Penguin Solutions, Inc. Q4 FY2022 Earnings Call

Good afternoon, everyone. Welcome to the SGH Fourth Quarter Fiscal 2022 Earnings Call. My name is Dante, and I'll be your operator for today's call. The operator provided instructions on how to ask questions and participate in the webcast. I would now like to pass the conference over to our host, Ms. Suzanne Schmidt. Ms. Schmidt?

Thank you, operator. Good afternoon and thank you for joining us on today's earnings conference call and webcast to discuss SGH's fourth quarter and full year fiscal 2022 results. 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 press release for this call on the Investor Relations section of our website. We encourage you to go to the site throughout the quarter for the most current information on the company. I would also like to remind everyone to read the use of forward-looking statements note that is included in the 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 the company's present expectations and that actual events or results may differ materially. We will 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 the GAAP to non-GAAP measures is included in today's press release. And with that, let me turn the call over to Mark Adams, CEO. Mark?

Thanks, Suzanne. Throughout fiscal 2022, we continued to transform SGH into a diversified, profitable company committed to growth and attractive long-term shareholder returns. During our FY '22, we achieved strong results and accomplished a number of key milestones despite a challenging macroeconomic climate. Our fiscal '22 achievements included record annual revenues of $1.8 billion, record gross margins of 24.9% on a GAAP basis and 25.9% on a non-GAAP basis, record annual adjusted EBITDA of $263 million and record annual non-GAAP earnings of $3.62 per share. And now looking back over the past 2 years, we have grown the top line by over 60%, expanded non-GAAP gross margins by 610 basis points, increased adjusted EBITDA by over 150% and grown non-GAAP earnings per share by over 175%. In addition, we completed our acquisition of Stratus Technologies just after our fiscal year-end, better positioning the IPS Group for continued growth in the years ahead. Now let me turn to the fourth quarter. SGH concluded fiscal 2022 with fourth quarter key financial metrics at or above the midpoint of our guidance. Fourth quarter revenues totaled $438 million, and non-GAAP gross margins came in at 24.6%. These results, combined with strong operating discipline and our share repurchase program, resulted in non-GAAP earnings of $0.80 per share, which exceeded the upper end of our guidance range. Let me turn to a brief review of each of our businesses, starting with IPS. Revenue came in at a record $145 million for the fourth quarter, up 52% sequentially and up 48% from the year ago quarter. New project rollouts were a major contributor to our revenue growth in the quarter. Despite the increased hardware shipments from these new installations, service revenues were up 11% in Q4 when compared to Q4 fiscal year '21. On a year-over-year basis, services grew 59% in fiscal year 2022 when compared to FY '21. Services continues to be an exciting growth area for IPS. After designing and implementing an HPC solution, IPS offers additional value-added services to meet our customers' individualized needs, including system management; development and operations, or DevOps; and HPC AI optimization. These offerings demonstrate the differentiated value proposition we offer to our customers. What's more, a large portion of our services revenues for Penguin are based on longer-term multiyear engagements that deliver more predictable revenue and higher margins. The market has taken notice of IPS' success, and we continue to garner industry recognition. This past quarter, Scientific Computing World highlighted Penguin Computing's cloud technology practice as part of a feature on cloud technologies available to researchers that use HPC. Heading into our first half of the year, we see continued strong demand across our IPS customer base. As we have mentioned on prior calls, IPS has traditionally been a somewhat lumpy business. And as a result, we will continue to monitor customer demand signals as we look further out into Q1 and into Q2. With the addition of Stratus, IPS is equipped with advanced high-availability and fault-tolerant capabilities that will expand our future IPS offerings and allow us to more comprehensively address our customers' needs. Now turning to our LED Solutions Group. Cree LED faced strong headwinds in China with COVID-related policies contributing to supply chain constraints and impacting demand. Revenue totaled $83 million in the fourth quarter. Our business continues to be soft in China, and we are also seeing demand weakness in the U.S. and Europe. As such, we expect to see a sequential decrease in the LED business in Q1. The key target markets for our LED business remains specialty high-value applications, such as entertainment and horticulture; premium video applications, such as fine pitch outdoor lighting designs; and high-performance general lighting applications, such as architectural and street lighting. Cree remains a technology and brand leader in the high-performance LED space, and we are confident in the long-term operating performance of the LED business as macro headwinds subside. In our Memory Solutions Group operating under the SMART Modular brand, revenue came in at $210 million. We saw strong demand for our core specialty memory offerings, such as DDR3, DDR4 and flash memory products from OEM customers in networking telecom, enterprise computing and storage segments. In the networking and storage markets, we are seeing an increased level of activity for our PCIe, NVMe, SSD products. In particular, design-ins are increasing for our SATA SSDs. We are also seeing strong design activity for specialty DRAM products spanning legacy technologies, such as DDR3 and DDR4; to newer technologies, such as DDR5; and compute XpressLink commonly referred to as CXL. Additionally, on the DDR5 front, we are seeing strong customer interest for specialty form factors. The strength of Specialty Memory partially offset continued headwinds in Brazil. The Brazilian smartphone and PC consumer markets were weaker in the fourth quarter, as anticipated and communicated on our last call. That said, we remain disciplined in our approach to introducing new products that meet the market demand, such as uMCPs, DDR5 modules and Gen 4 SSDs while managing our operating expenses and capital expenditures in order to continue generating positive free cash flows from our Brazil operations. Longer-term market trends remain favorable to our memory business overall with data center proliferation supporting AI and machine learning application growth, industry migration to DDR5 and an increasing SSD attach rate in our Brazil business, all providing us with the foundation for longer-term growth as we capitalize on core competencies of engineering, manufacturing and service to develop differentiated solutions for our valued customers. Now I'd like to take a step back and share some corporate level news with you as we look ahead into fiscal 2023. First, I would like to officially welcome the Stratus team who joined us when the acquisition closed at the end of August. In fact, we are conducting this earnings call from the Stratus headquarters in Maynard, Massachusetts to celebrate this important milestone with the team in person. I'd also like to welcome Mark Papermaster, Chief Technology Officer at AMD, who joined our Board of Directors on August 22. We are thrilled to have Mark join the SGH Board. With his 35-plus years of engineering and technology industry experience, Mark will be instrumental in helping to guide SGH as we continue our transformation and growth in the key markets such as AI, machine learning, data analytics, cloud and high-performance computing. Finally, I'm very proud to announce SGH's commitment to achieving net-zero Scope 1 and 2 emissions by 2030. You can read about this commitment as well as other environmental, social and governance efforts in our second annual ESG report, which will be available on our website in the coming weeks. And now I'll hand it over to Ken for a more detailed review of our Q4 financial performance and our guidance for next quarter. Ken?

Thanks, Mark. I will focus my remarks on our non-GAAP results, which are reconciled to GAAP in our earnings release tables. Now let me turn to our results for our fiscal 2022 full year and fourth quarter results. As Mark shared earlier, we had another strong year of performance. Overall revenues for fiscal 2022 were up 21% to a record $1.82 billion driven by strong execution across all of our businesses. Intelligent Platform Solutions grew by 28% on a year-over-year basis to a record $441 million. This is on top of the 30% sequential growth in the previous fiscal year. Memory Solutions grew by approximately 5% on a year-over-year basis to $975 million driven by strong growth in our Specialty Memory business. And LED Solutions contributed approximately $403 million in sales during our fiscal 2022, our first full year result with this business. Non-GAAP gross margin in fiscal 2022 was up approximately 370 basis points to 25.9% from 22.2% in the prior year driven by margin improvements across all 3 of our segments. For fiscal 2022, non-GAAP diluted earnings per share were a record $3.62, up from $2.61 in fiscal 2021. And adjusted EBITDA was a record $263 million, up from $188 million in fiscal 2021. In addition, we exited the year with a strong balance sheet, including year-end cash balance of $363 million as well as prudent leverage. Now let me turn to our fourth quarter results. Despite the macroeconomic headwinds, we reported a strong quarter of results, helped by the diversification of our business and the strength of our IPS segment. Net sales were $438 million. Non-GAAP gross margin came in at 24.6%, at the midpoint of our guidance range. And non-GAAP diluted earnings per share were $0.80 for the fourth quarter, above the high end of our guidance range. Our earnings per share were higher than the midpoint of our guidance in part due to better operating expense management, lower taxes and lower shares helped by our share repurchases during the quarter. Fourth quarter revenue by business unit was as follows: IPS had $145 million in sales, LED had $83 million in sales, and memory had $210 million in sales. This translates into a sales mix of 33% for IPS, 19% for LED and 48% for memory. Non-GAAP gross margin for SGH in the fourth quarter of 2022 was 24.6%, down from 26.4% in the year ago quarter, primarily driven by lower sales from LED. Non-GAAP operating expenses for the fourth quarter were $61.1 million, up from $57 million in the fourth quarter of 2021. Operating expenses were up primarily due to the continued investments in our businesses as well as a reduction from financial credit in Brazil. Operating expenses benefited in the fourth quarter of 2022 from $2 million in financial credits in Brazil, which was down from $3.3 million in the third quarter and $7.8 million in the fourth quarter of 2021. This credit is expected to provide approximately $2 million of benefit in our first quarter of fiscal 2023. Non-GAAP diluted earnings per share for the fourth quarter of 2022 was $0.80 per share compared with $1.08 per share in the year ago quarter. And adjusted EBITDA for the fourth quarter was $56 million or 13% of sales compared to $76 million or 16% of sales in the year ago quarter. And now turning to working capital. Our net accounts receivable totaled $410 million compared with $357 million last quarter. Days sales outstanding came in at 47 days, up 16 days from the last quarter, primarily due to the timing of IPS shipments. And inventory totaled $323 million at the end of the fourth quarter, down from $365 million at the end of the prior quarter. This decline was primarily driven by lower inventory for IPS. We would expect an increase in inventories in the first quarter due to the timing of builds to support second quarter IPS revenues. Inventory turns were 8.5x in the fourth quarter versus 10.1x in the prior quarter. And consistent with past practice, accounts receivable, days sales outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $789 million and $685 million, respectively, for the fourth quarter. As a reminder, the difference between gross revenue and net sales is related to our logistics services business, which is accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as net sales. Cash and equivalents totaled $363 million at the end of the fourth quarter compared with $387 million at the end of the prior quarter. Fourth quarter cash flow from operations totaled $20.9 million compared with $36.7 million in the prior quarter. In the fourth quarter, we repurchased 2.2 million shares, spending approximately $40 million during the quarter under our $75 million share repurchase authorization. And for those of you tracking capital expenditures and depreciation, capital expenditures were $8.9 million in the fourth quarter and depreciation was $10.8 million. For 2022, we spent approximately $38 million in capital expenditures. Our overall capital allocation strategy is as follows. First and foremost, we will continue to invest in our business as we see significant opportunities for further organic growth in each of our 3 business segments while maintaining a strong balance sheet and prudent leverage. Second, we will continue to review and seek acquisition opportunities such as Stratus for further scale and diversification in a disciplined manner. Third, capital return via share repurchases provides us flexibility to return capital in an opportunistic and price-sensitive manner. For 2023, an additional focus area will be to use excess cash flow to retire debt. Prior to turning to our first quarter guidance, let me update you on our recently closed acquisition of Stratus, a global provider of high-availability, fault-tolerant solutions for the data center and at the edge. The acquisition expands our capabilities and aligns with our growth and diversification strategy. We closed the acquisition in the beginning of our fiscal 2023 for $225 million and will incorporate the results from the first quarter of fiscal 2023. From a financial standpoint, Stratus fits well within our acquisition framework. It is expected to add more than $150 million of annual revenues, improves our overall non-GAAP gross margins and is immediately accretive to our non-GAAP EPS. In conjunction with the acquisition, we also expanded our existing term loan credit facilities by $300 million. We used the net proceeds to retire the $101.8 million outstanding under the Cree earn-out note and along with cash on hand, paid for the $225 million purchase of Stratus. The Term Loan A facility bears an interest of SOFR plus 2% based on a total leverage grid. With this larger facility and inclusive of our convertible notes, we would expect our total net interest to be approximately $8 million a quarter based on current SOFR rates. Now let me turn to our first quarter 2023 guidance. We expect that net sales for the first quarter of fiscal 2023 will range from approximately $425 million to $475 million or approximately $450 million at the midpoint. Our guidance incorporates the continued strong demand in our IPS business, including approximately $35 million to $40 million of revenue expected from Stratus, but is offset by macroeconomic headwinds impacting our LED business and our memory business in Brazil. Our GAAP gross margin for the first quarter is expected to be approximately 24.5% to 26.5%. Non-GAAP gross margin for the first quarter is expected to be approximately 25.5% to 27.5%, up sequentially primarily due to the incorporation of Stratus. Our non-GAAP operating expenses for the first quarter are expected to be approximately $75 million plus or minus $3 million and up approximately $14 million sequentially, primarily due to the incorporation of Stratus. GAAP diluted earnings per share for the first quarter is expected to be approximately $0.14 plus or minus $0.15. On a non-GAAP basis, excluding share-based compensation expense, intangible asset amortization expense, debt discount and other adjustments, we expect diluted earnings per share will be approximately $0.60 plus or minus $0.15. Our GAAP and non-GAAP diluted share count for the first quarter is expected to be approximately 51 million shares based on our current stock price. Cash capital expenditures for the first quarter are expected to be in the range of $12 million to $15 million and approximately $50 million to $60 million for fiscal 2023, in part due to the migration of Cree into its own facility. Our outlook incorporates the effects of the company's recent acquisition of Stratus. However, we have not completed our purchase accounting and assessment of the fair values of the assets and liabilities, and therefore, our GAAP outlook does not reflect this impact. In addition, I wanted to share an expected change to our upcoming reporting, which will result in an expected $2 million per-quarter benefit for fiscal 2023, and this is incorporated into our guidance. We periodically evaluate planned technology transitions, capital spending and reuse rates for our assets. In September 2022, we completed a preliminary assessment of our manufacturing equipment. And based on that assessment, we anticipate increasing the estimated useful lives of such equipment from 5 to 8 years beginning in the first quarter of fiscal 2023. Our forecast for the first quarter of fiscal 2023 is based on the current environment, which contemplates the global macroeconomic headwinds and continued supply chain constraints. Please refer to the non-GAAP financial information section and reconciliation of GAAP to non-GAAP measures table in our earnings release for further details. Now let me turn it over to Mark for a few remarks prior to Q&A.

Thanks, Ken. As we enter fiscal year 2023, I remain excited about the long-term future at SGH. We are well positioned to excel in our key focus areas of AI, machine learning, data analytics, HPC, data center cloud and advanced lighting solutions. Our commitment to strong execution, combined with our capital-light model, give me confidence that we will be able to navigate the broader market headwinds that most, if not all, companies are facing. In the short term, we will manage our spending appropriately, maximizing free cash flow generation. The secular demands for our differentiated solutions continue to grow, and we remain committed to developing innovative solutions for our customers and creating long-term value for our shareholders. Operator, we are now ready for Q&A.

The operator provided instructions for the question-and-answer session. Our first question comes from the line of Brian Chin with Stifel.

Congratulations on the August quarter results in this tough environment. Maybe since I'm the lead off, first question, I guess I'm obliged to ask: in your November quarter guidance, is the implicit guide by segment maybe like a mid-single-digit decline in memory, maybe flat to down in IPS prior to the acquisition and LED down kind of 10%? Is that sort of the right apples-to-apples way to think about it?

Yes. So Brian, thanks for the question and thanks for your comments. I would say if we look at Q1 and implicit in our guide is actually we're expecting to see a bit more decline in our LED business, and that's a result of the current macro headwinds we're seeing in China and also a little bit slower demand here in the U.S. and in Europe. In addition, I would say, for the LED business, our expectation is that the distributors will be burning through some inventory. So our sell-in will be lower than the sell-through at distributors, and that's part of the reason for the decline. So I would actually anticipate that business being down potentially 20% or a bit more sequentially from Q4, and then you can gauge what the other businesses are doing.

Got it. Got it. So I guess maybe that's the place to follow up. Since you acquired this out of Cree, this has been the first dip you've seen in terms of revenue in that business. Where is the break-even revenue on a quarterly or annualized basis for the LED business? I imagine maybe you're kind of touching it in the November quarter. And I guess to that end, you're trying to clean up the inventory that maybe had accumulated in the channel there. Do you know how many quarters you expect that to take? And any visibility in terms of when the sell-in will match sell-through and whether sell-through is also stabilizing?

Yes. So maybe a couple of questions in there, Brian. So let me see if I address them all. So I'd say, first and foremost, if you looked at the distributor inventory, I wouldn't say it's as much of a build-up of inventory that occurred. But what we are seeing with some of our distributor customers is they are trying to lean on the working capital and lean out their inventories given the macro uncertainty. And when is that going to clear up? It's a little uncertain given the visibility we have. But I would expect, based on today and today's environment, as we move through Q2 and into Q3, we should be clear and the shipments in should start to equal the shipments out, but it's early to tell that for certain. And obviously, we'll provide you more color as we move through the quarters. If we looked from an overall profitability standpoint, you are correct. As we look at Q1, that business is close to breakeven on an operating income basis, although if you include depreciation and amortization, still profitable to us. And that's where we'll look to see how we can optimize some of the expenses there to make sure that in the near term, we generate positive cash flow. And then as that business recovers — because this is very much macro-driven versus any specific product concerns — as the macro returns, hopefully, as we move into the back half of this fiscal year and fiscal '24, then it should start to return to a more profitable state for the LED business.

Got it. And just to get away from this topic and before I hop off: on Stratus given the closing of the deal, is it fair to say that there's a low degree of customer overlap but a high degree of vertical market overlap? And also given the earlier close of that acquisition and the necessary integration process, how long, 6 months, 12 months, do you foresee before we start to see positive impact in terms of cross-selling synergies?

Brian, I think you sized it up correctly. Not a lot of overlapping existing customers today, which we think is a strength in potential revenue synergies out into the future. Some overlap in terms of the vertical markets that we address. And you think about what's interesting right now is that the data center business for IPS is driving a lot of the growth. And with Stratus, it's actually the edge that's driving a lot of the growth. So not a lot of overlap there in terms of revenues going away. So we think from a model standpoint, it's pretty good. Relative to impact on the business and potential upside from revenue synergies and some of the cost opportunities we have, we stated in our last call and are sticking to it: we're thinking somewhere in the 12- to 18-month range. We may see some small wins in the short term, but we think a majority of the impact will be out 12 to 18 months from the time of close or out in the middle of our fiscal year '24.

Our next question comes from the line of Tom O'Malley with Barclays.

I just had a follow-up on the gross margin profile in the August quarter. I think you had called out previously that there may be lower software contribution in the quarter, which may have been muting the IPS gross margins. But could you walk through the puts and takes on each segment's margin contribution in the quarter? You saw a strong IPS, which should help your mix, but you saw gross margins down. Any color on gross margins by segment would be helpful in August.

Sure. Happy to talk through that at a high level, Tom. So if we look at the overall memory business, sequentially the margins were reasonably flat. I would say IPS, as we've talked about, given the growth from Q3 to Q4, we outlined on our last call that it would be more hardware-centric, and therefore, the margin percent is down a bit from Q3 levels for IPS. And then for LED, given the reduction in sales from Q3 to Q4 and some of the fixed costs on the back end, the margins are down in that business. So those are the puts and takes, which drove the margins to that 24.6% level in Q4.

Okay. And then I wanted to revisit a prior question. You gave the vector for the LED business in the November quarter. From an organic perspective, is the IPS business up in the November quarter?

Yes. So I would expect the IPS business to be organically — that's excluding the Stratus business — flat to up a bit here into our Q1 from Q4. And then the memory business is kind of flattish, flat to down a little bit, but flattish in Q1 as well.

Okay. That's helpful. One more quick one: you did the LED acquisition. I think early on you talked about $350 million to $400 million a year. There was an effort to improve the gross margin structure and the operating structure of the business. Clearly, there's a headwind in China. But outside of the implications from inventory in China, is there a change in customer behavior from a competitive perspective? Are you seeing customers go in a different direction? Or is it really just market weakness given the COVID and supply chain issues in that region?

Tom, it's really the latter relative to the demand profile. If you've looked at some of the industry structural activity, start with consumer devices: LEDs in that world are getting impacted by mobile phone decline globally. In terms of construction build and the like, it's also down. There was a major competitor who announced a restructuring in the quarter. A lot is going on. I think Korea is well positioned for scale and continued growth as we go through the bottom in the market. I think the gross margin profile in the business is good. This period will get us more efficient as we prepare to go back up. I'm pretty confident in this business given what's going on in the rest of the market.

And Tom, just to highlight as well, when we look at that business, right now what we're seeing is that distributors are burning through some inventory and trying to lean out given the macro uncertainty. So the end demand is higher than the revenues we're guiding to for LED in Q1. In this type of environment, visibility is a bit uncertain as we look out into Q2, Q3. But if we look at history, these periods of inventory burn usually last one to three quarters. So as we look into Q2 or Q3, we would hope that this is behind us and our sell-in will start to match our sell-out.

Our next question comes from the line of Rajvindra Gill with Needham & Company.

Just a follow-up on the guidance for November, specifically around the gross margin. I wanted to get a sense of what the gross margin organically, excluding Stratus, is trending quarter-over-quarter. How do we think about the puts and takes there by the different subsegments?

So historically, the Stratus acquisition adds north of 150 basis points on an annual basis to our non-GAAP gross margins. Given where sales levels are for Q1, it's probably closer to that 200 basis points or even a little bit more in Q1 given the current sales levels, so you can subtract the roughly 200 basis points to get to where the base business is. And similar to what I outlined earlier to Brian, if we look at the segments, the primary change would be LED: gross margins are expected to be down a little bit from Q4 to Q1 because of the fixed cost nature of the back end and the lower sales volume.

Appreciate that. On the November guide with respect to revenue: if LED is down 20%+ sequentially and IPS ex Stratus is flat to up, it implies memory overall will be down something like 4% or so. If we split that between Specialty Memory and Brazil memory, could you elaborate on the trends within each? Should we expect Brazil to continue to be under pressure given the economy there? Are we seeing any impact on Specialty Memory with respect to overall memory pricing?

Relative to the memory market, Brazil has some strong headwinds in the consumer-facing mobile phone and notebook market, and that played out as we anticipated. We're starting to see a bounce from the bottom in Brazil; possibly slightly stronger in Q1. On the enterprise side, the Specialty Memory business has been pretty stable quarter-over-quarter. You can analyze announcements from memory companies showing fluctuation in memory pricing. We don't tend to get hit very hard on the margin side because our products are often priced on a service-level model, so units can offset some revenue, but I think especially it'll be kind of flattish in the quarter.

If we looked at the business overall, we have a range on our guidance, but it can be flat to down at the midpoint level. The Brazil business did come down in Q4 and is bouncing at those levels in Q1. The hope is as we move into Q2 and beyond, we start to see a recovery in demand. The specialty business is essentially at a very similar level when comparing Q4 to Q1.

Very helpful. Just one last question on OpEx: OpEx is going up. You mentioned $14 million sequentially which includes Stratus. Is that the OpEx run rate on a go-forward basis, about $75 million a quarter? Or should we expect synergies on the OpEx side? Any clarity would be helpful.

From a modeling perspective, that's the run rate because we're incorporating Stratus. As Mark mentioned, we will be prudent on the cost structure and look for opportunities, but for modeling purposes that's fair to use as you move through the year.

Our next question comes from the line of Sidney Ho with Deutsche Bank.

My first question is on the IPS side. Last quarter you talked about demand trends into the first half of '23 looking pretty good and your backlog was close to $500 million, which is 3 to 4x your quarterly run rate. Can you give an update on how much visibility you have now? Are you seeing any demand-driven pushouts or cancellations? Directionally how has the backlog done, excluding Stratus?

Sidney, nothing has changed since we last talked. The backlog remains very strong, and the implicit guide in Q1 suggests it's still very strong. We haven't seen reductions in orders or backlog relative to the front half of our year. These are strategic systems for customers and typically not subject to short-term cuts. We haven't seen anything pull back at this point, though we can't call Q3 and beyond yet.

On IPS services: I understand services are up 11% year-over-year and 59% for the full year, but services are down from Q3. In absolute dollars that number can go down. Is Q3 an anomaly and Q4 the right run rate going forward?

Good question. Last quarter we noted some quarter-specific implementation and other services that occurred, which contributes to quarter-to-quarter variability. In Q4, services were in the low-20s percentage for IPS. Importantly, a larger portion of these services are based on longer-term engagements, providing visibility over 12 months. As we look into 2023, especially including Stratus, we expect a very good services year. My guess is the combined services component should be well north of $150 million, which is good for visibility, margins and cash flow.

One housekeeping question: what portion of the Memory Solutions business is now coming from Specialty Memory?

We didn't break out that exact split. But the specialty business is much larger than the Brazil business today for Q4 and expected Q1. Memory did about $210 million in Q4 and $266 million in Q3; the majority of that delta was from Brazil. Specialty came down a little but is flattening out at current levels. So Brazil has been the largest headwind on the memory side.

Our next question comes from the line of Kevin Cassidy with Rosenblatt Securities.

My question is about the number of RFQs you're getting for the IPS business. Has there been a change since the recession discussion? Are you seeing companies pull back on CapEx or fewer RFQs from private and public sectors?

Kevin, we have not seen any noticeable decline in IPS RFQ activity. If anything, we're seeing more opportunities. These cycles are 6 to 12 months or longer from RFQ to commitment. We're not in a hardware-only business; we're selective and focus on opportunities where we can be paid for the value we create, combining hardware, software and services. Our funnel continues to grow. The commercial side is strong, and federal business remains active with commitments and scheduled shipments.

How about the supply chain for IPS? A few quarters ago there were bottlenecks. What are you seeing now?

We're not completely out of the woods on supply chain. Some sectors have loosened up, such as memory, while other parts of the ecosystem remain tight. It's a mixed environment; the least common denominator components need to line up. Our teams are working to navigate this, and our guidance reflects that, but we remain cautious.

We have exhausted all questions in the queue. I will now pass the conference back to Mark Adams, CEO, for any closing remarks.

Thank you, operator, and thank you all again for joining today. After a record fiscal year 2022, we are excited about our future at SGH with a mindful eye on the current market headwinds. We will remain vigilant in how we operate the company to balance our investment for long-term success while being prudent in our spending in the near term.

This concludes today's SGH Fourth Quarter Fiscal 2022 Earnings Call. Thank you for your participation. You may now disconnect your lines.