Welcome to the SGH fourth quarter and full year fiscal 2021 results conference call.
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 open the webcast today with a corporate video that highlights our newly launched SGH brand. To learn more about our new identity, visit sghcorp.com. 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 the statements made today may constitute forward-looking statements, and that these statements are our present expectations, and that actual events or results may differ materially. We also discuss both GAAP and non-GAAP financial measures.
Non-GAAP measures should not be considered in isolation from, as a substitute for, or superior to, our GAAP results. We encourage you to consider all measures when analyzing our performance. A reconciliation of GAAP to non-GAAP measures is included in today's press release. We will begin the call with CEO Mark Adams, who will provide a business update, and then Ken Rizvi, CFO, will review the financials and forward guidance, after which we will take questions. Mark?
Thank you, Suzanne, and 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, with that, reorganized the company into 3 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 3 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.
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 longtime largest shareholder, Silver Lake, divesting of their ownership position, we appointed Sandeep Nayyar as lead independent director on the board. With the recent announcement of Penny Herscher joining the SGH 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.
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, 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 and 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 Cloud Manager, and Scyld Cloud Workstation software solutions. These software enhancements focus 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 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 funnel to drive more growth potential going forward. In our Memory Solutions Group, revenue grew by 7% Q4 fiscal 2021 versus Q4 fiscal 2020 to reach $247 million.
Excluding the impact due to the customer revenue reclassification from a 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 and developing new vertical market solutions. One such success is the work we are doing for a large hyperscale 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 host 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 modules 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 Gen 4 SSD qualification and began our Gen 5 SSD qualification process. 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 in Q4. [Break]
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. 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 our 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. 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, approximately $98 million, a record for that business. Continue to have quarter-to-quarter variability in revenue.
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 for 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-lite structure, enabling a more flexible operational model to better manage fluctuations of demand and supply.
Single-digit CAGR on a long-term basis. Anticipate some seasonality and variability quarter to quarter. Non-GAAP gross margin for the fourth quarter was a record 21%, 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 one-time 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, 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%. Turning to working capital. Our net accounts receivable totaled $313.4 million, compared with $274.9 million last quarter. Days 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 a distribution business where we are not the risk taker for the inventory purchase 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. Consistent with past practice, accounts receivable, days outstanding, and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $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 recognize as net sales the net uncertain at the end of the fourth quarter, which was $34 million. 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 was $153.4 million. For the year, 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. 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 -$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%, as we expect a higher mix of software and managed services related to our IPS business to help SGH's overall. Our non-GAAP operating expenses are expected to be in the range of $54 -$59 million in the first quarter of 2022.
GAAP diluted earnings per share is expected to be approximately $1.20, ±$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 $2.00, ±$0.20. Cash capital expenditures for the first fiscal quarter are expected to be in the range of $10 million-$12 million.
Cash capital expenditures for fiscal 2022 is expected to be approximately $60-$ 65 million and includes approximately $10 -$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 uncertain expected to be approximately 26 million shares, as it includes the benefit of share repurchases from our common stock.
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 adjusted EBITDA table for further details. Now let me turn the call back to Mark for some concluding comments before we open the call to questions. Mark?
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 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 vehicle segment. 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.
In Q4, we achieved 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. 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.
Our first question comes from Tom O'Malley with Barclays. Please go ahead.
Hey, guys. Thanks for taking my question. Congrats on the nice results. Forgive me if I missed this with some of the call issues here. Obviously the biggest highlight of the beat is the gross margins here. Could you explain where you saw that margin leverage? I know you mentioned more service and software business in IPS. You also mentioned LED. You need to see a substantial increase in one of those. Could you just weight that performance this quarter?
Sure, Tom. 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 continued improvement and the Cree LED gross margin expansion, the mix that Ken noted in his prepared comments and in service at IPS.
If we look at it actually across the board for IPS and for LED solutions, margins were up. As Mark highlighted, the two big driver enhancement relative to Q3 and relative to our guidance for IPS, as well as better performance in LED solutions, weight in terms of that margin upside to 26.4% on a non-GAAP basis.
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 within Memory Solutions? Any sort of color on the moving pieces within Memory Solutions would be really helpful.
Memory Solutions, you saw that business grow from about $3-$ 200 here in Q4. 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. Even with that, we did see good growth in our specialty memory business Q3 to Q4.
Let me just sneak in one more, if that's okay.
Sure.
You obviously grew inventory, 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?
Sure. Tom, just to clarify, when in our prepared remarks, the inventory grew for 2 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. 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. 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. We carry that inventory on our balance sheet, but we are not the risk taker for it. Those are the two drivers.
You will see that inventory balance overall for the company come down as we move from Q4 into Q1.
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 new business opportunities, and we're vigilant in 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.
Thanks, guys.
Thank you.
Okay. Your next question is from Brian Chin with Stifel. Please go ahead.
Hi there. Thanks. Good afternoon. Congratulations on the really strong margin performance, and thanks for letting us ask a few questions. Maybe to stay with gross margins here, which clearly is a big positive here on the results and outlook. I think it was the Analyst Day not long ago where you talked about mid-20s on the gross, low teens on the Op margin as a long-term target, right?
Maybe you meant to say year-end target because we're kind of there now. Jokes aside, can you sort of decompose again the things that are materializing a lot faster here? Some of those may not be fully sustainable, right? I mean, it could be the big positives on the mix, for example. Some of those initiatives clearly are 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. just trying to kind of get a sense of sort of what that baseline should be. 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.
Well, I'll let Ken get to the treatment on 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. We continue to look for new business opportunities that are driving and taking advantage of the capabilities we have and the certain value add that we're trying to drive on a go-forward basis.
As we think about our business, been tremendous execution on the LED side with this manufacturing transformation. Just when we bought the business back, and the transaction closed in March of 2021, just seven months ago, we couldn't have envisioned any better execution by Claude and his team. 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. 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'd like to think that we're going to continue to drive margins in this range. There will be times, due to 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%-24% on the bottom and 26%+ on the top is how I look at the business today.
Now, as I mentioned in my opening comments, about 700 basis points on the high end, better than we were just 12 months ago. 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 signaling today in our forecast. We are very confident, but 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?
Yeah. On that tactical item, if you look on the LED piece, that helped overall margins in terms of the sale of some previously reserved parts by about 50 basis points or so.
Okay. Got it. Okay. You expect that to be similar in the November quarter?
We don't expect to sell reserved parts, so that is part of the reason why when you look at our guidance at the midpoint, we're at around that 26% versus.
I got it. Yeah
the 26.4 in Q4.
Okay. Fair enough. Maybe just one more on gross margin, I'll just close on growth again. Ken, I may have missed it, but did you give the segment breakdowns by gross margins? Then just to kind of stress the memory margins. There's concerns clearly about sort of the choppy pricing in terms of DRAM. You sort of reemphasized a couple of times about 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?
Yeah, I would say that. Let me just take the last part. Then I'll hand it over to Ken. On the DRAM and broader memory market environment, 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.
Then to 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 custom solutions on, by the way, parts that are really profitable for these memory companies. These are legacy parts or early to ramp technology parts, both of which are of interest to any semiconductor company.
I think our ability to add value on these more strategic technologies also helps strengthen our balance in the business. 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.
To answer the first part of your question, as of Q4, you'll see this in our 10-K for fiscal 2021, we've migrated to those three segments we talked about at the Analyst Day in terms of how we are running our business. We have three presidents for each of those three segments, we will be reporting under IPS, under LED Solutions, under Memory Solutions, we'll report the revenues, you will see in our K and our Qs going forward the operating margin %. We will only be guiding to SGH gross margins on a go-forward basis.
Okay. Got that. Just closing on growth really fast. Just IPS, commercial has been strong throughout this fiscal year into the current. You talked about the DoD win. That's a good base against the current fiscal year. Mark, with all these in mind, does this give you the confidence now 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 as 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.
Yeah, I got to tell you, we like this business. 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. 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. 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.
Great. Thank you, guys.
Hey, thank you.
Our next question is from Kevin Cassidy with Rosenblatt securities .
Yeah, thanks for taking my question. Congratulations on the great results. Maybe sticking with the theme on IPS, for the DoD contracts, what is the timing of that, the $68 million? Does that ship all at once? I think it was early. It needed to be deployed by early 2022.
Our expectation for that, Kevin, is that it will flow in in our Q2 and Q3, our fiscal Q2, fiscal Q3 in terms of the timing.
Okay, great. Also, I think there were services tied to that. What % would be services, or is that just an ongoing revenue stream for years?
Yeah. In terms of the services piece, that should be kind of in the neighborhood of about 10, 15%, and that will be over time. We won't give you specifics on how long, but over time.
Okay. All right, great. You also mentioned the Brazil credit ending in calendar-
Yeah
2022. Can you reapply for that credit, or can you give us a little more details around that?
Sure. Kevin, on that one, that is actually the law in Brazil. It's nothing specific to SGH, but it's a current law. That law has that credit going away in January of 2022. What you can expect is that 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.
Okay. Any gauge of how much that would be?
I would say that should be in the neighborhood, based on where the credits are expected to be in Q1, I would say up to that $6 million range or so if we look at Q3 and Q4.
Okay, great. Thanks for clearing that up. Thank you.
No problem. Happy to do it.
Your next question is from Rajvindra Gill with Needham & Company.
Yeah, thank you. Echo my 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 this kind of similar range. We know on the LED there was a 50-basis-point impact from the sell of previous inventory. Excluding that, we're still kind of in this early 30s range. On the IPS, the quarter before it was 23%. It seems like it's early 30s this quarter. Very volatile. I wanted to get a better understanding of the baseline margins. I know you're giving kind of this 23%-24% range on the low end and 26% on the high end, but that's a wide range.
Any clarity in how to think about the margins on a quarter-by-quarter basis, particularly for IPS? When is managed services going to be light versus previous quarters? Secondarily, what's the baseline for LED margins? Is there more room for expansion as you shift all of the manufacturing there to-
Yeah.
Thanks.
Let me take that and break it into 2. On the IPS side, unfortunately, when we're growing like we're growing, Rajee, it's really tough to break down 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. I'm not sure we can give you any of that. We're very bullish, as I commented earlier.
To try to give you some color around where the margin's going to spike and not spike too far out is something that's just really challenging for us given the lumpiness of the business, and quite frankly, some of our bigger competitors have the same issue. We'll do our best. Intra-quarter up, quarter two.
At this point, we've 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 a 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%-75% done. I think the last 25% done will be in the next fiscal year, so to speak. Holding things constant, there is potential for improved margins. Again, remember where we bought this. We bought the company at somewhere in that range. And as we commented out, it's 30% and north of 30% kind of as we see the business today.
We're very pleased and are optimal for some upside. Both those have resulted in what you see now is, again, think about this, in 12 months, a 700 basis points improvement Q4 over Q4.
Okay, great. Thank you for that information. Just on the seasonality of the business, the revenue is guided to be down sequentially. We do have that extra week you mentioned in August. You mentioned Cree LED being down sequentially. I'm wondering about the other pieces of the business, how to think about that as we go into the November quarter.
Just sticking on the top line, with respect to Memory Solutions, in the past, you had broken it down or provided more color related to specialty versus Brazil and PCs/mobile within Brazil. I'm 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.
Got it. Let me try to address a couple of the items you talked about. One of the things we highlighted was for LED Solutions, 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 at the midpoint, ±$20 million.
Essentially, close to flat quarter-on-quarter with some moving pieces amongst the three businesses. When you asked also, I guess, going to the third part of your question in terms of seasonality, I would say that is normal for a 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 downtick Q1- Q2. 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.
As we talked about, we've now pulled 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. 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.
I appreciate the insight. Thank you.
Thank you.
Your next question is from Sidney Ho with Deutsche Bank.
Thanks for taking my question. I'll save you some gross margin questions later on. A couple of questions on the supply constraint. You talked about in your guidance that it's contemplating some supply constraint in the supply chain. Can you give us an update on what you're seeing within your own supply chain as well as maybe your customer supply chain, compared to maybe what 3 months ago it looked like?
Sure. I would say in general, we are still seeing constraints around specific parts of our overall solution sales. 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. As we look at our guidance, as we look at where we are for our fiscal Q1, we have contemplated what we're seeing in the overall supply chain, which is specific to certain components. There are shortages and the lead times are long. Despite that, I'd call out our supply chain team 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.
As we talked about on the earnings call, in the prepared remarks, there are constraints, but we're managing through it, and that is incorporated into our overall guidance.
Okay. That's helpful. Maybe, kind of related to that previous question, one of the memory suppliers 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 and specialty memory? Maybe asked differently, how do you think about memory inventory and level at your customers when compared to their build plans?
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. 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. When I think about our exposure to the PC business, it's kind of muted relative to broader macroeconomic supply conditions at 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.
Okay. Yes, sir. If I may ask another question.
Sure.
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. You talked about SSD plans on track in the past. Curious if you can share any revenue targets for both SSD and the specialty memory in Brazil. Thanks.
Yeah, I would just say that the way to think about specialty and SSD is it's very similar to every other product that we do there, which is a design and custom SSD implementation. Again, we're not selling client SSDs in retail or distribution. That's not our business. It's very custom in nature, and our NAND overall business is-- think of our NAND business and SSD as about in the maybe 20% of overall specialty memory on an annual basis.
In 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, we'll be up and running in volume for the Brazil market. Now that will be PC driven on the client side, and so we'll again have some exposure to the PC business, but we're coming from zero today.
I've commented that we expect to exit our fiscal year 2022 somewhere in the $40 million run rate, so to speak. We're encouraged. We're up and running. We're doing the tests, as I mentioned in my script. That will be coming from zero to what we believe is somewhere around a $40 million run rate in Brazil. Today, think of our specialty SSD business and specialty segment to be somewhere at about 20% of our overall business.
Great. Thank you.
Thank you.
Our final question comes from Mark Lipacis with Jefferies. Please go ahead.
Hi. Great. Thanks for taking my questions. Two questions. First one, Ken, I appreciate that you're contemplating some supply chain tightness. I had a question on how that might manifest for you guys from a different angle, and that is from your customers. 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.
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 onto that stuff?" In effect, pushing out the order until they get a complete kit. Two, they might take the memory module from you and put it into their own inventories.
I guess my question is, 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? Maybe as a second part to the question, maybe Mark and Ken, for both of you guys, because I know you've 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 get focused to make sure that you don't get burned, or you don't misread a signal, or you're executing as you hope to? Thank you very much.
Yeah. Appreciate it. Good question. One thing I just want to kind of remind everybody, the questions that are asking around the inventory kind of imply memory cycles and certain of the broader microelectronic constraints and the mix of all that. Ken commented that some of this was actually inventory we bought for early shipment in Q1 relative to our IPS business. It's not like these are all memory products that are sitting in 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. Most of these are firm commitments that we have for the inventory we're buying, given the market conditions. 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 for 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 the second part of your question, what should we be looking for? I think you're implying that what should we notice?
Right now, you can see by our guidance, we're pretty bullish on Q1. We're excited about the opportunity. That's reflected in what Ken shared with you for Q1 guidance. Now, what would we be looking for? Certainly changing behavior, pushing out of orders. We've seen none of that at this point. Again, because it's different markets.
Even the memory industry, kind of supply and demand conditions in the market today, it is not across all memory products. As a matter of fact, I think that the products that are most important to our specialty business, be it the legacy parts for long-standing customer solutions, as well as some of the early technologies, we are in pretty good supply environment there, and we are able to meet our customer needs, which you can see again from our guidance. All in all, we will look for it. We are on it.
We are watching customer signals. As we sit here today, we have not seen any major shifts in demand that should allow us to serve this demand appropriately to drive our business results, again, the ones that we forecasted for Q1.
Great call. Thank you very much.
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. 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 is slightly below 40%.
Think about that. In 12 months, our operating income in memory is 40%, slightly below 40%. 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.
We are targeting growth market segments such as AI, machine learning, data analytics, in-memory compute, edge computing, and advanced LED lighting technologies. Clearly, our future at SGH is bright. We couldn't be more excited. We thank you for your time on the call today, and we look forward to future communications.
Thank you.
Thank you again for joining us today.