Penguin Solutions, Inc. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the SMART Global Holdings Second Quarter Fiscal 2020 Earnings Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Operator provides instructions. Please be advised that today's conference may be recorded. Operator provides instructions. I'd now like to hand the conference over to your speaker today, Ms. Suzanne Schmidt of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and thank you for joining us on today's earnings conference call to discuss SMART Global Holdings second quarter fiscal 2020 results. Ajay Shah, Chairman and Chief Executive Officer, will begin the call with a discussion of the market and the business; followed by Jack Pacheco, Chief Operating and Financial Officer who will review the financial results in more detail and provide the forward guidance, after which we will open the call to your questions. As a reminder, our earnings press release and a replay of today's call can be accessed under the Investor Relations section of SMART's website at smartgh.com. 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 note that today's remarks and the answers to today's questions may include forward-looking statements. Any statement that refers to expectations, projections, or other characterizations of future events including financial projections and future market conditions is a forward-looking statement. Actual results may differ materially from those expressed in these forward-looking statements. For more information, please refer to the risk factors discussed in the documents we file from time to time with the SEC, including our most recent Form 10-K. We assume no obligation to update these forward-looking statements, which speak as of today. Additionally, during this call, our non-GAAP financial measures will be discussed. Reconciliations to those directly comparable GAAP financial measures are included in today's earnings press release. With that, I will now turn the call over to Chairman and CEO, Ajay Shah.

Thank you, Suzanne, and welcome to everyone on the call from, I assume, all of you at home. It is the most amazing time that we find ourselves in, and our fiscal second quarter has been one of the most difficult we've seen in a long time given the environment around the world. However, our team at SMART has stepped up to the challenges and delivered strong operational and financial results with both revenue and non-GAAP earnings per share above the midpoint of our guidance range, in spite of some delays we experienced in component availability from China and from some customer operations in China. We experienced technical difficulty.

Operator provides instructions. Mr. Shah has been connected now.

I'm sorry, I apologize for the difficulties that we had. I will start again since I was right close to the beginning. As I was saying, our fiscal second quarter has been one of the most difficult we've seen in a long time given the environment around the world. However, our team at SMART has stepped up to the challenges and delivered strong operational and financial results with both revenue and non-GAAP earnings per share above the midpoint of our guidance range in spite of some delays we experienced in component availability from China, and from some customers' operations in China. The emergence of the COVID-19 crisis has clearly created operational challenges and macroeconomic uncertainties. But considering the circumstances, we’ve proactively taken the necessary steps to first and foremost prioritize the safety and wellbeing of our global workforce at SMART while at the same time keeping the company's operations functioning and serving our diverse customer base to ensure their continued success. In the second fiscal quarter, our performance also benefited from a good macro environment for memory products and also from stability in Brazilian policies and the economy there. Furthermore, our acquisitions from fiscal 2019 are showing improved performance and increased potential with a robust pipeline of new business in place. Finally, and importantly, the convertible debt refinancing that we completed in early February this year is accretive to earnings and significantly strengthens our balance sheet and cash position to be able to better weather the challenges ahead, and also to take advantage of the opportunities that will be created in this changing environment. Today, we have our team around the world working from home or working in our manufacturing facilities, providing the essential services and products our customers need from us. While manufacturing operations continue in all of our facilities around the world so far, in some manufacturing locations we're operating at reduced levels to keep within local guidelines and to maintain employee safety. Overall, we’ve been able to prioritize requirements with our customers and keep them satisfied. In support of this effort, we’ve undertaken steps to secure our supply chain, properly reallocate our resources, and devise contingency plans to aggressively meet the challenges facing all of us today. From a supply chain perspective, we're functioning fairly well despite the disruption from COVID-19. As the crisis continues, we're running numerous contingency scenarios to mitigate these challenges as much as possible. In addition, our leadership team in all our locations around the world are engaging with their local communities and hospitals to support urgent needs in the areas. Turning now to the review of each of our lines of business. In the second quarter of fiscal 2020, approximately 41% of revenues came from our Specialty Memory Products business, 36% from our Brazil business, and 23% from our specialty computing products business. Starting now with Specialty Memory, which represented 41% of overall revenue and achieved about $111 million in revenues in the quarter, our revenues in this quarter were 8% higher than the previous quarter despite some supply shortages and some shutdowns by our China-based suppliers. During the quarter, we introduced some of the first of a range of specialty SSD products, based on our own recently developed firmware and controller technologies. Also, we're seeing a strong pipeline of new opportunities as we ramp up our sales efforts focused on a broader base of customers in new areas such as medical, industrial, defense, and security. During the second quarter, we had one of our strongest performances in terms of new design wins that resulted in additional customers and orders, some of which will start shipping as early as the third and fourth quarters of fiscal 2020. For example, the increase in IoT processing at the edge of the network is driving more demand for storage, and we won a new customer in the area of body cameras, a market segment where we were not present before. In addition, we had a very strong bookings quarter for our NVDIMM products, which offer a low-density alternative to 3D XPoint technology-based products. Moving on now to our Brazil business, which grew by 4% over the previous quarter to reach $98 million in revenue approximately, 36% of our overall revenue; Brazil outperformed our expectations in what is normally a seasonally weak quarter due to calendar year-end shutdowns and holidays. Our mobile memory products experienced higher selling prices as we saw significant increases in the average density of mobile memory products shipped in the period. We’ve also had some exciting new mobile memory product introductions and product qualifications at our customers. Also, our DRAM products in Brazil performed well in the quarter and pricing held steady. In Brazil, with the new manufacturing rules in place as of July last year and with our customers now clear about the new tax incentives that were signed into law at the end of December last year, we're now getting longer term forecasts, and we're also participating to a greater degree in the higher density product demand. Another new area of progress for our business in Brazil is the introduction of a line of LoRa-based IoT products for smart cities applications. We received the first trial orders for some of these products. As you may know, LoRa is a long-range, low-power wireless technology that's become a de facto technology for IoT networks worldwide. While it's difficult to anticipate the effects of COVID-19 related effects on the economy and operations in Brazil, as well as the significant weakening of the Brazilian real versus the U.S. dollar that has happened recently, longer term we remain optimistic about the prospects for profitable growth from this part of our business. Our specialty computing line of business totaled $63 million of revenue in the quarter, representing approximately 23% of overall revenue. While this is also a seasonally weak period for this line of business, revenues in the quarter were further lower than expected due to delays of certain government related orders. However, we made significant progress in improving gross margins through operational improvements, integration and an improved mix of business with increasing share of revenues coming from services in this business. You may recall that this business can be lumpy and is dependent on large projects, particularly those for government agencies. The quarter was also notable in terms of our strong bookings of multi-year managed services contracts, which led to our strongest booking quarter ever in this business in terms of total contract value. During the quarter, we introduced the first of our solution sets for different vertical applications utilizing GPU or graphics processors and CPU technologies, integrated with our networking and cluster management software tools for AI, HPC and other modeling and analytics applications. These solution-set offerings are now leading our new systems bookings. We're entering the second half of our fiscal year with a robust pipeline for new business across Specialty Compute and a solid competitive position given recent industry consolidation which has put us forward as a strong alternative for many large projects. Additionally, more and more applications are emerging driven by AI and edge computing. We're also seeing new applications in our Wireless Computing products, where we continue to win new designs in partnership with Qualcomm. We remain optimistic about the longer term prospects across all of our specialty computing areas. To further drive our efforts in these areas, we've integrated the management and many engineering services and sales organizations across Embedded Computing and Penguin Computing businesses. This will help to drive further operating cost improvements as well as a broader set of product offerings to the marketplace and a stronger go-to-market effort. In conclusion, these are clearly challenging times for all of us to navigate and indeed to forecast. However, the long-term underlying business strengths point towards an increasing need for more data-center, cloud and AI related capabilities as well as greater requirements for specialized application specific memory solutions, all of which leave us confident in our position to meet these demands in the future. Finally, in examining our portfolio, our lines of business have very limited exposure to affected end markets such as automotive, travel and hospitality, and real estate. We do have some exposure to oil and gas, and particularly in Brazil, to the consumer market. That said, we have a significant position in stronger end markets such as enterprise and infrastructure computing, communications, AI and HPC, government and defense applications, and enterprise storage. We're in a strong financial position with over $140 million in cash and minimal current debt. We have indeed run many financial simulations and scenarios and feel comfortable with our ability to withstand a prolonged downturn. As I said before, this should enable us to weather the storm and to be well positioned for the opportunities that will emerge. With that, let me turn the call over to Jack for a review of our financials and our guidance. Jack?

Thank you, Ajay. Overall gross revenue for the second fiscal quarter was $420.9 million while net sales were $272 million. 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 the net sales, the net profit on supply chain services transactions. Our breakdown of net sales by end market for second fiscal quarter was as follows: Mobile and PCs, 34%; network and telecom, 24%; service and storage, 11%; industrial, defense and other, 31%. Now moving to the rest of the income statement. Non-GAAP gross profit for the second quarter was $52.9 million, compared to last quarter's $55.7 million primarily due to product mix. Non-GAAP operating expenses were $35.6 million compared to $37.5 million in the previous quarter, as we had lower audit costs, as well as trade show related expenses. Non-GAAP net income for the second quarter was $12.8 million or $0.52 per diluted share compared with $13.4 million or $0.55 per diluted share in the previous quarter and adjusted EBITDA totaled $22.3 million, compared with $23.5 million in the prior quarter. Turning to working capital. Our net accounts receivable totaled $217.4 million, compared with $228.8 million last quarter. Our day sales outstanding decreased to 47 days for this quarter, compared with 50 days last quarter. Inventory totaled $161.4 million at the end of the second quarter, compared to $160 million at the end of the first quarter. Inventory turns remained flat at around 9 for both quarters. 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 $420.9 million and $369.4 million respectively for the second quarter. We ended the second quarter with $141.9 million of cash and cash equivalents, compared with $111.4 million at the end of the prior quarter. Second quarter cash flow from operations totaled $23.3 million, compared with $25.3 million in the prior quarter. We exited our second quarter with a very strong balance sheet, as well as a vastly improved capital structure. We issued $250 million of convertible notes on February 11th of 2020 and used $204.9 million of the proceeds to pay off our existing term loan, thereby extending our debt maturity out to 2026, which means we do not have any term loan debt payments for six years. We also used $21.8 million of proceeds to purchase capped calls, which is expected to reduce dilution to shareholders upon conversion of the notes. The maturity of our $50 million revolving line of credit was also extended about five years. We did not have any revolver withdrawal at the end of Q2, nor do we anticipate during the third quarter as we expect to continue to generate cash during our third quarter. Completing our debt refinancing reduces our cash interest, as well as our interest expense booked each quarter by over $3 million per quarter. This, along with eliminating our cash spend on amortizing our debt each quarter, which was approximately $5.6 million, will save us over $9 million in cash per quarter beginning our third quarter. For those of you tracking CapEx and depreciation, CapEx was $4.2 million for the quarter, and depreciation was $6 million. Now let me touch on some of the financial and operational dynamics we are currently facing. At this time, all of our manufacturing facilities across the globe are operating and servicing our customers as Ajay mentioned earlier. We're still seeing strong demand from our customers in our third quarter and our guidance reflects this current view of the quarter. We have analyzed and continue to assess our customers and their end markets for weaknesses and strengths, i.e., oil and gas is expected to be weaker, while our networking, telecom, server and storage businesses, which have some very large end markets, look to be performing stronger due to the increased demand for cloud, Internet services and telecom. The worldwide crisis due to COVID-19 has also further weakened the Brazilian real to new levels. We're not seeing this impact consumer spending yet but believe it could have a negative impact on the Brazilian economy, which was expected to have positive GDP growth for 2020. We have taken a number of steps to minimize the impact on the company, by having foreign exchange contracts for accounts payable, which we believe should minimize FX losses from payments. As a reminder, we price in U.S. dollars and we convert to the real when we invoice in order to minimize any negative impact to us. We'll continue to monitor the situation in Brazil very carefully, and work to minimize any resulting impact to our business. With that as a backdrop, let me now turn to our guidance for the third quarter of fiscal 2020. We currently estimate that our third quarter net sales will be in the range of $270 million to $300 million, the midpoint of which represents an increase of 5% sequentially. Gross margin for the quarter is estimated to be approximately 20% to 22%. GAAP earnings per diluted share is expected to be approximately $0.33 per share, plus or minus $0.05. On a non-GAAP basis, excluding share-based compensation expense, and intangible asset amortization expense, we expect non-GAAP earnings per diluted share will be in the range of $0.68, plus or minus $0.05, the midpoint of which represents an increase of 31% sequentially. The guidance for the third fiscal quarter does not include any view on the foreign exchange gains or losses or a mark-to-market adjustment for our capped call and includes an income tax provision expected to be in the range of 14% to 18%. The number of shares used to estimate earnings per diluted share for the third fiscal quarter is 24.6 million. Capital expenditures for third fiscal quarter are expected to be in the range of $4 million to $6 million. Please refer to the non-GAAP financial information section and the reconciliation of non-GAAP financial measures to GAAP results and reconciliation of GAAP net income to adjusted EBITDA tables in our earnings press release for further details. Operator, we are now ready to take questions.

Obviously, the backdrop here, I think most companies are lowering numbers. You had some good results. I'm curious about a couple things on that front. One, can you just talk about where you saw shortages? Any quantification on how much that impact was? And then as you're looking forward here, you kind of have two opposing factors. It seems like you probably would benefit from some work-from-home trends, which could be a near-term boost. But then obviously, you have a big consumer business in Brazil. I’m no expert on COVID exposures in Brazil, but I think most people assume that's going to get worse, so I'm curious how you're handicapping that?

As you know, Blayne, Jack and I are in different places. We will try to give you a coordinated response. I will start, and Jack can fill in. To come back to your question about Brazil: Brazil has, by the way, many of the same restrictions in place today as we do in most of the United States. So in other words, we have stay-at-home restrictions, as well as retail and travel are significantly limited. Effectively, most of our staff are working from home except for manufacturing, which is not possible to do from home. We are seeing some of our customers have slowdowns and shutdowns temporarily, maybe because they had a positive COVID case. It is an uneven environment and less predictable. But as you pointed out, some of the benefits we are seeing are particularly in the PC and the server market; PC, laptop, server, not as much in the mobile phone market. The mobile phone market, at least for now, shows production levels down and that was to some degree driven by component shortages. But now, I think we are going to see a different effect which is factories also slowing down because of shutdowns and temporary situations at certain customers, not all customers. So it is a fluid situation. We've been looking at our backlog and what we've shipped already. As a result, we’re pretty comfortable with where we are in terms of our Q3 estimates. We have a backlog at this stage for much of what we're talking about. Barring some significant incidents, which cause us to shut down operations, we're pretty confident in our estimates. Now to come back to the beginning of your question, which is shortages from China, which was a little earlier in the quarter, we had shortages and they rippled through all the way through the supply chain. Mostly, what we buy in China is our circuit boards and passives. Jack might elaborate further on that.

Sure, real quick Blayne. Some of our customers had component shortages. Even in Brazil, when Ajay mentioned that we didn't ship some mobile memory because of component shortages, it was our customers who couldn't get parts, not us. The phone manufacturers couldn't get enough parts to build phones, so they shut down for a little bit during the quarter. As far as us, we didn't really have an issue getting our parts, but we had customers who couldn’t get some of their parts out of China, and then we had the Chinese contract manufacturer shut down for five weeks or so in the quarter. So there was minimal impact to us in the quarter but it wasn't anything dramatic in our Q2.

And just one last one. If you could just explain the gross margin improvement into May, what's driving that?

A lot of it is that Specialty Compute, which is the highest gross margin segment of the business, is projected to have a better quarter in Q3. Remember, in Q2 we talked about the government sales that got pushed into Q3. So that performance will improve the margin somewhat in the quarter.

Our next question comes from Rajvi Gill from Needham & Company. Your line is now open.

A question on the memory market. My understanding is that the lead times have stretched out for memory in both DRAM and NAND and we're starting to see increased pricing in Flash and DRAM. Wondering if you could comment on that dynamic you're seeing in the market and how that's bleeding into your business? Also, you talked about some of the end markets—oil and gas being weaker, offset by network storage, telecom. You lumped PC and mobile together at 34%. It seems there could be some issues in mobile given the production problems. Can you break up the mobile and PC a little finer? It seems like enterprise PCs will be okay and networking telecom will be okay and storage. I'm trying to see the pinpoint exposure.

We are definitely seeing DRAM lead times stretched out to around 12 to 15 weeks. We're seeing Flash still longer, especially for capacitors and resistors. Customers are placing orders earlier to get their parts, which is helpful to us. As Ajay mentioned earlier, we have a backlog for most of our business here in the quarter, and so we're getting more backlog again from customers as they have to order farther out to make sure that they get their parts. So far it's not hurting us from a revenue or margin standpoint. It just gives a little bit better visibility.

Most of the mobile and PC is in Brazil, right? The only place you really play in the consumer markets is in Brazil. So it's not a worldwide phenomenon. Two-thirds of that is probably mobile, one-third PC?

Yes. Most of the mobile and PC is in Brazil. The only place we really play in the consumer markets is Brazil. Two-thirds of that is probably mobile and one-third PC.

In terms of the weakening real, you discussed using FX contracts to try to minimize accounts payable exposure. You haven't seen the impact yet on actual end demand. When would you see that and would it be lower sell-through for phones?

We should see it from our customers—we would start getting lower forecasts from the cellphone manufacturers in Brazil, such as Lenovo and LG, if their sell-through is going down. So far we haven't seen that yet in Brazil.

As you might imagine, Rajvi, this is a point we are particularly focused on because we can see the effect of a 20% change in the exchange rate on the end price of the product. To top it all off, you have significant slowdowns in retail, and quite a few phones are sold through retail. Meanwhile, online in Brazil is growing much faster. If we sound like we can't give an extremely clear answer, it's because we are not certain. The forecasts we’re getting as recently as this week continue to not show a significant drop-off—there are changes but not significant. What we are seeing are the effects of factories shutting down for a week or two because of issues with infections.

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

Thanks for taking my question. For the specialty computing business, can you give color on what portion of that business you consider stable and what is more GDP-driven that may get impacted in the current macro environment? I'm particularly interested in your view on government projects. Related to that, Ajay, you talked about increasing potential from the three acquisitions. Can you give more color on that potential?

I'll start and Jack can add. We have a fair amount of business with government and government labs and agencies; we don't see any drop-off in activity there. If anything, spending has increased. We also have business with financial services—mostly analytics—and medical analytics and trials, which seems all right. We have business with social media and telecom, which is also holding up. Some industrial-related business is small and could see push-out. We also have oil and gas related business, which we expect to be weaker, though we have not yet seen that weakness—perhaps they haven't reassessed CapEx yet. Our Wireless Computing area includes some consumer-related exposure that is doing strongly, and some enterprise-related exposure. When we combine all of that and consider seasonality, for our third quarter we have a pretty strong position and not a lot of weak ones.

Can you give a little more color on how the acquisitions are contributing?

All of our acquisitions have been in specialty computing and storage. Penguin Computing (HPC) is doing well, Embedded Computing has government and defense-related business and is doing well, and Wireless Computing is growing significantly with existing and new customers. Those are the areas where we're seeing increased potential.

Appreciate the gross margin color you provided in the filing. As we look forward, how do you think about gross margin for specialty computing? It improved by at least 10 points from a year ago. Is that sustainable? Which of the three businesses do you expect to see the most upside potential?

The big increase came from Artesyn, which is around a 40% gross margin business and that bumped up specialty. Going forward, we think we can continue to improve Penguin margins, especially as we get more managed services in that business. As our managed services business grows, we'll continue to see the gross margins in those businesses grow.

One last question. In the guidance, are you expecting any one-time charges in cost of goods sold or operating expenses related to logistics or other operational costs stemming from component availability or operational challenges? Anything specific we should expect in the following quarter?

No.

If you're referring to the convertible debt, we had a number of one-time expenses related to that offering and to extinguishing our term debt, which you see already in our financial statements. On the operational side, we're not anticipating any very specific one-time operational costs at this time. The rapid depreciation of the Brazilian real may play through in different ways—reducing local costs like labor while increasing local currency prices—but we do not have a specific one-time operational charge identified.

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

Just to level set on your outlook for the May quarter: 5% sequential growth at the midpoint. Can you walk us through how you see Brazil relative to the guide, Specialty Memory, and Specialty Compute?

At a high level, we would expect our Brazil business to be fairly flat quarter-over-quarter. We would expect both Specialty Compute and Specialty Memory to grow in Q3, with Specialty Compute probably a little bit faster than Specialty Memory.

On Specialty Memory: when shelter-in-place measures became more acute in mid-March, what was your customers' reaction? Did they buffer up more product? Did you see a change in their behavior?

Customers wanted to ensure we were operating to support them, especially customers in critical infrastructure like medical and defense. They wanted to make sure we could meet their schedules. Lead times have lengthened considerably, so they want to make sure we're going to ship what we've committed to for the quarter. It's mainly that reassurance and ensuring we can meet their commitments.

On Brazil, are you seeing any impact in fiscal Q3 from factory shutdowns related to the virus? And on the demand side, have you seen the weakening real cause customers to adjust their product pricing? From a timing perspective, if forecasts do turn down, when would you see that?

We get forecasts from customers every week or two and they constantly adjust them. They've been slowly adjusting but we haven't seen any major change from our customers in Brazil yet due to demand. There have been ups and downs because factories might shut for a week or two and then come back, but nothing long term. We really haven't seen the impact of the real weakening on their demand yet, and customers have been abating price increases. Also, many products in Brazil are financed—people often finance phones—so lower interest rates could offset the weaker real and consumers may still buy at higher local prices.

We're asking the same questions of our team in Brazil and customers because a 20% price increase could affect demand. We don't want an inventory buildup followed by a cliff. Customers have assured us they have recalculated forecasts based on the current demand they're seeing and provided those forecasts to us. We have limited visibility, but that's what we have so far.

You mentioned content improvement. Can you comment on what you're seeing in terms of content pickup?

In Brazil there is a local content system that went into effect in July last year and customers can emphasize certain commodities to meet local content requirements. Memory provides some of the best advantages for customers to meet local content requirements, which has driven more demand for our memory products. Also, a law signed at the end of December, effective recently, clearly spells out tax benefits, so customers are more comfortable and are giving us longer-term views. Average densities are rising, especially in smartphones, so customers are giving us a greater share of higher density product mix.

Our next question comes from Suji Desilva with ROTH Capital. Your line is now open.

A lot of conversation on Brazil. Can you talk about why Brazil outperformed seasonality in the quarter? Was it phones potentially? Also, on the SSD part of the business, is there a percent of revenue or material part of revenue you would call out that SSD is expected to provide in the next four to eight quarters to get a sense of how big that business could be?

Mostly it was higher density products in the mobile area. In DRAM, PCs have been fairly strong. Although there are seasonal shutdowns for holidays, we had a good quarter above plan particularly because of mobile product density improvements.

ASPs were up about 60% in the mobile area from Q1 to Q2. They're trending back up as product densities grow again.

On specialty flash SSD, do you have a sense of the percent of revenue it could provide over the next several quarters?

The growth engine of Specialty Memory as a whole continues to grow, but we don't have a firm number to say SSD will be half or three quarters of the business. We keep getting wins in specialty Flash SSD with the new controller and new design wins. We also had a very good quarter in NVDIMM design wins and DRAM design wins. The business as a whole is ramping up and continuing to grow as you see in our numbers.

And our last question comes from Mark Lipacis with Jefferies. Your line is now open.

Some investors are concerned that as the virus moves around the world it's going to impact different supply chains. China has been coming back but some places are getting hit and shutting down. Can you review how your supply chain is structured and which geographies you're most exposed to?

We have essentially three major manufacturing locations and a number of smaller ones. The major ones are in Malaysia (our main Asian center), Brazil, and in the San Francisco Bay Area (we have two facilities there). Malaysia was relatively unscathed early in the crisis when China was shut down in January and parts of February. Later, Malaysia had a number of cases and the government implemented restrictive measures for gatherings including work and manufacturing. We engaged with the Malaysian government and the American Chamber and reached detailed agreements on what we can do in terms of staffing and procedures. We are operating under those regulations at less than full strength, and we think it's a good thing because we're clearly regulated and operating with safety protocols. In Brazil, we operate a clean-room factory with heavy airflow and procedures to ensure self-sufficiency; so far we haven't had issues. In Alameda County, we've had discussions with health authorities, shown them our procedures, and they've been satisfied and continued to let us operate as an essential business. This is a changing situation but our focus is on safety of staff and maintaining operations under local guidelines.

I had a follow-up. We've seen little in terms of material order cuts; sometimes the opposite. To what extent do you think this is because the supply chain inventory had been leaned out already versus that you're in good end markets? Or is this a temporary situation that could change?

Is it possible, Mark, for me to ask you that question?

I'm in print. I can send you my report on this.

No problem. That's good.

And that will conclude today's question-and-answer session. I'd like to turn the call back to Mr. Shah for closing remarks.

Thank you, operator. We look forward to reporting on our progress in the coming months. It's going to be interesting. Thank you all again for joining us today. Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.