New home of Cree LED lighting components business reports strong Q2 results beating revenue and EPS expectations
Smart Global Holdings, Inc. (SGH) reported on Q2 2022 on April 5, 2022 showing strong operating results: revenue of $449M (up 47.7% over Q2 of the prior fiscal year), Non-GAAP EPS of $0.87 (a 2-for-1 share split became effective at the beginning of February), and Non-GAAP gross margin of 26%, up 660 basis points year-over-year (YoY). The reported results were in the midpoint of the company’s guidance given for Q2 at the Q1 2022 earning call, and above market consensus on expectations.
SGH operates 3 business units:
Intelligent Platform Solutions (IPS) $82.3M (18% of total sales)
Memory Solutions $260.1M (58% of total sales)
LED Solutions (Cree LED) $106.8M (24% of total sales)
Total Q2 net sales $449.2M
Cree LED was acquired from Wolfspeed (formerly Cree, Inc.) one year ago. Revenues for the LED Solutions business unit were up 5% compared with Q2 of the prior fiscal year when the business was still part of Wolfspeed. President & CEO Mark Adams noted in the earnings call on April 5, 2022 that SGH continues the manufacturing transformation of the LED Solutions business, including “the transition from silicon carbide to sapphire wafers and from a captive manufacturing model to an outsourced capital-light model.” The transition is anticipated to be complete by the end of calendar 2022.
The incorporation of Cree LED into SGH has been a significant contributor to revenue growth: excluding Cree LED, Q2 2022 revenues grew 13% YoY (versus 48% YoY Q2 revenue growth with Cree LED included.) Lighting represented 24% of SGH’s net sales by End Market.
On the same day as the Q2 2022 earnings release, SGH announced its board had approved a $75M stock buyback. CEO Adams noted in his remarks opening the earnings call that this capital allocation reflects positively on SGH’s strong balance sheet and expected continued cash flow growth, allowing SGH to invest in the existing 3 businesses for more organic growth and to allow them to “continue to review and seek acquisition opportunities for further scale and diversification…”
CFO Ken Rizvi commented on the earnings call that during Q2, SGH completed a refinancing via a $275M Term Loan A facility and a $250M revolving credit facility. Proceeds from the term loan were used to retire $160M in debt, including ending the seller note for the Cree LED acquisition.
Smart Global Holdings was founded in 1988 as primarily a memory company, and has been public, then private, now back to public. New leadership under Mark Adams (ex-CEO of Lumileds) started at the end of August 2020 after several years of decline in revenue and profit. FY21 revenues totaled $1.5B (up 34% from FY20). SGH has approximately 4,000 employees and 1,800 patents in its portfolio. The SGH leadership team has indicated they are focused on operational excellence, growth & diversification, and value creation. CEO Adams describes the “CapEx Light” model SGH is using as “very efficient”, keeping capital spent to 3-4% of sales. Another key area of focus has been Environmental, Social, and Governance (ESG), with progress made in Board independence and diversity, along with the release of SGH’s first ESG Report in October 2021.
Revenue guidance from CFO Rizvi for Q3 FY2022 referenced the current constraints in the global supply chain, giving a range ($435-$475M) with a slightly higher midpoint than the current Q2 results.
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