SMART F4Q07 (Qtr End 8/31/07) Earnings Call Transcript

| About: SMART Modular (SMOD)
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SMART Modular Technologies, Inc. (NASDAQ:SMOD)

F4Q07 Earnings Call

October 3, 2007 4:30 pm ET

Executives

Suzanne Craig - The Blueshirt Group

Iain MacKenzie - President, Chief Executive Officer, Director

Jack A. Pacheco - Chief Financial Officer, Senior Vice President

Analysts

Thomas J. Dinges - JPMorgan

Betsy Van Hees - Cowen and Company

Gordon Johnston - Lehman Brothers

Jim Suva - Citigroup

Edwin Mok - Needham

Doug Ashton - FTN Midwest

Bob Gujavarty - Deutsche Bank

Scott Hirleman - Robert W. Baird

Operator

I would like to thank everyone for holding for today’s conference call. (Operator Instructions) Now at this time I would like to turn the conference call over to your speaker, Suzanne Craig.

Suzanne Craig

Good afternoon, everyone and thank you for joining us on today’s earnings presentation and conference call to discuss SMART Modular Technologies’ fourth quarter and full year fiscal 2007 financial results. Joining me today for the presentation is Iain MacKenzie, President and Chief Executive Officer; and Jack Pacheco, Senior Vice President and Chief Financial Officer.

Please note that this is a pre-recorded presentation that will open up to a live question-and-answer session at its conclusion.

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

These statements are forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities and Exchange Act of 1934. You should review the management’s discussion and analysis and related risk factors affecting future results contained in the forms and reports filed with the Securities and Exchange Commission.

We caution you that such statements are just projections. Accordingly, our future results may differ materially from such projections. These forward-looking statements are made as of today and SMART does not currently intend and has no obligation to update or revise any forward-looking statements.

The fourth quarter and full year fiscal 2007 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 do not include restructuring costs, impairment charges, or other infrequent or unusual items. Please refer to the non-GAAP information section of our earnings press release for further details.

Our agenda for the call today is as follows: Iain MacKenzie will review key highlights from the quarter and fiscal year; then Jack Pacheco will discuss the quarter from a financial perspective and provide the forward-looking guidance. Our Q&A session will follow and a final transcript will be made available on our website. An audio replay of this call will be available for two weeks by accessing the investor relations page at smartm.com, or by dialing 866-590-3682 and using the passcode SMART.

Now, let me introduce Iain MacKenzie, President and CEO of SMART Modular.

Iain MacKenzie

Thank you and welcome to everyone on the call. Overall, fiscal 2007 was a good year for SMART. In the face of a volatile and increasingly challenging DRAM pricing environment, we achieved solid financial results with total net sales of $828.4 million, up 17% from fiscal 2006; gross profit of $147.8 million, also up 17% from fiscal 2006; and GAAP diluted net income of $0.88 per share, up 60% from fiscal 2006.

We also generated cash flow from operations amounting to approximately $69 million over the course of the fiscal year ending August 31st, with cash and cash equivalents totaling $144.1 million. These noteworthy accomplishments highlight the strong profit leverage in our business model and demonstrate the value proposition we provide our OEM customers.

In addition to our financial achievements in fiscal 2007, we achieved several important milestones, including the successful completion of a secondary offering in January, the multiple product introductions of our memory, embedded and display businesses, targeted at end markets such as servers, high performance computing, network, telecom, kiosk, point of sale applications; and a second consecutive year of 100%-plus growth in Brazil. The capacity ramp continued and August 2007 set another record for the highest quantity of ICs assembled and tested in-house. Qualifications and product introductions continue as the business grows.

As we indicated in our press release last month, our financial results for the fourth quarter of fiscal 2007 were negatively impacted by the unusually severe and sustained pricing pressure in the DRAM market, which in turn impacted our unit and density growth.

The rapid price reduction of existing high density products compresses product roadmaps and development cycles for our customers. This in turn creates new demand for the next density. We are therefore accelerating our design, sampling, and qualification of the 8-gigabyte DRAM modules, including the 8-gigabyte VLP, the 8-gigabyte mini-RDIMM, the 8-gigabyte two rank RDIMM, and the 8-gigabyte 1-gigabit based non-stacked RDIMM, leveraging our CoolFlex technology.

And as we announced last week, the recent drop in 1-gigabit component pricing is driving the doubling of server module densities, which is good for our business. As we work to close the density gap, the ASP of our DRAM business should be positively impacted.

In this challenging and dynamic business environment, one constant is that our OEM customers continue to view us as a valued partner and we remain dedicated to providing exceptional engineering expertise, specialty products and services.

While we remain optimistic about end market demand as it relates to our customer base, industry reports by market research firms such as iSuppli now point to a recovery during the second half of calendar 2008. From our viewpoint, we see several drivers for increased units and densities that would support such analysis. As server virtualization becomes more widely deployed, this will in turn drive a move toward higher powered computing equipment with more memory.

Additionally, AMD and Intel have each introduced its own quad-core based platforms, both of which are expected to utilize more memory. With qualification samples shipping to customers who are test-driving these platforms, we believe that we will see production ramp up in the first half of next year.

Also, by the summer of 2008, the transition to DDR3 should continue to accelerate demand for our advanced memory module solutions.

As we look to grow our non-DRAM business, we are particularly excited about our family of Flash-based solid state drives, our SSD products. We have extensive Flash experience and utilizing our Flash design center in Massachusetts, we have developed unique solutions for customer-specific applications.

As the industry begins to adopt SSDs, we have been focused on developing the best-in-breed technology for our customers as this evolution occurs. In particular, we are making continuous enhancements in terms of density and performance to both our XceedUltra and our XceedLite SATA SSDs. As customers look to integrate these solutions into their applications, we will continue to broaden our portfolio to meet their needs with specialty products.

Today, we see our SSDs as complementary to high-end servers and rate storage devices. As the price of Flash cost-per-gigabyte comes down, the customer recognized this in terms of Flash drives and we expect the price, capacity and performance considerations to drive further adoption in a wider range of applications.

In the embedded and display side of our business, we’ve continued to make progress in broadening our product portfolio and engaging with new customers. We continue to remain optimistic about the long-term potential of our diversification efforts and remain focused on kiosk, point of sale, and digital signage applications, where the markets and supply base are largely fragmented but growing and where we can best utilize our engineering expertise, purchasing leverage, and worldwide manufacturing resources.

The year-over-year results we have delivered demonstrate our leadership position and high-end OEM focused memory modules. We believe that our OEM customers will continue to out-source increasingly complex technologies and products. Such complexity strengthens the bond with our customers, integrating their business with ours by leveraging our custom design and test expertise in conjunction with our global manufacturing footprint.

As we look ahead to fiscal 2008, we will continue to diversify and expand into the Flash embedded computing and display markets. Though our presence in these areas grows, we intend to leverage our IP, bringing increased value to our existing customer base and differentiating ourselves among our competitors. These efforts we believe will lead to improved revenue and margin potential in the future.

Now I would like to turn the call over to Jack Pacheco, our Senior Vice President and CFO, for a closer look at the financials.

Jack A. Pacheco

Thanks, Iain and thanks to everyone who has joined us on our call this afternoon. For the year, net sales totaled $828.4 million, 17% higher than the $707.4 million in the previous fiscal year. For the quarter, net sales totaled $165.6 million, down 16% from the year-ago quarter, 11% lower than last quarter’s $186.5 million.

Gross profit for the fiscal year 2007 totaled $147.8 million, 17% higher than gross profit of $126.6 million for fiscal 2006. Gross profit for Q4 was $31.8 million, down from last quarter’s $36.9 million and down 5% from the fourth quarter a year ago.

GAAP net income for fiscal 2007 was $55.9 million, or $0.88 per diluted share, compared to $32.3 million, or $0.55 per diluted share for the fiscal year 2006. GAAP net income for the fourth quarter of fiscal 2007 was $13.2 million, or $0.21 per diluted share, compared to $14.2 million, or $0.22 per diluted share for the third quarter of fiscal 2007, and $15.7 million, or $0.25 per diluted share for the fourth quarter of fiscal 2006.

Our fourth quarter and full fiscal 2007 results also included an approximately $1.7 million, approximately $1 million net of tax, benefit due to the reversal of inventory reserve related to end-of-life inventory disposed of at cost.

Non-GAAP net income for fiscal 2007 was $53.5 million, or $0.84 per diluted share, compared to $40.2 million, or $0.68 per diluted share for fiscal 2006. Non-GAAP net income for the fourth quarter of fiscal 2007 was $10.8 million, or $0.17 per diluted share, compared to $11.9 million, or $0.19 per diluted share for the fourth quarter of fiscal 2006.

For the fourth quarter and full fiscal 2007, non-GAAP financial results have been adjusted to exclude approximately $2.4 million in tax benefit from the release of deferred tax assets valuation allowance.

Moving to sales by geography, for the fourth quarter the breakdown was as follows: the U.S., 62%; Asia, 15%; other Americas, 17%; Europe, 6%.

A breakdown of quarterly sales by end market was: servers, 44%; network and telecom, 21%; desktop PC, 20%; logistics, 6%; printers, 4%; industrial, 4%; and storage, 1%.

HP continues to be our largest customer, representing 43% of revenues versus 49% last quarter. As we mentioned in the past, our relationship with HP is diversified in nature, with our products and services being used across a broad spectrum of its products in 10 separate business units. This relationship encompasses many different types of memory products and services.

Cisco was our second-largest customer during the fourth quarter, representing 12% of our revenues, compared to 11% last quarter.

Moving to the rest of the income statement, R&D totaled $3.8 million in the fourth quarter, down slightly from last quarter. We continue to invest and pursue innovative technology to drive diversification efforts and new product introductions.

SG&A totaled $14.3 million in the fourth quarter and stayed in line with our expectations on a percentage basis of revenues. Net interest expense totaled $1.2 million in Q4, also in line with our expectations.

In terms of financial metrics, we are very pleased to once again have a strong return on equity in the 27% range, which we believe is the high-end for companies in our industry.

Turning to the balance sheet, cash and cash equivalents totaled $144.1 million at the end of the quarter, up $30.1 million from the end of last quarter. Accounts receivable totaled $184.4 million at the end of the quarter, down $84.7 million from the prior quarter. Account receivable day sales outstanding were at 45 days this quarter, compared to 50 days last quarter.

Net inventories were $65.1 million at the end of the quarter, down from $70.4 million at the end of last quarter. Inventory turns were 21 times for Q4 versus 26 times last quarter, within our targeted inventory turnover range of approximately 20 to 25 times.

As a reminder, accounts receivable and inventory turnover are calculated on a gross sales and cost of goods sold basis.

Capital expenditures during the fourth quarter total approximately $5.8 million compared to $3.1 million last quarter. CapEx for fiscal 2007 was $14.1 million.

Now I would like to discuss our view looking forward. For the first quarter of fiscal 2008, we currently expect that our net sales will be in the range of $165 million to $175 million. We anticipate gross profit will be in the range of $32 million to $35 million. GAAP diluted net income is expected to be in the range of $0.17 to $0.18 per share. Fully diluted shares outstanding should be in the range of 63.6 million to 64.4 million in the first quarter.

In addition, we currently expect that our fiscal 2008 GAAP diluted net income will be in the range of $0.82 to $0.86 per share.

To summarize the financial highlights for the fiscal year, we produced solid growth in the midst of an increasingly challenging business environment and we remain the leader in high-end OEM-focused memory modules. Fiscal 2007 GAAP diluted EPS grew by 60% to $0.88 per share. Net sales for fiscal 2007 totaled $828.4 million, up 17% from the previous year, and gross profit totaled $147.8 million, up 17% from a year ago. And lastly, we continued to demonstrate prudent financial management, as shown by the industry-leading metrics we achieve each quarter.

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

Iain MacKenzie

Thanks, Jack. It was a successful year for SMART as we delivered solid growth in net sales, gross profit, and EPS in spite of a challenging business environment. We exited the year as the leader in high-end OEM focused memory products and continue to diversify our business by broadening our product offerings. Looking forward, we remain committed to executing on our objectives and are optimistic for continued growth in the future.

As a reminder, we will be hosting our 2007 analyst day in New York City on Wednesday, November 14th, from 8:00 a.m. until 2:00 p.m. Eastern Standard Time. We look forward to meeting with many of you then.

We would now like to open the lines up for questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Thomas Dinges of JPMorgan.

Thomas J. Dinges - JPMorgan

Good afternoon, guys. I wanted to ask you a quick one. Iain, you brought the topic up about virtualization and an increase in server density. You talked about that as more of a second half of next year driver, but are you starting to see any of that come through right now? The reason I am asking is obviously you are putting your gross profit dollars, if you back out the inventory write-off, considerably higher next quarter than they were this quarter. Is that just more seasonal in terms of what you guys are seeing for next quarter or are you actually starting to see some of the density improve because of virtualization and the trends you see there? And then I have a quick follow-up for Jack.

Iain MacKenzie

On the virtualization, very slow qualification process, so just given as the belief and the visibility into the fact that that’s coming, so not a significant factor that would mix the swing. Definitely the mix in seasonality, and clearly with the DRAM pricing being down, then the gross margin looks to be going up and then, as I mentioned, our focus being on higher margin products moving forward.

Thomas J. Dinges - JPMorgan

Okay, and then quickly for Jack, just two kind of housekeeping items; one, I didn’t hear a tax rate, maybe I missed it, an expectation for a tax rate, both for the full year and for the quarter, next quarter. And then, do you anticipate any further inventory reversals coming, or is this a pretty clean number that you are guiding to for next quarter? Thanks.

Jack A. Pacheco

Tax rate, you are probably looking, I don’t know, somewhere between 15%, 17% for the quarter and the year.

No, that was the last of a last-time buy that we finally reversed out, so it’s pretty clean going forward.

Thomas J. Dinges - JPMorgan

Okay. Thank you very much.

Operator

Thank you. Your next question comes from Betsy Van Hees of Cowen & Company.

Betsy Van Hees - Cowen and Company

Thank you. Congratulations on great guidance, considering the very difficult DRAM environment. Iain, I just had a follow-up question on your embedded display; can you remind us what your target is as a percent of revenue for fiscal year ’08?

Iain MacKenzie

Actually, Betsy, we’ve continually said the goal of getting to essentially the end of calendar year ’08, but at the end of the year being 20% and I would say kind of 15% to 20% by the end of the calendar year. But we are showing very good progress and I thought I was going to be able to announce some wins but certainly some good qualification parts, multiple customer engagements and still looking strong but a little bit behind where we would like it to be.

Betsy Van Hees - Cowen and Company

Are you expecting at your analyst day that you would likely be able to announce some of those wins?

Iain MacKenzie

Yes, that’s correct.

Betsy Van Hees - Cowen and Company

Okay, great, and then Jack, looking at interest expense and other, what should we be looking at for fiscal year ’08?

Jack A. Pacheco

I think where we finished the year, I mean, where we finished Q4 is probably a decent number to go forward with, maybe it goes up a little bit. But as long as cash stays where it is, we’ll have a lot of interest income come in, so --

Betsy Van Hees - Cowen and Company

Okay, great. Thanks again and once again, congratulations.

Operator

Thank you. Your next question comes from Tim Luke of Lehman Brothers.

Gordon Johnston - Lehman Brothers

It’s Gordon Johnston in for Tim Luke. Congratulations, guys, on guidance in a very challenging environment. My first question, if you could just discuss briefly what your assumptions are on DRAM ASPs, given your gross margin guidance?

Iain MacKenzie

Obviously it’s a very topical subject and changing with the second half of September not showing the inflection point that was seen by many analysts, so at this moment in time, we’ve planned that in this current fiscal quarter, we will see another 20% reduction. We think that’s a good forecast potentially at this point, given in the quarter having seen maybe as much as 10% already.

Gordon Johnston - Lehman Brothers

Okay, so just to be clear, you guys are factoring in some DRAM ASP degradation --

Iain MacKenzie

That’s correct. That’s why we feel the guidance is quite strong.

Gordon Johnston - Lehman Brothers

Okay. Thank you. And then secondly, it looks like demand in emerging markets is tracking ahead of expectations. Can you talk about your assumptions for that in fiscal ’08 and how we should look at that, and particularly in Brazil and your expectation for facility ramps there, or additions to the facility there?

Jack A. Pacheco

The emerging markets continue to do well. The Brazil market is growing and as it grows, we expect to take our share of that growth in that market.

Our facility, we’ve added the extra space and really it’s there to add equipment if, from a module standpoint and also we could increase capacity in the packaging line, so as the business warrants, we would go ahead and add the capacity. So what we’ve done right now is add all the space and now as the business grows and we can add the equipment capacity to keep up with the business in Brazil.

Gordon Johnston - Lehman Brothers

Okay, and then just lastly, with the very impressive move in cash, is there anything we should look at potentially you guys planning to do with that from a shareholder value-added perspective?

Iain MacKenzie

Certainly not at this moment in time planning any financial engineering and still I’ll mention, it’s still been active in acquisitions and clearly not closed on anything.

Gordon Johnston - Lehman Brothers

All right. Thanks a lot and congratulations on the guidance again.

Operator

Thank you. Your next question comes from Jim Suva of Citigroup.

Jim Suva - Citigroup

Thank you very much. Can you guys explain a little; you mentioned 20% DRAM. That’s quarter over quarter, is that correct?

Iain MacKenzie

That’s correct.

Jim Suva - Citigroup

Okay, and then what about for your full fiscal year? When you build in, you definitely gave some EPS guidance. What type of DRAM ASP environment are we looking for there, or at least a range where we can look at before we see some additional either upside or downside?

Iain MacKenzie

It is a very strange thing the way it works out in the profile, but if it does indeed as currently forecast increase in the second half of 2008, so if you look kind of in Q1 and Q2, it goes down by 20% and then 10% respectively, I would actually look to see that other 10% come back in the second half. So the math says that the overall answer for the year is only 20% down, but as you see there’s a profile within the year there.

Jim Suva - Citigroup

Great. Thank you. And is there any impact to the lower DRAM pricing environment on your logistics segment? If so, can you walk us through that?

Jack A. Pacheco

Sure. I mean, some of the logistics business is tied to, it’s a percentage of revenue when you are doing some of these [kittings] at the gross revenue, so you will see some impact on the logistics revenues when you have ASP decline like this. Once again, that business, typically you get units to grow also when you have a decline in ASP, so the units grow and the density grows. It also helps out the logistics business.

Jim Suva - Citigroup

Okay, great. Thank you very much, gentlemen.

Operator

Thank you. Your next question comes from Edwin Mok of Needham & Company.

Edwin Mok - Needham

Thanks for taking my question. One thing I noticed is your networking improved quite a bit this quarter. Are you expecting a similar kind of growth in the coming quarter?

Jack A. Pacheco

If you look at networking and data com, it definitely -- you know, it grew Q4, Q3 was a pretty weak quarter for it. We thought Q4 would be better. We stated that. Going forward, we would anticipate that with Cisco finally getting the lean initiative out of the way somewhere in our Q1 that the Cisco business will probably pick up some.

But we’ve always talked about network and data com kind of being a steady state business for us, not huge growth. We think it will just keep kind of going as it’s going next year.

Edwin Mok - Needham

I see. So it was more of a rebound from a very weak quarter last quarter, right?

Jack A. Pacheco

Yes, I mean, we talked about Q3 just being a very weak quarter, so it just rebounded back the way we thought and then --

Edwin Mok - Needham

That’s fair. That’s great. In terms of your server business, it looked like it just declined a little bit. I imagine with the tough pricing environment, you are going to actually grow in the server market. Is that correct?

Iain MacKenzie

It was very marginal. I would say the units were fairly flat, nothing -- not really a move there. So I think it would just be the mix of servers, Edwin.

Edwin Mok - Needham

I see. That’s good. One last question; in terms of your full year guidance, any thought that maybe it’s more back-end loaded or front-end loaded? Can we expect the rebound to start happening in the second quarter or is it more back-end loaded in the third and fourth quarters?

Iain MacKenzie

You clearly see for the quarter one guidance, so I think what happens is you’ve seen a reset and now, if you look from here, then we are looking at growth as we go through the -- steady growth as we go through the year again. I mean, we expect to see each quarter building on the previous quarter, so if you hadn’t seen that immediate reset, then you’d be looking at the same path again. So I see each quarter growing on itself.

Edwin Mok - Needham

Great. Actually, a question on the Flash part of the business; when do you expect these new SSDs to be a more substantial part of your revenue stream and is that baked into your full year guidance?

Iain MacKenzie

You know, it’s baked in but we just have a very, very marginal percentage pick-up in Flash. Our total Flash business will be certainly less than 10%, so baked in to be ready for the OEM customers that we serve, baked in to be ready for the specialty products and certainly baked in to be ready but I’m still not looking at 2008 as being the year for the specialty enterprise adoption. Perhaps a lot of qualification efforts and first samples and first articles at the high-end, so but really preparing for 2009 production volumes.

Edwin Mok - Needham

Great. Thanks for the color.

Operator

Thank you. Your next question comes from Doug Ashton of FTN Midwest.

Doug Ashton - FTN Midwest

Good afternoon, guys. I just wanted to go back to your brief comments on product roadmap compression, et cetera, and that relating to falling DRAM prices. I mean, is there -- can you just elaborate on that a little bit? What’s going on in that customer base and if there were any differences third quarter to fourth quarter as the price declines elongated?

Iain MacKenzie

I think, Doug, in normal terms you would see the density doubling, perhaps through this time period, density doubling every nine months to -- nine to 15 months. What happens when this happens is that now all of a sudden the price point for that performance and that density, I mean, we’re enabling the very first 256-gigabyte Barcelona type system to be created now at a price point that used to be the 4-gigabit version.

So all of a sudden, the price point comparison can be compressed so the need for those modules is now and our qualification schedule for them was perhaps five months from now. So that’s typical and this, seeing a 60% reduction caused perhaps six months out of the evolution.

Doug Ashton - FTN Midwest

Okay, great. Thanks.

Operator

Thank you. Your next question comes from Bob Gujavarty of Deutsche Bank.

Bob Gujavarty - Deutsche Bank

Thanks, guys. Could you remind us of your CapEx plan for fiscal 2008 and how it flows quarterly? Do you think it would be pretty even through the year or front-end loaded or back-end loaded?

Jack A. Pacheco

I think our plan for next year is roughly probably $20 million, $25 million of CapEx and I don’t think it’s a -- it’s probably fairly even through the year. I don’t think we have it back-end or front-end loaded.

Bob Gujavarty - Deutsche Bank

Okay, fair enough. And the revenue is up a little bit. Is there going to be any significant change in the mix quarter on quarter, or just plus or minus a few percent in terms of -- you gave us the 4Q mix but just curious about the 1Q.

Jack A. Pacheco

Yes, we wouldn’t see a significant change in the mix. We just expect a little bit of -- you know, we saw pretty weak demand in Q4 so we anticipate demand across the board will be stronger in Q1.

Bob Gujavarty - Deutsche Bank

Okay, and just more of a -- I guess just a competitive and strategic question. I mean, is this really just -- I think you mentioned, it’s just a one-off event in terms of the DRAM volatility and now you are going to return to growth. Can you just reassure us that it’s really not any competitive issues, the customer relationships are still strong and it’s just a matter of going through this qualification process? Is that really what it’s all about?

Iain MacKenzie

Certainly if you look about other companies that look like ourselves, then it is easy to see that we are not losing share, so in that regard, we’ve been in business for a long time and I don’t remember ever seeing, and it’s been written up now, a 70% year-over-year DRAM reduction.

I think the timescale has just been pulled from us and now we are back on a path and I do see every quarter improving on the last, from the profitability point of view.

Bob Gujavarty - Deutsche Bank

Okay, and just a final question; do you still see -- I mean, you alluded to it with virtualization but you still see strong demand for high memory configurations and servers, and there’s still that demand for those high density memory products?

Iain MacKenzie

And clearly, I mentioned Barcelona. I could mention Kingland. I mean, these quad processors are coming out. Memory has always been a gate to performance and to speed within the system, so processors and memory go together. So as you see that processor road map by companies much bigger than ourselves, then that drives memory. So that’s what gives us confidence that the computing power requirements and storage requirements, it continues to increase.

Bob Gujavarty - Deutsche Bank

Great. Thanks, guys.

Operator

Thank you. Your next question comes from Thomas Dinges of JPMorgan.

Thomas J. Dinges - JPMorgan

Hi, sorry, guys. The question was asked and answered.

Operator

Thank you. Your next question comes from Betsy Van Hees of Cowen and Company.

Betsy Van Hees - Cowen and Company

Thanks. I just had a follow-up question; circling back to your expectations for DRAM ASP declines next year, so you are factoring, if I’m understanding correctly, 20% year-over-year ASP declines?

Iain MacKenzie

That’s correct, although if it goes down 20% for the quarter was the first piece, and then I was saying as there is a second half in the year, currently it is forecast to come back, so strangely by month. So if you looked at that, it would be kind of like minus 20% and then perhaps minus 10%, plus 10%, and zero, would give you minus 20% for the year, but there’s quarterly profiling inside there.

Betsy Van Hees - Cowen and Company

Okay, and then the ASP improvement, is that largely due to we’re going to see a mix from the 512 to 1-gigabit?

Jack A. Pacheco

Yes, we’d anticipate the 1-gigs coming down the pipe pretty soon here, at a decent crossover point. We do believe that you’ll see people transition to 1-gig, which will improve the ASP.

Betsy Van Hees - Cowen and Company

Okay, great and then a follow-up question in regards to Flash memory; what type of expectations are you factoring in for ASP declines next year?

Iain MacKenzie

Our Flash products, we’re not -- it’s not big enough to be a significant impact so we’ve left it as flat but any movement there, you know, normally we plan on Flash to go down by 20% to 30% per year, but we are an SLC company in the main, so the numbers you hear out there in the industry are typically for MLC and at this moment in time, SLC is flat. So the short answer is we’ve left it flat.

Betsy Van Hees - Cowen and Company

Okay, great. Thank you.

Operator

(Operator Instructions) And your next question comes from Scott Hirleman of Robert W. Baird.

Scott Hirleman - Robert W. Baird

Thanks for taking my question. This is Scott Hirleman for Tristan Gerra. I was just trying to get a little bit more information on what your assumptions are on overall server box loading. What’s the typical DRAM content per server out there in the market? And then I’ve got a couple of quick follow-ups.

Iain MacKenzie

Our DRAM content is all in the mid to high levels, so we’re kind of at the 64, 32 and 64 gigabyte level. Clearly I just mentioned that we populate at 256 gigabytes and, at the other end, four, but 32 to 64 would be our average content. You’ve got to be careful. That’s skewed since our concentration is on mid to high level servers only.

Scott Hirleman - Robert W. Baird

Okay, and are you seeing that people are -- with the virtualization trend, you’re expecting that to kick in in the second half of ’08, where we are going to see more of those high level servers going out there, or do you think that we are seeing people move more to the mid and high level now?

Iain MacKenzie

Yes, I mean, if what you are seeing at this moment in time is us qualifying 256 gigabytes together to show that the system cannot perform at that level, but typically systems still go out the door with perhaps 64 gigabytes and then memory and processors become a population add-on, so at this moment in time, not seeing any huge swing in density of systems as --

Operator

One moment, please. The conference leader has disconnected from the conference. It will be one moment until he rejoins. Please continue to hold. Again, this is the coordinator. Please continue to hold until the conference leader reconnects. Thank you.

Scott, your line is still open.

Scott Hirleman - Robert W. Baird

Sorry about that, guys. And then I actually had a quick question on where you see DRAM inventories in the channel at the OEMs. There had been some talk that the OEMs had forward bought a lot of DRAM. Do you think that they have worked that down or is there still a lot at the end OEMs?

Jack A. Pacheco

Our model, Scott, is really -- we are more of a build-to-order model, so with our customers, we don’t play, or they really pre-buy a lot of inventory so -- the products we service in the markets we are in, we don’t really see a lot of them with a bunch of inventories they are trying to bleed off.

Scott Hirleman - Robert W. Baird

So would you say that that’s -- you just don’t have the visibility into the market as a whole or --

Jack A. Pacheco

We don’t really play in the U.S. PC -- if you thought about where a lot of people would pre-buy it, typically it is in the U.S. PC market, notebooks. We don’t really play in that part of the market. We’re not really that high and low end server where they might pre-buy also. We are more of the build-to-order type supplier, so yes, we don’t see a lot of inventory again in the parts of the market that we are playing in.

Scott Hirleman - Robert W. Baird

Okay, sounds good. And then, when do you guys see the solid state drive market moving from SLC to MLC? Is that kind of a one-year off or is it just when the technology becomes mature enough that you can have the number of read writes that you have on an SLC?

Iain MacKenzie

Actually, Scott, I think they will both exist. It is going to be a question of endurance. MLC, SLC put more error correction into the controller chip so both are going to exist and it’s going to be a price performance endurance type trade-off that each of the customers make.

Scott Hirleman - Robert W. Baird

And do you see high end servers sticking with SLC and maybe low end and notebooks going MLC?

Iain MacKenzie

Yes, and storage systems, correct. That’s more of the place and why we play a more specialty role with enterprise type OEM customers.

Scott Hirleman - Robert W. Baird

All right, well, great. Thanks for the color, guys.

Operator

At this time, I show there are no further questions.

Iain MacKenzie

We would like to thank you again for joining us on today’s call and for your continued support of SMART Modular. We look forward to seeing you at our upcoming analyst day in November and to updating you on the business progress next quarter, so thanks very much.

Operator

That concludes today’s conference call. At this time, you may disconnect. Thank you.

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