Penguin Solutions - Earnings Call - Q2 2021
April 6, 2021
Transcript
Speaker 0
Thank you for standing by, and welcome to the SMART Global Holdings Second Quarter Fiscal twenty twenty one Earnings Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Suzanne Schmead in Investor Relations.
Thank you. Please go ahead.
Speaker 1
Thank you, operator. Good afternoon and thank you for joining us on today's earnings conference call to discuss SMART Global Holdings second quarter fiscal twenty twenty one results. On the call with me today are Mark Adams, Chief Executive Officer Jack Pacheco, Chief Operating Officer and Ken Rizvi, 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 note that today's remarks and the answers to questions may include forward looking statements. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections and future market conditions, is a forward looking statement. Actual results may differ materially from those expressed in these forward looking statements. For more information, please refer to the forward looking statements disclosures in our earnings press releases as well as the risk factors discussed in the documents we file from time to time with the SEC, including our most recent Form 10 ks and Form 10 Q.
We assume no obligation to update these forward looking statements, which speak as of today. Additionally, during this call, GAAP financial measures will be discussed. Reconciliations to the comparable GAAP financial measures are included in today's earnings 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?
Speaker 2
Thank you, Suzanne, and thanks to all of you on the call for joining us today. We've had a very successful second quarter of our fiscal year operationally as well as strategically where we continue to make significant strides on our growth and diversification initiatives. We believe we are set up for a great remainder of our fiscal year 2021 and beyond. During our last earnings call, I highlighted my personal philosophy that performance is driven by people, purpose, planning and process. At SGH, we are continuing to invest in these pillars to drive a new chapter for the company in all of our key constituents including our employees, customers, suppliers and shareholders.
We made significant progress in terms of strengthening our management team this past quarter with the addition of several key leaders. I'm very pleased with the level of talent we've been able to attract to the company. Since our last earnings call, we have hired Ken Rizvi as our CFO, allowing Jack to focus on the joint roles of Chief Operating Officer and President of the Memory Solutions Group. Thierry Pellegrino is President of Intelligent Platform Solutions Group, formerly known as Specialty Compute and Storage Solutions. As you'll recall, Thierry comes to us from Dell where he led their HPC and AI business.
And with the addition of Cree LED, we are pleased to have Claude Dembe as President to lead that business. Claude brings more than twenty five years of leadership experience at companies such as Procter and Gamble, GE and L and L Products. In addition, three new leaders have joined us as of April 1. Ann Kay Kendall is our new General Counsel for SGH. Ann was most recently General Counsel and VP of HR for MariaDB Corporation and before that held various senior legal management roles with Cloudera and Cadence Design Systems.
Bruce Goldberg, our formal General Counsel, will now take on a new role as Chief of Staff reporting to me, focused on building a winning culture and our overall human resource strategy. Joining us as VP of Marketing is Valerie Sasani, who come to us after nearly two decades at Lam Research. Valerie will be instrumental in amplifying the SDH family of brands, leveraging her expertise in marketing and communications. And lastly, Jean McDaniel joined us as VP of the Office of Transformation. Jean most recently worked at Micron where for twenty five years she led teams focused on M and A and corporate integration.
A major step in the next chapter of becoming a growing and diversified SGH is the completion of our acquisition of Cree LED, which closed at the March just after the end of our fiscal second quarter. With Cree's outstanding customer relationships, industry leading technology, new product development capabilities and strong intellectual property portfolio, we are able to greatly expand our served addressable markets with differentiated offerings while leveraging our foundation of operational excellence. With the addition of Cree LED, we will now organize the company into three primary lines of business. First, Intelligent Platform Solutions formerly called Specialty Compute and Storage Solutions, which consists of Penguin Computing and Smart Embedded and Smart Wireless. Next, memory solutions, which consists of smart modular technologies comprising our specialty memory business largely operated in The U.
S. And our Brazil module business. And finally, LED solutions, which consists of Cree LED. By focusing on these three business segments each with outstanding leadership in place, we are even better positioned to align our people, purpose, planning and processes and execute on our strategy address the tremendous market opportunities ahead of us. At our upcoming Analyst Day on April 20, you'll have the opportunity to hear from many of these leaders as we outline our growth initiatives in more detail.
During fiscal Q2, we remained focused on our growth and diversification strategy while achieving another strong quarter of financial results. All key metrics came in better than expected. Both revenue and non GAAP gross margin for the second fiscal quarter were at the high end of guidance range provided on our last call coming in at $3.00 $4,000,000 and 19.5% respectively. And non GAAP earnings per share of $0.87 exceeded the high end of our guidance range. Ken will cover these financials in more detail later in the call.
Let me now turn to our second quarter business performance, starting with our Intelligent Platform Solutions Group. This group, which includes Penguin Computing along with smart embedded and smart wireless, had a very strong quarter. Revenues grew approximately 30% sequentially to reach $85,400,000 or 28% of total SGH revenues. Our performance has been driven by growth across high performance computing, embedded computing, edge computing and AI solutions. Demand continues to be fueled by key customers across vertical markets such as cloud service providers, financial services, energy, federal and telecom.
Gross margin in this group also improved in the quarter and reached 29.3% for the second fiscal quarter, up from 27.3% in the prior quarter. The Intelligent Platform Solutions team is making excellent progress on evolving and expanding software and services which grew by more than 50% sequentially. We are proud of the recognition we continue to garner as a leader in HPC and embedded computing. One recent example was Penguin being named as one of the 10 hottest new enterprise servers of 2020 by CRN, a top technology news and information source for its highly dense Tundra AP platform for HPC and AI workloads. The team is focused on a number of new platforms and solutions in the areas of edge and AI analytics, which are slated for introduction in the second half of fiscal year twenty twenty one.
These platforms and solutions are targeted for military, retail, transportation and five gs application. We continue to have strong momentum heading into Q3 and the remainder of this fiscal year. Now turning to the Memory Solutions Group, which encompasses Specialty Memory and our module business in Brazil. Specialty Memory revenues totaled $115,500,000 in the quarter, down slightly from the previous quarter as expected and up 4% as compared to the year ago same quarter. As the market is showing optimism with regards to a potential COVID recovery, we are seeing demand returning from industrial customers.
In addition, we are making good progress expanding into new vertical end markets such as hyperscale cloud data centers and transportation. Our NVDIMM controller based memory products continue to gain traction in storage applications with customer applications such as cybersecurity and surveillance solutions. Our DDIMM solution, which is OpenCAPI based memory module, is showing some early success in HPC applications. Emerging memory and storage technology combined with growing computational demand from emerging workloads such as AI are driving the need for high performance server designs utilizing advanced memory technologies. In addition, we recently introduced a new high density DIMM module solution aimed at maximizing network bandwidth and reliability, which is critical for data center networking applications.
In our Brazil operations, revenue totaled $103,100,000 and were approximately flat compared to last quarter. On a year over year basis, revenues grew approximately 6% and if we exclude the end of life of our battery business, revenue was up by 12% compared with last year due to increasing memory densities in mobile and stronger unit sales in notebook related memory. We expect to generate higher revenues in Brazil in Q3 driven by increasing units of both mobile and notebook memory. Additionally, we continue to invest in capabilities to build SSDs in country by leveraging our manufacturing know how, our advanced packaging capabilities and our strategic supplier relationships. We believe SSDs will be a growth catalyst for our Brazil business in fiscal year twenty twenty two.
Now turning to CreeLED. We are thrilled to formally welcome the CreeLED team to SGH. The acquisition closed on March 1 and the integration is off to a great start. The transition from using silicon carbide to sapphire wafers is progressing on plan as well as the move to the outsourced wafer model. Over the next eighteen months, we expect to substantially complete both of these transitions.
We are excited about this manufacturing transformation to a Saphyr based fabless organization, which we believe will drive greater agility, resiliency and create a platform accelerating technology leadership, all of which will contribute to profitable growth. Longer term, Cree LED will focus on markets such as high power and mid power lighting, specialty lighting and video screens targeting key applications where we deliver a differentiated value proposition. Some specific examples of these applications include stadium and outdoor lighting, fine pitch video, horticulture and architectural applications as well as applications in the invisible spectra including infrared and ultraviolet. You'll hear about these plans and more from Claude at our Analyst Day. And now I'd like to introduce you to Ken Risbee, our new CFO for a closer look at the financials and guidance for Q3.
Ken?
Speaker 3
Thanks, Mark. First, let me begin by saying how excited I am to take on the CFO role at such a pivotal time at SGH. I'm grateful for Jack's continued guidance and look forward to working with Mark, Jack and the rest of the team at SGH as we execute on our growth and diversification strategy. As Mark mentioned earlier, we reported a strong quarter with all key metrics at the high end of our guidance range. Net sales for the 2021 were $3.00 $4,000,000 an increase of approximately 12% year over year from the second quarter of fiscal twenty twenty.
In addition, non GAAP gross margin came in at 19.5% and non GAAP earnings per share was $0.87 for the second fiscal quarter of twenty twenty one. Our year over year revenue growth was driven primarily by high sales from our Intelligent Platform Solutions Group, formerly known as Specialty Compute and Storage Solutions, which saw 36% year over year growth to $85,000,000 in the 2021 from $62,900,000 in the second fiscal quarter of twenty twenty. In addition, our Memory Solutions Group revenue which includes Specialty Memory and Brazil increased by approximately 5% on a year over year basis. Specialty Memory reported revenues of approximately $116,000,000 in the second fiscal quarter of twenty twenty one, which was an increase of approximately 4% year over year, while Brazil reported revenues of $103,000,000 in the second fiscal quarter of twenty twenty one, which was an increase of approximately 6% year over year. Our acquisition of Cree LED closed on the March 1 and we will begin reporting Cree LED results from the third fiscal quarter of twenty twenty one.
Non GAAP gross margins for the 2021 was 19.5% and flat with the second quarter of twenty twenty. Non GAAP operating expenses for the 2021 was approximately $32,100,000 down from $35,600,000 in the second fiscal quarter of twenty twenty. Operating expenses were lower and benefited from $6,200,000 in financial credits in Brazil. This helped offset our Brazil R and D spending which is required to benefit from this credit. The current law related to these specific financial credits is expected to expire in the beginning of calendar year 2022.
We plan to offset the vast majority of the expected decrease in financial credits through cost reductions including our move to Manaus, reduced spending in Brazil R and D along with other cost savings programs. In addition, we plan to modify our pricing as the supply chain adjusts to the expected reduced credits. Non GAAP diluted earnings per share for the 2021 was $0.87 per share, up approximately 67% year over year compared to $0.52 per share in the second fiscal quarter of twenty twenty. Adjusted EBITDA for the 2021 was $31,000,000 or approximately 10% of sales compared to $22,300,000 or approximately 8% of sales in the second fiscal quarter of twenty twenty. Our breakdown of net sales by end market for the second fiscal quarter were as follows: Mobile and PC was 31% Network and Telecom was 21% Servers and Storage was 13% and Industrial, Defense and Other was approximately 35%.
Strength from Server and Storage drove most of the growth on a year over year basis. Please note that for the third fiscal quarter with the addition of LED's business, we will be revising these categories to more accurately reflect the new mix of our business. As Mark mentioned earlier, beginning in the third quarter with the addition of Cree LED, we will be recasting the way we discuss our business into three main areas: Intelligent Platform Solutions, which is comprised of Penguin, Smart Embedded and Wireless businesses Memory Solutions, which is a combination of Specialty Memory in Brazil and LED Solutions. Turning to working capital. Our net account receivables totaled $203,400,000 compared with $212,900,000 last quarter and our days sales outstanding came in at forty one days compared with forty six days last quarter.
Inventory totaled $189,300,000 at the end of the second fiscal quarter compared with 147,200,000 at the end of the prior quarter as we added strategic inventory ahead of a more challenging global supply environment and as we prepare for a higher revenue ramp in our third fiscal quarter. Inventory turns were 8.3 times in the second fiscal quarter versus 10.1 times in the prior quarter. And consistent with past practices, our accounts receivable days outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $448,100,000 and $394,700,000 respectively for the second 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 and the net profit on the supply chain services are transacted. Cash and equivalents totaled $139,800,000 at the end of the second fiscal quarter, which was $24,300,000 lower than the previous quarter and reflects the $44,000,000 of share repurchases in the quarter.
Second quarter cash flow from operations totaled $20,400,000 compared with $35,600,000 in the prior quarter and was down sequentially from the first quarter primarily due to changes in our working capital including incremental strategic purchases of inventory. On a trailing twelve month basis, cash flow from operations totaled $94,600,000 For those of you tracking CapEx and depreciation, CapEx was $20,000,000 for the quarter and depreciation was $5,400,000 And now turning to our fiscal Q3 twenty twenty one guidance. We believe our net sales for the 2021 will grow to approximately 400,000,000 to $430,000,000 an increase of approximately 48% year over year at the midpoint of our guidance. Of this amount, we currently expect Cree LED to contribute approximately $95,000,000 of our sales in our third fiscal quarter of twenty twenty one. Note that due to the timing of the Cree LED transaction close in March, we only have twelve weeks from Cree LED in our 2021 instead of a normal thirteen week.
Our non GAAP gross margins for the 2021 are expected to be approximately 20% plus or minus 1%. Our non GAAP operating expenses are expected to be in the range of $48,000,000 to $53,000,000 in the third quarter of twenty twenty one, an increase driven primarily by the addition of Cree LED from the beginning of our third quarter as well as additional investments to support the growth in our Intelligent Platform Solutions group. Also a reminder for folks that Cree LED will have one additional week of costs for the fourth fiscal quarter as compared to our third fiscal quarter. GAAP earnings per diluted share is expected to be approximately $0.64 plus or minus $0.10 On a non GAAP basis, excluding share based compensation expense, intangible asset amortization expense, convertible debt discount and other infrequent or unusual items, we expect non GAAP earnings per diluted share will be in the range of $1.1 plus or minus $0.10 The guidance for the third fiscal quarter does not include any view on foreign exchange gains or losses and includes an income tax provision expected to be in the range of 12% to 15%. Cash capital expenditures for the third fiscal quarter are expected to be in the range of $10,000,000 to $12,000,000 and include approximately $2,000,000 of capital expenditures for Cree LED.
Our GAAP diluted share count for the 2021 is expected to be approximately 27,000,000 shares based on our current stock price. Our non GAAP diluted share count for the 2021 is expected to be approximately 26,000,000 shares and includes the benefit of our convertible note capped calls. Our forecast for the third fiscal quarter is based on the current environment, which contemplates constraints in the global supply chain as well as the potential impact due to the COVID-nineteen pandemic. And consistent with U. S.
GAAP guidelines, we will finalize the purchase accounting which requires us to fair value Cree LED's opening balance sheet. The fair value assessment may impact areas such as the value of property, plant and equipment, inventory and intangibles among other items, which should not have any impact to our operating cash flows and the adjusted EBITDA from this business. These factors have been contemplated in our Q3 guidance. We will provide further details on this on our next earnings call for the third quarter of twenty twenty one. Please refer to the non GAAP financial information section and the reconciliation of non GAAP financial measures to GAAP results and reconciliation of GAAP net income to adjusted EBITDA tables in our earnings press release for further details.
Operator, please open the line to Q and A.
Speaker 0
Thank you, presenters. Your first question comes from the line of Tom O'Malley with Barclays. Your line is open.
Speaker 4
Good afternoon, guys, and congrats on the really nice results, and welcome, Ken. I just wanted to ask on the segments heading into q three here. I think you gave us some great color on the CRE contribution. But on the two other segments, the memory solutions and the intelligent platform solutions, can you give us a little more color on where you're seeing strength? Because you're obviously indicating a pretty strong guide here with the the midpoint of the range being at four fifteen.
Speaker 2
Yeah. Thanks for the question. Well, primarily, we've seen strength. I I I've been pretty bullish in the past calls on our what now we're calling Intelligent Platform Solutions, primarily driven by strength in our Penguin business as well as embedded space. And the end markets really are around AI driven workloads in the cloud data center segments as well as oil and gas energy and our federal business.
Between those three segments, they're driving a lot of the upside growth. As mentioned in our prerecorded scripts, that segment was up 30% quarter over quarter and margins were up. We remain bullish in Q3 and Q4. On the memory side, we also were slightly ahead of our forecast for the quarter in our specialty business, and we're starting to see some return from our industrial customers in the telecommunications and network space as well as we're getting some design wins in very much of the same type of segments that I mentioned relative to the computing environment, HPC, AI and compute intensive workloads where memory is taking on a different role. On the Brazil front, as we mentioned, the mobile memory as as the density, we benefit from increasing densities down in Brazil in that environment and also notebook memory unit sales are growing.
And so the combination of that, if you excluded our end of life for the battery business, was up about 12%. And so if you sum all that together, all three right now of the business units are operating, in a in a growth environment.
Speaker 4
Great. That's helpful. I I guess my follow-up was around the the LED business. Obviously, in the in the deck you guys put out, you talked about 200 to 400 bps of margin improvement. Could you talk about the transition?
You mentioned eighteen months was kind of the time frame for what you what you kind of saw as the initial transition. But could you give us a little more color on the gross margin profile there? How quickly can you ramp that up to the high twenties, low thirties? And could you give us just a little extra color on the time frame that you think you can get there?
Speaker 2
Of course. If you if you go back to Cree's last reports on Cree LED, which wasn't their December call, It was actually their September call because it was not classified as a reporting unit in December. If you go back to September, I believe the gross margins were roughly 22%. And I articulated at the time of the acquisition, and I reinforced in our last call, that we expect over the next kind of eighteen months or so in the area of 400 to 500 basis points improvement in gross margin. You're going to see to start to see some of that in Q2 and I'll let Ken discuss this in a second.
But a lot of it is dependent on a number of factors including the silicon carbide to sapphire transition, the transition to an outsourced manufacturing partner and other efficiencies the team is driving in their manufacturing transformation. Specific to the short term, I'm going let Ken just talk a little bit about the gross margin outlook in the short term.
Speaker 3
Sure. Thanks, Mark. Yes, if we look at the gross margins for CRE in the near term, as Mark had mentioned, we're probably looking at somewhere in the mid-twenty percent range on a non GAAP basis. Now the reason I say non GAAP is that as part of the purchase price accounting, we will expect to step up the inventories on day balance sheet. So that will go through the P and L.
That should go through in the Q3 timeframe. But on a non GAAP basis, those margins should be in that 25% range plus or minus a bit. And then we will work to try to improve those over time.
Speaker 4
Great. Thanks guys and congrats again.
Speaker 2
Thank you.
Speaker 0
Your next question comes from the line of Brian Chin with Stifel. Your line is open.
Speaker 5
Hi there. Good afternoon. Welcome to the call, Ken, and thanks for letting us ask a few questions. Maybe first to follow-up on the last question about LED. Thanks again for the revenue breakout and then I guess the gross margin in the fiscal third quarter.
Also curious what sort of at a starting point the OpEx might look like against that and how you can maybe lean that out over time or a certain timeframe?
Speaker 3
Yes. So as we discussed, Brian, earlier on the call, we're
Speaker 2
going to
Speaker 3
have a shorter week or we'll be one week short here in Q3 for Cree LED. And then from Q4, we'll have the normal thirteen week quarter. So for this quarter, for Q3, I would expect that non GAAP OpEx to be in the neighborhood of $18,000,000 for that CRE business. Going forward, we will not break out the OpEx for each of the businesses, but just to give people some context in terms of the starting point given this is the first quarter with LED. That's where we're expecting to get.
In Q4, that will uptick given that there's an additional one week for Cree LED.
Speaker 5
Okay. Yes. Thanks. That's very helpful. Maybe to circle back to Brazil for a moment.
There was a recent announcement that one of the larger handset companies, LG, is exiting the handset market. They have a big base in Brazil, obviously. I'm just curious, are you seeing any discernible impact from that in your fiscal third quarter guidance? And this does seem more like a temporary effect. Do you ultimately just view this as washing out in another quarter or two as other OEMs like Samsung absorb that market share?
Speaker 2
Correct. I think your assumption is spot on. Remember, we're the largest memory manufacturer down in Brazil. And so, as we supply many of the largest handset makers in the country, whether the share shift is from A to B to C to D, we anticipate very little impact. And it's also any of that would be contemplated in the guidance that Ken provided.
Speaker 5
Okay. Great. Maybe one more question just maybe towards the balance sheet and maybe towards Ken. Accounting for the your cash after the March 1 close of the Cree acquisition, can you just remind us what minimum cash on hand is needed to run the business?
Speaker 6
Yes. If we look
Speaker 3
at the business itself, the minimum cash that we need to run the business, is probably in that $80,000,000 range, if you look, on a normalized basis. We exited Q2 with about $140,000,000 of cash on the balance sheet, just as a reminder.
Speaker 5
Okay. Great. Thank you.
Speaker 0
Your next question comes from the line of Kevin Cassidy with Rosenblatt. Your line is open.
Speaker 6
Yeah. Thanks for taking my question, and congratulations on the great results. And, I'll also welcome Ken. Good to talk to you again, Ken.
Speaker 7
Good to talk to you.
Speaker 6
The you know, in this environment, I see your inventories are up quarter over quarter, so that that seems like it's a very good accomplishment. Can you talk about, you know, what how you're handling the shortage that's so well publicized and the long lead times and also, you know, what kind of visibility you're getting from your customers?
Speaker 3
Yeah. So if we look at our inventories, Kevin, you're you're spot on. As we looked at Q1 to Q2, we did grow inventories strategically in part due to the constrained supply environment. And then also we are seeing a nice uplift in demand, not only Q1 to Q2, but as you can see by our guidance into Q3. And so the supply chain team has done a great job under Jack and the overall team to secure that supply for those projects.
We are working with our customers who are fairly large in size and have a good footprint and are able to help us in terms of securing that supply, especially as we move into Q3 and Q4 of this year.
Speaker 6
Okay, great. And maybe I was a bit surprised, when you talk about the Brazil market. You're seeing the, you know, the growth is gonna come from units and, you know, we've been talking about it for a few quarters of the memory content increasing per phone. But there wasn't any mention of, average selling price increases. And I was just a bit surprised that that that's not a factor in part of the growth.
Can you, discuss that? Is that gonna happen later in the year?
Speaker 7
Sure, Kevin. Hey. This is Jack. How are you doing? Good, Jack.
Yeah. No. That'd ASP for q three for Brazil price around $20. You know, we think we finished q two at around 19 something. So still fairly flat.
So we're still not seeing a huge growth yet in the content of memory on the phones that we expected and part of it is the real weakening phones a little more expensive. We would expect to see the density start to go up a little bit more as we probably get into early next year for phones in Brazil. Right now, it's units are driving the growth in Brazil.
Speaker 6
Okay. But, DRAM prices going up isn't helping in the Well, we just started yeah.
Speaker 7
Q three, we're just starting to see some price increase. Remember, Brazil for q two, we didn't see anything. So ASPs are up a little bit in q three for DRAM, but it's still more of a unit based growth down there than it is anything from DRAM on the ASP front.
Speaker 6
Okay, great. Thanks for clarifying that.
Speaker 2
And a bit just one other clarification. Remember, the accounting for the Brazil business is one month earlier in the quarter. So any of that pricing that you're implying probably wouldn't show up in Brazil in the q two numbers.
Speaker 6
Okay. Thank you. Thank you.
Speaker 0
Your next question comes from the line of Raji Gill with Needham and Company.
Speaker 8
Yes. Thanks for taking my questions and congrats and, welcome, Ken. Question, Ken, on LED business. You indicated that for the for the May, it will be about 92 and a half million, and you and you talked about the the different timing. How do we think about kind of a normal normalized quarterly LED business kind of going forward, particularly with some of the piece parts of of LED, some areas I think you've talked about you might wanna exit out of, some areas you might wanna keep.
So how do we think about kind of the the normalized quarterly kind of run rate for LED?
Speaker 3
Happy to provide a little context and color, although we will not be guiding on a long term basis for any one of our business segments. But if we look at that business for Q3, as I mentioned, dollars 90,000,000 to $95,000,000 in terms of the range, and that's based on a twelve week quarter here in Q3. So our expectation as we head into Q4 is we should be more closer to a $100,000,000 normalized run rate plus or minus a bit. And as we get into the end of Q3 and on our next earnings call, we'll provide fuller guidance on the CRE business and in terms both the revenue and outlook.
Speaker 8
Okay. That's helpful. And in terms of kind of the gross margins by segments, could you just highlight again the gross margin by segment? I think you said Intelligent Platform Solutions, the formal SCIF business, 29% gross margin. What was the Brazil gross margin, the Specialty margin?
And how do we think about the gross margin drivers for those three segments?
Speaker 3
Yes, sure. No problem. So if we look at Brazil, Brazil in Q2 was about 15.2% on a gross margin basis. Specialty Memory was about 16.1% in terms of gross margins. And as you mentioned earlier, the Intelligent Platform Solutions Group had about 29.3% in Q2 of twenty twenty one.
I would give you some ranges and context on a go forward basis. So for both the Specialty business sorry, Specialty Memory and Brazil, I would think those margins will be reasonably flattish, plus or minus a bit, Q2 to Q3. And the range I'd provide for Intelligent Platform Solutions would be in the mid to high 20% range. Now just to put into context for the Intelligent Platform Solutions, there is a bit of lumpiness based on the services component that we can see in any given quarter. So that may move around a bit.
That's why I gave you a broader range there.
Speaker 8
That's really helpful. And Mark, on if you're looking at kind of the the last quarter, talked about kind of a 40% increase in in in backlog, you know, by oil and gas, you know, cloud, some of these other markets. How do we think about the backlog as we go into May, as we go into the back half of summer and the year? How is that backlog being converted to revenue and kind of what's driving
Speaker 6
Thank you.
Speaker 2
Well, I mean, think it's the same drivers that I've mentioned either early on the call, and I'm happy to repeat them again. In high performance computing, the key segments for us today are cloud, federal, and energy with oil and gas. I think and that's that's not exclusive, but those are the big three contributors for us in in high performance computing. In the embedded space, it's primarily, federal plus transportation and telecommunications. So for us, the drivers continue.
Our backlog is actually healthier going back going into Q3. And really the back half of the year looks very, very strong in that business, which is why we guided as such. I think Ken referenced and if he didn't reference, let me just clarify that coming off a 30% sequential growth Q2 over Q1, we're continuing to forecast an increase in that business in the area of high single digits, low double digits off of that quarter. So we remain very confident in the back half of the year in the top line growth for I the Intelligent Solutions business.
Speaker 6
Alright. Thank you.
Speaker 0
Your next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open.
Speaker 9
Great. Thanks for taking my my good questions, and welcome, Ken, well. Maybe start off with a three business. I'm not trying to steal any thunder from your Analyst Day. But, Mark, can you talk about your general philosophy related to that business?
What are your priorities there? Is that mostly the two technology transitions that you talked about in your prepared remarks? And kinda related that, you talked about the gross margin goal in the near term, maybe a little longer term. But at the at the operating margin level, deadline, fiscal q three will will be more like mid single digit range, just based on numbers you gave. How are you thinking about that, that operating margin line over time?
Speaker 2
Great question. Thank you for asking. There's a couple of things. In addition to the manufacturing transformation we've discussed, we see improvements in demand. We see more of a more focused initiative in the top line growth on strategic projects out twelve to eighteen months.
So the team is now not limited by the manufacturing capacity in their captive environment in North Carolina. We have the ability to grow from just a sheer capacity perspective. And so I think you'll see better opportunities in terms of these differentiated markets that the team is driving. In addition to the go to market piece, we see the opportunity for, as I mentioned on the earlier calls, somewhere in the area of 10% to 12% operating synergies over the next eighteen months. And if I look at gross margins, I would suggest that this 400 or 500 basis points over the next twelve to eighteen months also fits in well.
So the culmination of that, I think, would drive significantly better operating results than you're referring to in your question.
Speaker 9
Okay. That's helpful. Thanks. Maybe my follow-up question is related to the supply shortage that was discussed in the Q and A. You talked about building strategic inventory for yourself, but are you assuming any kind of chip shortages impacting your revenue guidance in the near term?
And have you seen any changes in your customers' buying behavior in anticipation of memory component pricing going up?
Speaker 3
Yes, it's a good question. So I think we've contemplated that in our guidance as we look at Q3. I think the reality is there could have been or there could be some upside if we're able to get all of the supply that we want for specific chips and parts. But in general, we are comfortable in terms of the supply we need to meet our Q3 guidance in the range we provided. I would say as well, given that lead times have moved out a bit, customers are placing backlog further out.
So we are starting to see a bit more visibility, especially as it relates to the specialty memory business, and to some extent in Brazil.
Speaker 9
Great. Thank you.
Speaker 0
Thank you. Your next question comes from the line of Mark Liptiasis with Jefferies. Your line is open.
Speaker 10
Hi. Thanks for taking my question. And, Ken, good to talk to you again. First question on the intelligent platform, Really nice high sequential growth. And I I wonder, Mark, if you could just you you shared a little bit of this, but I understand that this is from a lot of it is from software and services.
To what extent is that, you know, the big jump in the sequential growth from pent up demand versus a new trajectory? And I appreciate you're saying high single, low double digits is kind of how you're thinking about it near term. But maybe if you could just talk about, share a little color on the capacity of that business. I I guess software, you know, has, you know, unlimited upside potentially. But on the services side or the the product side, you know, how should we think about any kind of capacity constraints you might have there?
Then I have a follow-up. Thank you.
Speaker 2
Yes, notwithstanding Ken's commentary around some of the mix issues we'll see guiding the gross margin between mid to high 20% gross margins on the software and services implying that there's a mix sometimes because depending on the amount of hardware we ship in a quarter versus how much of the software and services we sell in that period. Notwithstanding all that, we see significant upside in the business and we are a little bit constrained, as Ken noted, relative to some of the key components in Q3. We'll get a better handle on Q4. That's all contemplated in his guidance. But these workloads that we're working on in the different segments I've identified, top three in HPC are primarily in our cloud service providers in terms of the federal business as well as oil and gas.
Those represent some of our largest customer engagements. And I tried to describe this in our last call to do give another shot here. What happens in some of these installations is that we we begin with a development platform that is in development to work on a specific application at a given customer. And oftentimes, once we get through the development phase, it goes into production phase, and that represents a pretty attractive rollout opportunity for us with the customer. And that is what you're starting to see in some of our larger customers are add on opportunities as well as new customer development, but add on opportunities at an increased scale.
So coming off of a 30% growth in the business in Q2, Q3 and Q4 still represents some upside growth from where we are today, and we're pretty excited about the opportunity.
Speaker 10
Great. That's very helpful. Thank you, Martin. And I had a follow-up for Ken and then maybe for Jack. Ken, on the capacity constraints, can you describe the extent that the constraints are more on the material side?
Or is there support services that you guys look to? And then a question for Jack, I think, Jack. And you had, I think, previously described, you know, that SMART did not have a lot of exposure between the time that you you you purchased raw materials from memory modules and the time you sell them, but I I believe there was some exposure. I I don't know if it was three or five days or something like that. Could you and, could you just remind us of that?
And and and I guess my understanding that pricing is going higher during that time, then that that accrues to a slight benefit to your profitability. And if it's going lower, it hurts a little bit. If if you could just remind us of those dynamics and how they hit your profitability. And that's all I had. Thank you very much.
Speaker 3
Sure. Let me start and then Jack will chime in here. So if we look, just to be clear, we're not constrained from a capacity standpoint. And even as we look at our Q3 guidance and the range we provided, we feel very comfortable based on the inventory we have on hand and inventory that we will receive. We can achieve that guidance range as of today.
So we feel comfortable from that standpoint. As it relates to specifics around inventory in the second part of the question, maybe I'll turn it over to Jack to answer. That.
Speaker 7
Sure. Thanks, Ken. Yes. So I think Brazil, Mark, is where we have the most risk of the inventory. In Brazil, we will own the inventory anywhere from four to six weeks as we process it into either a module into a multi chip package.
And when pricing starts going down, we can shore that up to four weeks and now we're probably a little bit longer. But we don't see any issue in Brazil. The inventory is ample for what we're trying to do. As pricing is going up, it will benefit us a little bit in Brazil. On the specialty business, we typically don't take a risk on inventory.
So the inventory we have, we will, you know, we pretty much have sold it at the price we need to sell it out. So we really don't have a risk on it when you look at it from a specialty standpoint.
Speaker 10
Great. Thank you very much.
Speaker 6
No problem.
Speaker 0
There are no further questions at this time. I would now like to hand the conference over to Mark Adams, chief executive officer, for closing remarks.
Speaker 2
Thank you, operator, and thank you again to all of you on the call as well as to our global team at SGH for their outstanding contributions to our second quarter results. Given the strong momentum in our business, we remain confident in our growth and diversification strategy as we embark on this exciting new chapter at SGH. Thank you.
Speaker 0
This concludes today's conference call. Thank you for participating. You may now disconnect.