Is being webcast from our website at smartgh.com. In addition, our website contains an accompanying slide presentation and the earnings press release. We encourage you to go to our website throughout the quarter for the most current information on the company, including information on the various financial conferences we will be attending. Before we begin the call, I would like to 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 expectations and that actual events or results may differ materially.
We will also discuss GAAP and non GAAP financial measures. Non GAAP measures did not be considered in isolation from,
as a substitute for, or superior to
our GAAP results. Issued 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 Rizzi, CFO, with the financials and forward guidance.
Afterwards, we will take questions. Mark?
Thank you, Suzanne. We hope our U. S. Listeners enjoy the 4th July weekend and appreciate all of you joining today's call. We are excited to present our fiscal Q3 results and share with you our outlook for the 4th fiscal quarter.
Business execution was strong across all of our companies as our financial results exceeded expectations. We achieved record quarterly revenues of approximately $438,000,000 We improved non GAAP gross margins to approximately 22%, up from 19.5% in Q2 And we generated $1.39 in non GAAP earnings per share for the quarter compared to $0.87 per share last quarter. Our team remains focused on the execution of our growth and diversification strategy. In our first full quarter with Cree LED as part of SGH, LED solutions came in at 23% of total revenues And intelligent platform solution. Let me now cover some highlights for each of our businesses.
Our
ITPS Group Turned in an upstroke of approximately $96,000,000 which was 12% higher than last release. For reference, IPS includes Penguin Computing And Penguin Edge, which is our new brand comprising our smart embedded and smart wireless businesses. Gross margin percentage was down sequentially due to a larger mix of hardware sales in the quarter. On prior earnings calls, we have discussed the potential variability of IPS gross margin percentages due to software and services movement quarter to quarter. That said, the IPS team is making very good progress on expanding software and services, which represents 20% of Penguin Computing's revenue On a year to date basis, up from low teens in the prior year to date period.
Our Penguin Computing team Has a robust solutions roadmap focused on core data center, edge and cloud offerings targeting customer requirements in AI, High performance data analytics and traditional HPC workloads. We have a number of new platforms and solutions planned for introduction In the second half of calendar year 'twenty one, including Penguin Computing's Origin AI, an AI platform targeting customer need Which is a high performance server add in card used to accelerate and facilitate voice over 5 gs and LTE. ITS continues to focus on growing Penn's cloud based solutions to escape existing and new customers in the financial, oil and gas and federal To capitalize on future on demand opportunities which have the potential to drive reoccurring revenues for IPS. We are excited about the recent performance of IPS and continue to strengthen our new business funnel to drive future growth potential in Q4 and beyond. Now turning to the Memory Solutions Group, which encompasses specialty memory and our operations in Brazil.
Revenue grew by over 10 percent to $240,000,000 in Q3 and by 9% year over year in the same quarter. Gross margins expanded 2 40 basis points sequentially to 18.1% in the quarter, largely due to improved pricing and mix. Our specialty memory business executed well in a challenging supply environment. Beyond our core business with traditional Where new standards such as OpenAPI are helping to drive performance improvements. OpenAPI is an open interface architecture standard, to production for compute intensive applications and expect to ramp this business as we move into fiscal year 2022.
Backlog for our flash product portfolio grew nicely in the quarter and we anticipate strong quarter over quarter revenue performance in Q4. We are expanding our products for customers across new end markets to meet their application specific needs. We are in early production of mini and very low power DIM modules for use in cybersecurity applications and custom SSD products used in surveillance as well as the transportation sector. Each of these areas represents new segment opportunities for specialty memory. Our strong results in Brazil were due primarily to increasing unit demand in PC notebook and server, which grew 26% from the previous quarter.
Demand for mobile memory remained stable, while ASPs increased slightly when compared to Q2 ASPs. Additionally, our plans to build SSDs in country Remain on track and we are optimistic about this new catalyst for growth in revenues during our next fiscal year. Now turning to Cree LED, which exceeded expectations recording revenue of $102,000,000 versus a guide of $90,000,000 to 95,000,000 Non GAAP gross margins were all ahead of guidance despite operating in a supply constrained environment, A testament to the team's focus and ability to execute. The manufacturing transformation that Claude outlined during our recent Analyst Today is progressing well with the transition from silicon carbide to sapphire wafers and the migration to a fab light model with our key strategic partners driving our operating performance. The LED team continued to drive technology leadership Across their product portfolio.
For example, Cree LED's flagship outdoor lighting LED product, the Xlamp XP G3S line is one of the brightest and most reliable LEDs available in its class. This product line is optimized for directional high lumen lighting applications where efficacy and optical control are critical. Demand across Cree LEDs targeted end market segments continues to improve. We saw new customer wins in general lighting, specialty lighting, video And horticulture lighting. We remain confident in the team's ability to deliver strong results and couldn't be more excited to have the CRE team on board, Fully engaged in driving growth and profitability as part of SGH.
Let me stop here And hand the call over to Ken for a detailed look at our Q3 financials and Q4 forecast. Ken?
Thanks, Mark. At our Analyst Day in April, we outlined our strategy to continue to grow and diversify our business. The 3rd fiscal quarter of 2021 demonstrates how we're strategizing out with strong performance As Mark mentioned earlier, we reported a strong quarter with all key metrics above our guidance range. Net sales for the 3rd fiscal quarter of 2021 were approximately $438,000,000
An increase of 56%
year over year from the 3rd fiscal quarter of 2020 and 44% sequentially, a record result for the company. In addition, Non GAAP gross margin came in at 21.9 percent and non GAAP diluted earnings per share was release. Now turning to highlights from our non GAAP Income statement. On a year over year basis, total SGH revenues grew by approximately 56%. This growth was driven primarily by the incorporation of Cree LED into SGH, which added approximately 100 and $2,000,000 of sales in our 3rd fiscal quarter.
Excluding Cree LED, Our revenues grew by approximately 19% on a year over year basis, mainly driven by IPS, which grew by release. 57% in memory solutions, which grew by approximately 9%. For the 3rd fiscal quarter, IPS had revenues on a quarterly basis of approximately $96,000,000 a record for that business. Our memory solutions group had revenues of approximately $240,000,000 In the 3rd fiscal quarter of 2021, within the Memory Solutions Group, specialty memory reported revenues of approximately $122,000,000 in the 3rd fiscal quarter, while Brazil reported revenues of $118,000,000 Gross margin for the 3rd fiscal quarter of 2021 was 21.9%, up from the 19 point 5% in the prior quarter and up from 19.9% in the 3rd fiscal quarter of 2020 And helped by the performance of the LED Solutions Group. Gross margin for IPS is down from the same period in the prior year, primarily due to a higher mix of hardware sales.
As discussed previously, we expect some quarter to quarter variability in gross margin for IPS release. Based on the timing of solutions and services revenue, we are expecting, however, to see an uptick in gross margin for IPS in the 4th fiscal quarter of 2021. Gross margin for our memory solutions group was 18.1%, up approximately 240 basis points from the 2nd fiscal quarter and relatively flat With the year over year period, gross margin for LED Solutions was 29.6 release. Operating expenses for the 3rd fiscal quarter of 2021 were approximately $52,400,000 up from the $35,500,000 in the 3rd fiscal quarter of 2020. Operating expenses were up primarily due to the inclusion of LED solutions, Continued investments in IPS as well as increased bonus in the 3rd fiscal quarter of 2021.
In addition, operating expenses benefited from approximately $8,200,000 in financial credits in Brazil. This helped offset our Brazil R and D spending, which is required to benefit from 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 3rd fiscal quarter Adjusted EBITDA for the 3rd fiscal quarter of 2021 was $51,400,000 Or approximately 12% of sales compared to $25,400,000 or approximately 9% of sales In the 3rd fiscal quarter of 2020, our breakdown of net sales by end market for the 3rd fiscal quarter of 2021 was as follows: mobile and PCs was 24% Network and telecom, 15% server and storage, 12% advanced gliding, 23% And industrial, defense and other 26. Turning to working capital.
Our net accounts quarter. The increase was largely driven by the addition of LED solutions. Totaled $289,000,000 at the end of the 3rd fiscal quarter compared with $189,300,000 at the end of the prior quarter, driven by the addition of LED solutions as well as strategic inventory build During the quarter in preparation for a higher revenue ramp in our 4th fiscal quarter, inventory turns were 7.7 times in the 3rd fiscal quarter versus 8.3 times in the prior quarter. Consistent with Past practices, accounts receivables, days outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, release, which were $643,300,000 $558,800,000 respectively for the 3rd Fiscal quarter. As a reminder, the difference between gross revenue and net sales is related to our supply chain services business, which is accounted for on an agency basis, Meaning that we only recognize as net sales the net profit on a supply chain services transaction.
Cash and equivalents totaled $189,000,000 at the end of the 3rd fiscal quarter, which was $49,200,000 higher than the previous quarter. 3rd quarter cash Flow from operations totaled $49,300,000 compared with $20,400,000 In the prior quarter, it was up sequentially from the Q2, primarily due to the inclusion of LED Solutions. On a trailing 12 month basis, cash flow from operations totaled $130,300,000 For those of you tracking CapEx and depreciation, CapEx was $5,200,000 for the quarter and depreciation was $9,100,000 And now turning to our fiscal Q4 2021 guidance. We expect our net sales for the Q4 of 2021 will range from approximately $440,000,000 Our GAAP and non GAAP gross margin for the Q4 of 2021 is expected to be approximately 22% to 24%. Our non GAAP operating expenses are expected to be in the range of $55,000,000 to $60,000,000 in the Q4 of 2021.
The sequential increase
is in
line with our comments from the last earnings call and driven primarily by pre LED Having an additional week of expenses in the 4th fiscal quarter versus the 3rd fiscal quarter as well as additional investments to support the growth in our Intelligent Platform Solutions Group. GAAP earnings per diluted share is expected to be approximately $0.95 plus or minus $0.15 On a non GAAP basis, excluding share based compensation expense, intangible asset amortization expense And convertible debt discount, we expect non GAAP earnings per diluted share will be in the range of $1.60 plus or minus 0 point 15 dollars Cash capital expenditures for the 4th fiscal quarter are expected to be in the range of $10,000,000 to $12,000,000 Our GAAP diluted share count for the Q4 of fiscal 2021 is expected to be approximately 27,000,000 shares Based on our current stock price, our non GAAP diluted share count for the Q4 of fiscal 2021 is expected to be approximately 26,000,000 shares as it includes a benefit of our convertible note capped calls. Our forecast for the 4th fiscal quarter is based on the current environment, which contemplates the constraints in the global supply chain. Please refer to our non GAAP financial information section and the reconciliation of non GAAP financial measures to GAAP results And the reconciliation of GAAP net income to adjusted EBITDA tables in our earnings press release for further details.
With that, let me turn the call back to Mark for some concluding comments before we open the call to questions. Mark?
Thanks, Ken. Before opening the call for Q and A, I would like to end my prepared remarks with a few additional comments. First, I'd like to acknowledge that we are making good progress on our environmental sustainability and corporate governance or ESG disclosure and we will be providing updates in the coming quarters. Secondly, I want to recognize all of our factory workers around the globe who have done a fantastic job of keeping our sites operating at a high level of performance while maintaining a Safe and healthy environment. Our operating teams at Cree LED, Smart Modular and Penguin performed extremely well during these uncertain times considering the COVID pandemic situation and broad electronic supply shortages.
With new COVID outbreaks in Brazil and Asia, we are continuing to maintain strict measures And have not had any major operational issues in our facilities to date. As outlined during our Analyst Day back in April, Our key strategic objectives are to drive shareholder value by growing our business both organically and inorganically. When you couple the outstanding results from Cree LED with the growth in Penguin Computing and strong operating performance at Smart Modular, I hope you see evidence of this strategy playing out. While we are proud of our Q3 results, we feel we have tremendous opportunity for growth in the future. Operator, we are now ready to take questions.
Release.
We do
have a question from Tom Amalie from Barclays. You are now live.
Hey, good afternoon and thanks for taking my question and congrats on the nice results. My first question was on the LED business, obviously a really strong contribution in the quarter. When you guys first did the deal, you kind of laid out $300,000,000 of contribution and the run rate in the quarter was even a little bit ahead of that. Can you talk about what happened During the quarter to kind of get you outside of that run rate, and do you kind of see that higher run rate sustainable in the near future?
Yes, Tom, this is Mark. Yes, I think we're pleased with the demand profile of the business in the Braille I think that release. Just buy it to harvest it. Initially, we were looking at the kind of we're talking about 9 months ago right now back in October or so Or 6 months ago, I should say. We were looking at a business that was kind of traditionally doing about $100,000,000 a quarter, but the market is starting Turn a little bit more favorable on the demand signals and we're kind of bullish on the opportunity to grow from here.
Great. That's helpful. And then in your prepared remarks, you talked about going into August and seeing, I think, your particular comment with specialty memory We'll be strong quarter over quarter. Obviously, you have a big sequential increase in revenue. Can you talk through some of the moving parts?
What's really driving this increase outside of The special to memory data point you gave us already.
Are you meaning for the whole business or just in terms of memory?
Release. For the whole business, it's August.
Well, I think that broadly demand Across the sectors, we're doing very well, driven by different dynamics. When you look at IPS and from there, Penguin Computing and Penguin Edge, Things like edge computing and IoT are certainly catalysts in the front of the business, but in the back end we're thinking in computing Offering strong growth is driven primarily by AI initiatives at many of our customers and some of them are on early stage Development and some of them are actually rolling this out. But the dynamics on the HPC sector around AI is very strong And traditional kind of workload optimization, workload efficiency in many application sectors around HD are Continue to be strong. So we're on the IPS platform, Spamend and Penguin, Penguin being driven by AI and workload Performance Management. On the memory side, as you can see for the broader indicators, high performance computes, In memory computing, storage, enterprise storage, just a number of different trends that are driving for Higher memory consumption, both in the cloud and data center and hyperscalers.
And we're starting to see new market release. And so you cover that with pretty good economic situation notwithstanding the COVID Implications to Brazil, but the economic indicators in Brazil are largely favorable. GDP is good. Inflation is generally in hand. Unemployment is pretty standard in the Range that normally operates, so for and the currency is pretty strong.
So Brazil economic indicators are good. And so
release. So, servers and IT are
positive. So, you've got that coupled with new memory applications in the specialty business. So you've got IPS and memory. And then of course, as I mentioned to your first question is the CLE LED business. Just demand Across our sectors is relatively robust.
And I think that's a phenomenon that's kind of over the last 9 months or so that we've seen strength and we think there's more growth. Great. Congrats again guys. Thanks.
Next one on the queue, we do have Brian Chin from Stifel. You are now live.
Hi, there. Good afternoon. Congratulations on the results and thanks for letting us ask a few questions. Maybe first On gross margin, very good sequential improvement clearly. Are the improvements here in memory,
but particularly in LED sustainable? Or is this
a little bit above trend line based on the current progress you're making on outsourcing and the conversion to sapphire wafers?
Well, I think there's improvement in front of us still. I think that we would try to suggest that we are Some momentum here from the demand picture I just painted. In addition, some operating efficiencies that we're gaining across all of our businesses, With the exception as Ken called out on his comments relative to in quarter IPS gross margins, which were Down a little bit due to mix. But broadly speaking, our mix was favorable. Our operating efficiency and transformation at Cree release.
It's been successful in terms of where we were planned on plan. So if you combine that with again mix and pricing benefits, it showed the strength. We think there's improvement from here, but we think it's More incremental than we just experienced in Q3. And so I'll let Ken talk to that in a second. And on the memory side, But I think our biggest opportunities in memory are in these new market opportunities that have been in development for some time and are starting to get traction.
So We think memory margins from here can improve as well primarily and specialty.
We think Brazil is more of
a kind of a flattish to slightly up Improvement from here. But broadly speaking, we think memory can improve, LED can improve. And we were pretty confident on the IPS side that it will improve From Q3, just given we're forecasting a better mix of services on a go forward basis. But Ken, any comment?
Release. Hey, Brian, thanks for the question. So if we look at the Q3 margin profile on a non GAAP basis, if you recall, From 19 up to 21%. So we did exceed that. That was driven by a couple of factors, One of which is the performance of LED solutions or Cree LED, which had Very good margins on a non GAAP basis, 29.6%.
So higher than what we were expecting that helped drive that outperformance. As we look into Q4, we're seeing some nice trends overall. Mark highlighted some of those Trends within those three segments, memory solutions, IPS and Cree LED, that should drive us to that range Of 22% to 24% gross margins overall. Would also like to just highlight one item. As we move from q3 into q4, within our memory solutions group, we have a logistics release.
Historically, we've taken revenue on a net basis. There is one customer, However, that we are migrating or we have migrated now from a gross basis to a net basis, this has the effect of a couple fold. So one, as
we look at Q4, this
is already baked into our guidance. If you looked on On an apples to apples basis, q4 versus how versus q3, our revenues Would be at midpoint of guidance closer to $490,000,000 if we took that customer on a gross basis. But we have now moved that customer to a net basis, and that's embedded in our guidance range of $440,000,000 to $480,000,000 The other piece that does flow through the P and L is the fact that on a gross margin basis, by taking That one particular customer on a net basis, the margins, do improve a bit and that's why we feel fairly comfortable with this 22% to 24% With this 22% to 24% non GAAP guidance for Q4.
Okay, got it. So if I heard you correctly, it's sort of like a $30,000,000 at the midpoint benefit I guess, release. Reduction in the fiscal 4Q revenue. Can you quantify what the margin impact was then associated with that?
Yes. It is about in that 70 to 100 basis points benefit as we move into Q4 from Q3.
Okay. I appreciate that. Just a couple more questions, but just going to IPS, undoubtedly coming off, You're tracking a strong growth year here in fiscal 2021. But Mark, curious, even the IPS business can sustain double digit growth coming out Such a strong year in your fiscal 2022. And I guess with that, are you already building any sort of meaningful backlog That's shippable in the next fiscal year.
Yes. So one I'll comment in line to what we outlined. We said on a We can sustain a double digit type of CAGR for that business. If we looked on a quarter to quarter basis or you may see strong momentum, especially on the commercial side of that business.
Okay, great. Real last quick one on just on cash flow, really good operating and free cash flow generation in the quarter. I guess at the higher Revenue levels in fiscal 4Q, do you think the free cash kind of around similar levels? Thanks.
Yes, I would expect as we look at the free cash or you can look at EBITDA maybe as a proxy EBITDA minus CapEx, we would expect equivalent Type of free cash flows are slightly higher based on the guidance Q4 to Q3. Okay, great.
Thank you.
Thank you.
Next one on the queue is Sidney Ho from Deutsche Bank. You are now live.
Great. Thanks for taking my Questions and congrats on the solid results. A couple of questions on the memory side. Last quarter, you said mobile units in Brazil was Not a source of upside and notebook SSD should benefit in fiscal 2022. Are you starting to see an acceleration of these drivers Now that it seems like retail sales are improving, COVID cases are declining.
And are you seeing sounds like you're seeing some little bit of high ASP as well. My follow-up to that is, I guess, related to the specialty memory. Talk about good progress in data centers and some recovery in industrial last quarter. Curious how much of that business would you say is tied to the traditional IT enterprise spending, which I would think is also starting to recover? I have a follow-up question on that.
So I'll start and let Jack jump in. I think to your second question first, definitely starting to see the traditional customer base Increased demand, of course, as you know, there's a memory is one of the categories I think are Probably in tight supply relative to the broader supply conditions. But the demand profile that we're seeing is pretty strong in terms of our For customers
as well as some
of the new markets that we highlighted, well, B2B Brazil and your commentary there, When we're talking about SSPs in Brazil, in fact, there is a growth dynamic going on in the category. It's a much more earlier stage of penetration in terms of the notebook and desktop and server world in Brazil. What we're really focused on is in country manufacturing to take advantage of the infrastructure we have there, leverage our capital In place to drive the benefits of the incentive system to buy and award points to SSD purchases where we think we can drive growth in the category as the largest memory player in Brazil. Jack, any commentary to you around the Any questions?
Yes. I mean in Brazil, I think the real growth in Brazil right now is really units up in the PC, notebook, server area. For Brazil, mobile's been fairly flat quarter to quarter. So we're seeing growth in that part of the business down in Brazil. And ASPs Coming up a little bit, but it's more of the unit growth driving Brazil in that area.
Okay. That's helpful. Maybe my follow-up question is on the supply chain. Ken, you mentioned your guidance contemplated some supply Can you give us a little more color which businesses will likely be more impacted? How are you thinking about the impact of these new lock Down to Asia that may have on your memory or intelligent platforms, I think those are the 2 things that's manufactured there.
Is that More related to availability of parts or is more COVID related gross margin headwind that you're thinking about? Thanks.
Yes. Sidney, let me just make a comment before Good. Ken contributes here. The nice part about the businesses we're in, it's obviously an essential business. Our Malaysia and Brazil operations have been Up and running.
We're being very careful obviously that they're running at the capacity we need. And a lot of our manufacturing As you know, we're here based in the U. S. So from an operational standpoint, we're not being hit so much as it relates to being able to produce And supply, I'll let Ken deal with the second part of the question.
Sure. And so if we look at our inventory, and we We talked a little bit about this on the previous earnings call. Inventory did go up this quarter for really two reasons or three reasons. 1, We included Cree LED. So that was a large portion of the increase from q2 toq3.
3. And then the second factor, which we talked about on the last call, was the fact that if we were able to find And into Q1, we were going to take that opportunity, to secure that inventory. So as it relates To our businesses, the areas, that we saw growth Probably 2 thirds of the increase excluding CRE, in terms of the growth quarter to quarter, in our inventory. And that was just to secure supply as we look at both the Brazil and specialty businesses.
Great. Thank you.
Next one on the line is Raji Hill from Needham and Company.
Yes, thank you and congrats on great momentum across the board, very impressive.
Mark, I was wondering if
you could talk a little bit about The growth you're seeing in some of these end markets, if you when you break down mobile network and server storage, it looks like that the server and storage business More than doubled year over year in terms of growth. And then you're seeing Strong growth in industrial and defense, and at the same time mobile PCs continues to grow. But I'm wondering if you can maybe comment on server Storage and industrial because those seem to be kind of the outliers on an end market basis.
Sure. Really when you think about it, if you break up So, Rich, storage, which is only from a perspective of what's the catalyst of each. Obviously, there's an integration of those 2 lives for dinner center But on the storage growth, just the amount of data being stored and generated It's staggering continues to be kind of something that's forecasting broader sector growth. And that's just true for SSDs as well, even if you look at the hard drive numbers and what the likes of Seagate and Western Digital are So the data explosion in the market is just validated and we think it continues on the storage piece. On the server piece, In terms of the hyperscale and cloud businesses as well as edge computing And then word to edge architecture, both those Markets both in terms of the applications as well as the investments in broader enterprise networks Our leading to pretty high number, high growth numbers there and the content in those systems is relatively strong.
Beyond that, beyond just the kind of the enterprise architecture of benefits of a cloud implementation or hyperscale model With core to edge, you also have these catalysts of data analytics and AI and machine learning, Just a lot of investments at the end as well as in the federal sector driving kind of this combined demand profile That leads to pretty good growth in both the server and storage space, as you acknowledge.
And just another question on the revenue growth. If you look at The IPS business, it grew 57% year over year off a very tough compare In May of 2020, which grew that business grew 70% year over year. And so pretty Strong growth off tough compares. Wondering maybe if you could characterize what's leading in terms of customer trends? And also could you talk about the change, the shift in the business model that you've developed to focus more on services?
How has that helped release. That business is progressing forward.
Sure. The catalyst really is really kind of the answer I Gabe, because in that business, we're selling kind of the compute capabilities and we're also selling solutions around that platform as well as Storage and so AI data analytics workflow optimization allocation provisioning, Just all the traditional HPC platform capabilities as well as custom design edge applications, It's all very favorable. I think the more important thing that we're starting to see an increase in is what you said relative to services and our role. When you think of what the larger enterprises are investing in, in terms of capabilities, they're looking for a partner like to be their kind of outsourced integration solutions provider. And what I mean by that is As far as designing systems at the hardware and operating system and security level, they want an expert to come do that for them.
They Prefer to invest there limited capital dollars on kind of application layer capabilities. And so what we're starting to see is Things like design, deployment and post sale maintenance and service, those are all things that Quite frankly, our largest customer view and that dynamic I think has changed, maybe slightly accelerated by COVID when people didn't Have the right resources to bring in all that in house. They prefer a hardware OS kind of layer software partner like
release. And from my last Question, Ken, great job on the gross margins in the quarter and congratulations on the guide to 23%. But a question on the volatility in the IPS segment. I know you touched upon it, but The gross margin for IPS was down about 6 20 basis points quarter over quarter. It's going to go back up again in Q4.
How do we think about the components of mix of services and hardware? How does that what is the percentage of revenue How does it vary quarter by quarter? Is there some sort of seasonality in services and hardware quarter to quarter as we kind of try to model that segment going forward? Thanks.
There is seasonality in that overall business, because we do have Federal related business versus commercial and federal, does, have some incremental Sales as we head into our fiscal Q1 typically, think about software and Services for that business. There's longer term software and service, like managed services, but there are also Services as we install these large systems into our customers. And that's where there can be some Lumpiness, quarter to quarter. So as we looked at Q3, I would say more hardware oriented sales in Q3. As we look In Q4, there is going to be some incremental services.
That's why we highlighted we would Expect, that the margins for IPS would uptick, Q3 to Q4, Because there will be some installation related services for those systems. Thank you. Overall, on a long term basis, we highlighted that business can be in that 25% plus release. Just remind us, but longer term at the Analyst Day, we're looking to drive that business, towards 30%, 30% plus on a long term basis as we add more services and software into that business.
Next one on the queue, we do have Kevin Cassidy from Rosenblatt Securities. You are now live.
Thanks Thank you for taking my
questions and congratulations on the great results. And I'm going to ask more about the software services also. Just that's Great. It's moved up. It's growing faster than the group overall, going from low teens to 20%.
But in your funnel of sales release. Coming in, do you expect this to continue to outgrow and is this going to be 50% of the group's revenue? Just to understand how many opportunities you're looking at for this.
I think Kevin, I think that There's still some growth as a percentage basis. I would have to stop short of saying 50%. I think more of what you're going to see is the timing of these deployments and the mix as just And commented on, but I think it's reasonable to think that we can get this higher than 20%, maybe in the mid to high 20s over the next 12 to 18 months.
Okay. And that you renamed the Products, the Edge products, so Penguin Edge. How many of the opportunities lump in the Edge along with the core?
I'm not yes, I don't know if I have the right breakdown per se by opportunities to track it like that, but I would just say roughly think about the revenue mix Somewhere in the I think probably it's like 2 thirds, 1 third, 30%, 70%, 70% High performance computing, Penguin Computing, 30% Penguin Edge.
Okay. Good. That helps. All right. Congratulations again.
Thanks.
Thanks, Kevin.
There are no questions on the queue. I will now turn it back to the presenters.
Great. Well, again, we'd like to thank you all for joining us on today's call. While we're very excited about the results we announced today, we continue to be focused on our strategy and continue to focus on delivering great results in Q4. Have a great day. Thank you.
This concludes today's conference call. Thank you for participating.