SGH (2020 - Q3)

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the SMART Global Holdings Third Quarter Fiscal 2020 Earnings Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [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 host today, Suzanne Schmidt, Investor Relations. Madam, please go ahead.

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 2020 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 through our website throughout the quarter for the most current information on the company, including information on the various financial conferences we will be attending. Before we begin the call, I would like to note that today's remarks and the answers to questions may include forward-looking statements. Any statement that refers to expectations, projections, or other characterizations of future events including financial projections and 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-K and Form 10-Q. 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.

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 some 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 have 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 116% and 106% 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 in 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 2020, 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 $127.7 million 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 MIT solutions increase memory capacity in industrial IoT, embedded computing, broadcast video and mobile router applications among others. We’re maximizing DRAM capacity within space constraints, our principal concern. For example, this myth 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 a particularly appealing for certain industrial, consumer, military and aerospace applications. We also continued 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 base module for Edge Computing systems that enables secure access to cloud workspaces. We are also seeing good traction for our NV [ph] DIMM 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 [ph] die product to be used by the U.S. Army. Moving on to our Brazil business, which generated $92.7 million 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 have 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, particularly 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 7-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 4 gigabytes of LPDRAM and will utilize stacking of 11 dies in a package, including 4 Flash devices, 4 LPDRAM devices and a controller, a very advanced package leading anywhere, any packaging anywhere in the world. Our R&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're less favorable for other items such as batteries. We are therefore re-evaluating our efforts in the battery market in Brazil. Moving on to our Specialty Compute products business, which recorded revenues of $60.9 million 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 timeline. That said, we made significant progress across many aspects of this business. Earlier in the quarter, we launched this new system on module based on Qualcomm’s Snapdragon 660 processor. This compact connected computing module called the Inforce 6503 is designed for Rugged Display devices, and enables advanced visual computing, enhanced graphics and on-device machine learning capabilities. Ideal used 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 is now joined the Intel’s Select Solutions partner program. Through this collaboration, Penguin will empower customers to leverage the potential of high performance computing NAI, through reference designs and deliver a series of verified and quick-to-deploy infrastructure solutions optimized for high performance computing and AI/Machine learning application. This expanded relationship follows Intel's 2020 U.S. Partner of the Year award in which bank 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-19 related research. NYU, MIT, and Rice will use a series of AMP [ph] 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'll 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 and 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?

Great. Thanks Ajay. Overall, gross revenues for the third fiscal quarter was $449.9 million or net sales were $281.3 million. As a reminder, the difference between gross revenue and net sales is related to our supply chain services business, which is accounted for an agency basis meaning that we only recognized net sales and net profit on a supply chain services transaction. Our breakdown of net sales of the end markets for the third fiscal quarter was as follows: Mobile and PCs 27%, Network and Telecom 25%, Servers and Storage 15%, Industrial, Defense & Other 33%. Now moving to the rest of the income statement. Non-GAAP gross profit for the third quarter was $55.9 million compared with last quarter's $52.9 million. As we transition to our Embedded Computing manufacturing to our newer California Tempe Arizona location as well as managing expenses extremely well in Brazil, during a turbulent quarter. Non-GAAP operating expenses were $35.5 million compared with $35.6 million in the previous quarter. Non-GAAP net income for the third quarter was $17.1 million or $0.70 per diluted share compared with $12.8 million or $0.52 per diluted share in the previous quarter. Adjusted EBITDA totaled $25.4 million compared with $22.3 million in the prior quarter. Turning to working capital. Our net accounts receivables totaled $223.2 million compared with $217.4 million last quarter. Our day sales outstanding decreased to 45 days for this quarter compared with 47 days last quarter. Inventory totaled $180.6 million at the end of the third quarter, compared to $161.4 million at the end of 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 location. This is fully in line with our forecasts for the quarter. Inventory turns remain flat around 9 for both quarters. Consistent with past practice, accounts receivable, days outstanding and inventory turnover accounted on a gross sales in cost of goods sold basis, which were $449.9 million and $395.7 million respectively for the third quarter. We ended the third quarter with $131.8 million of cash and cash equivalents compared with $141.9 million at the end the prior quarter. Despite actually increasing cash in Brazil by R$60 million in the quarter due to the currency exchange headwinds, our overall cash balance was reduced by US$17.9 million at the translation back to USD for the Brazilian real. Third quarter cash flow from operations totaled $13.6 million compared with $23.3 million in the prior quarter. On a trailing 12-month basis, cash flow from operations totaled $111.2 million. We exited our third quarter with a very strong balance sheet as well as the vastly improved capital structure, thanks to the convertible note and subject restructuring and repayment of debt that we executed last quarter. For those of you tracking CapEx and depreciation, CapEx was $7.5 million for the quarter and depreciation was $5.4 million. 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 in 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 day multi-chip package in the quarter and are working on an 11 die multi-chip package, which are higher density products and they have a higher average selling price than our lower density solution. 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 2020. We currently estimate that our fourth quarter net sales will be in the range of $290 million to $310 million. 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 $0.08. On a non-GAAP basis excluding share based compensation expense, intangible assets 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 $0.08, 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 $24.5 million. Capital expenditures for the fourth fiscal quarter are expected to be in the range of $6 million to $10 million. 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, earnings press release for further details. Operator, we are now ready to take questions.

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Thank you. [Operator Instructions] Please stand by while we compile the Q&A roster. Our first question comes from the line of Blayne Curtis of Barclays. Your question, please?

Hey guys. Thanks for taking my question and nice results. I’m curious, could you just me just when you look at the segment into August, it seems like you're expecting a recovery in Brazil. Just try and understand the other segments, you were looking I believe last quarter for some pretty strong growth and especially -- said it pushed out. Is that business still going to be up, and I guess second part of it is that just push one quarter or is it going to kind of keep [Indiscernible] in any bit. And to just how long these push outs could be?

I’ll answer 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 as you know from what we understand, assign funding. I'm speaking particularly of government programs, and I think that's what you were asking about, right Blayne? And 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 sale 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 exactly as to how it's going to materialize this year, and when. You know 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 guess, given that answer just the first part of the question is, just looking at the three segments, do you have any color just directionally what you're expecting in that $300 million at the midpoint guidance. It sounds like pretty though [Indiscernible] what were your thoughts into their segments?

This still is not – is up very modestly, especially computers up. And so while we're not predicting as we said, we we're not predicting a significant number of federal order releases in this quarter, this quarter being the Q4 period we're 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, it could be low double digits weighing on the speciality computing growth in the quarter, so…

Got you.

So while the…

It just maybe delayed, it’s okay overall.

And then just finally on gross margins, I know you had to deal with shut down, so gross margins were a bit lower than I guess those modelling for May. Is there any other factors? And then as you look into August, it grows a bit, what do you, what's driving that?

Yes. I mean I think, what's driving the increase in gross margins is I mean – you have a little bit. You have the return to the -- you know speciality is up a little bit, that adds some gross margin percentage to us. In Brazil, we have a higher mix back to mobile. A little bit, I think you'll see some gross margins; certainly gross margins are up mainly because of Speciality Computing, up in Q4 from Q3.

Okay. Thank you.

Thank you. Our next question comes from the line of Sidney Ho of Deutsche Bank. Your line is open.

Great. Thank you. My first question is, you guys talked about the memory content is, that is increasing in the May quarter 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, I heard the previous quarter into May -- and the February quarter you said ASP 60%. And how do you think this trend in terms of memory content will go up and let's say the next six to twelve months?

So I think on Q3, I think Brazil’s ASPs were pretty flat to Q2. We didn’t see these roll up there, [Indiscernible] down, right. But I think we’re looking, we’re probably looking for some kind of – try looking maybe 15% to 20% growth maybe Q4 in AFCs there is some what we’re seeing right now. And then…

That’s helpful.

And as we’re releasing new products we had some really high density products being released so results, products released. I would expect to see ASPs still moderately increase probably actually even if memory prices do fall.

Got it. Maybe a follow up question. I know you had disclosed this in your 10-Q, but how was the gross margin by segment in the quarter? And related to that maybe I’ll just ask the rest of the question, if I look back at the previous quarter gross margin for speciality computer has gone up a lot year-over-year which is what you guys expected. But the reverse was true for speciality memory which I thought would 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 call 20% or more?

Okay, well for Brazil then you're at near normalized margins. So we ended at about 21% in Q3 for Brazil. Okay. Specialty Compute came down to 24%. You know Ajay mentioned how the higher mix of commercial and federal you know commercial margins are lower, so that doesn't drop down to 24%, and the specialty dropped roughly 16% in the quarter. In Specialty, where we've been talking about probably when we've been going out aggressively going to get share. So we are losing a bit of margin there and we are introducing new products which tends to 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 speciality will get back to where it needs to be, that Brazil's already kind of there in Q3.

Okay. Maybe If I can squeeze in one last one. Last quarter, you talked about DRM lead time stretching to 12 to 15 weeks. Customers are placing orders early to get -- to make sure they get their parts and backlogs exiting the quarter is pretty healthy. Can you give us an update on those metrics in the current quarter? Thanks.

Right. I mean flash is still -- we think flash is still out there for 16 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 to [Indiscernible] 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.

Great. Thank you very much.

Thank you.

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.

Thank you, Kevin.

I wonder if you could go in a little more details on the significance of the 7-die 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?

So let me try and take that one. The 7-die device is with 64 gig of Flash and 4 gig of LPDRAM. And that's going into some phones probably started shipping this quarter. The 11-die device by far the most complex product we've ever manufactured in Brazil, and is one of the leading products really up there with anything being shipped anywhere in the world. That's the 128 gigabytes of Flash and 4 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 phones are mostly made in country. So we do supply all of them.

Okay. Great. And on the Specialty Compute business, well you've been saying that you're seeing a lot of opportunities and good bookings. Can you describe how that the bookings -- are the contracts scheduled overtime 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 in the wireless products?

So yes, and you're right to point out that they are a little bit different. Penguin Computing is more in the – 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, modelling, weather and so on. Those are the prime applications and they tend to be more project driven. And as I was saying, our commercial business is actually held up pretty well. Some of our government related business which frankly tends to have this year end worse is not seeing the bush 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 narrow 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 2021 we're looking at much more backlog driven business similar to our embedded computing or specialty memory business. I hope, I'm answering the question you have.

Yes. And that helps a lot. Thank you.

Thank you.

Thank you. Our next question comes from Rajvi Gill of Needham & Company. Your question please?

Yes. Thank you and I echo my congrats in a tough environment. In terms of the upside in the specialty memory market, you'd mentioned in these new performed -- new products on module and package solutions. Has that led to an outsized kind of market share gain? I think you hinted that there was some share gains there. Basically kind of aggressive pricing, but I just want to get a little more clarity there. Do you intend to kind of -- do you feel very confident that this is kind of a new solution for high performance DDR for module for space to constrain 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. I'm just curious about that in the overall end markets within specialty memory with the kind of thoughts are there in terms of networking and enterprise server how that's tracking?

Thank you, Rajvi We try and then Jack can enhance. The – so first of all we don't look at it, our speciality memory business in the same way as sort of market share oriented. It’s a very design win oriented business. Because that by definition, especially memory is working on applications which are not in your main stream. 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 -- we're not trying to compete to win with 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’s engineers answer. But the point is, we tend not to be focused on the very high volume mainstream product. And so when we find the applications which can use something particularly differentiated like the products I was talking about earlier in the module, in a package and some of the Rugged Solutions and so on, sometimes to fit into the customer's applications we'll be aggressive to 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 the 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 that makes sense or are consistent with our historical levels.

Good, very good. And my follow up, in terms of seasonality in 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 in the management team are thinking about seasonality as we kind of progressed throughout the year. We have these kind of delays in government spending programs where there's uncertainty whether that will come back or – where it will hit. On how commercial -- Brazil ASPs could be going up, and so I’m just curious how you would think about seasonality?

Yes. So let's use two words, seasonality and cyclicality. Cyclicality as many of you know on the call with 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 that I'm sure many of you are quite familiar list. So our cyclicality is consistently 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 Speciality 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 festivals and so on. But overall, our business is not that seasonal except to an extent in in our HPC high performance bidding [ph] business. Jack, I don’t know if you add further.

I think you know typically our HPC business has a good Q4, because of the budget flush. And that, and as I did mention earlier, that's getting a little down a bit. So I mean, maybe we don't get a budget flush this year so maybe yes, we would feel our Q1 might drift down. We’re not sure right now, but I think that that's the one part of the business that's getting affected the most. I would say with what's going on with the COVID-19 issues out there is really the Penguin Defense government’s business right now.

Okay great. Thank you.

Thank you. Our next question comes from Brian Chin of state law. Your line is open.

Hi, good afternoon. Nice. Nice job on the quarter. And thanks for letting us ask a question. Let me just start off with a specialty memory so -- there is feedback here. Revenue is back to within I guess about 10% of your peak historical quarter, and that the product not a 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 embedded compute business?

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 is that noticeable in the number and we would actually be honest if that would give reporters their specialty for embedded computing anyway, or a memory of such memory guys wouldn't get the revenue on that way we reported.

Okay. Got it. Understood. In terms of the -- some of the Brazilian currency effects on the P&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 detail when I think you mentioned in fiscal 4Q. So just because, just mainly reflect your strategic shift to support the higher density products?

It’s not really a strategic shift, right. I mean, we follow the road map of the guys in Brazil of Samsung, LG Lenovo, Brazil. And so when they start saying we're going to build phones now in Brazil where we need a higher density 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're -- you should still be a positive on revenue and things in Brazil in fiscal 2021, for that, that question you asked a few questions. So I think on the specialty memory, I mean we're you know as I said we're winning design wins especially memory, there’s interesting products that we're winning in that business you know as our 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 and 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 I – yes.

Yes. 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, if customers wanted just the middle of the road, Standard DDR4, DRAM Module we wouldn't have you know if they would buy from Samsung or Micron or something 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, DDR3, DDR4 but look at the varieties of applications that are out there in consumer, industrial, and defense. And of course our more traditional markets, networking and telecom and so on, and storage, enterprise storage. We -- we are seeing just a tremendous variety of applications and a tremendous variety of technologies, memory technologies including emerging ones like three cross point. 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 are attached. 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.

Great. Makes sense. Thanks so much.

Thank you, again. [Operator Instructions] .Our final question comes from the line of Mark Lipacis of Jefferies. Your line is open.

Hi. Thanks for taking my question. Had a few if I may. On Specialty Memory, very impressive growth. And I'm wondering if the products, suddenly like a lot of new products that you're introducing and I wonder if this is kind of a result of a of an increased R&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 lifecycle or 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 growth, if you could kind of give us a characterization of the of the speciality memory business from that diversity standpoint and size of potential business?

I'll try my best Mark, and thank you for this question. The investment in R&D started I don't know four to six quarters ago. So that was as usual. What you're seeing now is products that are introduced today or in the last few months, but were you know the investment in the team from an R&D standpoint started what would you say Jack, five or six quarters ago.

You did have some beaten up…

And so these costs are run rate cost already. I mean you've seen them in our cost structure over the last year or more. The -- these new products. I mean, look, 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 you know we 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 with any of you might be familiar with EDSFF, but it's a very low profile form factor for storage you know boxes going forward. And so we've -- we introduced SSDs for that application that we believe has a lot of legs because people are looking for you know more efficient footprint for many of their storage boxes and many of these products are -- these all niche products. I mean by definition everything we do is a niche product. It's -- I know it's exactly counters 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 differentiation and is 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 a easy answer on. Well this product has the market opportunity of X hundred million or whatever. But that -- that's you know 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.

Fair enough. And then…

…yes river products are long life cycle products. I mean the reason we buy products because of a long lifecycle, right. So and also you know some of these products that we're now getting revenue on they've been they've been undergoing customer qualification for over a year. It's something, somebody said a year to qualify a product so they're just getting out there now with a certain item, it's kind of volume.

Got you. Okay. That's 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 -- that the cynic might say, well there's going to be there's, there's probably double ordering. And so what do you say to that people who voice their concern. Is there any way to track that? You know what -- how would you characterize inventories in the channel at your end customers?

We have a supply chain business where we know some of our big customers [Indiscernible] inventory they haven't. I mean we've been following really tightly our customer’s right. We've been really working hard to make sure that it doesn't look like they have over inventory. So we've working with the contract manufacturers. We're not seeing lease over inventory or the contract manufacturers. I mean, we have a lot of contract manufacturers who are screaming that they're short apart, right. So they're asking for parts. Now if you know if they're buying too many from the contract manufacturer, then they're stuck in the channel after that. We don't have visibility of that, but we don't. We don't believe the contract manufacturers have been buying a bunch of parts for inventory pulling on to.

Got you. That's fair. And then, a question on the government business. A lot of times at least historically you might have heard the expression used 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 is there talk on that? Or is this still kind of a black box in terms of that you know what happens at the end of the budget flush?

I guess the short answer is we don't know. We really -- 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 12-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 the budget. Then it goes through an internal process within the government departments to assign a budget to it. And that eventually gets awarded through a competitive process. It's the governments we 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.

It's completely understandable to. And a last question, if I may. On the -- you had, Ajay you hadn't mentioned, M&A as an important part of Smart Strategy and what has the pandemic done for the -- the target the environment for M&A targets. If you look at the -- 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 what's going on in the target environment or the businesses or are companies more willing to have conversations so the target environment get richer, during a pandemic?

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 as you kind of saw in 2008, 2009. 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 you know 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 as you would have thought. And we are also seeing an active set of opportunities around M&A. Now with the stock market being where it is overall, there is a question of how valuations are and expectations work. But with the right opportunity said, where we can bring in a lot of our synergies which is frankly what we look for. Well we're not just looking to be a financial buyer. We are not. We are a very strategic buyer in a way, because we are able to bring our 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 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 millions 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 you know that 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.

Great. That's very helpful. Thanks for taking my questions.

Thank you.

Thank you. At this time, I'd like to turn the call back over to Ajay Shah for closing remarks. Sir?

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 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.

: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.