This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Ladies and gentlemen, thank you for standing by, and welcome to the SGH second quarter fiscal 2022 earnings call. All lines being placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Suzanne Schmidt, you may begin your conference.
spk00: Thank you, operator. Good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss SGH's second quarter fiscal 2022 results. Joining me today are Mark Adams, Chief Executive Officer, Jack Pacheco, Chief Operating Officer, and Ken Risvey, Chief Financial Officer. You can find the accompanying slide presentation and earnings press release for this call on the investor relations section of our website. we encourage you to go to this site throughout the quarter for the most current information on the company, including information on the various financial conferences we will attend. I would also like to remind everyone to read the use of forward-looking statements notes that we have included in the earnings press release and the earnings call presentation. Please note that certain of the 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 also discussed 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 Risby, CFO, will review the financials and forward guidance, after which we will take questions. Mark?
spk04: Thank you, Suzanne, and thank you to all who have joined us today. We delivered another strong operating quarter at SGH. with total second quarter revenues of $449 million above the midpoint of our guidance range, non-GAAP gross margins at the high end of our guidance range at 26%, and non-GAAP earnings of 87 cents per share, which also came in well above the midpoint of our guidance. As a reminder, these per share results reflect the two-for-one share split that became effective at the beginning of February. In addition, we made progress in the following areas during the quarter. We strengthened our balance sheet, return loan refinancing, increasing our liquidity, and extending our overall debt maturities. We announced a $75 million share repurchase authorization today, demonstrating confidence in our business and the growth opportunities that we see over the long term. And we continue to improve our corporate governance with the appointment of Penny Hersher as chair of our board of directors. And we now have a fully independent board, except for me and my role as a CEO. Each one of our businesses, Intelligent Platform Solutions, Memory Solutions, and LED Solutions, delivered solid results despite the continuing macroeconomic challenges, including the supply chain constraints facing all companies, the impact of operating in COVID times, and of course, the conflict in Eastern Europe. As many of our peers have also reported, supply chain challenges remain with us, and if anything, have heightened from a few months ago. That said, I am very proud of the operational focus and tireless work of our supply chain teams that set SGAs apart, and importantly, place us in a position to drive continued support for our customers, as well as enabling us to deliver strong results for our shareholders. Let me turn to a review of each of our businesses, starting with Intelligent Platform Solutions Group. or IPS, where revenue came in at $82 million for the second quarter. As we've stated in the past, the quarterly level of business can vary due to the timing of deployments of various projects, and this was the case in Q2. That said, the business is performing very well. With the first half fiscal 2022, IPS revenue just over 200% compared to the first half of fiscal 21. An important part of this growth is our investment in services. Second quarter services revenue grew by 41% compared with Q2 of the prior fiscal year. Overall, services represented approximately 26% of IPS revenue in Q2. IPS continues to expand customer engagement across the ultra-scale government and oil and gas market segments. Specific to the ultra-scale market, Penguin Computing announced its role in providing both optimized AI research super cluster, or RSC. In its final build-out expected for mid-2022, The RSC is expected to utilize more than 16,000 NVIDIA GPUs and one exabyte of storage, which Meta believes will make it the fastest and largest AI supercomputer in the world. The RSC platform was designed to ensure performance, availability, data integrity, and managed security, all critical elements of an AI-optimized infrastructure. This engagement with Meta has been developed over several years and is a testament to Penguin's ability to address the unique needs of significant high-performance and AI compute application environments, highlighting our ability to provide a comprehensive solution of optimized hardware, software, and ongoing services. We also continue to invest in the edge a strategic segment of our business where we've experienced success in the telecommunications market as well as the government sector. We will continue to evolve and grow this business as part of our overall IPS strategy. As we think about our third quarter, component-level supply chain constraints are moving a portion of our expected delivery date out from fiscal Q3 into fiscal Q4 and in certain cases, into our fiscal 2023. As these constraints are industry-wide, this revenue shift is more of a timing issue and not reflective of our customer demand or loss revenue. This will be contemplated as part of our guidance for Q3 that Ken will provide. We also recently announced a new umbrella brand for IPS called Pain One Solutions. our customers will now identify all aspects of ips under the single brand name and we will leverage this new brand to showcase the full breadth of our capabilities we will continue to use the name penguin computing when referring to current hpc products including the servers storage and our data center support we will use the penguin edge name to refer to the new edge-related solutions and legacy embedded and wireless products. The new Penguin Solutions brand also reflects the direction we are taking to innovate and scale our offering, delivering solutions and services that span the continuum of edge, core, to cloud. Overall, we see growth in our new business funnel both in terms of commercial and federal business by expanding existing engagements and focusing on new customer acquisitions. We are expecting a strong second half of fiscal 2022 and continued momentum as we head into 2023. Now turning to LED Solutions. Our LED Solutions Group, which operates under the Cree LED brand, had another strong quarter of operating performance. Revenues were $107 million in Q2, with product revenues up approximately 5% when compared with Q2 fiscal 2021, when this business was still part of Wolfsby. Year-over-year revenue growth is being driven by customer wins with our high-brightness products into the video, architectural, and landscape specialty lighting markets. We continue to execute on our manufacturing transformation plan, which includes the transition from silicon carbide to sapphire wafers, and from a captive manufacturing model to an outsourced capital light model. We expect this transition to be largely completed by calendar fourth quarter. On the product front, the team is delivering innovative application optimized LEDs enabling a variety of lighting designs while achieving the best overall system value. We are seeing good traction with our CV94D products in the video display market, as well as new design wins for the horticultural market, indoor sports lighting, and road signage applications, each representing specialty areas of focus where our technology and product offering differentiate us versus our competitors. It has now been one year since the acquisition of Cree LED, and I continue to be impressed with the team's focus and ability to drive improvements in their product roadmaps, customer engagement, and operational excellence.
spk01: With Cree LED's long history of innovation and continuously improving technology in the focus of high-powered general lighting, mid-powered general lighting,
spk04: We believe the LED Solutions Group in the coming year. In our Memory Solutions Group, operating under the Smart Modular brand name, revenues totaled $250 million, which was up 9% compared with the prior quarter and up 19% compared with Q2 of the prior fiscal year. was driven by sales of our core specialty memory offerings, such as DDR3, DDR4, and Flash, as well as a favorable mix of higher-density products, such as our DDIMM product for the high-end server market. With legacy DDR3 and DDR4-based products, we are positioning ourselves
spk01: to offer next-generation products optimized for DDR5 and next-generation flash-based, controller-based memory solutions.
spk04: We are working closely with our key customers in the development of new products for data center and cloud applications, such as NV-CXL and CXL add-in card solutions. We were recently selected as a validation partner for a CXL E3.S memory module by a major semiconductor company for their next-generation CPU, another proof point in the investments we are making in advanced memory solutions. For applications at the edge of the network, We are seeing opportunities for specialization in terms of ruggedness, low power, and smaller form factors, all of which play to our strength of high mix, low volume differentiated solutions. Our custom encrypted SATA product in a USB form factor is expected to ramp from fiscal 23 and expands our flash storage capabilities targeted for network infrastructure equipment and systems. In Brazil, we have completed the transition to our Manaus facility, where we assemble our system-level products, including our new SSD product line, which we expect to ramp by the end of this fiscal year. Our results for the second quarter clearly demonstrate the benefits of our diversification strategy. And while we continue to see supply chain constraints similar to other businesses, and the electronic supply chain, we continue to meet the expectations of our customers and are optimistic about our ability to not only expand our footprint with existing customers, but also to grow our business with new customers across all three lines of our business. At this time, I'll hand it over to Ken for a more detailed review of the financials and our guidance for next quarter. Ken?
spk07: Thanks, Mark. I will focus my remarks on non-GAAP results which are reconciled to GAAP in our earnings release tables. In addition, my commentary reflects the two-for-one share split in the form of a dividend that took effect in February of 2022. The second fiscal quarter of 2022 is the eighth consecutive quarter of year-over-year growth for SGH, demonstrating how our strategy continues to yield positive results. A year ago, our Q2 sales were just over $300 million and our non-GAAP gross margin was 19.5%. In the second quarter of 2022, sales came in at $449 million and non-GAAP gross margin was 26%. We see tremendous opportunities ahead for SGH to deliver advanced technology solutions for our customers across all three of our businesses. Now let me turn to our detailed results for the second fiscal quarter of 2022. We reported another strong quarter. Net sales were $449 million, a 48% increase year over year for the second quarter of fiscal 2021. In addition, non-GAAP gross margin came in at 26%. At the high end of our guidance range, and non-GAAP diluted earnings per share was 87 cents for the second quarter, above the high end of our guidance range. Our 48% year-over-year SGH revenue growth was helped by the incorporation of Cree LED into SGH. Excluding Cree LED, our revenues grew 13% year-over-year, driven by strength in our memory solutions business. For the second quarter, IPS had revenues of $82 million. As we have discussed in our previous earnings calls, the IPS business will continue to have quarter-to-quarter variability in revenue and gross margin based on the timing of hardware, services, and software in every given quarter. That being said, the first half of 2022 for IPS was very strong with sales over $200 million and a growth of 33% from the same period a year ago. Our LED Solutions Group had revenues of $107 million in the second quarter, which was in line with our expectations from last quarter, and product sales were up approximately 5% when compared to the year-ago quarter, when this business was still a part of Wolfspeed. Our Memory Solutions Group had revenues of $260 million in the second quarter, 19% higher than the second quarter of the previous fiscal year, and was higher both for our specialty memory and Brazil businesses. Non-GAAP gross margin for SGH in the second quarter was 26%, up from 19.5% in the second quarter of fiscal 2021. Non-GAAP operating expenses for the second quarter were $59.5 million, up approximately from $32 million in the second quarter of 2021. Operating expenses were up primarily due to the inclusion of LED solutions and continued investments in our memory solutions and IPS businesses. In addition, operating expenses benefited in the second quarter of 2022. from $6 million in financial credits in Brazil. This helped offset our Brazil R&D spending, which is required to realize this credit. This credit was set to expire in January of 2022, but the law enabling this credit was extended through 2026. We do, however, expect the benefits from this credit to be reduced going forward. in part due to some of our production moving to our Manaus facility. As a result, we currently anticipate approximately 2 to 3 million of credits benefiting us in our fiscal third quarter. Non-GAAP diluted earnings per share for the second quarter of 2022 was 87 cents per share, up approximately 100% from 44 cents per share in the year-ago quarter. Adjusted EBITDA for the second quarter of 2022 was $66 million, or 14.7% of sales, compared to $31 million, or 10.2% of sales in the second quarter of 2021. Our breakdown of net sales by end market for the second quarter of 2022 was as follows. Mobile and PCs was 23%. Network and telecom, 11%. Servers and storage, 15%. AI, data analytics, and machine learning, 12%. Advanced lighting, 24%. And industrial defense and other, 15%. Turning to working capital, our net accounts receivable totaled $386 million, compared with $344 million last quarter. Day sales outstanding came in at 45 days, up six days from last quarter. Inventory totaled $334 million at the end of the second quarter, up from $318 million at the end of the prior quarter. This growth was driven primarily by higher inventory for IPS as we prepare for builds in the second half of the year. Inventory turns were 8.1 times in the second quarter versus 8.6 times in the prior quarter. And consistent with past practice, accounts receivables, days outstanding, and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $789 million and $676 million respectively for the second quarter. As a reminder, the difference between gross revenue and net sales is related to our logistics services business, which is accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as net sales. During the second quarter, we also completed a refinancing to strengthen our balance sheet, extend our debt maturities, and add to our liquidity. The refinancing was completed via a $275 million term loan aid facility and a $250 million revolving credit facility, with the net proceeds from the term loan used to retire approximately $160 million of debt, including the seller notes for the CREE LED acquisition and the outstanding amounts under our ADL. Cash and equivalents. totaled $366 million at the end of the second quarter, compared with $233 million at the end of the prior quarter. Second quarter cash flow from operations totaled $32.2 million, compared with $15.1 million in the prior quarter. With the continued global electronics supply chain constraints, more of our capital has been tied up in working capital over the past year. For those of you tracking CapEx and depreciation, CapEx was $7.4 million in the second quarter and depreciation was $10.2 million. Before turning to our guidance, I wanted to discuss the $75 million share repurchase authorization we announced today. This capital allocation decision reflects our strong balance sheet and our expectations for continued cash flow growth. First and foremost, we will continue to invest in our businesses as we see significant opportunities for further organic growth in each of our three business segments. Second, we will continue to review and seek acquisition opportunities for further scale and diversification in a disciplined manner. which we believe can provide strong shareholder returns, as we have seen with our most recent acquisition of Cree LED. And finally, the share repurchase authorization provides us flexibility to return capital to our shareholders in an opportunistic and price-sensitive manner and to utilize the volatility we have seen in the markets and the potential to capture value if there is further divergence between our share price and financial results. Turning to our fiscal third quarter 2022 guidance, we expect that net sales for the third quarter of 2022 will range from approximately $435 million to $475 million, up slightly at the midpoint from the second quarter and impacted by some of the supply chain constraints we highlighted earlier. Our GAAP gross margin for the third quarter is expected to be between 23 and 25 percent. Non-GAAP gross margin for the third quarter is expected to be approximately 24 to 26 percent. Our non-GAAP operating expenses for the third quarter are expected to be in the range of $60 million to $66 million. Gap diluted earnings per share for the third quarter is expected to be approximately 35 cents, plus or minus 8 cents. On a non-gap basis, excluding share-based compensation expense, intangible asset amortization expense, debt discount, and other adjustments, we expect non-gap diluted earnings per share will be approximately 75 cents, plus or minus 8 cents. Cash capital expenditures for the third quarter are expected to be in the range of $12 to $16 million. Our GAAP diluted share count for the third quarter is expected to be approximately 57 million shares based on our current stock price. Our non-GAAP diluted share count is expected to be approximately 54 million shares as it includes the benefit of our convertible note capped calls. Our forecast for the third fiscal quarter of 2022 is based on the current environment, which contemplates the current constraints in the global supply chain. Please refer to the non-GAAP financial information section and the reconciliation of GAAP to non-GAAP measures tables in our earnings release for further details. Operator, we are now ready for questions.
spk09: At this time, I would like to remind everyone, in order to ask a question, please press star, followed by the number one on your telephone keypad. Your first question comes from the line of Brian Chin with Stifel. Your line is open.
spk02: Hi there. Good afternoon. Thanks for laying at the desk. A few questions. Maybe to kick things off, can you, I guess, provide what your fiscal third quarter revenue guide would have been a word not for the constraints, and can you also relay sort of which businesses are most affected and which are the revenues, and what kinds of revenues are impacted all the way out to kind of fiscal 1Q?
spk07: Sure. Thanks for the question. This is Ken. Yeah, I think similar to other companies in the supply chain, we are impacted by the constraints that folks within the electronic supply chain are seeing. So if you look at our business specifically, I would say we're seeing that within our overall IPS segment where some of the constraints have pushed out sales, as we've talked about, into Q3, into Q4, and even into 2023 in certain instances. Now, I just remind you, a lot of the business that we do for IPS is very custom in nature. So it's not a loss of sales. It's just merely a push out into a future quarter. Now, specific to one we've talked about in the past around some government orders which totaled about $68 million in size, we announced that several months ago. That specific order, as an example, instead of happening in that Q3 and Q4 timeframe, is now more likely to happen in the Q4 and into Q1 timeframe, albeit we still need to lock down some of the components related to that product. So that is an example, Brian, of movement that can occur
spk04: given the constraints we're seeing. So, Brian, this is Mark. I would add also that that's an example that Ken used. I think we've seen a less dramatic but still noticeable impact across the other businesses. and that's reflected in Ken's guidance. I think the team did a great job in kind of supporting our customers, but you've got to sense the scale of what could have been had we had clear selling.
spk07: And that being said, I mean, we had a great quarter, a great Q2, if you look at the performance across overall SGH. And if you look at the guide for Q3, we're happy given the constraints we've talked about. The backlog overall as we look out into Q4 and even into 2023 looks good. So, you know, we're very excited about the business and where we are today.
spk02: Got it. Got it. Understood. And just, you know, relative to the overall guide in the business, is it right to kind of rank order the segments, maybe some growth, you know, highest growth in memory, maybe some growth in LED and then IPS sort of flattish, maybe down a little bit? Is that sort of the right way to think about it sequentially?
spk04: Sequentially, maybe, but overall growth opportunity, I wouldn't read too much into that trend either because I think our funnel in IPS continues to remain robust. and memory has been a pleasant surprise at the rate it's growing. We thought it was a growth in the kind of mid to high single digits, and as Ken highlighted, memory was up 19% versus the same quarter of 21. We continue to find new application wins, designs in the memory space. And the LED business, as we highlighted, is growing. is up year over year. So I think if you're looking about growth rates per se, I think from just a broad market opportunity, this is probably the grower at the highest rate in terms of market opportunity, followed by memory, followed by LED.
spk02: Sure, sure. Okay, that makes a lot of sense. Maybe lastly, just to close out with Ken, and just more of a financial model question, The extension of the R&D credit, $6 million benefit in fiscal 2Q. You're talking $2 to $3 million benefit in fiscal 3Q. Is the right way to think about that than sort of a $3 to $4 million sequential increase in R&D, It's some of that budget that you need.
spk07: Brian, that's one way to think about that. And that's embedded in our OpEx guidance. And part of the reason that you see that our guide for OpEx is in that $60 million to $66 million range was as a result of lower credit in Brazil for R&D.
spk02: Yeah. I was going to ask, Ken, is there another offset you're getting somewhere else in the P&L, the sort of – counterbalance sort of the increase, sequential increase in the R&D?
spk07: All of that is embedded in the guidance that we gave, Brian. So if you look at Q3, that is factored in. There are some benefits in terms of being able to manufacture in Manaus. That's a free trade zone, so there are some benefits there. Some of that is on the COG side, but all of that's baked into our overall guide as we look at Q3. Okay, great. Thanks for the help.
spk02: Thanks, Brian.
spk09: Your next question comes from the line of Tom O'Malley with Barclays. Your line is open.
spk03: Good afternoon, guys. Thanks for taking my question. I just wanted to dive a little bit more into the outperformance in the memory solutions group. You noted on the call you saw sequential revenue higher for both specialty and Brazil, but could you dive in a little more there about where you saw the strength, because it did come in a bit stronger than you expected. Sure.
spk07: Yeah, so, Tom, great call out. So if we look at our overall memory business, as Mark highlighted and I highlighted earlier, we saw very strong sequential growth quarter on quarter. That growth was, you know, in that 19% range. And actually, if I look sequentially for both of the businesses, meaning the Brazil business and the specialty business, both had very strong growth quarter on quarter as well. So they were in a very similar range if I look at the sequential growth Q1 to Q2 of this year.
spk03: Helpful. And then obviously in the environment we're in right now, you have inflation moving higher, consumer discretionary spend may be at risk in certain areas. Could you just talk about how you're handicapping the Brazil business? When you look out, you know, embedded in your model and what you said at the annual stage, is there anything different about the way you've thought about that business as a long-term grower? And I mean, the Memory Solutions Group, just with the change in the macro, particularly in Brazil?
spk04: You know, nothing that I would suggest is a radical change. I think as you're aware, we have a brand-new product category in Brazil launching by the end of our fiscal year in solid-state drives. We continue to be the largest player in broad-memory semiconductor solutions in Brazil. Of course, you know, if macroeconomic winds go sideways from here, you know, there can be an impact. But, you know, we're looking more at kind of just how to grow these solutions and opportunities. That was a lot of the basis for our move to Manaus. And, you know, we think there's a good growth from here. So, sure, if there's a massive demand shock to the system, you know, We'll have to think differently, but we haven't seen significant headwind yet in our business, and we're not anticipating that in the short term.
spk03: Longer-term growth rates, but you guys have been helpful giving color in the past on sequential growth rates. Could you just offer any detail on the sequential growth?
spk04: I'm going to let Ken take the actual numbers. I can comment on it a little bit. As I said, Ken gave an example of –
spk01: some of the supply chain impact on our Q2 Q3 numbers and that certainly impacts kind of sequential growth rates.
spk04: My commentary was around the demand piece of that equation. From an upside growth from here, we continue and seeing strong growth in the memory solutions piece as well, and just great overall operating performance and gross margin expansion in Cree LED. It's just been a good recipe for outstanding results. And so I'll let Ken talk about the actual data behind that, bullish about the business as we see it?
spk07: Yes. So as we look at our guide, it is a midpoint up a bit from Q2 levels to that 455 range at midpoint. And the way to think about that would be the memory business overall relatively flat, plus or minus a bit versus Q2. If we think about the LED business, it's also relatively flat, and we would expect that that IPS business... Your next question comes from the line of Kevin Cassidy.
spk06: Thank you for letting me ask a question, and congratulations. Congratulations on the great results. Just as we're talking about IPS and Mark, I think you mentioned that the opportunity funnel is growing. Can you say, you know, can you compare it to last year? Is it up, the opportunity is up 20%, 50% or?
spk04: What's driving that demand? I guess the best index I can give you is what we just completed. And that's just data. That's just factual that we first half fiscal 22 is up, I think it was 33% year over year. And, again, we continue to see not only new opportunities but growth in in existing customer relationships. And why that's important, because I think I explained in the past that the transition from a development platform to a production platform is significant in terms of the scale of relationships and the overall size of the business opportunity with our customers. And that's going to be meaningful as we kind of continue to expand this business. And as Ken highlighted, We remain very confident in our opportunity to deliver growth, and I would say that just some of these supply chain issues are more timing in nature. And, by the way, we've talked about that in terms of the timing of deployments. So, you know, we're very happy with the growth in the first half, and we're very bullish about the opportunity in IPS as we head into the second half.
spk06: Okay, great. And maybe to, you know, there's a lot of questions I get from investors about inventory building in customers and in the channel, but you're showing great growth in your memory business, and especially specialty memory. That's custom, but would any of your customers be building inventory for custom products?
spk04: Yeah, I think we're very careful with that, and I understand the question. It's a really good question. It's less of an issue in IP.
spk01: Yes, given the nature of our agreements and the custom nature of the products developed for them, not all of them, but many cases, product design, not necessarily at the customer, but sole source on a specific design.
spk04: So there's not much double ordering that we're seeing.
spk01: We're kind of working with the customers on this, and quite frankly,
spk04: I think it's a different, this is much different than a memory cycle in the past. This is a broad electronic cycle across the whole supply chain. So I think people are more, these orders are non-cancellable.
spk01: So I think we're in pretty good shape on the memory side of the house. And, of course, LED on the foundry model, outsourced inventories as well.
spk04: What you're seeing on our balance sheet, and Ken can comment on this as well, is that, you know, given our supply side, we can try to position ourselves so we can deliver and continue to grow the business as we have in the past.
spk07: Yeah, so, Kevin, on that, when you think about some of the demand, specifically, these are large system orders.
spk01: It can be $2, $3, $4, $5, $10 million plus in size.
spk07: And so from a supply chain standpoint, we just need to be able to order all of those components in part that make up that system. And so that's where we are, as Mark just highlighted, being a bit strategic just to make sure that we can continue to meet the customer demands and the timelines we're committing to our customers.
spk06: Okay, thanks for that clarification.
spk01: Thanks, Kevin. Thanks, Kevin. Your next question comes from the line of Sidney Ho with Deutsche Bank.
spk09: Your line is open.
spk08: Thanks for taking my question. Maybe one more question on IPA expected.
spk01: I hear you that you were supply constrained, but what would it be without IPA? I know you talked about IPS probably growing a little bit in the next quarter.
spk08: How are you thinking about the growth rate for the full year, counting the 22, especially given that some of the contracts, like the government contracts got pushed out from fiscal three to basically the second half of 22? What is the right number?
spk07: Yeah, fair enough. So I think a couple of things. So even as we look at Q,
spk01: Q2 and Q3, there were some pushouts. We talked about what was the specific number.
spk07: It is in that neighborhood, I would say, $15 to $20 million of movement that moved from Q2 into Q3.
spk01: In reality, it's Some of that, just because of the constraints, can move into Q4.
spk07: I highlighted one example of that, where it's a large order that has pushed out, not because of anything except for being able to get all of the components together for that complete system. So that's the reality that we're in. We've got to call it how it is. But, you know, as we've talked about that IPS business, you know, good demand, good backlog as we look out into, you know, back into Q4 and even into the beginning of next year. And so hopefully we can – the supply chain will ease a bit and we'll be able to fulfill those demand trends.
spk08: you don't get all the gross margin by segment anymore, but can you give us some qualitative comments as to how gross margin by segment has done in the quarter on a sequential basis? And if you put that mix of software services aside, which business is seeing the most impact from higher logistics costs or input costs, and are you able to offset that with any kind of price increases?
spk07: Yeah, so you're correct. So we do not provide the gross margin specifics quarter to quarter. But if I looked, kind of Q1 did come down a little bit in terms of the margins. You know, IPS was flat to up a bit, and LED was pretty flat quarter to quarter overall for the margins. But we don't provide the specifics in terms of an actual gross margin percent.
spk08: Sorry, the second part of that. Which businesses impact the most from whether higher logistics costs or higher input costs, and are you able to offset that with any kind of price increases?
spk01: Yes, sir. Some of the products, actually, we don't bear those costs in terms of the logistics.
spk07: So those are pass-through costs, essentially. So all of that, when we think about our guidance, we have baked that into Q3 in terms of our overall guidance, both on the margin side and on the cog side to get to our gross margin.
spk01: So those have been baked into our outlook here for Q3. Okay, thank you.
spk09: Your next question comes from the line of Rajiv Gill with Needham & Company. Your line is open.
spk05: Can you mention, you know, the guide is 25%.
spk01: If I look at the, you know, the incremental and then it implies that the gross profit will be down about $3 million.
spk05: despite the fact that revenue is going up by about $6 million. So I know you mentioned kind of lumpiness in IPS in terms with respect to the software service component. But I wanted to kind of give some clarity on kind of the mix effect that you're seeing in the gross margin in the May quarter.
spk07: No problem. So good question. So if we look at the margins from Q2 to Q3, there's a couple of factors.
spk01: One, I would say there is some margin impact on the memory side. albeit very small.
spk07: And then even within an IPS, you've already highlighted it and we talked about it before. And even within the LED business, there's some geographic mix. So depending on where our sales are geographically throughout the world, there can be some mixed benefits or headwinds. This quarter in Q3, based on the geographic mix, there will be a little bit of a headwind. And that gets us to that 25%. plus or minus one point on margins.
spk05: Great. That's helpful. When we're looking, you know, you talked about expectations for a strong fiscal second half, particularly around the IPS business, but then you talked about, you know, 15 to 20 million invested, a little bit vague, saying it could even push into the next fiscal year. So I guess my question is how confident are you in terms of securing in order to meet this demand and this funnel, particularly around these kind of long – and kind of maybe if you could provide a little more detail on where the constraints are with respect to your position and what specific components are you seeing the most acute constraints?
spk01: These specific components, some of these are around the semiconductor supply chain, so I won't name names, but I think you've seen it through others in the electronics industries where there are specific semiconductor chips along with even things like that have out these large systems.
spk07: So we're talking about small components in the scheme of an overall system, but those still have an impact when you're looking to.
spk01: Some of this is also just due to the sequential nature of a deployment. And so if something moves from
spk04: Q3 into Q4, that might be the beginning because we're deploying a system that has to get validated until we go entity or technology beyond that. And so these deployments are not just necessarily within a quarter or one-time event, and the growth of potentially adding capacity to a system might lead to Q4 impacting a Q4 ship and
spk01: By the way, I just want to make sure everyone understands, A, all of this was contemplated in Ken's guidance, and B, the business continues to be robust.
spk04: We're not able to call Q4 yet, as we are still working on.
spk01: We're just being transparent about the supply chain challenges, and We're also being transparent that the demand side looks pretty good.
spk04: Got it. Great. Thank you.
spk09: There are no further questions. I'll turn the call back to Mark Adams for closing remarks.
spk01: Thank you, Operator, and thanks to all of you for your continued interest and support.
spk04: When I started less than two years ago, we committed to delivering on our growth and diversification strategy by focusing on operational excellence.
spk01: ...to the mid-600s to 700 basis points, all of which allows us to deliver strong earnings per share.
spk04: In addition, we are... Delivering on our goal to operate as a best-in-class company from an ESG perspective. Last fall, we delivered our first ever ESG report, highlighting our performance to date and future goals. We've also made great strides in the area of corporate governance, including shifting to an independent board of directors and the naming of Penny as our chair. Our commitment to our shareholders is to make continuous progress and operate SGH as a best-in-class public company. We appreciate all of you for joining today's call.
spk09: This concludes today's conference call. Thank you for joining. You may now disconnect.
Disclaimer