Ladies and gentlemen, thank you for standing by, and welcome to the SGH Second Quarter Fiscal 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Suzanne Schmidt, you may begin your conference.

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 '22 results. Joining me today are Mark Adams, Chief Executive Officer; Jack Pacheco, Chief Operating Officer; and Ken Rizvi, 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 the 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 note 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 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 Rizvi, CFO, will review the financials and forward guidance, after which we will take questions. Mark?

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 $0.87 per share which also came in well above the midpoint of our guidance. As a reminder, these per share results reflect the 2-for-1 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 with term loan refinancing, increasing our liquidity and extending our overall debt maturity. 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 Herscher as Chair of our Board of Directors, and we now have a fully independent Board except for me in 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 SGH apart and importantly, places 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…

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 2-for-1 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 3 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% and at the high end of our guidance range. And non-GAAP diluted earnings per share was $0.87 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…

[Operator Instructions]. Your first question comes from the line of Brian Chin with Stifel.

Thanks for letting us ask a few questions. Maybe to kick things off, can you, I guess, provide what your fiscal third quarter revenue guide would have been were it not for the constraints? And can you also relay sort of which businesses are most affected and which are the revenues -- what kinds of revenues are impacted all the way out to kind of fiscal 1Q?

Sure. Thanks for the question. This is Ken. Yes, 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, 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'd just remind you, a lot of the business that we do for IPS is very custom nature. So it's not a loss of sales, it's just nearly 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, so albeit we still need to lock down some of the components related to that product. So that is an example, Brian, of movements that can occur given the constraints we're seeing.

I think I would add -- so Brian, I would add -- 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 and kind of supporting our customers, but you got a sense to scale what could have been had we had clear selling.

Yes. 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 we're very excited about the business and where we are today.

Got it. Got it. Understood. And just relative to the overall guide in the business, is it right to kind of rank order of the segments maybe some growth -- 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 sequentially?

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 win designs that -- in the memory space. And the LED business, as we highlighted, 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, I think this is probably the grower at the highest rate in terms of market opportunity, followed by memory, followed by LED.

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 million to $3 million benefit in fiscal 3Q. Is the right way to think about that than sort of a $3 million to $4 million sequential increase in R&D? Or is some of that budget maybe being...

I guess, Brian, that’s best 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 a result of lower credit in Brazil for R&D.

Yes. I was going to ask, Ken, is there another offset you're getting somewhere else in the P&L to sort of counterbalance sort of the increase -- sequential increase in the R&D?

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 COGS side, but all of that's baked into our overall guide as we look at Q3.

Your next question comes from the line of Tom O'Malley with Barclays.

I just wanted to dive a little bit more into the outperformance in the Memory Solutions Group. You noted on the call, you saw a sequential revenue higher for both specialty in Brazil, but could you dive in a little more there about where you saw the strength as it did come in a bit stronger than you expected?

Yes. So, Tom, great call out. So if we look at our overall memory business, as Mark highlighted and I highlighted earlier, we saw a very strong sequential growth quarter-on-quarter. That growth was in that 19% range overall. And then 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.

Helpful. And then obviously, in the environment we're in right now, you have inflation moving higher, consumer discretionary spend maybe a risk in certain areas. Could you just talk about how you're handicapping the Brazil business? When you look out embedded in your model and what you said at the Analyst Day, is there anything different about the way you 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?

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, if macroeconomic wins go sideways from here, there can be an impact. But we're looking more at kind of just how to grow these solutions and opportunities as a lot of the basis for our move to Manaus. And we think there's a good growth from here. So sure, if there's a massive demand shock to the system, 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.

Helpful. And then just if I could sneak one more, and I think Brian asked the question. Mark, you talked about the 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 for each of your 3 businesses into the next quarter?

I'm going to let Ken take the actual numbers. I can just comment on a little bit. As I said, Ken gave an example of some of the supply chain impact on our Q2, Q3 numbers and that certainly impacts kind of sequential growth rates. My commentary was around the demand piece of that equation. From an upside growth from here, we continue to remain very bullish in IPS 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, but pretty bullish about the business as we see it.

Yes. So as we look at our guide, it is a midpoint up a bit from Q2 levels to that $455 million 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 can grow a bit here Q2 to Q3.

Your next question comes from the line of Kevin Cassidy with Rosenblatt.

Thank you for letting me ask a question and 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 -- can you compare it to last year? Is it up -- the opportunity is up 20%, 50%? Or what's driving the demand?

I guess the best index I can give you is what we just completed and that's just from 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 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 the supply chain issues are more tiny in nature. And by the way, we've talked about that in terms of the time and deployments. So we're very happy with the growth in the first half, and we're very bullish about the opportunity in IPS as we head in the second half.

Okay. Great. And maybe to -- there's a lot of questions I get from investors about inventory building in that end customers and in the channel. But you're showing growth in your memory business and especially specialty memory. That's custom, but would any of your customers be building inventory for custom products?

Yes. I think it -- we're very careful with that. And I understand the question. It's a really good question. It's probably a good question across all of our businesses really. It's less of an issue in IPS given the nature of our agreements and the custom nature of the products developed for that segment. In Specialty Memory, very similarly. And a lot of times, not all of them, but in many cases, we're sole sourced on a product design, not necessarily at the customer, but sole source on a specific design. So there's not much double ordering that we're seeing, and we're kind of working with the customers on this. And quite frankly, 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 willing to be in longer supply commitments and not have -- in a lot of our cases, in each of these businesses, these orders are non-cancelable. And so I would -- I think we're in pretty good shape on the memory side of the house. And of course, LED on the foundry model, outsourced capital-light model, we're in pretty good shape there. We continue to watch channel inventories as well. What you're seeing on our balance sheet, and Ken can comment on this as well, is that given our supply side challenges, we're being strategic in trying to position ourselves so we can deliver and continue to grow the business as we have in the past.

Yes. So Kevin, on that, when you think about some of the design wins or even the demand specific to the IPS segment, these are large system orders, they can be $2 million, $3 million, $4 million, $5 million, $10 million plus in size. 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 could continue to meet the customer demands and the timelines we're committing to our customers.

Your next question comes from the line of Sidney Ho with Deutsche Bank.

Maybe one more question on IPS side. IPS down 30% quarter-over-quarter was a lot lower than we expected. I hear you that you were supply constrained, but what would it be without those constraints? What were you in your expectation? And then maybe -- I know you talked about IPS probably growing a little bit in the next quarter. How are you thinking about the growth rate for the full year calendar '22, especially given that some of the contracts may -- some of it like the government contracts got pushed out from just 3Q 4Q to basically second half of '22? What is the right number to think about for the year?

Yes. Fair enough. So I think a couple of things. So even as we look at Q2 and Q3, they have -- there were some pushouts we talked about what was the specific number. It is in that neighborhood, I would say, $15 million to $20 million of movement that moved from Q2 into Q3. And reality is some of that just because of the constraints can move into Q4. 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 I mean that's the reality that we're in. We've got to call it how it is. But as we've talked about that IPS business, good demand, good backlog as we look out into -- 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.

Okay. Maybe my follow-up question is on the gross margin side. I know you don't give out the gross margin by segment anymore, but can you give us some qualitative comments as to how gross margin by segment have done in the quarter on a sequential basis? When we put that mix of software services side, which business is seeing the most impact from higher logistics cost or input costs? And are you able to offset that with any kind of price increases?

Yes. So if we -- you're correct. So we do not provide the gross margin specifics quarter-to-quarter. But if I look kind of Q1 to Q2, I would say memory did come down a little bit in terms of the margins. 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. And sorry, the second part of that question?

Yes, it's more about which business is impacted most from whether higher logistics costs or higher input costs? And are you able to offset that with any kind of price increases?

Yes. So on some of the products, actually, we don't bear those costs in terms of the logistics. 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 COGS side to get to our gross margin. So those have been baked into our outlook here for Q3.

Your next question comes from the line of Raji Gill with Needham & Company.

Thank you. And congrats on the recent momentum. Question on the gross margin, on the guidance. So Ken, you mentioned the guide is 25%. If I look at the incremental revenue, that's about $6 million, and then it implies that the gross profit will be down about $3 million despite the fact that revenue is going up by about $6 million. Since I know you mentioned kind of lumpiness in IPS in terms with respect to the software service component. But wondering if you could kind of give some clarity on kind of the mix of -- of the mix effect that you're seeing in the gross margin in the May quarter?

Yes, no problem. So good question. So if we look at the margins from Q2 to Q3, there's a couple of factors. One, I would say there is some margin impact on the memory side, albeit very small. And then even within -- in 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 1 point on margins.

Great. That's helpful. When we're looking -- you talked about expectations for a strong fiscal second half, particularly around the IPS business. But then you talked about $15 million to $20 million worth of kind of sales that were being pushed into the second quarter and into the third quarter and beyond and you kind of left it a little bit vague saying it could be even pushed into the next fiscal year. So I guess my question is, how confident are you in terms of securing a certain amount of components in order to meet this demand in this funnel, particularly around these kind of large government orders? 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?

Yes. So if we look at -- I won't give you specific components, but I would say some of these are around the semiconductor supply chain. So I won't make names, but I think you've seen it through others in the electronics industries where there are some shortages of specific semiconductor chipsets. That, along with even things like power cords and the like that have impacted when we can ship out these large systems. 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 ship out these large-scale systems overall.

Raji, the only other comment I would add is that, some of this is also just due to the sequential nature of the deployment. And so if something moves from Q3 into Q4, that might be the beginning of a push for the next quarter only because we're deploying a system that has to get validated until we go add incremental capacity or technology beyond that. And so these deployments are not just necessarily within a quarter or a onetime event. And the growth of potentially adding capacity to a system might lead a Q3 push to Q4 impacting a Q4 shipping. By the way, I just want to make sure everyone understands, a, all this was contemplated in Ken's guidance; and b, the business continues to be robust. We're not able to call Q4 yet as we are still working on getting the components lined up for finishing out fiscal year. But the commentary you're hearing is pretty bullish. And so we're just being transparent about the supply chain challenges, and we're also being transparent that the demand side looks pretty good.

There no further questions. I'll turn the call back to Mark Adams for closing remarks.

Thank you, operator, and thanks to all of you for your continued interest and support. When I started less than 2 years ago, we committed to delivering on our growth and diversification strategy by focusing on operational excellence. Our top line continues to grow. And we've expanded gross margins from less than 20% in fiscal year 2020 to the mid-20% range today of some 600 basis points to 700 basis points, all of which allows us to deliver strong earnings per share results to our shareholders. 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 in 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.

This concludes today's conference call. Thank you for joining. You may now disconnect.