Good afternoon. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the SGH First Quarter Fiscal 2022 Earnings Call. [Operator Instructions] Thank you. Suzanne Schmidt, you may begin your conference.

Suzanne Schmidt - Investor Relations

Thank you, operator. Good afternoon and thank you for joining us on today's earnings conference call and webcast to discuss SGH's first quarter fiscal 2022 results. Joining me on the call today are Mark Adams, Chief Executive Officer; Jack Pacheco, Chief Operating Officer; and Ken Rizvi, Chief Financial Officer. You can find the accompanying slide presentation and earnings press release for this call on the Investor Relations section of our 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 attend.

I would also like to remind everyone to read the use of forward-looking statements note 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?

Mark Adams - President and Chief Executive Officer

Thank you Suzanne. We hope all of you had a nice holiday and appreciate you joining us today. We are off to a strong start to our fiscal 2022. Let me share some of the highlights from our first quarter results. We had record quarterly revenue $470 million, record non-GAAP gross margins of 27%, and non-GAAP earnings per share of $2.16, which was at the upper end of our guidance range with excellent performance across all of our businesses. Common to each of our businesses, Intelligent Platform Solutions, Memory Solutions and LED Solutions is the focus on delivering operational excellence that leverages our SGH operating system.

SGH is an engineering-driven set of businesses that delivers advanced technology solutions at the system or sub-system level addressing the unique or specialty requirements of our customers helping them compete in the markets they serve. I continue to be extremely proud of our team's execution especially in light of the unprecedented challenges stemming from operating during the COVID pandemic era amidst microelectronics supply chain shortages. I'm excited to share some of the successes from each of our three businesses. Starting with the Intelligent Platform Solutions Group or IPS, which turned in another record quarter with revenue of approximately $119 million, 80% higher than the same quarter last year and more than 20% higher compared to the prior quarter, our Q4 '21.

Expanding customer engagements in ultra-scale, government and the oil and gas end markets contributed to strength in sales in Q1. Our managed services growth initiative is progressing well with revenues almost doubling in Q1 fiscal '22 as compared to Q1 fiscal '21. Software and services for IPS overall represented approximately 17% of total IPS Q1 fiscal '22 revenue. What I believe is still under-appreciated in the world of high performance computing is the complexity of integrating a myriad of technology components and subsystems including GPUs and CPUs, Advanced Memory Solutions, Enterprise Storage, Networking Systems, Cooling Systems along with software and optimizing them with specific workloads within the datacenter.

There are few companies capable of both designing and delivering complete hardware infrastructure and software-based solutions while offering best-in-class support services to the extent we do with Penguin. With AI and Machine Learning still in their infancy we are well-positioned to capitalize on this growing trend. Our 20 years of experience in HPC enables us to design and manufacture best-in-class systems customized for our customers' workloads, implement the systems, optimize the systems for commercial scalable performance and maintain the systems for maximum availability.

Another strategic priority for our business is enhancing capabilities to service our customers via the cloud. At Supercompute '21 which took place in this past November, Penguin Computing announced the launch of its GovPOD HPC/AI Cloud Solution, an on-demand high performance secure environment that supports AI, traditional HPC and containerized workflows. We continue to invest in offerings such as the GovPOD HPC/AI Cloud Solution to address our customers' future needs for an as-a-Service offering in a secure environment. The success of our unique workload-centric approach to solving our customers' HPC and AI challenges is garnering increasing industry recognition.

In November, Hyperion Research declared that Penguin Computing was the fastest-growing major HPC solution provider of 2021. This is a testament to our team and the trust our customers have placed with us to help them maximize their compute, network and storage infrastructure to solve complex problems. Now turning to LED Solutions Group, which had another strong quarter of operating performance. Revenues were $112 million in Q1, which is in line with our expectations and up substantially when compared with Q1 fiscal 2021 when this business was still part of Cree Wolfspeed.

Revenue growth was driven by customer wins with our high brightness products into the video, architectural and landscape specialty lighting markets. We continue to execute on our manufacturing transformation plan. The transition from silicon carbide to sapphire wafers and from a captive manufacturing model to an outsourced capital-light model strengthens our cost competitiveness in the markets we serve. On the product front, the team is focused on delivering innovative application-optimized LEDs enabling a variety of lighting designs while achieving the best overall system value.

Recent highlights of these efforts include the launch of three new products in our extreme high-power product line, which deliver improved brightness and efficiency. Securing new design wins of our CV94D products which are optimized for the video display markets such as billboard and traffic signs and expanding our roadmap with exciting new products that leverage our cutting edge packaging technology addressing both the high-power and custom mid-power lighting spaces. These products target high value color mixing applications, which will enable Cree LED to deliver the next generation of premier lighting products for architectural, horticultural, medical and stage lighting applications.

We believe that Cree's focus on innovation, industry-leading intellectual property and application level differentiation will result in improved traction in our targeted market segments. In our Memory Solutions Group, operating under the SMART Modular brand name revenues grew by 6% to $239 million in fiscal Q1 of 2022 versus the same quarter a year ago. And on an apples-to-apples basis, revenues were actually up approximately 20% from the year-ago quarter when adjusted for the impact of customer revenue recognition that we reclassified beginning in our third quarter of fiscal 2021. Driving this strong year-over-year performance has been in increased sales of our core specialty solutions such as DDR3, DDR4 and Flash products to our Tier 1 networking and telecom customers.

We are also beginning to see the benefits of the investments we've made in our Memory product roadmap targeting new verticals such as data center and cloud. One example is our Open CAPI DDIMM products, which are now ramping at a leading data center customer. And on the SSD front we remain on plan and expect to ramp production in Brazil during Q4 of the fiscal year. The team has also made great progress on developing solutions targeted for the upcoming DDR5 transition. We are actively engaged with several Tier 1 customers on next generation NVDIMMs and are in design of the CXL DDR5 memory modules or system validation to address the industry's need for additional memory in both data center and cloud applications.

We are developing the industry's first DDR5 Very Low Profile or VLP RDIMM for industrial security and networking applications. These VLP modules for new DDR5 One Uplay Computing and storage applications help customers maximize density and minimize system board space. We are excited about the opportunities ahead of us in our Memory business and feel uniquely positioned to serve the needs of our expanding customer base. Our 30 plus years of design engineering and manufacturing know how providing custom solutions that incorporate hardware, firmware and software as well as our expertise in controller-based memory products positions us for success particularly as memory has taken on a much more integral role in the overall compute ecosystem.

In the past I've discussed our goal of becoming a more independently governed public company and in mid-December we announced that as of our upcoming Annual Shareholder Meeting on February 11, our Board will be entirely independent with the exception of myself and more diversified with one-third of the Board comprised of female Director. I also wanted to note the Board has approved a two-for-one share split.

We anticipate this being completed in our current quarter. This is intended to further improve our liquidity and to broaden our shareholder base. Ken will provide more detail in his commentary. We are off to a strong start in fiscal 2022 and remain focused on operational excellence across all of our businesses. We will continue to drive growth and diversification, strive to expand margins and efficiently run the company to deliver improved financial performance and increased value for our shareholders.

At this time, I'll hand it over to Ken for a more detailed review of the financials and our guidance for next quarter. Ken?

Ken Rizvi - Senior Vice President and Chief Financial Officer

Thanks Mark. The first quarter of 2022 is the seventh consecutive quarter of year-over-year growth for SGH and demonstrates how our strategy is continuing to play out with strong performance across all three of our businesses. A year ago, close to 80% of our net sales came from Memory Solutions, nearly 90% of our operating income. Today, in the first quarter of 2022, Memory Solutions represents approximately 50% of our overall net sales and operating income. We see tremendous opportunities ahead for SGH in 2022 and beyond to deliver advanced technology solutions for our customers across all three of our businesses.

Let me turn to our fiscal first quarter 2022 results. I will focus my remarks on our non-GAAP results, which are reconciled to GAAP in our earnings release tables. We reported another strong quarter in fiscal Q1. Net sales for the first quarter were $470 million, another record for the company and an increase of 61% on a year-over-year basis from the first quarter of fiscal 2021 and up slightly from Q4. In addition, non-GAAP gross margin came in at a record 27% and non-GAAP diluted earnings per share was $2.16 for the first quarter both at the higher end of our guidance ranges.

On a year-over-year basis SGH revenue growth of 61% was helped by the incorporation of Cree LED into SGH. Excluding Cree LED, our revenues grew approximately 23% on a year-over-year basis mainly driven by IPS which grew 80% and Memory Solutions which grew 6%. For the first quarter IPS had revenues of approximately $119 million, another record for that business. As we have discussed in our previous earnings call the IPS business will continue to have quarter-to-quarter variability in revenue and gross margins based on the timing of hardware, software and managed services in any given quarter.

Our LED Solutions Group had revenues of $112 million in the first quarter. This was in line with our commentary last quarter. As we head into the second quarter of fiscal 2022 we anticipate revenues for LED Solutions to come down sequentially primarily due to seasonality in the second fiscal quarter. We continue to migrate towards a fab-light structure enabling a more flexible operational model to better manage fluctuations of demand and supply. Our Memory Solutions Group had revenues of $239 million in the first quarter. Revenue grew year-over-year from growth in both our Specialty Memory and Brazil business and overall by approximate 20% when adjusted for the impact of the customer revenue reclassification from a gross to net basis that we discussed a few quarters ago.

Non-GAAP gross margin for SGH in the first quarter was a record 27%, up from 26.4% in the prior quarter and up from 18.6% in the first fiscal quarter of 2021. Gross margins for SGH were helped by stronger margin performance from our Memory Solutions Group and gross margins from both LED Solutions Group and IKEA also remained relatively strong. Our IPS segment continued to benefit from higher margin managed services and software mix in the first 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, managed services and software.

Operating expenses for the first quarter were approximately $57.9 million up from $30.4 million in the first quarter of 2021. Operating expenses were up primarily due to the inclusion of LED Solutions and continued investments in our Memory Solutions and IPS businesses. In addition, operating expenses benefited in the first fiscal quarter of 2022 from approximately $5.9 million in financial credits in Brazil. This helped offset our Brazil R&D spending, which is required to realize this credit. As we have previously indicated, the law enabling this credit is currently set to expire in January of 2022. Non-GAAP diluted earnings per share for the first quarter of fiscal 2022 was $2.16 per share equal to the record $2.16 achieved in prior quarter and up 177% from $0.78 per share in the year ago quarter.

Adjusted EBITDA for the first fiscal quarter of fiscal 2022 was $76.7 million or 16.3% of sales compared to $29.5 million or 10.1% of sales in the first quarter of 2021. Our breakdown of net sales by end market for the first fiscal quarter of 2022 was as follows: Mobile and PCs was 21%; network and telecom was 10%; servers and storage was 12%, AI, data analytics and machine learning was 15%; advanced lighting was 24%; and industrial, defense and other was 18%. Now turning to working capital; our net accounts receivable totaled $344 million compared with $313 million last quarter.

Days sales outstanding came in at 39 days, flat with the last quarter on a days basis. Inventory totaled $318 million at the end of the first quarter, down from $364 million at the end of the prior quarter. This reduction was driven by lower inventory for Memory Solutions and IPS. Inventory turns were 8.6 times in the first quarter versus 6.8 times in the prior quarter. And 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 $806 million and $684 million respectively for the first 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 agent basis meaning that we only recognize the net profit on a supply chain services transaction as net sales. Cash and equivalents totaled $233 million at the end of the first quarter compared with $223 million in the prior quarter. First quarter cash flow from operation totaled $15.1 million compared with $48 million in the prior quarter. During the quarter, given the timing of our November quarter end as well as the constraints in the overall global electronic supply chain more of our capital was tied up in working capital to help ensure we continue to meet the needs of our customers.

For those of you tracking capex and depreciation, capex was $12.8 million for the first quarter and depreciation was $9.5 million. Before turning to our guide, I wanted to highlight that the company is announcing a two-for-one share split in the form of a share dividend of one ordinary share per one outstanding ordinary share. The share split is a significant milestone for the company and intended to improve our liquidity and broaden our shareholder base. The additional shares are expected to be distributed on February 1, 2022 to shareholders of record as of January 25, 2022. The dividend will double the number of outstanding ordinary shares.

Note that ordinary shares and per share data in this call and in our earnings release have not been adjusted for the impact of the share split. Also, our guidance does not incorporate the impact from this share split. Now, turning to our fiscal second quarter 2022 guidance. We expect that net sales for the second quarter of 2022 will range from approximately $415 million to $455 million, lower than the first quarter, primarily due to seasonality from our LED business as well as the expected quarter-to-quarter variability of our IPS business.

Our GAAP gross margin for the second quarter of 2022 is expected to be between 23% and 25%. Non-GAAP gross margin for the second quarter of 2022 is expected to be approximately 24% to 26% driven primarily by lower overall sequential sales and lower mix from sales in our LED and IPS businesses. Our non-GAAP operating expenses are expected to be in the range of $55 million to $62 million in the second quarter of 2022. GAAP diluted earnings per share is expected to be approximately $0.70 plus or minus $0.15. 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 will be approximately $1.45 plus or minus $0.15.

Again, our second quarter EPS guidance does not include the impact from our share split announcement, which is expected to be effective the beginning of February. Cash capital expenditures for the second fiscal quarter are expected to be in the range of $12 million to $15 million. Our GAAP diluted share count for the second quarter of fiscal '22 is expected to be approximately 29 million shares based on our current stock price. Our non-GAAP diluted share count for the second quarter of fiscal 2022 is expected to be approximately 28 million shares.

And it includes the benefit of our convertible note capped calls. Our share count guidance does not incorporate the share split, which will be effective from the beginning of February. Our forecast for the second 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 to non-GAAP measure tables in our earnings 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?

Mark Adams - President and Chief Executive Officer

Thanks, Ken, and thanks to all of you for your support. We look forward to meeting with you in the coming months virtually or in person and updating you as we continue to execute on our growth and diversification strategy. We appreciate all of you for joining today's call.

Question & Answers

Operator

[Operator Instructions] Your first question comes from the line of Tom O'Malley with Barclays. Your line is now open.

Thomas O'Malley - Barclays Capital, Inc. - Analyst

Good afternoon, guys and thanks for taking my questions and congrats on the nice results. My first question was just about the performance during the quarter. It looked like the IPS business far exceed your expectations. I know you - you said it was up, I think was up, greater than 20%. You had previously talked in some calls about some U.S. government awards totaling almost $70 million. Is the timing of those awards the difference there or was there some traction with new customers that kind of led to the upside? Any color there would be helpful.

Mark Adams - President and Chief Executive Officer

Sure. The award that you're referring to, close to the, it was actually $68 million Tom. It is more likely a second half Q3, Q4 timing. So that's not contemplated in our results today. Today, was a little bit of increase in some of the business opportunities at our existing customers as well as some new development accounts that have registered some revenue opportunities for us.

Thomas O'Malley - Barclays Capital, Inc. - Analyst

Helpful. And then you mentioned in the preamble that your efforts for the SSD business are going to ramp in Q4 during the fiscal year. Could you just give us some perspective on what you think the size of that opportunity is? How big can that be for you guys? Obviously, it's a little bit later this year so a little further out. But just over time what could that look like for your business?

Mark Adams - President and Chief Executive Officer

Okay. Just roughly and Ken can hold me to this. The Brazil business is somewhere in the $450 million to $475 million range from a scale perspective on kind of a backwards looking kind of last 12 months pace. And you look at that, we think the SSD business is something that could ramp up in the short term over the next, starting from Q4 out on a 12-month basis, roughly in the $40 million to $45 million range and we expect to hit a run rate - of a quarterly run rate of roughly $10 million by Q4. Now let me qualify also that this is an area that we have seen some constraints on the electronic supply chain shortage, some of the components there are ones that could be in our way of getting there, but we feel pretty good about it today as we sit here in Q1. And overall, we like our position relative to the market and our manufacturing of SSDs in-country to be at the pace, I said roughly, again, think about Q4 target roughly $10 million, run rate business about $40 million to $45 million.

Thomas O'Malley - Barclays Capital, Inc. - Analyst

Great, that's helpful. Congrats on the nice results, guys.

Mark Adams - President and Chief Executive Officer

Thanks, Tom.

Operator

Your next question comes from the line of Brian Chin with Stifel. Your line is now open.

Brian Chin - Stifel, Nicolaus & Co., Inc. - Analyst

Hi, there. Happy New Year to everyone and thanks for letting us ask a few questions. Maybe my first question actually - thanks. My first question is about the financial credits in Brazil tied to R&D and so I guess based on our understanding there has been some progress there towards a possible extension of the program that underlies those credits that you benefited from. And so going forward, there may not be such an increase in your opex as you've talked to here in the past. So I'm curious, do you share that view that there is a high probability of an expansion? And two, what would your EPS guide for the February quarter be assuming that, that program is extended?

Mark Adams - President and Chief Executive Officer

Let me take the front half of that and I'll ask Ken maybe to quantify any hypothetical changes that could be pending. As you know, we - Ken and I both have articulated what the current law says and that's the expiration of these tax credits in January of '22. Needless to say, in the background we've been working with the government and as the largest memory manufacturer in-country have pretty good presence. As a matter of fact, the President of our Brazil business is the Head of what their Semiconductor Association in Brazil. And so we've been lobbying pretty hard.

And I think the government has recently contemplated the impact of things like the supply constraints in the industry and they understand the value. And so we think there is a probability that they will extend the tax credits in some way, shape or form, albeit it has not been done at the timing of our call today. So we think there's been a lot of progress, especially over the last 30 days. We're very much part of the lobbying to the government for these tax credits to be extended. And we'll certainly keep you posted. Ken, maybe you can just kind of give us a sense on what that might look like in Q2.

Ken Rizvi - Senior Vice President and Chief Financial Officer

Yes. So, Brian in Q2, there isn't an impact for us even that law gets extended. It's just based on the timing of our quarter-end or the Brazil business. It's actually one month ahead of our quarter end or our other businesses that's outlined in our Q.

Brian Chin - Stifel, Nicolaus & Co., Inc. - Analyst

Okay.

Ken Rizvi - Senior Vice President and Chief Financial Officer

So there is no impact here in Q2. If it does get extended in Q3 and Q4 it's still a bit TBD depending on what the specific law would look like. So for now, I think what we've outlined to the analysts and to The Street on our last call based on the current law I would just keep it as is, in terms of that credit going away as we look at Q3 and Q4. If things change obviously we can have an update after that law changes.

Brian Chin - Stifel, Nicolaus & Co., Inc. - Analyst

Okay, all right, fair enough. Appreciate the color. I guess I'll stay tuned on that probably in the near-term. Maybe kind of more broadly and our focus is a little bit on the IPS business specifically, but clearly there are some challenges out there. You alluded to that in terms of labor and hardware availability and cost. And I guess specifically again in the IPS business, can you give us an idea and quantify what this headwind to growth and our operating margin expansion might be that you're facing right or over the duration of the fiscal year? Because you probably had good results but obviously this is something that you're having to work through on your inventory - it obviously went down a lot on higher revenue but also maybe you didn't want that to be a little bit higher in this environment.

Mark Adams - President and Chief Executive Officer

Yeah, I think - also this is specific to the inventory as you go back and say what was the right level of kind of pre all this because as we mentioned on our last call, from an inventory perspective, we had a holdover, a shipment that went out earlier in Q1. So I wouldn't read too much into the inventory movement per se. I think we're acknowledging that the supply chain constraints are real. Having said that, it's a record quarter and this is a business I think as I mentioned before, that grew substantially in Q2 '21 and we're pretty bullish on '22.

So I don't look at it like a headwind per se. I think that the complexity of the systems, just the depth of the technology that we integrate into these finished good systems and overlying software and services, all of that has to come together with the timing of deliveries and we're just working with the constraints that everybody else is under. I mean, NVIDIA, AMD, Intel, a number of different suppliers are tied on lead times and we're working on that. Having said that, it really hasn't had a massive impact on our business and we expect a strong growth year in IPS. And I think got out of the gates with a record quarter here. So we're just cautious to the sense that the world is operating in these certain times of constraints and we just want to call that out.

Brian Chin - Stifel, Nicolaus & Co., Inc. - Analyst

Okay, fair enough. Appreciate all the color. Thanks so much.

Mark Adams - President and Chief Executive Officer

Thank you.

Ken Rizvi - Senior Vice President and Chief Financial Officer

Thanks, Brian.

Operator

Your next question comes from the line of Raji Gill with Needham & Company. Your line is now open.

Raji Gill - Needham & Co. LLC - Analyst

Yes. Thank you, and I echo my congratulations on really good results and momentum. Just on the IPS segment, the lumpiness in that, obviously is a very strong quarter in November. You're looking for it to be down in February. Is there a way to think about the seasonality on a quarter-by-quarter basis, at least on the topline? And with respect to the gross margin for IPS, you mentioned 70% of revenues coming from Services that also is very volatile. Is there a goal to increase the percentage of IPS that come from services? And if so, how do you intend to do that and what are the steps?

Mark Adams - President and Chief Executive Officer

Let me start with the back part of that question. I'll let Ken talk to some of the seasonality and how you might want to model that or think about that. But on the service side, I think we've targeted over the next three years we'd like to get this somewhere in the neighborhood of 25% plus or minus. Now, mind you when a business is growing last year over 30% and we consider this to be a - still a very strong growth business for us in the '22 and beyond. Your services are doing well just to keep up with the impressive revenue growth that we see at topline.

But part of what we're doing as we think about the growth opportunities is being a little bit selective in the engagements we're participating in. This can be a very low gross margin business if it's only hardware. And those are not the type of opportunities we want to be in. As I talked about in my commentary, we get a lot of value creation with our customers from the design side of the business upfront and the system design, optimize around the workloads of each of our customer specific to their needs, and so it starts with that, the actual integration services, deployment services and post sale maintenance break fix services. These are all part of the elements that we're emphasizing in our proposals upfront.

And each customer is a little bit different. So it's hard for us to give you a exact kind of precise measurement on how each customer will engage with us. But whether we bid upfront on certain transactions is really driven by the full engagement model that we have with these customers. We're not going to be a hardware-only shop. Now, before I hand it to Ken on this, I'll just mention to you that this lumpiness and mix issue shows up because in certain quarters we're installing these systems. And some of the larger deployments can dominate a specific quarter hardware-wise or services-wise depending on which quarter.

As we've mentioned on our Q4 call, we had the benefit of a number of services that helped our mix and our gross margin as they did in Q1. And so we will do our best to guide to that, but there will be quarters that are very service-rich and there'll be quarters that where the hardware deployment is the beginning of a new installation and services will follow on in due quarters. So Ken, maybe it will be okay if you could just talk a little bit about the quarter-by-quarter overall trend line of the business.

Ken Rizvi - Senior Vice President and Chief Financial Officer

Yes. So Raji, thanks for the question. As we look at this business, we've tried to highlight that there is variability quarter-to-quarter. And the business overall though has grown dramatically. You talked about 80% type of growth year-over-year and even as we look at the pipeline into the second half of the year that still remains very strong. So while we do expect a little bit of a downtick in sales Q1 to Q2 based on the variability, our expectations are that as we head into the back half of the year, we should see some growth or continued growth in this business in the back half of the fiscal year. Now, we're not going to provide any specifics, but I would say the pipeline does look good as we head into Q3 and Q4 after the back half of 2022.

Raji Gill - Needham & Co. LLC - Analyst

Very good. And for my follow-up on the LED business; in the presentation you mentioned the shift over to sapphire and fab-light model can be completed end of calendar '22. Once that happens, what's the kind of the normalized LED gross margins on a go-forward basis? Are there other levers that you can pull to drive the LED margins above and beyond that or is that kind of the level do you want to maintain that business at once you achieve the manufacturing transition?

Mark Adams - President and Chief Executive Officer

I think - again, Ken will jump in on the numbers side. Let me just philosophically speaking, we've got some - we've got a little room to go on the transition itself and then some of this has to do with how we design future products for new customer environments and which products get used as a base platform. So we think that this cost competitiveness we have achieved will not only benefit us as we finish out the transition, but will allow us to use some of this new technology and newer market opportunities. Ken, maybe you can follow on the back half.

Ken Rizvi - Senior Vice President and Chief Financial Officer

Yeah. Yeah. And then in terms of the margin profile, I mean one of the things that we've done here is focused on the three segments in aggregate SGH margin, which we've outlined. For this business, I would expect that the margin profile is in that low to mid 30% range over time, but we won't give specifics on any given quarter.

Raji Gill - Needham & Co. LLC - Analyst

Thank you. That's helpful and then just one more question on margin and then I'll step back. In the November quarter the overall margins were 27%. You mentioned that a lot of that was driven by stronger margins from Memory. I'm wondering if you could describe what's going on in Memory that's independent obviously of the LED manufacturing transition and is independent of the IPS given the percentage of the services. But what are the steps you've taken to improve the margins in Specialty Memory and kind of Brazil Memory? Thank you.

Mark Adams - President and Chief Executive Officer

Well, I think similar to how we're treating IPS and really all of our businesses, LED has done a great job on this as well is really looking at business opportunities where we can create some additional value and drive a better mix. We saw better end market opportunities in Memory, in Specialty. And then also, I would say our mix towards Flash was a little stronger in Q1 than it was in prior quarters. And so our Custom Flash business is one that's a little bit more attractive, given the configuration of the controller and products overall from a solution standpoint is a little bit more Specialty nature differentiated and so that mix can help.

And so when you combine kind of the market opportunity we're going after in terms of the end markets and allocating kind of limited resources in terms of inventory to the right out to marked products. But all-in-all, I think it's a mix issue that you're identifying and really the end market segments that we're prioritizing in terms of developments away from kind of a commodity side of the business, whether it'd be standard products to more differentiated specialty products.

Raji Gill - Needham & Co. LLC - Analyst

Got it. Congratulations again.

Mark Adams - President and Chief Executive Officer

Hey, thanks.

Operator

Your next question comes from the line of Sidney Ho with Deutsche Bank. Your line is now open.

Sidney Ho - Deutsche Bank Securities, Inc. - Analyst

Thanks, and thanks for taking my question. So I have a couple of questions on the Memory Solutions business. In your prepared remarks you talked about ramping up this Open CAPI DDIMM at a leading data customer. Is that a new opportunity for you or does it replace an existing product that you already offered? And maybe can you help us understand how big this opportunity could be?

Mark Adams - President and Chief Executive Officer

Sure. It's a really good example to the question that Raji was asking. Basically, this is a new customer socket opportunity. This is not a replacement and DDIMM application that we've described is one that we stepped in. We provided a value add in terms of engineering and test and reliability as well as kind of engineering design. And it started out to be in low-single digits millions of dollars in the prior quarter, and we think that this can grow in fiscal year '22 in the range of 10% to 15% of the Specialty Memory business, so somewhere in the $40 million to $50 million range. And that type of engagement Sidney is one, the company hasn't really done super well on the custom side in the newer application environments of late. Jack and the team has done a great job this year out cultivating opportunities and we're starting to see the benefit of some of these in data center cloud and even high performance compute.

Sidney Ho - Deutsche Bank Securities, Inc. - Analyst

That's helpful, thanks. My next question is, last quarter you talked about part of the increase in your inventory was driven by your supply chain business where you are not the risk taker. I assume they may be worried about component shortages or whatnot. Has there been any changes in your conversations with those customers in terms of their procurement strategy?

Ken Rizvi - Senior Vice President and Chief Financial Officer

Sidney on that front, I would say that the supply chain is still really tight. I think it's no different than probably what you're hearing from other folks that are supplying to the global electronic industry. And so it's tight on various components and our customers are doing it to us and we're doing it to our suppliers and so we're just navigating through that. And you'll see some ebbs and flows as we move through this year. I think like all companies are, we believe our supply chain team is doing a great job in terms of ensuring that we can get the components we need to service our customers. And so we're navigating it like everybody else but it's a tight supply chain overall.

Sidney Ho - Deutsche Bank Securities, Inc. - Analyst

Okay. Maybe one last one from me if I may. Appreciate you guys start providing operating margin by business segment in your last Annual Report with data going back for a few years. Can you talk about how we should think about operating margins [Indecipherable] by segment going forward. I know in the past, you talk about the gross margin by segment, but just trying to figure out, now that the new disclosures operating margin start to think about - how to think about going forward?

Ken Rizvi - Senior Vice President and Chief Financial Officer

Yeah, we haven't outlined specific targets by each of the business segments. I think in aggregate we've talked about just a while ago at least achieving in this kind of 12%, 13%, 14%, 15% EBIT target, which is where we're at today. So I think over the course of the next 12 months or so we can outline some higher targets. But in aggregate we feel like the business is operating very well with the current EBITDA or EBIT sorry levels that we've been able to achieve. I think one of the things that we've outlined on the prepared remarks and via Q&A is that there will be variability specifically as it relates to the IPS business and the margin profile quarter-to-quarter. You've seen that as we've migrated from Q1 and towards our guide in Q2 that there is some variability in the overall gross margins which then impacts the operating margins. But overall business is tremendously healthy if you look at where we are today versus just 12 months ago in terms of both the gross margin profile and the operating margin profile of the business. We're just so different today as a company than 12 months ago.

Sidney Ho - Deutsche Bank Securities, Inc. - Analyst

Great. Thank you very much.

Operator

Your next question comes from the line of Kevin Cassidy with Rosenblatt. Your line is now open.

Kevin Cassidy - Rosenblatt Securities, Inc. - Analyst

Thank you and congratulations also on the great results. The Gov or the Penguin On-Demand is an interesting product line to me anyway, and can you give us a little more description of what that is and how many agencies you're addressing and would there be a commercial version of this something besides just the public sector or private sector?

Mark Adams - President and Chief Executive Officer

Sure. Good question. Thanks, Kevin. Yeah, GovPOD for us is really an extension of our partnerships that we have with the government and our clients and the government. As we look what's happening is we're seeing in high-performance compute, we have mentioned this on prior calls is that we don't think this is kind of binary. We think this is a hybrid model that's evolving. And this extension of our on-premise relationships with these clients is that they want to utilize and benefit from the economics and just the flexibility of operating in an as-a-Service model for certain applications.

And so this extension really is for our existing customers and potentially new customers to use this platform sometimes early on in development of testing out applications and sometimes because these applications are not one that are frequently used or the overhead doesn't warrant awful lot of on-prem system. So from that perspective it works and the government yeah, it works. We also have a platform called Penguin On-Demand just POD, P-O-D and that is one that we've got, that's up and running today. Again, very small in terms of the revenue contribution.

I want to say a couple of million dollars a quarter in the business and - but it's something that we're trying to cultivate more and more as our clients want to have the flexibility for future development as well as new customers that we can target that just quite frankly aren't going to go out and make a investment in their own data center implementation of high performance compute AI. So it is an opportunity for us. It's early going and we're investing in it. And so as you look at Penguin on a go-forward basis you'll hear more about that in our efforts to drive a hybrid model both on-prem and in the Gov.

Kevin Cassidy - Rosenblatt Securities, Inc. - Analyst

Okay, great. Thanks for that explanation. And what do you see as a competitive landscape for this? Are you seeing your competitors coming in with similar products or are you ahead of the competition?

Mark Adams - President and Chief Executive Officer

Well, I think there is kind of two parts of that question. One is our current on-prem customers are looking at elements of this strategy and they're investing. And then there is obviously the cloud service providers themselves who are developing high performance compute approach. Now the one the latter the cloud service providers, the top three of four of those parties are potential partners of ours. Actually they've - we're in discussions with those type of providers where we can provide design and system utilization, advisory capabilities to our customers in a cloud environment. And so at the end of the day, this vertical that we operate in we're kind of a trusted advisor. And I think you'll see elements of our own On-Demand-as-a-Service, as well as potentially utilizing some of these cloud providers as a back end to our offering. So it's pretty good flexibility that we're developing here relative to customer engagements while we strike it at the core.

Kevin Cassidy - Rosenblatt Securities, Inc. - Analyst

Okay, great. Thank you.

Mark Adams - President and Chief Executive Officer

Thank you.

Operator

There are no further questions at this time. Mr. Mark Adams, I turn the call back over to you.

Mark Adams - President and Chief Executive Officer

Well, again, I'd like to thank everyone for joining our call today. The team did a great job in Q1 with record revenue, non-GAAP record gross margins of 27% and an EPS of $2.16 tying the record we just in Q4 of '21. Feel like we have a lot of momentum and look forward to reporting on our future growth and success. With that, the call and thank you.

Operator

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PENGUIN SOLUTIONS INC

Q1 2022

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