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spk01: Good day and thank you for standing by. Welcome to the STH Third Quarter Fiscal 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, press star zero. I would now like to hand the conference over to your speaker today, Suzanne Smith with Investor Relations. Please go ahead.
spk00: Thank you, Operator. Good afternoon, and thank you for joining us on today's earnings conference call to discuss Mark Global Holdings' third quarter fiscal 2021 results. On the call with me today are Mark Adams, Chief Executive Officer, Jack Pacheco, Chief Operating Officer, and Ken Risby, Chief Financial Officer. This call is being webcast from our website at smartgh.com. In addition, our website contains an accompanying slide presentation and the earnings press release. We encourage you to go to our website 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 remind everyone to read the forward-looking statements information that we have included in the earnings press release and the earnings call presentation. Please note that certain of these statements made today may constitute forward-looking statements and that these statements are our present expectations and that actual events or results may differ materially. We will also discuss both GAAP and non-GAAP financial measures. Non-GAAP measures should not be considered in isolation from, as a substitute for, or superior to our GAAP results. We encourage you to consider all measures when analyzing our performance. A reconciliation of GAAP to non-GAAP measures is included in today's press release. We will begin the call with CEO Mark Adams, who will provide a business update, and then Ken Rizzi, CFO, will review the financials and forward guidance, after which we will take questions. Mark?
spk09: Thank you, Suzanne. We hope our U.S. listeners enjoyed the Fourth of July weekend and appreciate all of you joining today's call. We are excited to present our fiscal third quarter results and share with you our outlook for the fourth fiscal quarter. Business execution was strong across all of our companies as our financial results exceeded expectations. We achieved record quarterly revenues of approximately $438 million. We improved non-GAAP gross margins to approximately 22% up from 19.5% in Q2. And we generated $1.39 in non-GAAP earnings per share for the quarter, compared to $0.87 per share last quarter. Our team remains focused on the execution of our growth and diversification strategy. In our first full quarter with Cree LED as part of SGH, we are reporting a more diversified revenue mix. Memory Solutions, which includes Specialty Memory and Brazil, accounted for 55% of total revenues. Within Memory Solutions, Specialty Memory was 28% of total SGH revenues, and Brazil was 27% of total SGH revenues. LED Solutions came in at 23% of total revenues, and Intelligent Platform Solutions, or IPS, was 22% of revenues in Q3. Let me now cover some highlights for each of our businesses. Our IPS group turned in another strong quarter with revenue of approximately $96 million which was 12% higher than last quarter, in line with our expectations for double-digit growth and 57% higher than the same quarter a year ago. These results reflect growth across our key focus areas of core, edge, and cloud. For reference, IPS includes Penguin Computing and Penguin Edge, which is our new brand comprising the former smart-embedded and smart wireless businesses. Gross margin percentage was down sequentially due to a larger mix of hardware sales in the quarter. On prior earnings calls, we have discussed the potential variability of IPS gross margin percentages due to software and services movement quarter to quarter. That said, the IPS team is making very good progress on expanding software and services, which represents 20% of Penguin Computing's revenue on a year-to-date basis, up from low teens in the prior year-to-date period. Our Penguin computing team has a robust solutions roadmap focused on core data center, edge, and cloud offerings, targeting customer requirements in AI, high-performance data analytics, and traditional HPC workloads. We have a number of new platforms and solutions planned for introduction. in the second half of calendar year 21, including Penguin Computing's Origin AI, an AI platform targeting customer needs at the core data center for at-scale training and inference. Additionally, Penguin Edge released the PCIe 8130, which is a high-performance server add-in card used to accelerate and facilitate voice over 5G and LTE. IPS continues to focus on growing Penguin's cloud-based solutions business as evidenced by expanding engagements with existing and new customers in the financial, oil and gas, and federal sectors. We will continue to scale our investments in Penguin On Demand, or POD, and government POD cloud-based solutions to capitalize on future on-demand opportunities which have the potential to drive reoccurring revenues for IPS. We are excited about the recent performance of IPS and continue to strengthen our new business funnel to drive future growth potential in Q4 and beyond. Now turning to the memory solutions group, which encompasses specialty memory and our operations in Brazil. Revenue grew by over 10% sequentially to reach $240 million in Q3 and by 9% year over year in the same quarter. Gross margins expanded 240 basis points sequentially to 18.1% in the quarter, largely due to improved pricing and mix. Our specialty memory business executed well in a challenging supply environment. Beyond our core business with traditional customers in telecom, networking, and the enterprise, we are gaining traction in more data intensive applications. where new standards such as OpenCAPI are helping to drive performance improvements. OpenCAPI is an open interface architecture standard which supports very low latency and high bandwidth memory. We are seeing our DRAM OpenCAPI modules moving into production for compute-intensive applications and expect to ramp this business as we move into fiscal year 22. Backlog for our Flash product portfolio grew nicely in the quarter. and we anticipate strong quarter-over-quarter revenue performance in Q4. We are expanding our product development focus for customers across new and markets to meet their application-specific needs. We are in early production of many and very low-powered DIM modules for use in cybersecurity applications and custom SSD products used in surveillance as well as the transportation sector. Each of these areas represents new segment opportunities for specialty memory. Our strong results in Brazil were due primarily to increasing unit demand in PC notebook and server, which grew 26% from the previous quarter. Demand for mobile memory remained stable, while ASPs increased slightly when compared to Q2 ASPs. Additionally, our plans to build SSDs in-country remain on track, and we are optimistic about this new catalyst for growth in revenues during our next fiscal year. Now turning to Cree LED, which exceeded expectations, recording revenue of $102 million versus a guide of $90 to $95 million. Non-GAAP gross margins were almost 30% well ahead of guidance, despite operating in a supply-constrained environment, a testament to the team's focus and ability to execute. The manufacturing transformation that Claude outlined during our recent analyst day is progressing well. with the transition from silicon carbide to sapphire wafers and the migration to a fab light model with our key strategic partners driving our operating performance. The LED team continued to drive technology leadership across their product portfolio. For example, Cree LED's flagship outdoor lighting LED product, the X-Lamp XP-G3S line, is one of the brightest and most reliable LEDs available in its class. This product line is optimized for directional, high-lumen lighting applications where efficacy and optical control are critical. Demand across Cree LEDs targeted and market segments continues to improve. We saw new customer wins in general lighting, specialty lighting, video, and horticulture lighting. We remain confident in the team's ability to deliver strong results and couldn't be more excited to have the Crete team on board, fully engaged in driving growth and profitability as part of SGH. Let me stop here and hand the call over to Ken for a detailed look at our Q3 financials and Q4 forecast. Ken?
spk04: Thanks, Mark. At our analyst day in April, we outlined our strategy to continue to grow and diversify our business. The third fiscal quarter of 2021 demonstrates how our strategy is playing out with strong performance across all of our businesses, intelligent platform solutions, memory solutions, and LED solutions. As Mark mentioned earlier, we reported a strong quarter with all key metrics above our guidance range. Net sales for the third fiscal quarter of 2021 were approximately $438 million, an increase of 56% year-over-year from the third fiscal quarter of 2020 and 44% sequentially, a record result for the company. In addition, non-GAAP gross margin came in at 21.9%, and non-GAAP diluted earnings per share was $1.39 for the third fiscal quarter of 2021, both above our guidance range. Now, turning to highlights from our non-GAAP income statement. On a year-over-year basis, total SGH revenues grew by approximately 56%. This growth was driven primarily by the incorporation of Cree LED into SGH, which added approximately $102 million of sales in our third fiscal quarter. Excluding Cree LED, our revenues grew by approximately 19% on a year-over-year basis. mainly driven by IPS, which grew by approximately 57%, and Memory Solutions, which grew by approximately 9%. For the third fiscal quarter, IPS had revenues on a quarterly basis of approximately $96 million, a record for that business. Our Memory Solutions group had revenues of approximately $240 million, in the third fiscal quarter of 2021. Within the memory solutions group, specialty memory reported revenues of approximately $122 million in the third fiscal quarter, while Brazil reported revenues of $118 million. Gross margin for the third fiscal quarter of 2021 was 21.9%. up from the 19.5% in the prior quarter and up from 19.9% in the third fiscal quarter of 2020, and helped by the performance of the LED Solutions Group. Gross margin for IPS was 23.1% in the third fiscal quarter of 2021, down from the same period in the prior year. primarily due to a higher mix of hardware sales. As we have discussed previously, we expect some quarter to quarter variability in gross margin for IPS based on the timing of solutions and services revenue. We are expecting, however, to see an uptick in gross margin for IPS in the fourth fiscal quarter of 2021. Gross margin for our memory solutions group was 18.1%, up approximately 240 basis points from the second fiscal quarter and relatively flat with the year-over-year period. Gross margin for LED solutions was 29.6% in the third fiscal quarter. Operating expenses for the third fiscal quarter of 2021 were approximately $52.4 million, up from the $35.5 million in the third fiscal quarter of 2020. Operating expenses were up primarily due to the inclusion of LED solutions, continued investments in IPS, as well as increased bonus in the third fiscal quarter of 2021. In addition, operating expenses benefited from approximately $8.2 million in financial credits in Brazil. This helped offset our Brazil R&D spending, which is required to benefit from this credit. As discussed during our last earnings call, the current law related to these specific financial credits is expected to expire in the beginning of calendar year 2022. Non-GAAP diluted earnings per share for the third fiscal quarter of 2021 was $1.39 per share, compared with 87 cents per share in the second fiscal quarter, and almost doubled from 70 cents per share in the third fiscal quarter of 2020. Adjusted EBITDA for the third fiscal quarter of 2021 was $51.4 million, or approximately 12% of sales, compared to $25.4 million, or approximately 9% of sales, in the third fiscal quarter of 2020. Our breakdown of net sales by end market for the third fiscal quarter of 2021 was as follows. Mobile and PCs was 24%. Network and telecom, 15%. Server and storage, 12%. Advanced lighting, 23%. And industrial defense and other, 26%. Turning to working capital, our net accounts receivables totaled $274.9 million, compared with $203.4 million last quarter. The increase was largely driven by the addition of LED solutions. Days sales outstanding came in at 39 days compared with 41 days last quarter. Inventory totaled $289 million at the end of the third fiscal quarter, compared with $189.3 million at the end of the prior quarter, driven by the addition of LED solutions as well as strategic inventory build during the quarter in preparation for a higher revenue ramp in our fourth fiscal quarter. Inventory turns were 7.7 times in the third fiscal quarter versus 8.3 times in the prior quarter. Consistent with past practices, accounts receivables, days outstanding, and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $643.3 million and $558.8 million, respectively, for the third fiscal quarter. 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 as net sales the net profit on the supply chain services transaction. Cash and equivalents totaled $189 million at the end of the third fiscal quarter, which was $49.2 million higher than the previous quarter. Third quarter cash flow from operations totaled $49.3 million, compared with $20.4 million in the prior quarter and was up sequentially from the second quarter, primarily due to the inclusion of LED solutions. On a trailing 12-month basis, cash flow from operations totaled $130.3 million. For those of you tracking CapEx and depreciation, CapEx was $5.2 million for the quarter and depreciation was $9.1 million. And now, turning to our fiscal fourth quarter 2021 guidance. We expect our net sales for the fourth quarter of 2021 will range from approximately $440 million to $480 million, an increase of approximately 55% year-over-year at the midpoint of our guidance. Our GAAP and non-GAAP gross margin for the fourth quarter of 2021 is expected to be approximately 22 to 24 percent. Our non-GAAP operating expenses are expected to be in the range of $55 to $60 million in the fourth quarter of 2021. The sequential increase is in line with our comments from the last earnings call and driven primarily by pre-LED having an additional week of expenses in the fourth fiscal quarter versus the third fiscal quarter, as well as additional investments to support the growth in our intelligent platform solutions group. GAAP earnings per diluted share is expected to be approximately 95 cents, plus or minus 15 cents. On a non-GAAP basis, excluding share-based compensation expense, intangible asset amortization expense, and convertible debt discount, we expect non-GAAP earnings per diluted share will be in the range of $1.60, plus or minus 15 cents. Cash capital expenditures for the fourth fiscal quarter are expected to be in the range of $10 million to $12 million. Our GAAP diluted share count for the fourth quarter of fiscal 2021 is expected to be approximately 27 million shares based on our current stock price. Our non-GAAP diluted share count for the fourth quarter of fiscal 2021 is expected to be approximately 26 million shares as it includes the benefit of our convertible note capped calls. Our forecast for the fourth fiscal quarter is based on the current environment, which contemplates the constraints in the global supply chain. Please refer to our 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 our earnings press release for further details. With that, let me turn the call back to Mark for some concluding comments before we open the call to questions. Mark?
spk09: Thanks, Ken. Before opening the call for Q&A, I would like to end my prepared remarks with a few additional comments. First, I'd like to acknowledge that we are making good progress on our Environmental Sustainability and Corporate Governance, or ESG, disclosures, and we will be providing updates in the coming quarters. Secondly, I want to recognize all of our factory workers around the globe who have done a fantastic job of keeping our sites operating at a high level of performance while maintaining a safe and healthy environment. Our operating teams at CreeLED, SmartModular, and Penguin have performed extremely well during these uncertain times considering the COVID pandemic situation and broad electronic supply shortages. With new COVID outbreaks in Brazil and Asia, we are continuing to maintain strict employee safety measures and have not had any major operational issues in our facilities to date. As outlined during our analyst day back in April, our key strategic objectives are to drive shareholder value by growing our business both organically and inorganically. When you couple the outstanding results from pre-LED, with the growth in Penguin Computing and strong operating performance at Smart Modular, I hope you see evidence of this strategy playing out. While we are proud of our third quarter results, we feel we have tremendous opportunity for growth in the future. Operator, we are now ready to take questions.
spk01: All right, so as a reminder, to ask a question, you will need to press star one on your telephone. To resolve your question, press the pound key. Again, that is star one on your telephone. Please stand by while we compile the Q&A roster. We do have a question from Tom O'Malley from Barclays. You are now live.
spk06: hey good afternoon and thanks for taking my question and congrats on the nice results my first question was on the led business obviously a really strong contribution in the quarter when you guys first did the deal you kind of laid out 350 to 400 million of contribution and the run rate in the quarter was even a little bit ahead of that can you talk about what happened during the quarter to kind of get you outside of that run rate and do you kind of see that higher run rate sustainable in the near future yes this is mark um
spk09: Yeah, I think we're pleased with the demand profile in the business and the broader LED sector and certainly the markets we play in. You know, I think that what's lost in the LED industry a little bit is they've been in a downturn for about the last two or three years. And there has been some good signals, positive signals on the demand side of the house. And of course, uh the operations team at creed led did a great job in reacting accordingly um and we think that you know we think that there's potential that we're catching this thing on a trough, and there is some off-site growth, as we predicted at the analyst day, or forecasted the analyst day, kind of mid-single-digit growth, 4% or 5%. And, you know, like I said, we're investing in this business. We want to grow it. We didn't just buy it to harvest it. Initially, we were looking at the kind of, you know, we're talking about nine months ago right now, back in October or so, or six months ago, I should say. We were looking at, you know, a business that was kind of traditionally doing about 100 million a quarter. But the market is starting to turn a little bit more favor on the demand signals, and we're kind of bullish on the opportunity to grow from here.
spk06: Great. That's helpful. And then in your prepared remarks, you talked about going into August and seeing, I think, your particular comment with specialty memory, which will be strong quarter over quarter. Obviously, you have a big sequential increase in revenue. Can you talk through some of the moving parts? What's really driving this increase outside of the specialty memory data point you gave us already? Are you meaning for the whole business or just in terms of memory? For the whole business into August.
spk09: Well, I think that broadly demand across the sectors is doing very well, driven by different dynamics. When you look at IPS and primarily Fenwood Computing and Fenwood Edge, Things like edge computing and IoT are certainly catalysts in the front of the business, but in the back end, we're paying in computing, offering strong growth. It's driven primarily by AI initiatives at many of our customers, and some of them are on early stage development, and some of them are actually rolling this out. But the dynamics on the HPC sector around AI is very strong. and traditional kind of workload optimization, workload efficiency in many application sectors around HPC are continuing to be strong. So we're on the IPS platform. It's primarily Penguin, Penguin being driven by AI and workload performance management. On the memory side, as you can see from the broader indicators, high performance computes, in-memory computing, storage, enterprise storage, just a number of different trends that are driving for higher memory consumption, both in the cloud and data center and hyperscalers. And we're starting to see new market opportunities in that way. And so you cover that with pretty good economic situation, notwithstanding the COVID situation. implications to Brazil, but the economic indicators in Brazil are largely favorable. GDP is good. Inflation is generally in hand. Unemployment is, you know, pretty standard in the range that it normally operates. You know, the currency is pretty strong. So Brazil economic indicators are good, and so servers and IT spending in Brazil are positive. So you've got that coupled with new memory applications in the specialty business. So you've got IPS and memory. And then, of course, as I mentioned to your first question, is the CRE-LED business. Just demand across our sectors is relatively robust, and I think that's a phenomenon that's kind of over the last nine months or so that we've seen strengthen, and we think there's more growth from here.
spk06: Great. Congrats again, Gus.
spk09: Thanks.
spk01: Next one on the queue, we do have Brian Chin from Stifo. You are now live.
spk02: Hi there. Good afternoon. Congratulations on the results, and thanks for letting us ask a few questions. Maybe first on gross margins, very good sequential improvement, clearly. Are the improvements here in memory, but particularly in LED, sustainable, or is this a little bit above trend line based on the current progress you're making on outsourcing and the conversion to Sapphire wafers?
spk09: Well, I think there's improvement in front of us still. I think that we would kind of suggest that we are gaining some momentum here from the demand picture I just painted. In addition, some operating efficiencies that we're gaining across all of our businesses. with the exception, as Ken called out on his comments, relative to in-quarter IPS gross margins, which were down a little bit due to mix. But broadly speaking, our mix was favorable. Our operating efficiency and transformation at Cree has been successful in terms of where we were plan on plan. And so to combine that with, again, mix in pricing benefits, It showed the strength. We think there's improvement from here, but we think it's more incremental than we just experienced in Q3. And so I'll let Ken talk to that in a second. And on the memory side, you know, good margins, but I think our biggest opportunities in memory are in these new market opportunities that have been in development for some time and they're starting to get traction. So we think memory margins from here can improve as well, primarily and especially we think Brazil is more of a kind of a flattish to slightly up improvement from here. But broadly speaking, we think memory can improve, LED can improve, and we were pretty confident on the IPS side that it will improve from Q3, just given we're forecasting a better mix of services on a go-forward basis. But, Ken, any comments?
spk04: Yeah, hey, Brian, thanks for the question. So if we look at the Q3 margin profile on a non-GAAP basis, if you recall, we guided from 19% up to 21%. So we did exceed that. That was driven by a couple of factors, one of which is the performance of LED solutions or pre-LED solutions. which had very good margins on a non-GAAP basis, 29.6%. So higher than what we were expecting. That helped drive that outperformance. As we look into Q4, we're seeing some nice trends overall. So Mark highlighted some of those trends within those three segments, memory solutions, IPS, and Cree LED. That should drive us to that range of 22 to 24% gross margins overall. I would also like to just highlight one item. As we move from Q3 into Q4, within our memory solutions group, we have a logistics business where historically we've taken revenue on a net basis. There is one customer however, that we are migrating or we have migrated now from a gross basis to a net basis, this has the effect of a couple fold. So one, as we look at Q4, this is already baked into our guidance. If you looked on an apples to apples basis, Q4 versus Q3, our revenues would be at midpoint of guidance close to $490 million if we took that customer on a gross basis. But we have now moved that customer to a net basis, and that's embedded in our guidance range of $440 to $480 million. The other piece that does – flow through the P&L is the fact that on a gross margin basis, by taking that one particular customer on a net basis, the margins do improve a bit, and that's why we feel fairly comfortable with this 22% to 24% non-GAAP guidance for Q4.
spk02: Okay, got it. So if I heard you correctly, it's sort of like a $30 million at the midpoint benefit benefit uh i guess reduction in the fiscal 4q revenue can you quantify what the margin impact was then associated with that yeah it is about uh in that 70 to 100 basis points benefit as we move uh into q4 from q3 okay okay i appreciate that the um you know just a couple more questions but just going to ips Undoubtedly, you're tracking a strong growth year here in fiscal 21. But Mark, curious, even the IPS business can sustain double-digit growth coming out of such a strong year in your fiscal 22. And I guess with that, are you already building any sort of meaningful backlog that's shippable in the next fiscal year?
spk04: I'll comment and align to what we outlined at the analyst base. We said on a longer-term basis we believe we can sustain a double-digit type of CAGR for that business. Any given year, we're not providing guidance for 2022, but we do have good backlog as we head into Q1. Obviously, we'll have to see what the global economy looks like in 2022, but that business continues to have good momentum. If we looked on a quarter-to-quarter basis or year-over-year basis, strong momentum, especially on the commercial side of that business.
spk02: Great. And a real last quick one, just on cash flow, really good operating and free cash flow generation in the quarter. Like I said, the higher expected revenue levels in fiscal 4Q, do you think the free cash kind of is around similar levels? Thanks.
spk04: Yeah, I would expect as we look at the free cash, or you can look at an EBITDA maybe as a proxy, EBITDA minus CapEx, we would expect equivalent type of free cash flows or slightly higher based on the guidance Q4 to Q3.
spk08: Great. Thank you.
spk04: Thank you.
spk01: Next one on the queue is Sidney Ho from Douche Bank. You're now live.
spk03: Great. Thanks for taking my questions, and congrats on the solid results. A couple of questions on the memory side. Last quarter, you said mobile units in Brazil was not a source of upside and notebook SSDs should benefit in fiscal 22. Are you starting to see an acceleration of these drivers now that it seems like retail sales are improving, COVID cases are declining? And it sounds like you're seeing a little bit of high ESP as well. My follow-up to that is, I guess, related to the specialty memory. You talk about good progress in data centers and some recovery in industrial last quarter. Curious how much of that business would you say is tied to the traditional IT enterprise spending, which I would think is also starting to recover. I have a follow-up question on that. Thanks.
spk09: Well, I'll start and let Jack jump in. I think to your second question first, Definitely starting to see the traditional customer base increase demand. Of course, as you know, there's a, you know, memory is one of the categories I think are probably in tight supply relative to the broader supply conditions. But the demand profile that we're seeing is pretty strong in terms of our core customers, as well as some of the new markets that we highlighted. Well, vis-a-vis Brazil in your commentary there, when we're talking about SSBs in Brazil, In fact, there is a growth dynamic going on in the category. It's a much more earlier stage of penetration in terms of the notebook and desktop and server world in Brazil. What we're really focused on is in-country manufacturing to take advantage of the infrastructure we have there, leverage our capital in place to drive the benefits of the incentive system to buy and award points to SSD purchases where we think we can drive growth in the category as the largest memory player in Brazil. Jack, any commentary to you around the question?
spk07: Yeah, I mean, in Brazil, I think the real growth in Brazil right now is really units up in the PC, notebook, server area for Brazil. Mobile's been fairly flat quarter to quarter, so we're seeing growth in that part of the business down in Brazil. And ASP's having up a little bit, but it's more of the unit growth driving Brazil in that area.
spk03: Okay, that's helpful. My follow-up question is on the supply chain. Can you mention your guidance contemplated some supply constraints in there? Can you give us a little more color which businesses will likely be more impacted? How are you thinking about the impact of these new lockdowns in Asia that may have on your memory or intelligent platform solutions? I think those are the two things that are manufactured there. Is that more related to availability of parts or is more COVID-related gross margin headwind that you're thinking about? Thanks.
spk09: Let me just make a comment before Ken contributes here. The nice part about the businesses we're in, it's obviously an essential business. Our Malaysia and Brazil operations have been up and running. We're being very careful, obviously, but they're running at the capacity we need. And a lot of our manufacturing assets, as you know, are here based in the U.S. So from an operational standpoint, we're not being hit so much as it relates to being able to produce and supply. I'll let Ken deal with the second part of the question.
spk04: Sure. And so if we look at our inventory, and we talked a little bit about this on the previous earnings call, the inventory did go up this quarter for really two reasons or three reasons. One, we included Cree LED. So that was a large portion of the increase from Q2 to Q3. And then the second factor, which we talked about on the last call, was the fact that if we were able to find inventory to secure parts for our revenue, not only in Q3 but Q4 and into Q1, we were going to take that opportunity to secure that inventory. So as it relates to our businesses, the areas, that we saw growth excluding the Cree acquisition and the incremental inventory for that was primarily around our memory business. And that constituted probably two-thirds of the increase excluding Cree in terms of the growth quarter to quarter in our inventory. And that was just to secure supply as we look at both the Brazil and specialty businesses.
spk01: Great. Thank you. Next one on the line is Raji Hill from Needham & Company. You are now live.
spk05: Yes, thank you, and congrats on great momentum across the board. Very impressive. Mark, I was wondering if you could talk a little bit about the growth you're seeing in some of these end markets. When you break down mobile network and server storage, it looks like that the server and storage business more than doubled year over year in terms of growth. And then you're seeing strong growth in industrial and defense markets, And at the same time, mobile PCs continues to grow. But I'm wondering if you can maybe comment on server and storage and industrial, because those seem to be kind of the outliers on an end market basis.
spk09: Sure. Really, when you think about it, if you break up server and storage, which only from a perspective of what's the catalyst of each, obviously there's an integration of those two laws for data center IT growth. But On the storage growth, just the amount of data being stored and generated is staggering, continues to be, you know, kind of something that's forecasting broader sector growth. And that's just true for SSDs as well, even if you look at the hard drive numbers and what the likes of Seagate and Western Digital are forecasting. So the data explosion in the market is just validated and we think it continues on the storage piece. On the server piece, in terms of the hyperscale and cloud businesses as well as edge computing and then core to edge architecture, both those markets, both in terms of the applications as well as the investments in broader enterprise networks are leading to pretty high numbers, high growth numbers there. And the content in those systems is relatively strong. Beyond that, beyond just the kind of the enterprise architecture of benefits of a cloud implementation or hyperscale model with core to edge, you also have these catalysts of data analytics and AI and machine learning. just a lot of investments at the enterprise corporate level, as well as in the federal sector, driving kind of this combined demand profile that leads to pretty good growth in both the server and storage space, as you acknowledge.
spk05: And just another question on the revenue growth. If you look at the IPS business, it grew 57% year over year, off a very tough compare in May of 2020, which that business grew 70% year over year. And so pretty strong growth off tough compares. I'm wondering maybe if you could characterize what specifically you're seeing in terms of customer trends And also, could you talk about, you know, the change, the shift in the business model that you've developed to focus more on services? How has that helped that business as it progresses forward?
spk09: Sure. The catalyst really is really kind of the answer I just gave you, because in that business, we're selling kind of compute capabilities, and we're also selling solutions around that platform, as well as storage. AI, data analytics, workflow, optimization, allocation, provisioning, just all the traditional HPC platform capabilities, as well as custom design, edge applications. It's all very favorable. I think the more important thing that we're starting to see an increase in is what you said relative to services and our role. When you think of what the larger enterprises are investing in in terms of capabilities, they're looking for a partner like Penguin to be their outsourced integration solutions provider. And what I mean by that is, as far as designing systems at the hardware and operating system and security level, they want an expert to come do that for them. They prefer to invest their limited capital dollars on application layer capabilities. And so what we're starting to see is things like design, deployment, and post-sale maintenance and service, those are all things that, quite frankly, our largest customers would prefer that we do. And that dynamic, I think, has changed maybe slightly accelerated by covid when people didn't have the right resources to bring in all that in-house they prefer a hardware os kind of layered software partner like a penguin to do that job for them in a kind of an advisory consulting way and some of my last question ken you know great job on the gross margins in the quarter and congratulations on the guide
spk05: to 23%. But a question on the volatility in the IPS segment. I know you touched upon it. But the gross margin for IPS was down about 620 basis points quarter over quarter. It's going to go back up again in Q4. How do we think about the components of mix of services and hardware? What is the percentage of revenue of services and hardware? How does that vary quarter by quarter? Is there some sort of seasonality in services and hardware quarter to quarter as we kind of try to model that segment going forward.
spk04: Thanks. There is seasonality in that overall business because we do have federal-related business versus commercial, and federal does have some incremental sales as we head into our fiscal Q1 typically. But when you think about software and services for that business, there's longer-term software and service, like managed services. But there are also services as we install these large systems into our customers. And that's where there can be some lumpiness. So as we looked at Q3, I would say more hardware-oriented sales in Q3. As we look at Q4, there is going to be some incremental services. That's why we highlighted we would expect that the margins for IPS would uptick Q3 to Q4 because there will be some installation-related services for those systems. Overall, on a long-term basis, we highlighted that business can be in that 25% plus or minus, but longer term at the analyst day, we're looking to drive that business towards 30%, 30% plus on a long-term basis as we add more services and software into that business.
spk01: Right, so again, if you would like to ask a question, please press star 1. Next one on the queue, we do have Kevin Cassidy from Rosenblatt Securities. You are now live.
spk08: Thanks for taking my question, and congratulations on the great results. And I'm going to ask more about the software services also. Just, you know, that's great. It's moved up. It's growing faster than the group overall, going from low teens to 20%. But in your funnel of sales, you know, coming in, do you expect this to continue to outgrow and is this going to be 50% of the group's revenue? Maybe just to understand how many opportunities you're looking at for this.
spk09: I think, Kevin, I think that there's still some growth as a percentage basis. I stopped short of saying 50%. I think more of what you're going to see is the timing of these deployments and the mix, as just Ken commented on. But I think it's reasonable to think that we can get this higher than 20%, maybe in the mid to high 20s over the next 12 to 18 months.
spk08: Okay. And, you know, Diane, that's interesting.
spk09: rename the products the edge products of penguin edge are how many of the opportunities lump in the edge along with the core yeah I don't know that I have the right breakdown per se by opportunities to track it like that but I would just say roughly think about the revenue mix somewhere in the So I think probably it's like two-thirds, one-third, 30%, 70%, 70% high-performance computing, penguin computing, 30% penguin edge.
spk08: Okay. Good. That helps. All right. Congratulations again. Thanks. Thanks, Kevin.
spk01: If there are no further questions on the keyhole, I'll turn it back to the presenters.
spk09: great well again we'd like to thank you all for joining us on today's call while we're very excited about the results we announced today we continue to be focused on our strategy and continue to focus on delivering great results in q4 have a great day thank you this includes today's conference call thank you for participating you may now disconnect
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