Penguin Solutions - Earnings Call - Q3 2020
July 7, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the SMART Global Holdings Third Quarter Fiscal twenty twenty Earnings Call. At this time, all participants are in a listen only mode. After the speaker 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 host today, Suzanne Schmidt, Investor Relations.
Madam, please go ahead.
Speaker 1
Thank you, operator. Good afternoon, everyone, and thank you for joining us on today's earnings conference call to discuss SMART Global Holdings third quarter fiscal twenty twenty results. On the call with me today are Ajay Shah, Chairman and Chief Executive Officer and Jack Pacheco, Chief Operating and 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'll 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 the 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 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 Qs.
We assume no obligation to update these forward looking statements, which speak as of today. Additionally, during this call, our non GAAP financial measures will be discussed. Reconciliations to the comparable GAAP financial measures are included in today's press release. With that, I will now turn the call over to Chairman and CEO, Ajay Shah.
Speaker 2
Thank you, Suzanne, and welcome again to our quarterly call. We are certainly living in some interesting times. Despite facing some disruptions to our business early in the quarter, we are pleased to report strong financial results at the high end of our expectations for the third fiscal quarter. Thanks to the efforts of our employees around the world who've come together to respond and adapt to current challenges and also to their dedication to our customers' success. Total net sales in the quarter increased by approximately 19% as compared with the year ago quarter and were driven in particular by strength in our specialty memory business.
With the operating leverage from our cost efficient business model, non GAAP net income and EPS were even stronger increasing by 116106% respectively as compared with last year's third fiscal quarter. As we will review in more detail later in this call, we continue to see strong financial performance ahead. With new products and design wins at existing and new customers combined with our cost and capital efficiency, we are well positioned to take advantage of opportunities in this uncertain market environment. Turning now to a review of our different businesses. In the third quarter of fiscal twenty twenty, approximately 45 of revenues came from our Specialty Memory Products business, 33% from our Brazil business and 22% from our Specialty Computing Products business.
Starting with the Specialty Memory Products business, which generated $127,700,000 in revenue for the quarter or approximately 45% of the overall revenue. Revenue this quarter was 15% higher than the previous quarter despite some headwinds from pandemic related slowdowns that have impacted some of our industrial customers. During the quarter, we announced a variety of new high performance, high density DDR4 module solutions for space constrained applications. These new module in a package or MIP solutions increase memory capacity in industrial IoT, embedded computing, broadcast video and mobile router applications among others, where maximizing DRAM capacity within space constraints are a principal concern. For example, this MIP can be used instead of a standard DRAM module or discrete DRAMs in order to double the memory density and to use as little as one fifth of the space required otherwise, a feature which is particularly appealing for certain industrial, consumer, military and aerospace applications.
We also continue to make great progress against our stated goal of expanding our reach across new geographies and customers. On the DRAM side, during the quarter, we began production shipments of an application specific DRAM module for industrial tester applications as well as a new DDR4 based module for edge computing systems that enable secure access to cloud workspaces. We are also seeing good traction for our NVDIMM modules in the enterprise storage space. These products provide persistent memory with unlimited endurance and very low latency. In addition, our ruggedized products are drawing increased customer interest from the industrial and defense markets, where we recently achieved new design wins for an application to be used by the U.
S. Navy and a boot dive product to be used by the U. S. Army. Moving on to our Brazil business, which generated $92,700,000 in revenues for the quarter or approximately 33% of overall net sales and met our expectations despite the issues with the pandemic related economic slowdown in the country and the weaker Brazilian currency.
Earlier in this past quarter, the work from home phenomenon resulted in stronger demand for our DRAM based modules for notebooks and PCs. At the same time, we saw lower sales of mobile memory as some of our smartphone customers' factories in Brazil were shut down for approximately three weeks. Since that time, however, we've seen demand for PCs and notebooks return back to more normal levels and meanwhile demand in our mobile memory business has recovered. The Brazilian smartphone market is forecasted to see a unit sales slowdown this year similar to other world markets. However, particular to Brazil, the average mobile memory capacity per phone has continued to increase steadily and so have our ASPs along with the density increases, helping to meet overall revenue expectations and the performance of the business.
Mobile memory capacities in smartphones in Brazil on average still lag world averages by a significant margin, so there's more room there. In our Q3, in Brazil, we introduced a seven chip based eMCP or multi chip package with 64 gigabytes of flash and four gigabytes of LPDRAM for use by our major smartphone customers and have subsequently seen the steady growth of high density mobile memory sales. Additionally, for the mid to high end smartphone market, our customers are now moving towards higher capacity products for delivery in the next fiscal year. These new products will have 128 gigabytes of flash and four gigabytes of LPD WAN and will utilize stacking of 11 dies in a package, including four flash devices, four LPD WAN devices and a controller, a very advanced package leading anywhere any packaging anywhere in the world. Our R and D team is working diligently on developing and qualifying these products and we expect to introduce these high density products over the next few quarters.
In this new environment, as we've said before, the new points based local manufacturing rules are very favorable to memory. In fact, so much so that they are less favorable for other items such as batteries. We are therefore reevaluating our efforts in the battery market in Brazil. Moving on to our Specialty Compute Products business, which recorded revenues of $60,900,000 in the quarter or representing approximately 22% of overall revenue. As you recall, some of this business is more heavily weighted towards the end of the government's fiscal year.
This year, due to the work from home situation, federal year end spending looks to be delayed as many program awards are running behind original timelines. That said, we made significant progress across many aspects of this business. Earlier in the quarter, we launched a new system on module based on Qualcomm Snapdragon six sixty processor. This compact connected computing module called the INFOR6503 is designed for rugged display devices and enables advanced visual computing, enhanced graphics and on device machine learning capabilities. Ideal use cases include applications such as high end industrial IoT, wearables and portable healthcare devices that require advanced imaging and connected cameras, all of which are fast growing areas that we can address with these new powerful connected solutions.
Also during the quarter, we announced that Penguin Computing has expanded its partnership with Intel and has now joined the Intel Select Solutions Partner Program. Through this collaboration, Penguin will empower customers to leverage potential of high performance computing and AI through reference designs and deliver a series of verified and quick to deploy infrastructure solutions optimized for high performance computing and AImachine learning applications. This expanded relationship follows Intel's 2020 U. S. Partner of the Year award in which Penguin Computing was honored for demonstrating excellence in technology platform design and integrated solutions development.
Additionally, during the quarter, Penguin has expanded its partnership with AMD to deliver HPC systems to several top tier universities for COVID-nineteen related research. NYU, MIT and Rice will use a series of AMD processor based Penguin computing on premises and cloud based HPC systems to help accelerate research across a range of pandemic related topics including genomics, vaccine development, transmission science and modeling. We are very proud of our contribution to this research effort and these systems will be offered by us over time to even broader community of research and development projects. In summary, we've navigated this initial phase of the global health crisis with our business performing very well and more importantly with our global workforce safe and adapting extremely well to this new work environment both in our own operations and also in how we work with our customers and our partners at a time like this. We remain well positioned to navigate through this challenging time and we will emerge stronger as a result of our targeted and differentiated product offerings, our superior operating model and our strong financial performance.
The primary markets that we serve all have growing requirements for additional capacity and more complexity in their memory and compute solutions, which is exactly where we excel. We also continue to evaluate a number of opportunities to further leverage our operations strength with accretive acquisitions that both strengthen, diversify and continue to drive the future growth in earnings for our company. I'll now turn the call over to Jack Pacheco, our CFO for a more detailed review of the financials as well as our forward guidance. Jack?
Speaker 3
Great. Thank you, Ajay. Overall, gross revenue for the third fiscal quarter was $449,900,000 while net sales were $281,300,000 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 net profit on a Supply Chain Services transaction. Our breakdown of net sales by end market for the third fiscal quarter was as follows: Mobile and PCs 27% Network and Telecom 25% Servers and Storage 15% Industrial, Defense and Other 33%. Now moving to the rest of the income statement.
Non GAAP gross profit for the third quarter was $55,900,000 compared with last quarter's $52,900,000 As we transitioned our embedded computing manufacturing to our Newark, California and Tempe, Arizona locations, as well as managing expenses extremely well in Brazil during a turbulent quarter. Non GAAP operating expenses were $35,500,000 compared with $35,600,000 in the previous quarter. Non GAAP net income for the third quarter was $17,100,000 or $0.70 per diluted share compared with 12,800,000 or $0.52 per diluted share in the previous quarter. Adjusted EBITDA totaled $25,400,000 compared with $22,300,000 in the prior quarter. Turning to working capital.
Our net accounts receivables totaled $223,200,000 compared with $217,400,000 last quarter. Our day sales outstanding decreased to forty five days for this quarter compared with forty seven days last quarter. Inventory totaled $180,600,000 at the end of the third quarter compared with $161,400,000
Speaker 2
at the end of
Speaker 3
the second quarter as we now have fully transferred all of our embedded computing manufacturing from a U. S. Contract manufacturer to our Newark and Tempe locations. This is fully in line with our forecast for the quarter. Inventory turns remained flat around nine for both quarters.
Consistent with past practice, accounts receivable days outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $449,900,000 and 395,700,000 respectively for the third quarter. We ended the third quarter with $131,800,000 of cash and cash equivalents compared compared with $141,900,000 at the end of the prior quarter. Despite actually increasing cash in Brazil by $60,000,000 Brazilian real in the quarter due to the currency exchange headwinds, our overall cash balance was reduced by $70,900,000 after translation back to USD for the Brazilian real. Third quarter cash flow from operations totaled $13,600,000 compared with $23,300,000 in the prior quarter. On a trailing twelve month basis, cash flow from operations totaled $111,200,000 We exited our third quarter with a very strong balance sheet as well as a vastly improved capital structure, thanks to the convertible note and subsequent restructuring and repayment of debt that we executed last quarter.
For those of you tracking CapEx and depreciation, CapEx was $7,500,000 for the quarter and depreciation was $5,400,000 And now let me touch on some of the financial and operational dynamics we are currently facing. All of our manufacturing facilities across the globe continue to operate and service our customers. We are still seeing strong demand from our customers for our fourth fiscal quarter and our guidance reflects this current view of the quarter. As we discussed on our last call, we continue to closely analyze and assess our customers and their end markets for weakness or strength. In Brazil, as Ajay mentioned earlier, we qualified a seven die multi chip package during the quarter and are working on 11 die multi chip package, which are higher density products and they have a higher average selling price than our lower density solutions.
These products will help to drive higher density demand by our customers in our future quarters. With that as a backdrop, let me now turn to our guidance for the fourth quarter of fiscal twenty twenty. We currently estimate that our fourth quarter net sales will be in the range of $290,000,000 to $310,000,000 Gross margin for the quarter is estimated to be approximately 20% to 22%. GAAP earnings per diluted share is expected to be approximately $0.34 per share plus or minus $08 On a non GAAP basis, excluding share based compensation expense, intangible asset amortization expense and convertible debt discount OID and fees, we expect non GAAP earnings per diluted share will be in the range of $0.78 plus or minus $08 the midpoint of which represents an increase of 11% sequentially. The guidance for the fourth fiscal quarter does not include any view on the foreign exchange gains and includes an income tax provision expected to be in the range of 16% to 20%.
The number of shares used to estimate earnings per diluted share for the fourth fiscal quarter is $24,500,000 Capital expenditures for the fourth fiscal quarter are expected to be in the range of 6,000,000 to 10,000,000 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 our earnings press release for further details. Operator, we are now ready to take questions.
Speaker 0
Thank you. Our first question comes from the line of Blayne Curtis of Barclays. Your question please.
Speaker 2
Hey guys, thanks for taking
Speaker 4
my question and nice results.
Speaker 0
I'm curious, maybe just to help
Speaker 4
me in, just when you look at the segments into August, it seems like you're expecting a recovery in Brazil. Just trying to understand the other segments. You were looking, I believe, last quarter for some pretty strong growth in Specialty Compute, you said it's pushed out. Is that business still going to be up? And I guess second part of it is, is it just pushed one quarter or is it going to kind of can you dial us in any bit into just how long these push outs could be?
Speaker 2
I'll ask your last part first, which is unfortunately we're not very we're not able to figure out exactly how long the delays are going to be. I mean there are projects and there are projects that have been defined and even have from what we understand assigned funding. I'm speaking particularly of government programs and I think that's what you were asking about, right Blaine?
Speaker 4
And
Speaker 2
so I have to admit that we don't have a clear idea of exactly when these programs will be finally released. However, in our third quarter and our fourth quarter, we have had a pretty strong commercial sales in our high performance computing business. So overall, the business continues. But yes, the year end federal spend, which is often linked to the year end budget is not clear as to exactly how it's going to materialize this year and when, because many of these contracts have many of these projects have high security clearances and people can't work from home on some of them from what we understand. Got you.
And then maybe, I
Speaker 4
guess, given that answer, just the first part of the question is, just looking at the three segments, if you have any color just directionally what you're expecting in that $300,000,000 at midpoint guidance. It sounds like Brazil is up. What are your thoughts on the other segment?
Speaker 2
Brazil is not is up very modestly, especially Compute is up. And so while we're not predicting a as we said, we're not predicting a significant number of federal order releases in this quarter, this quarter being the Q4 period we are in right now. We are continuing to see other projects. And so especially computing does continue to improve actually meaningfully. Brazil steps up, but not significantly.
And our specialty memory business continues to perform well. That's the forecast we're working with right now. Yes. Could be low double digits, Blaine, on
Speaker 3
the Specialty Compute growth in the quarter.
Speaker 0
Got you.
Speaker 2
So while the CapEx maybe delayed, it's okay overall.
Speaker 4
And then just finally on gross margins, I know you had to deal with the shutdown. So gross margins were a bit lower than I guess I was modeling for May. Is there any other factors? And then as
Speaker 2
you look to
Speaker 4
August, it grows a bit. What do you what's driving that?
Speaker 3
Yes. I mean, think what's driving the increase in gross margins, I mean, you have a little bit you have the return of the and then specialty use up a little bit that adds some gross margin percent to us. In Brazil, we have a higher mix back to mobile a little bit. So I think that you'll see some gross margins. I think gross margins are up mainly because of Specialty Compute up in Q4 and Q3.
Speaker 4
Okay. Thanks guys.
Speaker 0
Thank you. Our next question comes from the line of Simeon Oh of Deutsche Bank. Your line is open.
Speaker 5
Great. Thank you. My first question is, you guys talked about the memory content is increasing in the May and expect to continue to increase. Can you quantify for us what the impact on the average selling price was in the last quarter? I think the previous quarter in the February, you said ASP was up 60%.
And how do you think this trend in terms of memory content will go up in, let's say, the next six to twelve months?
Speaker 3
Okay. So I think in Q3, I think Brazil's ASPs are pretty flat to Q2. So we didn't see these growth there, but they didn't come down, right? But I think we're looking we're probably looking for some kind of probably looking maybe 15%, 20% growth maybe Q4 in ASPs based on what we're seeing right now.
Speaker 0
Then That's how And
Speaker 3
as we release these new products, mean, we have some really high density products being released, right? So those products release, I would expect to see ASPs still moderately increased probably next year even if memory prices do fall.
Speaker 5
Got it. Maybe a follow-up question. I know you'll disclose this in your 10 Q, but how was the gross margin by segment in the quarter? And related to that, maybe I just asked the rest of the question. If I look back at the previous quarter, gross margins for Specialty Compute has gone up a lot year over year, which is what you guys expected.
But the reverse was true for specialty memory, which I thought will be more stable. I also don't recall Brazil margin being in the mid teens in the past. I always thought it's probably closer to 20%. I assume there are higher logistics costs and operational costs. But my question is what needs to happen to get margins back to the kind of normalized range for those businesses, which is what I'll 20% or more?
Speaker 3
Okay. Well, for Brazil, then you're at near normalized margins. So we ended about 21% in Q3 for Brazil. Okay. Specialty Compute came down to 24%.
Ajay mentioned, they have a higher mix of commercial and federal, commercial margins are lower. So that business dropped down to 24% and then specialty dropped to roughly 16% in the quarter. And specialty, we've been talking about a couple of things. One, we've been going out aggressively going to get share. So we are losing a little of margin there.
And then we introduced some new products, which typically have a higher sales value, but a lower gross margin percent in the quarter. So that impacted margins a little bit. But I think over time, specialty will get back to where it needs to be. That result is already kind of there in Q3.
Speaker 5
Okay. Maybe if I can squeeze in one last one. Last quarter, you talked about DRAM lead time stretching to twelve to fifteen weeks customers are placing orders early to get to make sure they get their parts and backlog exiting the quarter is pretty healthy. Can you give us an update on those metrics in the current quarter? Thanks.
Speaker 3
Sure. I mean, Flash is still Flash is still out there twelve, sixteen weeks. I mean DRAM lead times have come down a little bit, but backlog is still very strong for this quarter. Everybody we've got the orders we need. So I mean, people are still placing orders out in the right amount of time and we're still expediting certain customers parts, trying for them to meet their quarters.
Speaker 5
Great. Thank you very much.
Speaker 2
Thank you.
Speaker 0
Thank you. Our next question comes from the line of Kevin Cassidy of Rosenblatt Securities. Your question please. Thank you and congratulations on making it through a tough time.
Speaker 3
Thanks, Kevin.
Speaker 0
I wonder if you could go in a little more details on the significance of the, 7Die device. Will this be, I guess it increases your density. Will there be more phones manufactured using this? And what do those phones do if they're not manufactured in Brazil? What module would they use?
Speaker 2
So let me try and take that one. The seven die device is a 64 gig of flash and four gig of LPDRAM and that's going into some phones that already started shipping this quarter. The 11 die device is by far the most complex product we've ever manufactured in Brazil and is one of the leading it's really up there with anything being shipped anywhere in the world. That's 128 gigabytes of flash and four gigabytes of LPDRAM. So these products are going into sort of the mid to upper range of smartphones.
The super high end of smartphones may well be imported, but that's primarily we're talking about the iPhone. The super high end of Samsung or Motorola or LG's phones are mostly made in country. So we do supply all of them.
Speaker 0
Okay, great. And on the specialty compute business, you've been saying that you're seeing a lot of opportunities and good bookings. Can you describe how the bookings are the contracts scheduled over time and released against the forecast? Or I guess how much visibility do you get with both not just the Penguin portion of it, but also some of the embedded compute and the wireless products?
Speaker 2
So yes, and you're right to point out that they are a little bit different. Penguin Computing is more in the project oriented business, meaning it could be a project at a lab or often at a research department within a company or an analytics department within a financial services organization. Those are the kinds of applications where high performance computing systems go, modeling, weather, so on. Those are the prime applications and they tend to be more project driven. And as I was saying, our commercial business has actually held up pretty well.
Some of our government related business, which frankly tends to have this year end burst is not seeing the burst just yet. We're hoping that some of these projects that have been lined up for a while will eventually come out into backlog, but they haven't yet. And that's kind of what we were trying to explain. Meanwhile, our embedded computing business is pretty good. It's doing well.
And we have opportunities that are emerging in new areas and that business tends to get a somewhat longer backlog. And our wireless computing business, which has had a relatively narrower customer base because it's a young company that's growing fast. It's a young business that's growing fast. That business has got a lot more design wins over the last couple of quarters. And so as we look forward to fiscal twenty twenty one, we're looking at much more backlog driven business similar to our embedded computing or our specialty memory business.
I hope I'm answering the question you have.
Speaker 0
Yes, that helps a lot. Thank you.
Speaker 2
Thank you.
Speaker 0
You. Our next question comes from Rajeev Gill of Needham and Company.
Speaker 6
Yes. Thank you and I echo my congrats in a tough environment. In terms of the upside in the specialty memory market, you had mentioned kind of some of these new products, module and package solutions. Has that led to an outsized kind of market share gain? I think you hinted that there were some share gains there based on kind of aggressive pricing.
But I just want to get a little more clarity there. Do you intend to kind of or do you feel very confident that this kind of new solution for high performance DDR4 module for space constraint applications is going to be the norm in some of these applications over the next several years, you see kind of a healthy attach rate. Just curious about that and the overall end markets within Specialty Memory, what the kind of thoughts are there in terms of networking and enterprise server, how that's been tracking?
Speaker 2
Sure. Thank you, Raji. We try and Jack can enhance. And the so first of all, we don't look at it our Specialty Memory business in the same way as sort of market share oriented. It's a very design win oriented business.
Because by definition, the specialty memory is working on applications which are not in your mainstream. So if someone is looking for a standard DDR4 module, our specialty memory business is not a good fit for that. And we're not trying to compete to win that kind of a business. We in fact, we've focused on all kinds of different all the way from very so if you think about the entire business like on a normal curve, we focus on the left side of the curve on the right side of the curve. We don't focus on the middle.
I don't know if that is too much of an engineer's answer. But the point is, we tend not to be focused on the very high volume mainstream product. And so when we find applications which can use something particularly differentiated like the products I was talking about earlier, module in a package and some of the rugged solutions and so on. Sometimes to fit into the customer's applications will be aggressive to win the business and the design. And what we need then is for that business to come back to our normal margins over time through cost improvements and so on, which is typical for our business.
We will sometimes forward price, if you know what I mean, to be able to get the design win. And yes, it's not something we are particularly encouraging, but on the other hand for a big opportunity, we will do that. And there's been a couple of large opportunities that we've been able to win as a result. And we're pretty confident that we will get our margins back up to levels that make sense or are consistent with our historical levels.
Speaker 6
Very good. And for my follow-up, in terms of seasonality of the business, it's been a bit volatile given the acquisitions, and also given some of the external events, trade war and obviously COVID. So I'm curious to see how you and the management team are thinking about seasonality as we kind of progress throughout the year. We have these kind of delays in government spending programs, where there's uncertainty whether that will come back or when it will hit, how commercial is strong, Brazil ASPs could be going up. And so I'm just curious how you how is everyone thinking about seasonality?
Speaker 2
Yes. So let's use two words, seasonality and cyclicality. Cyclicality, as you know, many of you know on the call, following the memory business, is an essential almost a feature of the memory marketplace. We actually suffer far less cyclicality compared to, let's say, a classic semiconductor memory company I'm sure many of you are quite familiar with. So our cyclicality is considerably muted.
In fact, we're much more consistent. The only place where we do suffer the cyclicality of memory prices is Brazil, as I think we've explained before. We don't really see that much of it in our specialty memory business and certainly not in our specialty compute business. We do see some seasonality or call it unevenness across the year in our specialty compute business, particularly in the project oriented high performance computing business. The other businesses may see a little dip.
For example, Brazil might see a little dip in its Q1 our fiscal Q1 because of the holidays and because of this festivals and so on. But overall, our business is not that seasonal except to the extent in our HPC, high performance computing business. Jack, I don't know if you would add further.
Speaker 3
No, mean, think typically our HPC business has a good Q4 because of the budget flush and that as Ajay mentioned earlier, that's getting moved out a
Speaker 2
little bit. So I mean, maybe
Speaker 3
we don't get a budget flush this year. So maybe our we will our Q1 might drift down. We're not sure right now, but I think that's the one part of the business that's getting affected the most. I would say what's going on with the COVID-nineteen issues out there is really the Penguin defense government's business right now.
Speaker 6
Okay, great. Thank you.
Speaker 0
Thank you. Our next question comes from Brian Chin of Stifel. Your line is open.
Speaker 7
Hi, good afternoon. Nice job on the quarter and thanks for letting us ask a question. Maybe to start off with Specialty Memory. Sorry if there's feedback here. Revenue is back to within, I guess, about 10% of your peak historical quarter.
And while the broader commodity memory market is obviously down a lot more from its peak, I was curious from your perspective, is your design and sales momentum also reflecting any positive revenue synergies with the specialty and embedded compute business?
Speaker 3
I mean, we already were a vendor to them before we acquired them. So maybe we're getting a little bit extra memory, but I don't think it's that noticeable in the number. And we would actually be honest with you, that would get reported through specialty for embedded computer anyway. So our memory our social memory guys wouldn't get the revenue on that way we reported.
Speaker 7
Okay, got it. Understood. In terms of maybe some of the Brazilian currency effects on the P and L and the business, I guess, one, Jack, can you quantify the EPS benefit to OpEx from your local operations in Brazil? Also, given that devaluation of the local currency, I might expect a negative shift in device mix locally, but you are expecting obviously a meaningful ASP tailwind, I think you mentioned in fiscal 4Q. So just to be clear, does this mainly reflect your strategic shift to support the higher density products?
Speaker 3
Well, mean, it's not really a strategic shift, right? I mean, we follow the roadmaps of the guys in Brazil of Samsung, LG, Lenovo in Brazil. And so when they start saying we're going to build phones now in Brazil where we need a higher density of product and we will develop those products in Brazil to meet the demand. So it's not like we've decided we're going to go after that market in Brazil. Our customers have said we're going to start to build phones in Brazil that need more memory and so we're going to support them with the products in Brazil, which will be a higher density product.
ASP should go up. So even if you lost some units, you should still be a positive on revenue and things in Brazil in fiscal twenty twenty one. So that's that question. You asked a few questions. So I think on Specialty Memory, mean we're as I said, we're winning design wins in Specialty Memory.
There's interesting products that are that we're winning in that business. There are new we just take a long time to go from a design win to ramp into revenue. We've got some programs that we've been working on for a year, year and a half that we're finally ramping into revenue. And so that's having some of that impact on the revenue you're seeing there in the numbers for us. And
Speaker 2
I Yes. No, I think that's I think we're performing well with new design wins. And one of the things that drives our Specialty Memory business is the need for customers to have something different. I know that sounds like an overly simplified statement, but that's really the bottom line. I mean, customers wanted just the middle of the road standard DDR4 DRAM module, we wouldn't have they would buy it from Samsung or Micron or someone like that.
We offer something different for specific applications and that's why we win designs and that's where we win designs. And now if you look at the plethora of memory technologies out there today, not just in DRAM like DDR3, DDR4, but look at the varieties of applications that are out there in consumer and industrial and defense and of course our more traditional markets networking and telecom and so on and storage enterprise storage. We are seeing just a tremendous variety of applications and the tremendous variety of technologies, memory technologies including emerging ones like three d XPoint and of course the QLC flash. And so our roadmaps are now much fuller with a variety of application oriented products, which gives us the opportunity to increase our design wins and our attach. That's really underlying this business is a need by specific customer usage cases for something different, something that's not supported by the mainstream, middle of the road memory module that comes from typically from the large semiconductor vendors.
Speaker 7
Great. Makes sense. Thanks so much.
Speaker 2
Thank you. All right. Thanks, Brian.
Speaker 0
Thank you. Our final question comes from the line of Mark Lapasos of Jefferies. Your line is open.
Speaker 8
Hi, thanks for taking my question. I had a few, if I may. On Specialty Memory, very impressive growth. And I'm wondering if the products it sounded like a lot of new products that you're introducing. And I wonder if this is kind of a result of an increased R and D effort or increased cadence, or if this just seems to be products hitting coincidentally at one time.
And can you talk about the nature of this business? Like how can any of these new products be 10% or 20% of this business ultimately? Or is this what is the life cycle? Is this are these new products that are layered on? Do they have very long life cycles or short life cycles?
Is this the cadence that you need in order to just to tread water or growth? If you could kind of give us a characterization of the Specialty Memory business from a diversity standpoint and size of potential business?
Speaker 2
I'll try my best, Mark, and thank you for the question. The investment in R and D started I don't know four to six quarters ago. So as usual what you're seeing now is products that are introduced today or in the last few months. But we're the investment in the team from an R and D standpoint started, what would you say, Jack, five or six quarters ago.
Speaker 3
Right. Easy. That's when we start
Speaker 2
beefing up. And so these costs are run rate costs already. I mean, you've seen them in our cost structure over the last year or more. These new products, I mean, we are spending our resources and our expertise on identifying these kinds of opportunities, both proactively as in we design the product and market it and reactively if you will, meaning some customers come and tell us, really need a very low profile device. Recently, we introduced an SSD in this EDSFF form factor.
I'm not sure if you're familiar if any of you might be familiar with EDSFF, but it's a very low profile form factor for storage boxes going forward. And so we introduced SSDs for that application. That we believe has a lot of legs because people are looking for a more efficient footprint for many of their storage boxes. And many of these products are these are all niche products. I mean, by definition, everything we do is a niche product.
I know it's exactly counter to what you would hear from a large semiconductor company. We're not in the middle of trying to find the sweet spot of the highest density in the largest volume of, let's say, SSDs. We're really looking for that particular product, which gives you a differentiation and we can engineer for that particular set of applications. And that's really where we are focused. Now each of these will have a different sort of market opportunity, I have to admit.
So it's hard for me to give you an easy answer on, well, this product has a market opportunity of X $100,000,000 or whatever. But that's each of them internally gets justified based on a certain revenue expectation and a certain margin contribution. And then that justification is what drives our product roadmap and eventually the revenue.
Speaker 8
Fair enough. Then Mark, most
Speaker 2
of
Speaker 3
our products are long life cycle products.
Speaker 0
I mean, reason they buy products from us
Speaker 3
is because of the long life cycle, right? And also some of these products that we're now getting revenue on, they've been undergoing customer qualification for over a year. Some of these guys take a year to qualify a product. So they're just getting out there. Now, they're starting to buy them in some kind of volume.
Speaker 8
Got you. Okay, that's very helpful. And then on this business, a lot of times when you hear the kind of sequential growth that you put up, the cynic might say, well, there's going to there's probably double ordering. And so what do you say to that people who voice that concern? Like is there any way to track that?
How would you characterize inventories in the channel or at your end customers?
Speaker 3
We have the supply chain business where we know some of our big customers got inventory they have. And then we've been following really tightly our customers, right? We've been really working hard to make sure that it doesn't look like they have over inventory. So we work with the contract manufacturers. We're not seeing lease over inventory to the contract manufacturers.
We have a lot of contract manufacturers who are screaming that they're short of parts, right? So they're asking for parts. Now if they're buying too many from the contract manufacturers and their stuff in the channel after that, we don't have visibility of that, but we don't believe the contract manufacturers have been buying a bunch of parts for inventory and holding on to them.
Speaker 8
Got you. That's fair. And then a question on the government business. A lot of times you at least historically you might have heard the expression use or lose coming from that segment. Is that still the case?
Is that a characteristic of that? If they don't use it by the end of the fiscal their fiscal year, then it goes away. And is there any talk from that customer segment about to avoid that like prepaying for systems where you may see a deferred revenue or something like this? Is there talk on that? Or is this still kind of a black box in terms of that what happens at the end of the budget flush?
Speaker 2
I guess the short answer is we don't know. We really this I think we'll all agree quite easily that this is not a normal year. And we just really don't know. Luckily, it's not the biggest segment of our business. And we still are getting, I mean, let's just be clear that it's not that it's gone to zero.
It's just that there are many projects that have been these projects emerge over a nine to twelve month period. It's not like they suddenly show up. And then they get defined. We work with them to architect the solution, to quote the solution, to get at the budget then it goes through an internal process within the government departments to sign a budget to it. And that eventually gets awarded through a competitive process.
It's the government, so you always have to have a competitive process. And that whole process is extremely well defined. Now the question is whether and your question is whether the year end flush is somehow not happening this year. And I really just don't know.
Speaker 8
That's fair. Completely understandable too. And last question, if I may. On the you had, Ajay, you had mentioned M and A is an important part of SmartStrategy. And what has the is the pandemic done for the target the environment for M and A targets?
If you look at the stock market, things seem to be valuations seem to be good. But I'm wondering what on the private side, what's going on in the target environment or the businesses are companies more willing to have conversations as the target environment get richer during a pandemic?
Speaker 2
Yes, I think so. I think that the target environment is more active. My initial thought as we went through March, April was that this would kill transactions, meaning there would be sort of a freeze as you kind of saw in 02/1929. But it's been the most surprising year in many ways and this is certainly one of them. In that, there's been a very active set of not only transactions, I mean everyone on the call is quite familiar with IPOs.
It's been an active and pretty good year for IPOs who would have thought. And we are also seeing an active set of opportunities around M and A. Now with the stock market being where it is overall, there's a question of how valuations are and expectations work. But with the right opportunity set where we can bring in a lot of our synergies, which is frankly what we look for. We're not just looking to be a financial buyer.
We are not we're strategic buyer in a way because we are able to bring our operational and other synergies to bear. And that would have to be part of the equation to make sense of any acquisition that we make. And I think that those opportunities exist and we'll continue to evaluate them. And the other good news is that in February, we completed a restructuring of our balance sheet where we took out $200 odd million of relatively shorter maturity debt and certainly much more expensive debt and replaced it with a convert that has got a six year maturity. This happened just this February.
Now it's extremely meaningful because we have a strong balance sheet. We have very little in terms of short term debt. Our debt service costs have gone way down and including amortization. And meanwhile there are a number, as I was saying earlier, of a number of interesting targets. So this is actually a time when we are not only seeing some interesting opportunities, but also able to do something about it.
Speaker 8
That's very helpful. Thanks for taking my questions.
Speaker 2
Thank you.
Speaker 0
Thank you. At this time, I'd like to turn the call back over to Ajay Shah for closing remarks. Sir?
Speaker 2
Thank you. And thank you all for your interest in our company. And we look forward to speaking with you all again as we do our next quarter. We're pleased to have reported strong results and to be able to guide strongly forward as well. And we look forward to your support and your interest.
Thank you all very much for attending our call today.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.