{ "docId": "019dd923-622c-750b-8b9a-931d15d7e8ac", "docSlug": "c71f39d7ed80", "documentTitle": "SMART Global Holdings, Inc. (SGH)", "authorId": "60_Wolfpack_Research", "authorName": "Wolfpack Research", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2019-09-25 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 19, "pageCount": 35, "prevPage": 18, "nextPage": 20, "slideType": "research-note", "function": "diagnose_problem", "density": "overcrowded", "nDataPoints": 4, "notes": "The slide uses a 'mouse in the land of giants' metaphor to describe Penguin's competitive position.", "elementsJson": [ "headline_text", "paragraph", "footnote" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b9a-931d15d7e8ac/19", "deckHref": "/decks/019dd923-622c-750b-8b9a-931d15d7e8ac", "deckJsonHref": "/decks/019dd923-622c-750b-8b9a-931d15d7e8ac.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b9a-931d15d7e8ac#slide-19", "components": [ { "bbox": null, "kind": "callout", "text": "We see Penguin as a mouse in the land of giants, an observation which chimes with its financial performance.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-78b4-70ad-b391-aeb15abce7e0", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "metric", "text": "operating margin: 4.1%", "attrs": null, "subkind": "primary", "toolName": "Quantification", "toolSlug": "quantification", "confidence": null, "componentId": "019dd953-78b4-70ad-b391-b16f267c1bf3", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.86, "x": 0.07, "y": 0.42 }, "kind": "paragraph", "text": "Penguin Computing advertises a wide array of services on its website, including assembly, server management, design, and even financing. It appears that Penguin is a database management company, providing the services a customer needs to host high-performance computing on premise. Providing these services requires a fixed cost and capital base, adding operational leverage to SGH as a group.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "06f65331-9db8-404c-91e5-f2ee701a6a4f", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.86, "x": 0.07, "y": 0.29 }, "kind": "paragraph", "text": "\"Specialty Compute\" refers to High-Performance Computing (\"HPC\"). This technology is constantly evolving, demanding significant investment in R&D and human capital. It takes skilled engineers to develop these products and deliver Penguin's services. Indeed, our channel checks point to a significant portion of Penguin's revenues being service related.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "1cc5e0fb-95cc-4ad6-bff5-d2acabf87a1f", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.86, "x": 0.07, "y": 0.67 }, "kind": "paragraph", "text": "In 2017, Penguin's operating margin was only 4.1% on a gross margin of 18.2%. It went on to produce a net loss of $0.7 million on $52.5 million in revenue between the date of its acquisition by SGH, on June 8, 2018, and August 31, 2018, the end of SGH's fiscal 2018.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "418d33eb-090c-4db7-90ee-d27a3eb10524", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.86, "x": 0.07, "y": 0.15 }, "kind": "paragraph", "text": "SGH's first acquisition after going public in 2017 was Penguin Computing, which closed shortly after the critical WTO ruling in June 2018. A review of the disclosed financials for this acquisition shows that it has already diluted SGH's margins.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "445597cb-f7f3-4a52-9cec-3c06fbb99695", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.86, "x": 0.07, "y": 0.38 }, "kind": "paragraph", "text": "SSCS was first reported as a distinct segment in SGH's fiscal Q4 2018 (ending August 31, 2018), after the acquisition of Penguin.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "58d742b3-fc6e-4972-be3a-939a8abec4fc", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.86, "x": 0.07, "y": 0.22 }, "kind": "paragraph", "text": "SMART Brazil harvested the gains of the tax subsidy, a line of business that was logically high-margin with low fixed costs. The same cannot be said about Penguin, which now forms the core of what SGH calls Specialty Compute and Storage Solutions (\"SCSS\").", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "afb32a67-22ad-4c9e-b0fb-112606a57047", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.86, "x": 0.07, "y": 0.58 }, "kind": "paragraph", "text": "The HPC industry is dominated by the likes of Nvidia and Xilinx, which act as suppliers to Penguin, providing the primary intellectual property required for supercomputing. While database management itself is highly fragmented, with thousands of small players, the gorilla in the room is HPE. We see Penguin as a mouse in the land of giants, an observation which chimes with its financial performance.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f13f68fa-7b5c-4022-8487-b99435e1559e", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.86, "x": 0.07, "y": 0.51 }, "kind": "paragraph", "text": "Further, Penguin boasts about large public sector customers, such as government agencies and universities. These are notorious for long sales cycles and intense competition to win new accounts. Competition inherently creates margin compression due to constant pricing pressure and consistently heightened SG&A expense.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f94fd424-fd30-4c2e-8976-d5c707eb41a7", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.4, "x": 0.07, "y": 0.91 }, "kind": "source-note", "text": "15 SGH SEC Form 8-K/A filed on 08/24/2018, exhibit 99.1\n16 SGH FQ3 2019 SEC Form 10-Q, p. 22", "attrs": { "numbered": true }, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "a142219f-7159-456b-afca-e80aeb9b1e93", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.02, "w": 0.35, "x": 0.07, "y": 0.12 }, "kind": "title", "text": "SMART's Work Becomes Hard Work", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "eda18dcc-bbe7-4ddd-943f-20aebf4e5b2a", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [], "loops": [ { "to": 22, "from": 16, "name": "Aha Moment", "slug": "03-aha-moment", "bestFor": "Data-heavy sections, research findings, analytical arguments", "matchId": "b609d924-f695-472b-9a8c-f06626448acd", "evidence": "The document's analysis of SGH's financial data and market trends.", "position": 1, "objective": "To highlight the implications of SGH's strategy and financial performance", "structure": "The Problem/Question -> What the Data Shows -> The Insight", "confidence": 0.7, "description": "Establish a tension, present data, then deliver the insight that changes everything" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }