Smart Modular (NASDAQ:SMOD): How To Invest in Memory

SMOD reports strong 4QFY10 results

SMOD reports strong 4QFY10 results. SMOD reported strong 4Q10 results, with revenues and proforma EPS of $218.7 million and $0.29, respectively, versus our estimates of $205 million and $0.23.

While consumer PC demand has been soft, we believe that SMOD is benefiting from greater exposure to emerging markets (Brazil 51% of revenues) and also demand for specialty server, networking, and industrial/embedded memory modules. SMOD benefits from access to global blue-chip customers such as HPQ (22% of revenues), Cisco (15% of revenues), and Dell (15% of revenues).

We think that the company's favored supplier status in Brazil, due to its local DRAM and flash memory packaging and module production, allows it to benefit from high growth in the Brazil market.

Management indicated increased R&D spending, including a one-time technology charge of $7.5 million in 1QFY11 to potentially accelerate growth in the enterprise flash storage market.

The company is expanding beyond its roots in embedded/industrial solid state storage applications into new, high-growth consumer flash card and enterprise storage applications. We think that SMOD is executing well through a combination of acquisitions and partnerships with several storage companies. These include SandForce for MLC drive controllers for SAS/SATA enterprise storage and Marvell for PCI Express drive controllers. The company partners with controller companies such as Phison, Hyperstone, and SiliconMotion for merchant controller technologies. SMOD is sampling PCI Express and SATA/SAS enterprise storage drives with large, global OEMs, and we think it may ramp production during 2011.

SMOD benefits from PC and server upgrade cycle, in our view. We note that SMOD derives almost 84% of revenues from the core DRAM module business. Recent server introductions from Intel and AMD have led to strong DRAM module demand. In PCs, SMOD has successfully partnered with OEMs, such as HPQ and Dell, to serve high-growth BRIC markets, such as Brazil. SMOD management also indicated a focus on building flash memory packaging and more DRAM packaging/assembly capabilities in Brazil, which give the company a favored partner status and low tax rates.

Diversified revenue and earnings growth. Revenues by end-market are PC, 45%; Telco/network 20%; servers, 15%; logistics, 5%; industrial/printers, 4%; and storage, 11%. We estimate that non-DRAM products such as consumer flash cards and enterprise flash drives may comprise 15-20% of revenues over the next 18-24 months.

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Smart Modular (NASDAQ:SMOD): How To Invest in Memory

By: Ronald Russo

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