the foreign exchange gains or losses and includes an income tax revision expected to be in the range of 8% to 12%.

The number of shares used to estimate earnings per diluted share for the first fiscal quarter is 23.9 million. Capital expenditures for the first fiscal quarter are expected to be in the range of $6 million to $10 million as we will add equipment to facilitate the manufacturing move of Embedded Computing to our factory.

Please refer to the non-GAAP financial information section and the reconciliation of non-GAAP financial measures to GAAP results and the reconciliation of GAAP net income to adjusted EBITDA tables in the earnings press release for further details.

Operator, we're now ready to take questions.

Question-and-Answer Session


Sure, sir. [Operator Instructions]

Our first question comes from the line of Rajvi Gill from Needham & Company. Your line is open.

Rajvi Gill

Yes. Thank you for taking my questions. Just on the guidance around the Brazil business. So, just doing the math, you're basically saying that the units for mobile are going to be up 20% and the Brazil mobile revenue will be up mid-single digits, if I heard that correctly. So, that means ASPs are still coming down decently. Could you talk a little bit about the pricing environment in the Brazil mobile segment?

Jack Pacheco

Yes. I mean, we still expect ASPs to be down somewhere between 10%, 15% in Q1 as well. So, units are up at -- ASPs are going down. So, the revenues are not growing as fast as it would have. ASPs were flattening out.

Rajvi Gill

And then, in the specialty memory, the customers working down their inventory issues, the OEMs. Is there a specific area of vertical within specialty memory? Is it on the server storage? Is it on the networking side? And you mentioned that you expect the bottom in that area, what's giving you confidence on that?

Jack Pacheco

So, the answer is, yes. Okay, all of the above have had over inventoried out in their channels. And this reference is really into the supply chain part of the business, which -- now we're dealing with the customers and more of their products are going through channels, and so definitely there's a lot of channel inventory out there for them. And so, we are looking at signals from our customers, we expect that that business will start to slowly recover here in 2020, as they start working down their channel inventory issues.

Rajvi Gill

And last question would be on the points system. A lot of discussion and uncertainty around the new points system. Ajay you have mentioned that you view this actually as a positive for your business because it eliminates -- well, first of all, eliminates the uncertainty now that the new rules are lifted. But it gives customers like Samsung Mobile, LG Mobile more flexibility to mix and match. I was wondering if you could kind of go over the points system in terms of how many points memory is as a percentage or as part of the total points that are needed for mobile phones and just to kind of frame that discussion? And then kind of your discussion about customers are giving to increased visibility now. Could you maybe talk about that as well? Thanks.

Ajay Shah

Sure. As I think you may be alluded to in your question, the points are different for different areas. So, for example, mobile phone, which is I think the area that you referred too. Mobile phone, the way that system is defined is, I think there's a gross total of 151 points, and our customers are required to achieve 57 points. Now if you look at memory, memory makes up -- itself 45 points, and in addition batteries make up another 8 points. For them to achieve their 57 points, by the way off the 151, many, many of those items are simply not available from local Brazilian manufacturing.

So, the choices are far fewer. And so, which is why we have been of course in contact with all of our major customers and they understand that memory is a big part of what they would require to buy to meet their points for mobile phones. And then, of course, that by itself, while we say, they could buy more in, say, cables or they could do other things, the choices are limited. As a result of which our customers are giving us clear forecast and orders not just sort of a directional thing. That gives us confidence that memory is going to be a big part of their ongoing requirements in terms of local content.

And not only are we talking about this in some theoretical fashion, that's what we're saying is happening right now. So, if you look at our projections for Q1, our projections for Q1 are amazingly for increase in revenue because the units are going up so sharply. And as Jack mentioned earlier in the mobile phone area, our units’ expected growth is about 20%, slightly above 20% actually, and the overall revenue growth is in the mid-single digits.

So not only are we talking about this in terms of how the system is defined to work, but more specifically in terms of how it's working.

Now this is not some theoretical discussion. So, I know there's been a lot of speculation around this, and we can walk through whether it's mobile phones or notebooks or desktops and we clearly have understood this and have been working with our customers for months. And we have, as a result, been talking to them about how they could simplify their overall supply chains by focusing most of their purchasing on memory in a long-term basis. So, you referred to and I refer to comments that we think this is a positive.

In the past, take again mobile phones, customers really had no benefit in buying more than 50% of their requirements from local manufacturing. However, now, they can fulfill much more -- they can buy much more than 50% if that's what makes sense for them. And I had referred to a metric called cost per point, and we analyzed this carefully, because we look at all the different choices that our customers have, and we look at the points that they will get from that, and we look at the premium that they would pay compared to international prices. And based on that, memory is very much the -- one of the most attractive ways for them to capture the points they require and for the lowest premium, if you will, over international prices.

And that's really a big part of why we're seeing the forecast to be going up and that's really why we have confidence that our business model, as we've said before is completely intact and one could argue, maybe gives us greater flexibility and is better. I know Brazilian regulations can be a little bit of a challenge for clear understanding. And so, I'm trying to spell it out as well as I can in a phone call like this.

Rajvi Gill

Thank you.


Our next question comes from the line of Blayne Curtis from Barclays. Your line is open.

Tom O'Malley

Hey, guys. This is Tom O'Malley on for Blayne Curtis. Just a quick question on Artesyn and Inforce in the August quarter. Could you guys break out how much they contributed to revenue in the quarter?

Ajay Shah

This is a partial quarter, sorry, I didn't catch your name. Tom, this is a partial quarter, so it's not meaningful what we did in the last period because these acquisitions didn't close to somewhere approximately middle of July. So, but what we have said is that for the quarter or for the year, these acquisitions we think on a run rate basis will be around $90 million to $100 million is the numbers that we have provided in the past.

And I have also said in my comments, that Inforce had trailing 12-month revenue before we acquired the company of about $15 million. And we are expecting based on design wins and these Inforce products don't -- they are design-win products, so once they designed in takes a certain amount of time for that to ramp up. And based on modeling that, we are expecting both a very accretive as well as a significant growth business coming from there.

Tom O'Malley

Okay. I guess a better way to ask the question then is just from a Penguin exclusively perspective, clearly, this is a seasonally strong quarter. Can you just give us some color on how that performed in the quarter; what kind of design traction are you seeing? And if you could give us some year-over-year commentary that'd be great as well, if you can?

Ajay Shah

Penguin had as expected a strong quarter, and particularly driven by federal, because this is seasonally a high period for our federal business. And so, the company came in more or less at expectations, but that business came in more or less at expectations. And so, if we look at a year-over-year growth, we acquired the company only in June of 2018, so that was a partial quarter.

And so, if we look forward now, we think that the business -- and the quarters are different right, they were on a calendar quarter -- calendar year-end and we were on a August year-end. But when we try to compare roughly, we would say that the growth rate was in the mid-teens.

Tom O'Malley



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

Sidney Ho

Great. Thank you. I want to go back to the implied guidance, I think you said that you expect Brazil mobile revenues to be up mid-single digit in both specialty computing and service businesses are also up, but I don't think recall you give a range. But, the overall guidance is roughly flat. Does that mean the other businesses meaning Brazil memory and the specialty memory outside of the supply chain services will be down? What kind of magnitude are you thinking? And within specialty computing, I know you have Inforce and Artesyn for being a full quarter. Should we expect the Penguin side of things to come down after a strong quarter?

Jack Pacheco

Yes. Real quick, so on the Brazil piece, we expect Brazil as a whole will be up to single-digits, not just Brazil mobile memory. Brazil as a whole group of business is going to be up in Q1 over Q4. Specialty compute we said would be up Q4 over Q1, so that would imply that we've talked about our supply chain business being weak that we continue to -- that we expect that to continue to be weak in the Q1 timeframe and that's at a high level. And then, I got the first part of the question Sidney, what was the second part?

Sidney Ho

Yes. It's more about the specialty computing, if you exclude the --

Jack Pacheco

Yes. I mean you got to remember Penguin's Q4 is their seasonally high quarter. And we always expect that that business will drop off somewhat in Q1. So, we expect that same phenomenon to happen this quarter, it will drop down by a certain percent. But as a whole, then we have the full quarter of Artesyn and Inforce which will -- which get combined will make that segment grow somewhat from Q4 to Q1.

Sidney Ho

Okay. That's fair. Thanks. A follow up question is on the Brazil business, and you talk about the new rules in place, since July. You're seeing a rebound in forecast in volumes. How should we think about the revenue opportunity going forward for this, let's say, the entire Brazil business? Is the $90 million to $100 million range the right way you're thinking about it? Or do you think this is going to continue to grow as well?

Ajay Shah

Well, Sidney, I don't know if you are in the business of forecasting memory prices, but that's what we would need to be doing to really give you an answer, that's precise. Right now, we're somewhere in that neighborhood. We are currently based on our forecast of some, but not as significant decline in memory prices looking at that growth continuing through, maybe Q2 is a seasonally weak period even in Brazil because you have the calendar year-end and that tends to be many factory shutdown for weeks. So, Q2 if you look back in our history has always been seasonally a little weaker. And then Q3 and Q4 are stronger, so that's the kind of behavior we expect in Brazil.

And based on our model of memory prices and I can't claim that we have a fantastic model, because that's not our business, but based on our model, we think that Q2 will be sequential small decline, and then Q3 and Q4 will be stronger up in terms of revenue.

Sidney Ho


Ajay Shah

And that's based on -- as I just want to caveat again, based on our model of what prices are going to do. It's unfortunately, we don't have crystal ball that's necessarily perfect, but I haven't figured out who does. So --

Sidney Ho

Right. I'll have one more question, I'll go away, but if you're looking at the local manufacturing calculation within the new rules. How often are those calculations are being assessed? And do you think we'll see periods where customer purchases are low and then followed by a period of catch-up, because they have to make the quarter? Is there anything that will do skew the linearity of the business?

Ajay Shah

I think the short answer for right now is we don't know, because these rules, as I said earlier, came into place July 1. We know that -- so earlier we had said that we expect the second half of calendar '19 to be stronger than the first half of calendar '19, and that we are seeing, certainly in units, but even, right now, even in revenue dollars. And so that seasonality, we have a decent idea to predict. But as to how the new local content rules will impact this seasonality is a little early to tell to be honest.

Sidney Ho

Okay, great. Thank you.


Our next question on the line is from Suji Desilva from ROTH Capital. Your line is open.

Suji Desilva

Hi, Ajay. Hi, Jack. Can you talk about the Brazil business, you talked Ajay about with the rule changes, you can now run the business like your other segments? Can you elaborate on that, what that might mean for maybe the cost structure in Brazil, the capacity, how you might address that potential profitability improvement? Anything you could there would be helpful.

Ajay Shah

No, it's a great question. I think that when we say that what we're saying is, see before you had a ceiling 50% and you had a floor 50%. So, I'm talking specifically about mobile memory. It's different in different business, so I just want to clarify that, before I keep going and some of accuses me of having mislead everyone.

Coming back to your question, so if we just are in a mode where we work with our partner, as you know, we have a large semiconductor company that's a partner. And we want to increase our penetration in memory. We are able to adjust pricing accordingly and get customers more excited about buying greater amounts of memory and there is no ceiling at 50%.

Meanwhile, if on the other hand, there are shortages and maybe availability is tighter for whatever reason. We might take the approach that might instead try to optimize the value from the units we do have. So, you can -- like every other business, you can use a strategic aspect of availability, pricing, products, supply chain.

What we never talk about is we enable for many of our particularly PC and notebook customers. The ability to configure memory at the very last minute and they can take advantage of price declines in that way, because we offer a much, much shorter lead time with our local manufacturing. So, that's yet another metric that we can employ like any other business. I mean, so I don't know, if I'm not clear enough, please let me know because I'd like to make sure that I explain myself well.

Suji Desilva

No. I think the point about not having to ship 50% no matter what is very clear, I guess, it gives you a lot of flexibility. So that part helps for sure. And then, going to the supply chain services, I'm sorry, the specialty computing business. The $90 million to $100 million from the acquisitions in fiscal '20 you're roughly forecasting. What's the linearity of that; is that back-end loaded or fairly even? And do the acquired businesses have similar seasonality to Penguin in the coming years or just in general?

Ajay Shah

Yes. We don't think that the seasonality is quite the same because Penguin has a significant federal component which has this particular seasonality. However, Penguin is a big part of that specialty compute segment for us. And so, we will see that variation, a weaker Q2 again because that's when the federal business is at its low point. And then a stronger Q4 -- the business we acquired from Artesyn does have some decent size military component as well. So that tends to have a slightly higher Q4, it's not as much of a peak. So, we would see somewhat similar behavior, just a little bit more modulated compared to Penguin, which has somewhat more extreme seasonality.

Suji Desilva

Okay. All right. Appreciate the color. Thanks.


[Operator Instructions] We have our next question on the line from [indiscernible] from Benjamin. Sorry, we have [indiscernible] from Jefferies. Your line is open.

Ajay Shah

Sorry, we didn't hear your question.

Unidentified Analyst


Jack Pacheco

Hi, [indiscernible].

Ajay Shah

Yes. Hello.

Unidentified Analyst

Hi, this is [indiscernible] here. I'm speaking on behalf of [indiscernible]. So, a quick question here. I wanted to understand is, till now our understanding was it's a pass along business essentially you buy memory components and you put them together and sell them. So, can you help me understand how the memory price movement really, how does it affect your profitability, if memory prices are going up profitability goes up, is it something like that of that order?

Jack Pacheco

Yes. I mean, so there's two ways. And we talked about demands. Of course, in this business, we have different ways, we charge our customers for services. Some of the services we charge our customer on a flat dollar rate, let's say, per unit, other parts of the services may be a percentage of the total value of the memory product we're buying. So, it really depends on the customer and what we're doing for that customer.

So, of course, if memory prices, let's say, fell, we could get less percentage of that, but then that also, if you look at the density of memory you buy too, sometimes density of memory doesn't drop, I mean, they buy higher density memory because they're cheaper, so you may not get as much of a memory price impact on the business. But basically, there's two ways, we either charge per unit or we're going to charge a percentage of the total value of the product in that business.

Unidentified Analyst

Yes. That makes sense. Thank you.

Jack Pacheco



This concludes our Q&A session. And now, I would like to turn the call to Ajay Shah, CEO of company.

Ajay Shah

Thank you, operator. And thank you all for joining us and we look forward to reporting on our progress in the coming months. Once again, thanks for joining us on this call this afternoon. Goodbye.


Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.

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