SMART Global Holdings Reports First Quarter Fiscal 2019 Financial Results

Bay Street

6 years ago

NEWARK, Calif., Jan. 08, 2019 (GLOBE NEWSWIRE) — SMART Global Holdings, Inc. (“SMART”) (NASDAQ: SGH), parent company of SMART Modular Technologies, Inc., today reported financial results for the first quarter of fiscal 2019 ended November 30, 2018.


First Quarter Fiscal 2019 Highlights:
•	Net sales of $393.9 million, 48% higher than year ago quarter
•	GAAP operating income of $47.8 million
•	GAAP net income of $31.0 million
•	Adjusted EBITDA of $56.5 million
•	GAAP diluted earnings per share (EPS) of $1.33
•	Non-GAAP diluted EPS of $1.75

“We had a strong start to fiscal 2019 with revenue in our first quarter exceeding the high end of our guidance and coming in at $393.9 million,” commented Ajay Shah, Chairman and Chief Executive Officer. “Driving the quarter was continued success in our Specialty Memory business, as well as solid sequential growth from our new Specialty Compute & Storage Solutions business. Our business in Brazil also met expectations”

“Looking ahead we remain optimistic about our overall business. We are seeing increased seasonality during our second fiscal quarter in our Brazil business. However, our other lines of business are expected to perform at or above our previous expectations for fiscal Q2,” concluded Mr. Shah.


Quarterly Financial Results	GAAP ⁽¹⁾						Non-GAAP ⁽²⁾
(In millions, except per share amounts)	Q1 FY19		Q4 FY18		Q1 FY18		Q1 FY19		Q4 FY18		Q1 FY18
Net sales	$	393.9	$	374.0	$	265.4	$	393.9	$	374.0	$	265.4
Gross profit	$	85.1	$	82.7	$	57.8	$	85.6	$	83.8	$	58.1
Operating income	$	47.8	$	45.0	$	31.5	$	54.4	$	51.8	$	34.6
Net income	$	31.0	$	29.7	$	21.0	$	40.6	$	40.0	$	26.3
Diluted earnings per share (EPS)	$	1.33	$	1.28	$	0.92	$	1.75	$	1.72	$	1.16

(1) GAAP represents U.S. Generally Accepted Accounting Principles.
(2) Please refer to the “Non-GAAP Information” section and the “Reconciliation of Non-GAAP Financial Measures” table below for further detail on the non-GAAP financial reporting referenced above and a reconciliation of such measures to our nearest GAAP measures.

Business Outlook
The following statements are based upon management’s current expectations for the second quarter of fiscal 2019 ending March 1, 2019. These statements are forward-looking and actual results may differ materially. SMART undertakes no obligation to update these statements.


Net Sales – GAAP / Non-GAAP	$310 to $325 million
Gross Margin – GAAP / Non-GAAP	18% to 20%
Diluted EPS – GAAP	$0.53 to $0.57

Share-based compensation per share	$0.16
Intangible amortization per share	$0.04

Diluted EPS – Non-GAAP	$0.73 to $0.77

Expected diluted share count	23.4 million

Conference Call Details
SMART will host a conference call today for analysts and investors at 1:30 p.m. Pacific time, 4:30 p.m. Eastern time. Dial-in US toll free +1-866-487-6452 using access code 4068047.

A replay of the conference call will be available for one week following today’s call through the Events section of the SMART website at www.smartgh.com or by calling US toll free +1-855-859-2056; Passcode: 4068047.

Forward-Looking Statements
This release contains, and statements made during the above-referenced conference call will contain “forward-looking statements” including among other things, statements regarding future events and the future financial performance of SMART (including the business outlook for the next fiscal quarter) and statements regarding growth drivers in SMART’s industries and markets. These statements are only predictions and may differ materially from actual future events or results due to a variety of factors, including but not limited to: business and economic conditions and growth trends in the technology industry, our customer markets and various geographic regions; global economic conditions and uncertainties in the geopolitical environment; changes in seasonal impacts on our results; changes in currency exchange rates; overall information technology spending; appropriations for government spending; the success of our strategic initiatives including additional investments in new products, additional capacity and acquisitions; the DRAM market and the temporary and volatile nature of pricing trends; deterioration in customer relationships; production or manufacturing difficulties; competitive factors; technological changes; difficulties with or delays in the introduction of new products; slowing or contraction of growth in the memory market in Brazil; reduction in or termination of local content requirements in Brazil; changes to applicable tax regimes or rates; prices for the end products of our customers; fluctuations in material costs and availability; strikes or labor disputes; deterioration in or loss of relations with any of our limited number of key vendors; changes in the availability of supply of materials, components or memory products; the inability of Penguin Computing to obtain and retain security clearances to expand its government business; and other factors and risks detailed in SMART’s filings with the Securities and Exchange Commission. Such factors and risks as outlined above and in such filings may not constitute all factors and risks that could cause actual results of SMART to be materially different from the historical results and/or from any future results or outcomes expressed or implied by such forward-looking statements. SMART and its subsidiaries operate in a continually changing business environment and new factors emerge from time to time. SMART cannot predict such factors, nor can it assess the impact, if any, from such factors on SMART or its subsidiaries’ results. Accordingly, investors are cautioned not to place undue reliance on any forward-looking statements. Forward-looking statements should not be relied upon as a prediction of actual results. These forward-looking statements are made as of today, and SMART does not intend, and has no obligation, to update or revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this press release, except as required by law.

Non-GAAP Information
Certain non-GAAP financial measures are contained in this press release or will be discussed on our conference call, including non-GAAP gross profit, non-GAAP operating income, Adjusted EBITDA, non-GAAP net income and non-GAAP diluted EPS. We define Adjusted EBITDA as GAAP net income plus net interest expense, income tax expense, depreciation and amortization expense, share-based compensation expense, acquisition-related expenses, restructuring charges, and other infrequent or unusual items. Adjusted EBITDA is not a measure of financial performance calculated in accordance with U.S. GAAP and should be viewed as a supplement to, not a substitute for, our results of operations presented on the basis of U.S. GAAP. Adjusted EBITDA also does not purport to represent cash flow provided by, or used in, operating activities in accordance with U.S. GAAP and should not be used as a measure of liquidity.

The non-GAAP financial results presented herein exclude share-based compensation expense, intangible amortization expense, acquisition-related expenses, and other infrequent or unusual items, and with respect to non-GAAP diluted EPS, foreign currency gains (losses). These non-GAAP financial measures are provided to enhance the user’s overall understanding of our financial performance. By excluding these charges, as well as any related tax effects, our non-GAAP results provide information to management and investors that is useful in assessing SMART’s core operating performance and in evaluating and comparing our results of operations on a consistent basis from period to period. These non-GAAP financial measures are also used by management to evaluate financial results, to plan and forecast future periods, and to assess performance of certain executives for compensation purposes. The presentation of this additional information is not meant to be a substitute for the corresponding financial measures prepared in accordance with U.S. GAAP. In addition, these measures may not be used similarly by other companies and therefore may not be comparable between companies.

Investors are encouraged to review the “Reconciliation of Non-GAAP Financial Measures to GAAP Results” and “Reconciliation of GAAP Net Income to Adjusted EBITDA” tables below for more detail on non-GAAP calculations.

About SMART Global Holdings
The SMART family of companies are global leaders in specialty memory, storage and hybrid solutions serving the electronics industry with standard and custom products for over 25 years. SMART delivers components, modules and solutions to a broad customer base, including OEMs in computing, networking, communications, storage, mobile and industrial markets. With the addition of Penguin Computing and the creation of a new business unit, SMART Specialty Compute & Storage Solutions (SCSS), SMART has expanded its serviceable markets into areas requiring specialized computing platforms in artificial intelligence and machine learning, advanced modeling and high performance computing. Customers rely on SMART as a strategic supplier with custom designs, product quality, technical support, a global footprint, and the ability to provide locally manufactured products in multiple geographies. See www.smartgh.com, www.smartm.com, www.smarth.com, www.smartsscs.com and www.penguincomputing.com for more information.


SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Income Statements
(In thousands, except per share data)

			Three Months Ended
			November 30, 2018			August 31, 2018			November 24, 2017
Net sales:
	Brazil		$	199,279		$	198,624		$	157,850
	Specialty Memory			139,949			122,820			107,559
	Specialty Compute and Storage Solutions			54,651			52,526			—
		Total net sales		393,879			373,970			265,409
Cost of sales ⁽¹⁾⁽²⁾				308,810			291,291			207,573
	Gross profit			85,069			82,679			57,836
Operating expenses:
	Research and development ^{(1) (2)}			11,816			11,659			8,550
	Selling, general and administrative^{(1) (2)}			25,454			29,039			17,818
	Change in estimated fair value of acquisition-related
		contingent consideration		—			(3,000	)		—
		Total operating expenses		37,270			37,698			26,368

		Income from operations		47,799			44,981			31,468
Other income (expense):
	Interest expense, net			(5,875	)		(6,217	)		(4,599	)
	Other expense, net			(3,329	)		(5,987	)		(2,715	)
		Total other expense		(9,204	)		(12,204	)		(7,314	)
		Income before income taxes		38,595			32,777			24,154
Provision for income taxes				7,619			3,059			3,149
		Net income	$	30,976		$	29,718		$	21,005

Earnings per share:
	Basic		$	1.37		$	1.33		$	0.97
	Diluted		$	1.33		$	1.28		$	0.92

Shares used in computing earnings per share:
	Basic			22,595			22,383			21,673
	Diluted			23,257			23,270			22,715

(1) Includes share-based compensation expense as follows:
	Cost of sales		$	545		$	475		$	218
	Research and development			634			572			274
	Selling, general and administrative			2,876			2,911			1,113
		Total stock-based compensation expense	$	4,055		$	3,958		$	1,605

(2) Includes amortization of intangible assets expense as follows:
	Cost of sales		$	16		$	7		$	—
	Research and development			—			252			245
	Selling, general and administrative			961			2,144			1,023
		Total amortization expense	$	977		$	2,403		$	1,268

SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of Non-GAAP Financial Measures to GAAP Results
(In thousands, except per share data)

			Three Months Ended
			November 30, 2018			August 31, 2018			November 24, 2017
Reconciliation of gross profit:
GAAP gross profit			$	85,069		$	82,679		$	57,836
	GAAP gross margin			21.6	%		22.1	%		21.8	%

Add: Share-based compensation included in cost of sales				545			475			218
Add: Intangible amortization included in cost of sales				16			7			—
Add: Purchase accounting adjustment				—			631			—

Non-GAAP gross profit			$	85,630		$	83,792		$	58,054
	Non-GAAP gross margin			21.7	%		22.4	%		21.9	%

Reconciliation of operating expenses:
GAAP operating expenses			$	37,270		$	37,698		$	26,368

Less: Share-based compensation expense included in opex
	Research and development			634			572			274
	Selling, general and administrative			2,876			2,911			1,113
		Total		3,510			3,483			1,387

Less: Amortization of intangible assets included in opex
	Research and development			—			252			245
	Selling, general and administrative			961			2,144			1,023
		Total		961			2,396			1,268

Less: S-1 related costs				—			—			300
Less: Legal fees – term loan (payment holiday)				126			—			—
Less: Acquisition-related expenses				1,423			2,844			—
Less: Contingent consideration fair value adjustment				—			(3,000	)		—

Non-GAAP operating expenses			$	31,250		$	31,975		$	23,413

Reconciliation of income from operations:
GAAP income from operations			$	47,799		$	44,981		$	31,468
	GAAP operating margin			12.1	%		12.0	%		11.9	%

Add: Share-based compensation expense				4,055			3,958			1,605
Add: Amortization of intangible assets				977			2,403			1,268
Add: Purchase accounting adjustment				—			631			—
Add: S-1 related costs				—			—			300
Add: Legal fees – term loan (payment holiday)				126			—			—
Add: Acquisition-related expenses				1,423			2,844			—
Add: Contingent consideration fair value adjustment				—			(3,000	)		—

Non-GAAP income from operations			$	54,380		$	51,817		$	34,641
	Non-GAAP operating margin			13.8	%		13.9	%		13.1	%

SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of Non-GAAP Financial Measures to GAAP Results
(In thousands, except per share data)

		Three Months Ended
		November 30, 2018			August 31, 2018			November 24, 2017
Reconciliation of income before income taxes:
GAAP income before income taxes		$	38,595		$	32,777		$	24,154
Add: Share-based compensation expense			4,055			3,958			1,605
Add: Amortization of intangible assets			977			2,403			1,268
Add: Purchase accounting adjustment			—			631			—
Add: S-1 related costs			—			—			300
Add: Legal fees – term loan (payment holiday)			126			—			—
Add: Acquisition-related expenses			1,423			2,844			—
Add: Contingent consideration fair value adjustment			—			(3,000	)		—
Add: Foreign currency losses			3,384			5,968			2,742

Non-GAAP income before income taxes		$	48,560		$	45,581		$	30,069

Reconciliation of provision for income taxes:
GAAP provision for income taxes		$	7,619		$	3,059		$	3,149
	GAAP effective tax rate		19.7	%		9.3	%		13.0	%

Tax effect of adjustments to GAAP results			(338	)		(2,529	)		(622	)

Non-GAAP provision for income taxes		$	7,957		$	5,588		$	3,771
	Non-GAAP effective tax rate		16.4	%		12.3	%		12.5	%

Reconciliation of net income and earnings per share (diluted):
GAAP net income		$	30,976		$	29,718		$	21,005

Adjustments to GAAP net income:
	Share-based compensation		4,055			3,958			1,605
	Amortization of intangible assets		977			2,403			1,268
	Purchase accounting adjustment		—			631			—
	S-1 related costs		—			—			300
	Legal fees – term loan (payment holiday)		126			—			—
	Acquisition related expenses		1,423			2,844			—
	Contingent consideration fair value adjustment		—			(3,000	)		—
	Foreign currency losses		3,384			5,968			2,742
	Tax effect of items excluded from non-GAAP results		(338	)		(2,529	)		(622	)

Non-GAAP net income		$	40,603		$	39,993		$	26,298

Shares used in computing earnings per share (diluted)			23,257			23,270			22,715

Non-GAAP earnings per share (diluted)		$	1.75		$	1.72		$	1.16

GAAP income per share (diluted)		$	1.33		$	1.28		$	0.92

SMART Global Holdings, Inc.
and Subsidiaries
Reconciliation of GAAP Net Income to Adjusted EBITDA
(In thousands)

		Three Months Ended
		November 30, 2018		August 31, 2018			November 24, 2017

GAAP net income		$	30,976	$	29,718		$	21,005

	Share-based compensation expense		4,055		3,958			1,605
	Amortization of intangible assets		977		2,403			1,268
	Interest expense, net		5,875		6,217			4,599
	Provision for income tax		7,619		3,059			3,149
	Depreciation		5,431		5,124			5,002
	S-1 related costs		—		—			300
	Legal fees – term loan (payment holiday)		126		—			—
	Purchase accounting adjustment⁽¹⁾		—		631			—
	Acquisition-related expenses⁽¹⁾		1,423		2,844			—
	Contingent consideration fair value adjustment⁽¹⁾		—		(3,000	)		—

	Adjusted EBITDA	$	56,482	$	50,954		$	36,928

	(1) Amounts in Q1’19 and Q4’18 related to acquisition of Penguin Computing in June 2018.

SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Balance Sheets
(In thousands)

			November 30,			August 31,
				2018			2018
Assets
Current assets:
	Cash and cash equivalents		$	62,954		$	31,375
	Accounts receivable, net			330,473			237,212
	Inventories			188,390			221,419
	Prepaid expenses and other current assets			40,351			32,043
		Total current assets		622,168			522,049
Property and equipment, net				60,412			56,615
Other noncurrent assets				17,561			22,449
Intangible assets, net				25,279			26,255
Goodwill				45,655			45,394
		Total assets	$	771,075		$	672,762
Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable		$	273,655		$	223,186
	Accrued liabilities			49,317			45,190
	Current portion of long-term debt			9,868			27,409
		Total current liabilities		332,840			295,785
Long-term debt				200,532			184,190
Other long-term liabilities				8,038			5,659
		Total liabilities	$	541,410		$	485,634
Shareholders’ equity:
	Ordinary shares			687			678
	Additional paid-in capital			257,607			250,191
	Accumulated other comprehensive loss			(172,893	)		(175,995	)
	Retained earnings			144,264			112,254
		Total shareholders’ equity		229,665			187,128
		Total liabilities and shareholders’ equity	$	771,075		$	672,762

SMART Global Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)

							Three Months Ended
							November 30, 2018			August 31, 2018			November 24, 2017
Cash flows from operating activities:
	Net income						$	30,976		$	29,718		$	21,005
	Adjustments to reconcile net income to net cash
		provided by (used in) operating activities:
			Depreciation and amortization					6,408			7,526			6,270
			Share-based compensation					4,055			3,958			1,605
			Provision for doubtful accounts receivable and sales returns					(104	)		(73	)		28
			Deferred income tax benefit					403			(1,444	)		(220	)
			Loss on disposal of property and equipment					3			461			—
			Amortization of debt discounts and issuance costs					685			807			729
			Change in fair value of contingent consideration					—			(3,000	)		—
			Changes in operating assets and liabilities:
				Accounts receivable				(89,441	)		31,409			(55,801	)
				Inventories				30,576			(14,495	)		(3,746	)
				Prepaid expenses and other assets				(3,182	)		(5,241	)		1,758
				Accounts payable				48,574			(66,331	)		47,492
				Accrued expenses and other liabilities				6,399			7,321			(4,863	)
					Net cash provided by (used in) operating activities			35,352			(9,384	)		14,257
Cash flows from investing activities:
	Capital expenditures and deposits on equipment							(13,384	)		(7,487	)		(6,039	)
	Proceeds from sale of property and equipment							21			204			—
	Acquisition of business, net of cash acquired							—			(42,316	)		—
					Net cash used in investing activities			(13,363	)		(49,599	)		(6,039	)
Cash flows from financing activities:
	Long-term debt payment							(1,657	)		(5,865	)		(6,184	)
	Proceeds from issuance of long-term debt, net of costs paid							—			59,365			—
	Fees paid for revolving line of credit refinancing							—			—			(299	)
	Payment of costs related to initial public offering							—			—			(1,289	)
	Proceeds from borrowings under revolving line of credit							104,000			151,895			105,500
	Repayments of borrowings under revolving line of credit							(104,000	)		(184,184	)		(105,500	)
	Proceeds from issuance of ordinary shares from share option exercises							2,402			1,324			539
	Proceeds from issuance of ordinary shares from ESPP							968			—			—
					Net cash provided by (used in) financing activities			1,713			22,535			(7,233	)
	Effect of exchange rate changes on the cash, cash equivalents
		and restricted cash *						2,018			2,867			(231	)
					Net increase (decrease) in cash and cash equivalents
						and restricted cash *		25,720			(33,581	)		754
Cash, cash equivalents, and restricted cash at beginning of period *								37,234			70,815			29,463
Cash, cash equivalents, and restricted cash at end of period *							$	62,954		$	37,234		$	30,217


* Cash balance was adjusted to include restricted cash upon adoption of ASU 2016-18 in fiscal 2019.

Investor Contacts:
Karl Motey
Vice President
Strategic Marketing and Communications
(510) 624-8213
karl.motey@smartm.com

Suzanne Schmidt
Investor Relations for SMART Global Holdings, Inc.
(510) 360-8596
ir@smartm.com