Taking into account also the soft guidance from Apple (AAPL) -- which is Samsung's largest customer – last week, there certainly has been an abundance of evidence that the current climate for memory components and modules is challenging. With that in mind, it shouldn't come as a huge surprise that another memory company, SMART Global (SGH 23.39, -8.52, -26.70%), missed analysts' Q1 earnings estimates last night while also providing Q2 guidance that was well below expectations. The reaction to those misses has not been light: the stock has gotten hammered this morning, pushing it down by more than 26%. It's worth noting that the float on this stock is quite thin at 13 mln shares, making it prone to volatile intra-day moves.
Specifically, EPS came in at $1.75, two cents short of the consensus, with revenue increasing 48% to $393.9 mln versus the $382.3 mln consensus. Since going public in May 2017, the company had exceeded the Street's EPS and revenue estimates on every occasion. With this EPS shortfall, that streak has now come to an end.
For those who are unfamiliar with SGH, the company generates a significant amount of revenue in Brazil -- about 51%, in fact. The economic and political situation in that country has been in turmoil over the past few years, but favorable regulation there has more than offset those headwinds. Since Brazil has been lagging much of the developed world in terms of memory content on smart devices, the government there has required that OEMs ramp up their capacity in order to become more competitive. For 2018, the Brazilian government imposed a 50% increase in memory content, creating a built-in growth catalyst for SGH.
Unfortunately, global slowdown in the memory market has largely curtailed this catalyst as its largest customers, including Samsung and LG, have pulled back on purchases. During the cyclical upturn over the past couple of years, when a shortage of chips existed, smartphone makers and their suppliers ramped up their buying activity, pushing prices higher. However, as memory chip makers sought to catch up with demand, inventory levels began to rise, saturating the market. To make matters worse, the industry is now facing a demand problem tied to China’s decelerating economy and continued trade concerns there.
Furthermore, similar to both Samsung and Micron, SGH clearly doesn't see conditions improving next quarter, as indicated by its guidance. For Q2, it guided for EPS of $0.73-$0.77, far below the $1.27 consensus, with revenue of $310-$325 mln, also short of the $326.2 mln expectation. Seasonality is a factor for all memory companies, and SGH is no different as its government-related customers typically clear their budgets at year end, with some customers also shutting down for part of December. On that note, in its earnings press release, management commented that it is experiencing increased seasonality in its Brazil business, which is one cause for its downside guidance.
On a positive note, this was SGH's second quarter that included revenue from its new Specialty Compute and Storage Solutions business, and that business remained relatively solid. To rewind, last June, SGH acquired Penguin Computing, which partners with companies like NVIDIA (NVDA) and Intel (INTC) to provide artificial intelligence and high-performance computing. That acquisition ultimately became this new operating segment. For the quarter, revenue from this segment came in at $54.7 mln, up 4% sequentially, in contrast to its Brazil DRAM business, which came in essentially flat.
To conclude, SGH sees brighter days ahead in 2H19, just as Samsung and Micron do. In the near-term, however, the company is facing multiple headwinds that could leave sentiment on the bearish side.