SMART Global Holdings, Inc. (SGH) Q4 2021 Earnings Call Transcript

SMART Global Holdings, Inc. (NASDAQ: SGH) Q4 2021 earnings call dated Oct. 12, 2021

Corporate Participants:

Suzanne Schmidt — Investor Relations

Mark Adams — President and Chief Executive Officer

Ken Rizvi — Senior Vice President and Chief Financial Officer

Analysts:

Thomas O’Malley — Barclays Capital, Inc. — Analyst

Brian Chin — Stifel, Nicolaus & Co., Inc. — Analyst

Kevin Cassidy — Rosenblatt Securities, Inc. — Analyst

Rajvindra Gill — Needham & Co. LLC — Analyst

Sidney Ho — Deutsche Bank Securities, Inc. — Analyst

Mark Lipacis — Jefferies LLC — Analyst

Presentaton:

Operator

Good day, and thank you for standing by. Welcome to the SGH Fourth Quarter and Full Year Fiscal 2021 Results Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Suzanne Schmidt, Investor Relations. Please go ahead.

Suzanne Schmidt — Investor Relations

Thank you, operator. Good afternoon and thank you for joining us on today’s earnings conference call and webcast to discuss SGH’s fourth quarter and full year fiscal 2021 results. Joining me on the call today are Mark Adams, Chief Executive Officer; Jack Pacheco, Chief Operating Officer; and Ken Rizvi, Chief Financial Officer. We opened the webcast today with a corporate video that highlights our newly launched SGH brand. To learn more about our new identity visit sghcorp.com.

In addition, you can find the accompanying slide presentation and earnings press release for this call on this new website. We encourage you to go to this site throughout the quarter for the most current information on the company, including information on the various financial conferences we will be attending. Before we begin the call, I would like to remind everyone to read the forward-looking statements information that we have included in the earnings press release and the earnings call presentation.

Please note that certain of these statements made today may constitute forward-looking statements, and that these statements are our present expectation 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?

Mark Adams — President and Chief Executive Officer

Thank you, Suzanne, and to all of you for joining us today. I am pleased to report that we completed fiscal 2021 with outstanding fourth quarter results and are entering fiscal 2022 with strong momentum. In many ways, fiscal 2021 was a milestone year for SGH. We closed the acquisition of Cree LED, and with that we organized the company into three lines of business: Intelligent Platform Solutions under the Penguin brand, Memory Solutions under the SMART Modular brand, and LED Solutions under the Cree LED brand.

Our three businesses share a common operating model in that they all deliver custom solutions that address the requirements of the niche markets they serve leveraging core capabilities in engineering, manufacturing, managed services and quality. I couldn’t be more proud of our team that in a year of unprecedented macro challenges from the COVID pandemic to microelectronic supply chain constraints, our businesses rose to the challenge and were able to deliver outstanding results. Let me share a few highlights from the fourth quarter and our fiscal year 2021. Total revenue was $1.5 billion in fiscal 2021, an increase of 34% year-over-year.

Non-GAAP gross margins reached 22%, up 240 basis points from the prior year. And in Q4, we recorded gross margins of 26.4%. We achieved a more diversified mix of business with Memory Solutions accounting for just 53% of Q4 revenue, down from 77% in the prior year same quarter. Each of our individual businesses achieved outstanding results from record revenues at Penguin to new customer wins and new vertical markets at SMART Modular to significant gross margin expansion at Cree LED. On the governance side, in the midst of our long time largest shareholder, Silver Lake divesting of their ownership position, we appointed Sandeep Nayyar as Lead Independent Director on the board.

In addition, with the recent announcement of Penny Herscher joining the SGH’s board, we are reinforcing the company’s commitment to greater independence, diversity and public company board experience. We’ve also made great progress on our ESG initiatives and released our inaugural ESG report for 2020 highlighting what we’ve accomplished to-date and our long-term commitment to creating a sustainable future. And as some of you may have noticed, we’ve launched our new SGH brand and website to more accurately reflect our mission of powering growth and expanding possibilities in everything we do.

We made great progress in the execution of our growth and diversification strategy in 2021 and believe our go forward investment thesis is compelling. We have built an outstanding leadership team and we are well-positioned across each of our lines of business by driving innovation in the specialty markets we serve. We are pleased by the progress to-date but even more excited by the tremendous opportunities for profitable growth that lie ahead. I will now provide some more detail of our Q4 performance from each line of business, starting with Intelligent Platform Solutions Group or IPS, which turned in another strong quarter and record revenue of approximately $98 million, 46% higher than the same quarter a year ago.

Gross margins were up sequentially due primarily to a higher mix of managed services. As a reminder, we previously discussed the potential variability of IPS revenues and gross margin percentages due to the timing of deployments quarter-over-quarter. The IPS team continues to make progress on its managed service growth initiatives, with total software and managed services revenue growing by 40% in Q4 fiscal 2021 versus Q4 of last year. Turning to customer highlights, we received two awards from the Department of Defense High Performance Computing Modernization Program, totaling $68 million for the Navy and Air Force Supercomputing Resource Centers.

For both awards, we will deliver Penguin computing’s TrueHPC platform, plus managed services and high performance storage. TrueHPC systems are complete solutions equipped with the most advanced processing technology coupled with the latest memory solutions making them ideal for HPC simulation applications in tech research. Our systems will be among the most powerful supercomputers in the DoD’s portfolio. This win is an example of the progress we continue to make in expanding our engagements with existing and new customers in the federal, ultra-scale financial and oil and gas sectors. In Q4, Penguin Computing released major updates to Scyld ClusterWare, Scyld CloudManager and Scyld CloudWorkstation Software Solutions.

These software enhancements focused on performance, scaling and security to deploy and manage complex HPC solutions. We’re seeing customer demand continue to grow with a bias towards complete solutions. IPS is well-positioned to meet this demand with our hardware and software expertise, 20 years of the experience in HPC and AI and our cloud and service offerings. We are excited about the solid performance of IPS and continue to strengthen our new business model to drive more growth potential going forward. In our Memory Solutions Group, revenue grew by 7% Q4 fiscal ’21 versus Q4 fiscal 2020 to reach $247 million.

Excluding the impact due to the customer revenue reclassification from the gross to net basis that we discussed on the Q3 call, revenues would have been up approximately 23% from a year ago quarter on an apples-to-apples basis. The team continues to make progress expanding our customer base in developing new vertical market solutions. One such success is the work we are doing for a large hyper-scale data center customer where memory requirements are becoming more critical to overall system performance. The specific design requirements from large data center companies play to our strengths stemming from our long history of developing highly focused, engineering driven and application specific solutions.

In this instance, we delivered a high performance accelerator card that provides memory expansion and offloads selected algorithms from any of those CPU by moving the compute processing near the data enabling parallel execution with very low latency. We continue to invest in new memory based products and technology. In Q4, we delivered first samples of memory models based on the new CCIX standard to a leading server manufacturer. CCIX is an emerging standard that improves performance by offloading certain compute functions to the memory module.

The CCIX module is designed for emerging applications such as AI and machine learning. In our Brazil business, we successfully concluded our internal Gen4 SSD qualification and began our Gen5 SSD qualification process. In addition, we launched our high density uMCP solution for 5G smartphones, which is our first product in Brazil utilizing the UFS interface for low power and greater storage capacity. Now turning to our LED Solutions Group, which had an outstanding quarter. Revenues grew to $123 million dollars in Q4 [Technical Issues]. Operator?

Operator

Yes. One moment.

Mark Adams — President and Chief Executive Officer

Why has it stopped?

Operator

One moment. I’m going to figure that out. Give me just one second, please. Thank you. We apologize for the delay. Please stand by. [Technical Issues]

Suzanne Schmidt — Investor Relations

Operator, we’re going to go ahead and continue from this point on in the LED section. Mark, go ahead.

Mark Adams — President and Chief Executive Officer

Thank you for your patience. I just started to talk to LED Solutions Group, which had an outstanding quarter. Revenues grew to $123 million in Q4 in what is historically a strong quarter for the LED business. Gross margins were higher in the quarter as we were able to both meet the increased demand in the specialty markets we serve as well as advance on the execution of our manufacturing transformation.

Moving from silicon carbide to sapphire wafers and from a captive manufacturing model to an outsourced capital light model pre-LED’s technology portfolio is a key competitive advantage. Our focus on the high-performance and specialized portions of the LED market, including the high and mid-tower general lighting segment, video and specialty lighting segments reinforces our market leadership position. We are investing in new technology areas where tomorrow’s growth will come from. Example of emerging trends we are following include improving lumen density for incentives or [Technical Issues].

Ken Rizvi — Senior Vice President and Chief Financial Officer

By approximately 34% to a record $1.5 billion, driven by strong performance across all of our businesses. Intelligent Platform Solutions grew by approximately 30% on a year-over-year basis to a record $345 million. Memory Solutions grew by approximately 9% on a year-over-year basis to $932 million. And in addition, our LED Solutions Group contributed approximately $225 million in sales during our fiscal 2021. Non-GAAP gross margin in fiscal 2021 was up approximately 240 basis points to 22.2% from prior year non-GAAP gross margin of 19.8% driven by or accretive LED Solutions acquisition and IPS.

For fiscal 2021, our non-GAAP diluted earnings per share was $5.22, up from $2.59 in fiscal 2020. And adjusted EBITDA was $188 million, up approximately 80% from $104 million in fiscal 2020. Now, let me turn to our fourth quarter results. We reported another strong quarter in the fourth quarter with all key metrics above the midpoint of our guidance range. Net sales for the fourth quarter were approximately $468 million, a record for the company and an increase of 57% year-over-year from the fourth quarter of 2020 and up 7% sequentially.

In addition, non-GAAP gross margin came in at a record 26.4% and non-GAAP diluted earnings per share was a record $2.16 for the fourth quarter, both above our guidance. Turning to our non-GAAP operating highlights; on a year-over-year basis, total SGH revenues grew by approximately 57% in the fourth quarter, helped by the incorporation of Cree LED into SGH, which added approximately $123 million of sales in the quarter. Excluding Cree LED, our revenues grew by approximately 16% on a year-over-year basis, mainly driven by IPS, which grew by 46% and Memory Solutions which grew by 7%. For the fourth quarter, IPS had record revenues of approximately $98 million, a record for that business.

As we have discussed in our previous earnings calls, the IPS business will continue to have quarter-to-quarter variability in revenues and gross margins based on the timing of hardware, software and managed services in any given quarter. Our Memory Solutions Group had revenues of approximately $247 million in the fourth quarter. Revenues grew primarily from the continued growth of our Specialty Memory business. Our LED Solutions Group had revenues of approximately $123 million in the fourth quarter. This growth was driven by strong overall demand for our high power products, as well as the benefit of an additional week for the LED business versus the 12 weeks in the third quarter.

In the fourth quarter, we were also able to replenish the channel to a more normal level as some of our supply constraints eased. As we head into the first quarter of fiscal 2022, we anticipate revenues for LED solutions to come down sequentially. We continue to migrate towards a fab light structure, enabling a more flexible operational model to better manage fluctuations of demand and supply. As discussed at our Analyst Day, we continue to expect this business to grow at a mid-single-digit CAGR on a long-term basis, but anticipate some seasonality and variability quarter-to-quarter. Non-GAAP gross margin for the fourth quarter was a record 26.4%, up from the 21.9% in the prior quarter and up from 19.5% in the fourth quarter of 2020.

Gross margins for SGH were helped by stronger margin performance from the LED Solutions Group, as well as IPS, which benefited from higher margin software and managed services mix in the fourth quarter. As we have discussed in the past, our IPS business will have variability in its gross margin profile quarter-to-quarter based on the mix of hardware, software and services revenue. In addition, in the fourth quarter, we did have a onetime benefit to gross margin within LED Solutions related to the sale of previously reserved parts. Operating expenses for the fourth quarter were approximately $57 million up from $29.4 million in the fourth quarter of 2020.

Operating expenses were up due to the inclusion of LED Solutions, continued investments in IPS, as well as an increased bonus accrual in the fourth quarter of 2021. In addition, operating expenses benefited from approximately $7.8 million in financial credits in Brazil. This helped offset our Brazil R&D spending, which is required to realize this credit. As discussed during our last earnings call, the current law related to these specific financial credits is expected to expire in the beginning of calendar year 2022. Non-GAAP diluted earnings per share for the fourth quarter of 2021 was $2.16 per share, compared with $1.39 per share in the third quarter and up 163% from $0.82 per share in the fourth quarter of 2020.

Adjusted EBITDA for the fourth quarter of 2021 was $75.9 million or approximately 16% of sales compared to $33 million or approximately 11% of sales in the fourth quarter of 2020. Our breakdown of net sales by end market for the fourth fiscal quarter of 2021 was as follows. Mobile and PCs was 23%; network and telecom 11%; servers and storage 12%; AI, data analytics and machine learning 13%; advanced lighting 26%; and industrial, defense and other at 15%. Now turning to working capital; our net accounts receivable totaled $313.4 million compared with $274.9 million last quarter.

Day sales outstanding came in at 39 days flat with the last quarter on a days’ basis. Inventory totaled $363.6 million at the end of the fourth quarter compared with $289 million at the end of the prior quarter. This growth was driven by additional inventory for our Memory Solutions Group including our supply chain business where we are not the risk taker for the inventory purchased on the behalf of our customers. In addition, we built up inventory for our IPS business in the fourth quarter to support shipments early in our fiscal first quarter of 2022. Inventory turns were 6.8 times in the fourth quarter versus 7.7 times in the prior quarter.

And consistent with past practice, accounts receivable, days outstanding in inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $738.5 million and $620.7 million respectively for the fourth 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 recognized as net sales the net profit on a supply chain services transaction. Cash and cash equivalents totaled $223 million at the end of the fourth quarter, which was $34 million higher than our previous quarter.

Fourth quarter cash flow from operations totaled $48 million, compared with $49.3 million in the prior quarter. For fiscal 2021, cash flow from operations totaled $153.4 million. For those of you tracking capex and depreciation, capex was $47.6 million for the year and $7.6 million for the quarter and depreciation was $9.4 million for the quarter. And now turning to our fiscal first quarter 2022 guidance; we expect our net sales for the first quarter of 2022 will range from approximately $440 million to $480 million. Our GAAP gross margin for the first fiscal quarter of 2022 is expected to be between 24% and 26%.

Non-GAAP gross margin for the first quarter of 2022 is expected to be approximately 25% to 27% as we expect a higher mix of software and managed services related to our IPS business, which is expected to help SGH’s overall gross margins for the quarter. Our non-GAAP operating expenses are expected to be in the range of $54 million to $59 million in the first quarter of 2022. GAAP diluted earnings per share is expected to be approximately $1.20 plus or minus $0.20. On a non-GAAP basis, excluding share-based compensation expense, intangible asset amortization expense, convertible debt discount and other adjustments, we expect non-GAAP diluted earnings per share to be approximately $2 plus or minus $0.20.

Cash capital expenditures for the first fiscal quarter are expected to be in the range of $10 million to $12 million. Cash capital expenditures for fiscal 2022 is expected to be approximately $60 million to $65 million and includes approximately $10 million to $15 million of integration-related capital expenditures for LED Solutions. Our GAAP diluted share count for the first fiscal quarter of 2022 is expected to be approximately 27 million shares based on our current stock price.

Our non-GAAP diluted share count for the first quarter of fiscal 2022 is expected to be approximately 26 million shares, as it includes the benefit of our convertible note capped calls. Our forecast for the first fiscal quarter is based on the current environment, which contemplates the constraints in the global supply chain. Please refer to the non-GAAP financial information section and the reconciliation of GAAP results to non-GAAP financial measures and the reconciliation of GAAP net income to adjusted EBITDA tables in our earnings release for further details.

Now let me turn the call back to Mark for some concluding comments before we open the call to questions. Mark?

Mark Adams — President and Chief Executive Officer

Thanks Ken. Prior to when I became CEO of SGH over a year ago, I was aware of the long history the company had in memory both the Specialty business as well as our Brazilian operations. What I didn’t have as much of an appreciation for until I joined was the opportunities at our computing business now called Intelligent Platform Solutions. When you factor in the acquisition of Cree LED on top of that, we truly are a much different company. Today, we are literally installing one of the largest high-performance computer systems in the world.

Our LED technology is making the world safer, enabling lighting solutions for the emergency vehicles segment and our Specialty Memory Solutions are at the core of high bandwidth networks, enabling access to data anywhere in the world in an instant. There are many more examples of how SGH is powering growth and expanding possibilities. We set record revenues in Q3 and in Q4. We see gross margins of 26% in Q4 up by almost 700 basis points compared to the same quarter a year ago ultimately leading to a Q4 EPS of $2.16. Our team at SGH feels we are building something very special and couldn’t be more excited about our future.

Thank you all again for joining our call. Operator, please open the lines for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Tom O’Malley with Barclays. Please go ahead.

Thomas O’Malley — Barclays Capital, Inc. — Analyst

Hey, guys. Thanks for taking my question and congrats on the nice results. Forgive me if I missed this with some of the, the call issues here. But obviously the biggest highlight of the beat is the gross margins here. Could you explain you know where you saw that margin leverage? I know you mentioned — more service and software business in IPS. Then you also mentioned LED, but you need to see a substantial increase in one of those? Could you just weigh, which segment contributed most to the gross margin outperformance this quarter?

Mark Adams — President and Chief Executive Officer

Sure, Tom. And this is Mark. First of all, before I get to that, we will get to it. I want to apologize our third party hosting service apparently had some technical problems throughout the call, and thank you very much for your patience. Sometimes these things are out of our control. We’ll continue on with the Q&A here, but I appreciate your patience. Relative to the margin question you just asked, I’ll let Ken get into the specifics. But it really truly was a combination, I would say heavily weighted towards continued improvement in the Cree LED gross margin expansion, as well as the mix that Ken noted in his prepared comments vis-a-vis managed service at IPS.

Ken Rizvi — Senior Vice President and Chief Financial Officer

Yeah. So Tom, if we look at it actually across the board for Memory Solutions or IPS and for LED Solutions, margins were up. As Mark highlighted the two big drivers of the margin enhancement relative to Q3 and relative to our guidance for IPS, as well as better performance in LED Solutions, both having good weight in terms of that margin upside — the 26.4% on a non-GAAP basis.

Thomas O’Malley — Barclays Capital, Inc. — Analyst

And then just another moving piece on the quarter, you guys mentioned that within Memory Solutions, the strength really came from Specialty Memory and Logistics. I think last quarter you talked about the revenue headwind you’re seeing. Are you talking about that business line ex that headwind or on a dollars basis was not the strongest business for you within Memory Solutions? Any sort of color on the moving pieces within Memory Solutions would be really helpful.

Mark Adams — President and Chief Executive Officer

Yeah. So, Tom, specifically within Memory Solutions you saw that business grow from about $240 million in Q3 to $247 million here in Q4. And when we look at that growth, most of that growth was due to the Specialty business. Now one thing to note that we talked about in Q3 — as of Q3 or the tail end of Q3 we moved one customer from a gross basis to a net basis. And so, even with that, we did see good growth in our Specialty Memory business Q3 to Q4.

Thomas O’Malley — Barclays Capital, Inc. — Analyst

It’s helpful. Let me just sneak in one more if that’s okay.

Mark Adams — President and Chief Executive Officer

Sure.

Thomas O’Malley — Barclays Capital, Inc. — Analyst

You obviously [Technical Issues] and you’re mentioning two things, you’re mentioning IPS ramp and also some — LED inventory as well, you kind of described some seasonality in the LED business in Q1. Can you talk about your confidence in building that inventory? Is that primarily related to IPS or can you just talk about why you’re so confident in growing that into the beginning of the next fiscal year?

Ken Rizvi — Senior Vice President and Chief Financial Officer

Sure. So, Tom, just to clarify when we in our prepared remarks, the inventory grew for two reasons. One, as you highlighted in the IPS segment, we did grow inventory essentially to be able to ship orders early in our fiscal Q1 2022. So we had to have that inventory on hand that amounted to about half of the inventory growth Q3 to Q4. The other half a big portion of that was related to the overall Memory Solutions Group, and within there, I would say about two-thirds of that growth was related to our supply chain business where, as we highlighted, we are not the risk taker to carry that inventory on our balance sheet, but we are not the risk taker for it. And so those are the two drivers. You will see that inventory balance overall with the company come down as we move from Q4 into Q1.

Mark Adams — President and Chief Executive Officer

And the only other comment Tom, I would make in support of what Ken just said is that we’re all aware of the certain supply chain constraints. And we’re in growth mode in our business as we talked about top line revenue growth. We’re in growth mode in newer business opportunities and we’re vigilant and how we’re looking at it. But we’re also taking advantage of sourcing opportunities to be able to take advantage of these opportunities across all three businesses.

Thomas O’Malley — Barclays Capital, Inc. — Analyst

Thanks, guys.

Mark Adams — President and Chief Executive Officer

Thank you.

Operator

And your next question is from Brian Chin with Stifel. Please go ahead.

Brian Chin — Stifel, Nicolaus & Co., Inc. — Analyst

Hi there. Yes. Thanks. Good afternoon. Congratulations on the very strong margin performance. And actually I wanted to ask you a few questions. Maybe to stay with gross margins here which clearly is a big positive here on the results and outlook. Yeah, I think it was the Analyst Day not long ago where you talked about sort of mid-20s on the gross, low teens on the out margin as a long term target, right? And maybe you meant to say yearend target because we’re kind of there now.

But jokes aside, can you sort of decompose again the things that are materializing a lot faster here and some of those may not be fully sustainable, right? I mean they could be that the big positives on the mix for example, but some of those initiatives clearly around sort of durable hardware versus software on the IPS — some of the other pruning and optimization of product lines or businesses — they’re going to take place over a longer horizon. So just trying to kind of get a sense on sort of what that what that baseline should be and maybe you could also calibrate Ken, sort of what that positive benefit to gross margins is in terms of the selling of previously reserved inventory?

Mark Adams — President and Chief Executive Officer

I’ll let Ken get to the treatment and the numbers specifically. I would just say that, yeah, your humor is taken well that we did have a longer term guide to get to where we are today. Of course, we continue to look for new business opportunities that are driving and taking advantage of the capabilities we have and the uncertain value add that we’re trying to drive on a go-forward basis. And so as we think about our business been tremendous execution on the LED side with this manufacturing transformation, just, when we bought the business back in, when the transaction closed in March of 2021, just seven months ago, we couldn’t have envisioned any better execution by Claude and his team.

And in addition to that, the demand environment is certainly stable and more favorable than we probably thought of as we went into the back half of the year. On the IPS side, we’ve talked about some of the puts and takes around the deployment schedules, and it doesn’t always line up to our 90-day quarter, so to speak. And then as we think about hardware versus managed services and software per se it is going to induce some variability into the gross margins. All-in-all, as we continue to focus on the Specialty Memory business as well, we like to think that we’re going to continue to drive margins in this range. There will be times do the lumpiness of this business that margins might not be in the upper end of the range.

I think, Ken will probably keep me honest, but I’m thinking that the range somewhere in the 23 and 24 on the bottom and 26 plus on the top is how I look at the business today. Now, as I mentioned in my opening comments, it’s about 700 basis points on the high end, better than we were just 12 months ago. And so I think we’re making a lot of progress. Our job as a management team over the next 12 to 24 to 36 months is to continue to strengthen our funnel, and we’re confident in that strengthen our funnel to increase our mix, to strengthen our margin and maintain a growth direction that we’re sitting in today and our forecast. We are very confident, but I understand the question and we will be driving our behaviors to drive value and mix accordingly to strengthen the margins on a go forward basis. Ken?

Ken Rizvi — Senior Vice President and Chief Financial Officer

Yeah, on that tactical item, if you look on the LED piece, it helped overall margins in terms of the sale of some previously reserved parts by about 50 basis points or so.

Brian Chin — Stifel, Nicolaus & Co., Inc. — Analyst

Okay, got it. Okay. And you expect that would be similar in the November quarter?

Ken Rizvi — Senior Vice President and Chief Financial Officer

Well, we don’t expect to sell pre-reserved parts. So that is part of the reason why when we look at our guidance at the midpoint, we’re at around that 26% versus 26.4% in Q4.

Brian Chin — Stifel, Nicolaus & Co., Inc. — Analyst

Okay. Fair enough. Maybe just one more in gross margin and I’ll just close on growth again, but Ken did you — I may have missed it. But did you give the segment breakdowns by gross margins and then just to kind of stress the memory margins there’s concerns clearly about sort of the choppy pricing in terms of DRAM and you sort of reemphasize a couple of times about sort of how you don’t take on that risk per se, but just — in terms of more choppiness on DRAM, how does that sort of flow through in terms of maybe not your margin so much, but in terms of your demand profile in terms of those engagements?

Mark Adams — President and Chief Executive Officer

Yeah, I would say that. Let me just take a last part and I’ll hand it over to Ken. On the DRAM and broader memory market environments, we have stressed on prior calls that given the specialty nature of our business and the fact that we’re not sitting on the capital risk of a pure play memory semiconductor company, our exposure is certainly lighter. And to then address your question more specifically, we don’t see the memory business as a byproduct of the lack of demand from our customers.

As a matter of fact, we think the demand of the business remains stable. We think that our ability to provide kind of custom solutions and by the way parts that are really profitable for this memory company these are legacy parts or early DRAM technology parts both of which are of interest to any semiconductor company. And I think our ability to add value on these more strategic technologies also helps strengthen our balance in the business. So — we’re not here talking about a weaker memory business today. We’re actually very excited about the memory business and demand remains pretty strong.

Ken Rizvi — Senior Vice President and Chief Financial Officer

Yeah, and then to answer the first part of your question as of Q4 so you’ll see this in our 10-K for fiscal 2021 is we’ve migrated to those three segments. We talked about it at the Analyst Day in terms of how we are running our business with three presidents for each of those three segments. And so we will be reporting under IPS, under LED Solutions, under memory solutions, and we’ll report the revenues and you will see in our K, in our Qs going forward the operating margin percent, but we will only be guiding to SGH gross margins on a go-forward basis.

Brian Chin — Stifel, Nicolaus & Co., Inc. — Analyst

Okay. Okay. Got that. And then just closing on growth really fast just IPS commercial has been strong throughout this fiscal year and into the current. You talked about the DoD win as a good base against the current fiscal year. Mark, with all these in mind does this give you the confidence now that that fiscal 2022 is going to be a double-digit growth year for IPS or is there some risk there maybe not even so much demand but just in terms of that sort of inventory effect where you kind of need to buy forward on processors other key components just to ensure you can ship on a go-forward basis?

Mark Adams — President and Chief Executive Officer

Yeah, I got to tell you — we like this business and I remember on my first earnings call just 12 months ago, it wasn’t very well understood the potential of this business. And the back half of the year, the team under Thierry’s guidance and leadership has done a fantastic job. And as I mentioned — early on in my process, the funnel has not been super strong. We are now more and more encouraged about the go forward funnel. Yes, it will be lumpy and when it’s going to be lumpy, we’re going to tell you and guide you properly. But the potential for this business we remain very bullish on. We’re going to stop short of giving a guidance for the year. Although I would just tell you that there’s nothing that’s happened in Q4 that would change our optimism around the business.

Brian Chin — Stifel, Nicolaus & Co., Inc. — Analyst

Great. Thank you guys.

Mark Adams — President and Chief Executive Officer

Okay. Thank you.

Operator

And our next question is from Kevin Cassidy with Rosenblatt Securities.

Kevin Cassidy — Rosenblatt Securities, Inc. — Analyst

Yeah. Thanks for taking my question and congratulations on the great results. Maybe sticking with the theme on IPS for the DoD contracts, what is the timing of that $68 million? Does that ship all at once? I think it was early — need to be deployed by early 2022.

Ken Rizvi — Senior Vice President and Chief Financial Officer

Yeah. So, our expectation for that, Kevin, is that it will flow in, in our Q2 and Q3 or fiscal Q2, fiscal Q3 in terms of the timing.

Kevin Cassidy — Rosenblatt Securities, Inc. — Analyst

Okay, great. And also, I think there were services tied to that. What percentage would be services or is that just an ongoing revenue stream for years?

Ken Rizvi — Senior Vice President and Chief Financial Officer

Yeah. So in terms of the services piece that should be kind of in the neighborhood of about 10%, 15% and that will that will be over time. We won’t give you specifics on how long but over time.

Kevin Cassidy — Rosenblatt Securities, Inc. — Analyst

Okay, great. And you also mentioned the Brazil credit ending in calendar year 2022, is that can you reapply for that credit or can you give us a little more details around that?

Ken Rizvi — Senior Vice President and Chief Financial Officer

Sure. Kevin, so on that one that is actually the law in Brazil. So it’s nothing specific to SGH, but it’s a current law. That law has that credit going away in January of 2022. So what you can expect is we get a benefit from spending R&D dollars locally in Brazil that will go away and will have the effect of increasing our opex in Q3 and Q4 of all things being the same.

Kevin Cassidy — Rosenblatt Securities, Inc. — Analyst

Okay. Any gauge of how much that would be?

Ken Rizvi — Senior Vice President and Chief Financial Officer

I would say that should be in the neighborhood. I mean based on where the credits are expected to be in Q1 I would say up to that $6 million range or so as we look at Q3 and Q4.

Kevin Cassidy — Rosenblatt Securities, Inc. — Analyst

Okay, great. Thanks for clearing that up. Thank you.

Ken Rizvi — Senior Vice President and Chief Financial Officer

No problem. Happy to.

Operator

Your next question is from Rajiv Gill with Needham & Company.

Rajvindra Gill — Needham & Co. LLC — Analyst

Yes, thank you and congratulations on the margins. Just sticking to the margins once again Ken. The gross margins based on the math and the mix of the revenue for August implies that the LED business is — getting to kind of early 30s gross margin and IPS is in kind of similar range. We know on the LED there was — a 50 basis point impact from the sale of previous inventory, but — excluding that, we’re still kind of in this kind of early 30s range.

And on the IPS — the quarter before it was 23%, it’s been — it seems like it’s early 30s this quarter, very volatile. But if I wanted to get a better understanding of the baseline margins I know you’re giving kind of this — 23% or 24% range on the low end and 26% on the high end, but that’s a wide range. So, any clarity in how to think about the margins on a quarter-by-quarter basis particularly for IPS, when is managed service is going to be light versus previous quarters? And then secondarily, what’s the baseline for LED margins? Is there more room for expansion as you shift all of the manufacturing there?

Mark Adams — President and Chief Executive Officer

Let me just say. Let me take that and break it into two. On the IPS side, unfortunately when we’re growing like we’re growing Rajiv it’s really tough to breakdown into quarters at the level we’re deploying these systems and the future growth. We’re projecting that the timing of the mix and how it’s going to be shifting back and forth from more hardware orientation to managed services and software. So I’m not sure we can give you any better color than we’re doing today relative to Q1 per say.

Again we think we’re very bullish as I commented earlier, but to try to give you some color around where the margin is going to spike and not spike too far out is just is something that’s just really challenging for us in the lumpiness of the business. And quite frankly, some of our bigger competitors have the same issue. And so, we’ll do our best intra quarter, quarter to two quarters. But at this point, we just got to be really careful because again as you’re seeing, we’re executing properly and we’re getting everything we talked about in terms of the mix. It’s just the timing issue and it helps us in some quarters.

And it might be — again on the lower end of our guidance range on a go forward basis. Vis-a-vis the LED margin expansion — we just — again as I said earlier very pleased with the execution — we’re about 70 % to 75% done. I think the last 25% done will be in the next fiscal year so to speak. And so — holding things constant, there is potential for improved margins. But again, remember where we bought this. We bought the company at 22% gross margin, 21% gross margin somewhere in that range. And as we commented on, it’s 30% and north of 30% kind of as we see the business today. And — we’re very pleased and are optimistic about the future potential for some upside. But both those have resulted in what you see now is again think about this in 12 months, 700 basis points improvement Q4 over Q4.

Rajvindra Gill — Needham & Co. LLC — Analyst

Okay, great. Thank you for that information. And then just on the seasonality of the business that the revenue is going to be down sequentially. We do have that extra week you mentioned in August. You mentioned LED being down sequentially. Wondering about the other pieces of the business, how to think about that on as we go into the November quarter? And just sticking on the top line with respect to memory in the past — you had broken it down or provided a more color related to specialty versus Brazil and PCs/mobile within Brazil. Wondering any kind of color commentary on those individual segments? What are we seeing in Brazil? What’s the expectation as we kind of progress throughout the fiscal year 2022 for Brazil and likewise with specialty memory? Thanks.

Mark Adams — President and Chief Executive Officer

Got it. So let me try to address a couple of the items you talked about. So one of the things we highlighted was for LED solutions. We had an actual, we had 12 weeks in Q3 versus a normal 13 weeks in Q4. So that did help the revenue growth that we saw for LED Solutions Q3 to Q4. As we look at Q4 to Q1, I think you saw our guidance $460 million at the midpoint plus or minus $20 million. So essentially close to flat quarter-on-quarter with some moving pieces amongst the three businesses. And you asked also, I guess, going to the third part of your question in terms of seasonality, I would say that is normal for Q1, even though we have a unique environment in the world today, but we would expect that to be within the norms, seasonally as we head into Q2, we talked about this on our last earnings call.

We would, for instance, for the LED business, you do see it seasonally down due to the fact that you have Chinese New Year in our fiscal Q2 and also for the memory business in Brazil. You do see some seasonal down tick Q1 to Q2. So you do see seasonality there. Fourth, part of your question if I remember correctly was around some of the color and breakout of the memory business, so as we talked about, we now pull these businesses together and we’re looking at memory solutions overall. Brazil being a component of the overall memory solutions business less than 50% of the revenue for memory solutions in Q4 and there the mix has not changed substantially I would say quarter-to-quarter. We did see within Brazil better PC demand in Q4 versus Q3 and that drove the relatively flat revenues quarter-on-quarter with mobile being down a bit within Brazil.

Rajvindra Gill — Needham & Co. LLC — Analyst

I appreciate it, guys. Thank you.

Mark Adams — President and Chief Executive Officer

Thank you.

Operator

Your next question is from Sidney Ho with Deutsche Bank.

Sidney Ho — Deutsche Bank Securities, Inc. — Analyst

Thanks for taking my question. I’ll save you some gross margin questions later on, but a couple of questions on the supply constraint. Ken when you talk about in the guidance that is contemplating some supply constraints in the supply chain can you give us an update on what you seeing within your own supply chain as well as maybe your customer supply chain compared to maybe what three months ago it looked like?

Ken Rizvi — Senior Vice President and Chief Financial Officer

Sure. I would say in general we are still seeing constraints around specific parts of our overall solution sales, so there are still constraints. And I think like other players within the electronic supply chain if we had more parts we would be able to do more revenue. But as we look at our guidance as we look at where we are for our fiscal Q1 we had contemplated what we’re seeing in the overall supply chain which is specific to certain components there are shortages of the lead times are long. But despite that I’d call out our supply chain overall. They’ve done a fantastic job in terms of being able to source supply and enable us to ensure that we hit the guidance and the numbers that we put out there. So as we talked about on the earnings call, in the prepared remarks, yeah, there are constraints, but we’re managing through it. And that is incorporated into our overall guidance.

Sidney Ho — Deutsche Bank Securities, Inc. — Analyst

Okay. That’s helpful. Maybe kind of related to that, that previous question. One of the memory supply just talk about supply shortages of non-memory component causing some OEMs adjusting their memory inventory, especially in the PC market. Are you seeing any of that impacting your business, both in Brazil in specialty memory? And the aspect from it, how do you think about memory inventory level and your customers when compared to their build plans?

Mark Adams — President and Chief Executive Officer

I would just suggest that, first of all, as we’ve talked about in the past, we don’t have a high exposure to PC. Our specialty business has no exposure to PC, virtually none. And our Brazil business does have some exposure to PCs, albeit within a confined environment where we’re the largest supplier as well as mobile and SSDs. So when I think about our exposure to the PC business, it’s kind of muted relative to broader macroeconomic supply conditions that our customers. We have heard the same thing on the memory side. But our exposure is so little that it’s not material to our business.

Sidney Ho — Deutsche Bank Securities, Inc. — Analyst

Okay. that’s fair. If I may just ask another question.

Mark Adams — President and Chief Executive Officer

Sure.

Sidney Ho — Deutsche Bank Securities, Inc. — Analyst

It’s a product that you guys didn’t talk about on this call, but in the past you talk about SSD products using your internally developed controller. Is that for the specialty memory business or is that also for the Brazil memory business? Clearly there is a margin implication if it’s using your own controller? And also, you talked about SSD plans kind of on track in the past. Curious if you can share any revenue targets for both SSD and the Specialty Memory in Brazil? Thanks.

Mark Adams — President and Chief Executive Officer

Yeah. I would just say that the — the way to think about it Specialty an SSD is it’s very similar to every other product that we do there, which is the design and custom SSD implementation. Again, we’re not selling client SSDs in retail or distribution. That’s not our business. So, it’s very custom in nature and our NAND overall business is think of our NAND business and SSD is about and they may be 20% of overall Specialty Memory on an annual basis. And Brazil, as I’ve talked about in prior calls, we’re just ramping SSD production in Brazil and we anticipate by the second half of this year will be kind of up and running in volume for the Brazil market.

Now that will be PC-driven at the client — on the client side. And so, we’ll again have some exposure to the PC business. But we’re coming from zero today and I’ve commented that we expect to exit our fiscal year 2022 somewhere in the $40 million run rate so to speak. And so, we’re encouraged. We’re up and running. We’re doing the test as I mentioned in my script. And so that will be coming from zero to what we believe is somewhere on a $40 million revenue in Brazil. And today, think of our Specialty SSD business in the Specialty segment to be somewhere about 20% of our overall business.

Sidney Ho — Deutsche Bank Securities, Inc. — Analyst

Great. Thank you.

Mark Adams — President and Chief Executive Officer

Thank you.

Operator

And our final question comes from Mark Lipacis with Jefferies. Please go ahead.

Mark Lipacis — Jefferies LLC — Analyst

Hi. Great. Thanks for taking my questions. Two questions. First one, can — I appreciate that you’re contemplating some supply chain tightness. But I had a question on how that might manifest for you guys from a different angle and that is from your customers. So I imagine when the supply chain is tight — you hear stories about how your customers may not be able to have full complete kits in order to produce whatever their end product is. And so I imagine to you guys that might manifest in one of two ways.

One either they call you guys up and say, hey can you just hold on to that stuff? In fact, pushing out the order until they get a complete kit or two they might take the memory module from you and put it into their own inventories. And so I guess my question is, are you seeing any — are you seeing any differences in order activity like push outs or is any of your own investigations suggesting your customers might be building inventory.

And maybe as a second part of the question, maybe Mark and Ken for both of you guys, because I know you lived through a lot of cycles. When you have this kind of tightness and disruptions in the supply chain, where do your antenna go up? And where do your management cycles kind of get focus to make sure that you don’t get burned, you don’t misread a signal or — you’re executing as you hope to? Thank you very much.

Mark Adams — President and Chief Executive Officer

Yeah, appreciate it. Good question. Hey. One thing I just want to kind of remind everybody is the questions that are asking around inventory can’t imply kind of memory cycles and certainly the broader microelectronics constraints and the mix of all that. Ken commented as some of this was actually inventory we bought for early shipment in Q1 relative to our IPS business. So it’s not like these are all memory products are sitting inventory. We’re actually pretty comfortable with our business on the supply and demand balance that we have at SGH.

Jack has navigated the commitments from the customers. We most of these are firm commitments that we have for the inventory we’re buying given the market conditions. So I appreciate all the implications on are we exposed? Our sense is we’re doing pretty well on this and on the LED side, very similarly feel pretty good about our inventory position there. Some of the upside as I mentioned was more opportunistic buying to be able to serve our customers in each of these segments specifically IPS but also in the memory and LED space. Now to your last the last second part of your question what should we be looking for? I think you’re saying the rate.

You’re implying that what should we notice right now you can see by our guidance we’re pretty bullish on Q1 and we’re excited about the opportunity. And that’s reflected in what Jan shared with you for Q1 guidance. Now what would we be looking for? Certainly changing in behavior pushing out of orders we’ve seen none of that at this point. And again because it’s different markets, even the memory industry kind of supply and demand conditions in the market today it’s not across all memory products.

It’s as a matter of fact I think that the products that are most important to our specialty business, be it the legacy parts for a long standing customer solutions as well as some of the early technologies we’re in pretty good supply environment there and we’re able to meet our customer needs which you can see again from our guide. So all-in-all, we’ll look for it, we’re on it. We’re going to watching customer signals. But as we sit here today we have not seen any major shifts in demand signals from our customers and our inventory position allows us to service this demand appropriately to drive our business results again the ones that we forecasted for Q1.

Mark Lipacis — Jefferies LLC — Analyst

Great color. Thank you very much.

Mark Adams — President and Chief Executive Officer

So, operator, before we close, I’d just like to close with some comments. First of all, at our Analyst Day, the theme of the Analyst Day was more than a memory company. And today in Q4, we reported results that memory, which was roughly 77% of the business in Q4 2020 is now down to 53%. Furthermore, operating income which at the time Q4 2020 just 12 months ago was roughly 85% of our operating income, today, it’s slightly below 40%. Think about that. In 12 months, our operating income in memory is 40%, slightly below 40%.

And as strong as fiscal year 2021 was in terms of overall performance, we’re even more excited about fiscal year 2022. We’re developing and attracting outstanding talent. We’re investing in new capabilities to provide more value add for our customers. And we are targeting growth market segments such as AI, machine learning, data analytics, in-memory compute, edge computing, advanced LED lighting technologies. Clearly, our future at SGH is bright. We couldn’t be more excited. So we thank you for your call — the time on the call today. And we look forward to future communications.

Ken Rizvi — Senior Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]