Item 1. Business
Item 1. Business
Overview
At SGH, we design, build and manage high-performance, high-availability enterprise solutions that help our customers solve for the future. Across our computing, memory and LED lines of business, we focus on serving our customers by providing deep technical knowledge and expertise, custom design engineering, build-to-order flexibility and a commitment to best-in-class quality.
Our Business Lines
Over the last five years, SGH has evolved from a memory module company into a diversified business focused on providing high-performance, high-availability solutions to enterprise customers in markets such as computing, memory and LED end markets. Through our customer-centered approach, we are committed to delivering the highest quality product and services, ensuring efficient time-to-market and build-to-order flexibility, offering advanced technical expertise and providing excellent customer service.
As part of this transformation, SGH has completed five acquisitions since 2018. Upon acquiring Cree LED in 2021, we restructured the company into three lines of business: Intelligent Platform Solutions (“IPS”), Memory Solutions and LED Solutions. More recently, in August 2022, we acquired Stratus Technologies, Inc. (“Stratus”), a leading provider of high-availability, fault-tolerant computing platforms, software and services, to expand our IPS offerings at the edge and at the core. In June 2023, we announced an agreement to divest a majority stake in our Brazil business, which manufactures standards-based memory products for consumer electronics sold in Brazil. The completion of this transaction will further refine our focus on advanced solutions for enterprise customers.
SGH is unified by our operating system, which supports and drives operational efficiency and performance. SGH’s operating system incorporates best practices to ensure our business lines are empowered to deliver for our customers consistently and efficiently.
At SGH, our people are our greatest asset. We understand that diverse, inclusive and equitable workplaces require continuous and intentional actions to achieve success. As of the end of fiscal year 2023, SGH employed approximately 3,000 employees worldwide, with a majority of our employees in China, Malaysia and the United States.
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Acquisition of Stratus Technologies
On August 29, 2022, we completed the acquisition of Storm Private Holdings I Ltd., a Cayman Islands exempted company (“Stratus Holding Company” and together with its subsidiaries, “Stratus Technologies”). At the closing, we paid a cash purchase price of $225 million, subject to certain adjustments. In addition, the seller has the right to receive, and we are obligated to pay, contingent consideration of up to $50 million (the “Stratus Earnout”) based on the gross profit performance of the Stratus business during the first full 12 fiscal months of Stratus following the closing.
Stratus is a global leader in simplified, protected and autonomous computing platforms and services in the data center and at the Edge. For more than 40 years, Stratus has provided high-availability, fault-tolerant computing to Fortune 500 companies and small-to-medium sized businesses enabling them to securely and remotely run critical applications with minimal downtime.
See “PART II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Business Acquisitions – Stratus Technologies.”
Divestiture of SMART Brazil
On June 13, 2023, we entered into an agreement to sell an 81% interest in SMART Modular Technologies Brasil – Indústria e Comercio de Componentes Ltda. (“SMART Brazil”) to Lexar Europe B.V. (“Lexar Europe”), an affiliate of Shenzhen Longsys Electronics Co. Ltd., for approximately $205 million. The transaction is expected to close at the end of calendar year 2023 or beginning of calendar year 2024, subject to required regulatory approvals and satisfaction of customary closing conditions.
SMART Brazil operates as a stand-alone business which assembles and tests modules for electronics manufacturers that sell devices to Brazilian consumers. In line with our strategic priorities, the majority divestiture of our standards-based, commodity module business in Brazil will enable us to focus on our strategy of delivering high-performance, high availability solutions to our enterprise customers. This transaction also strengthens our financial position, enabling us to increase our strategic investments into domestic research and development and U.S.-based production of advanced technologies.
Presentation of SMART Brazil as Discontinued Operations : In accordance with authoritative guidance under U.S. GAAP, we concluded that our SMART Brazil operations met held-for-sale and discontinued operations accounting criteria as of the end of fiscal year 2023. Accordingly, we have presented the balance sheets, results of operations and cash flows of SMART Brazil in this Annual Report on Form 10-K, including in the accompanying consolidated financial statements and notes, as discontinued operations for all periods presented. SMART Brazil was previously reported as part of our Memory Solutions segment. Unless otherwise noted, discussion within this Annual Report on Form 10-K relates to our continuing operations.
See “PART II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Divestiture of SMART Brazil.”
COVID-19
While the ongoing effects of the COVID-19 outbreak have stabilized, the COVID-19 pandemic (“COVID-19”) has resulted in substantial loss of life, economic disruption and government intervention worldwide. As a result, we have experienced fluctuating sales volumes of certain product lines since early calendar 2020. It also disrupted our product development, marketing and corporate development activities. We are unable to accurately predict the full impact that COVID-19 will continue to have. For example, we may, among other issues, experience, in any or all product lines, delays in product development, a decreased ability to support our customers, disruptions in sales and manufacturing activities and overall reduced productivity, each of which could have a negative impact on our ability to meet customer commitments and on our revenue and profitability. While initially we did not experience a major disruption in our supply chain as a result of COVID-19, we cannot guarantee that such downstream effects will not impact us in the future. We are unable to accurately predict the impact that COVID-19 will have in future periods due to various uncertainties and future developments, including the evolution and severity of the disease, the occurrence of other epidemics, the imposition of related public health measures and travel and business restrictions or other actions that may be taken by governmental authorities in an effort to contain or treat the virus, all of which, together with the disruptions and other factors discussed above, could have a material adverse effect on our customer relationships, operating results, cash flows and financial condition and have a negative impact on our share price.
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Our Products and Services
Memory Solutions
Our Memory Solutions business line enables high-performance, high-availability computing solutions through the design, development and advanced packaging of specialty memory and storage solutions. Products include dynamic random access memory (“DRAM”) modules, solid-state/flash storage and other advanced memory solutions critical to networking and telecom, data analytics, artificial intelligence (“AI”) and machine learning (“ML”). Our Memory Solutions group also offers SMART Supply Chain Services, which provides customized, integrated supply chain services to enable our customers to better manage supply chain planning and execution, reduce costs and increase productivity. Our Memory Solutions group had net sales of $443.3 million, $551.7 million and $486.2 million in 2023, 2022 and 2021, respectively.
SMART Modular Technologies
Through its brand, SMART Modular Technologies, Memory Solutions has been helping customers enable high performance computing through the design, development and advanced packaging of specialty memory solutions for over 30 years. Our robust portfolio ranges from today’s leading edge technologies to standard and legacy DRAM and Flash storage products. We provide standard, ruggedized and custom memory and storage solutions that meet the needs of diverse applications in high-growth markets.
We collaborate closely with our global original equipment manufacturer (“OEM”) customers throughout their design process and across multiple projects to create solutions for demanding applications with differentiated requirements, such as specific form factors, higher density, lower power, specific firmware or greater durability and reliability compared to standard solutions. We target opportunities where we believe we can be a primary supplier of longer-lifecycle solutions to OEM customers for diverse and growing end markets within the industrial, government, networking and communications and enterprise storage and computing markets as well as other vertical markets. In this business, we offer an extensive portfolio of approximately 2,000 products available in standard and rugged formats.
Our offerings include an extensive lineup of DRAM modules utilizing a wide range of DRAM technologies from legacy synchronous DRAM to double data rate (“DDR”), DDR2, DDR3 and leading-edge, high-performance DDR4 and DDR5 DRAM devices. These technologies are incorporated into standard memory, enterprise memory and hybrid memory solutions in standard and rugged formats. These modules encompass a broad range of form factors and functions, including dual in-line memory modules (“DIMMs”), nonvolatile DIMMs, differential DIMM (“DDIMM”), load reduced DIMMs, registered DIMMs, unbuffered DIMMs, small outline dual in-line memory modules and mini-DIMMs for industrial, government, networking and communications, enterprise storage and computing and other vertical markets. These memory modules come in configurations of up to 288 pins and densities of up to 128 gigabytes. We support leading-edge and emerging interconnect standards such as Compute Express Link TM (“CXL TM ”). We utilize advanced printed circuit board and device packaging and stacking technologies to achieve cost-effective, high-density solutions. Our products are designed to meet the quality requirements of enterprise class systems pursuant to stringent specifications required by various high-speed applications.
We also design and manufacture embedded and removable Flash memory products in a variety of form factors and capacities incorporated into storage and hybrid memory solutions in standard and rugged formats. Our wide range of Flash memory products includes solid-state drives (“SSDs”), Serial Advanced Technology Attachment (“SATA”) and peripheral component interconnect express (“PCIe”) NVMe products in 2.5" enclosures, M.2 and other module form factors. We also offer Flash component products such as embedded MultiMediaCard (“eMMC”) and embedded and removable products in USB, CompactFlash and SD and microSD Card configurations. Our Flash capabilities include application-specific and customized firmware development.
Our Memory Solutions segment also offers Zero Failure Rate (“Zefr TM ”) memory modules to support powerful high-performance computing (“HPC”) platforms that process massive amounts of data. Zefr is a screening process performed on OEM original memory modules or SMART Modular built memory modules to deliver ultra-high reliability for demanding workloads.
SMART Supply Chain Services
We offer supply chain services, including procurement, logistics, inventory management, temporary warehousing, programming, kitting and packaging services. We tailor our supply chain service offerings to meet the specific needs of our customers to enable our customers to manage supply chain planning and execution, which reduces costs and increases productivity. Our supply chain services are based on our proprietary software platform that we develop, which is then
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integrated with our customers’ respective procurement management systems as well as our suppliers’ distribution management systems. Our global footprint allows us to provide these services to customers and their manufacturing partners in many regions of the world and our global inventory management capabilities allow us to manage a vast array of customer and supplier part numbers across worldwide manufacturing and logistics hubs, helping our customers minimize inventory levels while maintaining reliable delivery and availability of supply.
Intelligent Platform Solutions
Our Intelligent Platform Solutions business line offers high-performance, high-availability/fault-tolerant integrated computing platforms and services for AI, accelerated computing, ML and the internet of things (“IoT”) that span the continuum of edge, core and cloud. Within our IPS business line are two operating brands – Penguin Solutions™, the umbrella brand for Penguin Computing™ and Penguin Edge™ products, and Stratus®. Penguin Computing focuses on technical computing for core and cloud environments via industry-leading HPC and AI solutions. Penguin Edge offers edge computing solutions for embedded and wireless applications, specializing in high-performance products for customers in government, health care, industrial and telecommunications applications. Stratus provides simplified, protected and autonomous fault tolerant computing solutions in the data center and at the Edge through hardware, software and services offerings. We provide these leading-edge solutions to customers in the education, energy, financial services, government, hyperscale and manufacturing markets. IPS had net sales of $749.7 million, $441.0 million and $344.8 million in 2023, 2022 and 2021, respectively.
Penguin Computing
Through Penguin Computing, we provide a robust portfolio of hardware (including solutions based on the Open Compute Project (“OCP”)), software products and services offerings. Our solutions are comprised of servers, software, integrated turn-key clusters, enterprise-grade storage and networking (available as hardware and software) and cloud-based solutions via Penguin-On-Demand (“POD”). Our product offering includes our OCP-inspired Tundra Extreme Scale products to solve technical compute and density challenges. Our rackmount servers and graphics processing unit (“GPU”) accelerated computing platforms provide customers powerful tools focused on the development and implementation of AI, ML advanced modeling and HPC applications. Complementing our compute, storage and networking hardware solutions is our Scyld ClusterWare® line of cloud and cluster management software. These products provide advanced capabilities for management of HPC clusters from department-level systems to supercomputers. In addition, our products and services enable customers to provide their own HPC cloud with remote access via our proprietary browser-based Virtual Desktop Infrastructure (“VDI”) solution. Our portfolio includes solution design, build, deployment and management, software automation and managed services.
Penguin Edge
The Penguin Edge product portfolio is a combination of SMART Embedded Computing (“SMART EC”) and SMART Wireless Computing (“SMART Wireless”) operating under the unified Penguin Edge product brand. Penguin Edge products include system-on-modules (“SoMs”), single board computers (“SBCs”), PCIe accelerators and application-ready platforms including bladed edge servers. These solutions extend insight, intelligence and analytical capabilities closer to where the data is generated, optimizing a range of use cases across industries and rugged environments.
Target markets for Penguin Edge solutions include network edge computing, government, telecommunications infrastructure and manufacturing applications, as well as IoT endpoint applications such as smart city, digital health, digital signage and smart buildings.
During the second quarter of 2023, we initiated a plan pursuant to which we intend to wind down manufacturing and discontinue the sale of legacy products offered through Penguin Edge by approximately the end of calendar 2024. See “PART II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Intangible Assets and Goodwill – Impairment of Penguin Edge Goodwill.”
Stratus
Through Stratus, we provide for the continuous availability of business-critical applications by delivering zero-touch computing platforms that are simple to deploy and maintain, protected from interruptions and threats, and autonomous. For 40 years, Stratus has provided reliable and redundant computing, allowing global Fortune 500 companies and small-to-medium sized businesses to securely and remotely turn data into actionable intelligence at the Edge, data center and cloud – driving uptime and efficiency. As a result, IT and operational technology professionals across financial services, telecom,
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oil and gas, transportation, healthcare, retail and industrial automation rely on Stratus’ platforms and services to achieve greater productivity, efficiency, safety, security, sustainability and peace of mind.
Our high-availability and fault-tolerant platforms include Stratus ztC® Edge, a secure, purpose-built, highly automated computing platform for resource constrained and remote locations and rugged environments; Stratus ftServer®, a fully integrated, fault-tolerant computing platform for complex software workloads; Stratus ftServer® V series, a market leader for continuously available processing of high volume, highly sensitive transactions leveraging Stratus’ VOS (“Virtual Operating System”); and Stratus everRun®, a flexible software only option for ensuring fault tolerance of third party hardware. These platforms are backed by dedicated and expert customer, professional and managed services.
LED Solutions
Our LED Solutions group offers a broad portfolio of application-optimized LEDs focused on improving lumen density, intensity, efficacy, optical control and/or reliability. Backed by expert design assistance and superior sales support, our LED products enable our customers to develop and market LED-based products for lighting, video screens and specialty lighting applications. Our LED Solutions group, which was formed after the closing of our acquisition of Cree LED in March 2021, offers products under the CreeLED® brand. Our LED Solutions group had net sales of $248.3 million, $403.2 million and $224.6 million in 2023, 2022 and 2021, respectively.
Cree LED
For over 30 years, Cree LED has been a leader in LED lighting technology, offering innovative and differentiated LED solutions to a broad base of customers across multiple market segments. The Cree LED product offering includes both chips and packaged LED components.
Our Cree LED chip products include blue and green LED chips based on gallium nitride (“GaN”) and related materials. LED chips are used in a number of applications and are currently available in a range of brightness levels, wavelengths (colors) and sizes. Products using our blue and green LED chips are featured in a variety of applications including automotive, video screens, gaming displays, heart rate monitor and function indicator lights. Customers also combine our blue LED chips with phosphors to create white LEDs, which are used in various applications for indoor and outdoor illumination, a variety of medical and industrial applications, automotive interior lighting and indicators, headlamps and daytime running lights.
Our Cree LED XLamp®, J Series® and high brightness product lines feature packaged LED components. Our XLamp and J series LED components are designed to meet a broad range of market needs for lighting applications, including general illumination (both indoor and outdoor applications), portable, architectural, signal and transportation lighting. Our high-brightness LED components consist of surface mount device (“SMD”) and through-hole packaged LED products. Our SMD LED component products are available in a full range of colors designed to meet a broad range of market needs, including video, signage, general illumination, transportation, gaming and specialty lighting. Our through-hole packaged LED component products are available in a full range of colors primarily designed for the signage market.
Manufacturing and Test
We have manufacturing facilities in Newark and Fremont, California and Penang, Malaysia, all of which are certified in one or more of the following: ISO 9001:2015, ISO 14001:2015 and ISO 45001:2018. We also have a manufacturing facility in Huizhou, China, which is ISO9001:2015, ISO14001:2015 and IATF16949:2016 certified. In addition, have a test and integration facility in Tempe, Arizona for our Penguin Edge portfolio of products. Additionally, we are a member of the Responsible Business Alliance (“RBA”) and our manufacturing facilities in Malaysia and California are compliant with the RBA Code of Conduct, which is increasingly a business requirement of our customers.
We believe that our manufacturing operations for Memory Solutions have benefited from our many years of design experience and our existing library of proven designs which stress high manufacturability and quality. Over 30 years of manufacturing experience enables us to quickly move from manufacturing initiation to full production volumes of new products, which is paramount in helping our customers achieve rapid time-to-market for their new product introductions. As a result of our design efficiencies, high level of automation and expertise in utilizing advanced manufacturing processes, we achieve high manufacturing yields and reduced direct labor costs and offer our customers quick turnaround of both small and large production orders, which is a key factor in enabling our build-to-order model.
While we do not own or operate wafer fabrication facilities, we have capabilities for subsequent stages of the product manufacturing cycle. In our manufacturing facilities in Huizhou, China, we receive LED chips from third-party wafer
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fabrication facilities, prepare and package die into LED components, test components and, in some cases, assemble components on substrates or printed circuit boards to manufacture LED products. Through our investments and experience, we have developed expertise in LED technology which allow for LED products that provide brighter, more efficient and lower cost LED chips and components for a broad range of lighting applications.
Within IPS, we have utilized three primary methods of fulfilling demand for products: using third-party contract manufacturers, building products to order and configuring products to order, in each case using components and subassemblies we acquire from a wide range of vendors. For Stratus, we primarily use third-party manufacturers for most products, with some minor assembly for certain product lines in our Ireland facility. For Penguin Computing products, we have developed capabilities for design and development of large scale systems and dense HPC and AI clusters that have significant power and cooling requirements with manufacturing and test for our HPC products being done in Fremont, California. For our Penguin Edge product brand, we have developed capabilities for design and development of a wide range of embedded and wireless computing products which we manufacture, assemble and/or test in our manufacturing facilities in Newark, California; Penang, Malaysia; and Tempe, Arizona.
Product testing is an important aspect of our manufacturing operations, and we believe that we have established substantial technical expertise in the testing of products for high-end applications. Our extensive testing capabilities not only help to ensure a low defect rate, but they also enable us, in certain situations, to sell specialized testing as an additional service. We design customer specific testing processes that differ from the core focus of standard providers. We have achieved stringent quality targets across a broad spectrum of system applications and customer-specific designs. Our staff includes experienced test engineers who have developed proprietary testing routines and parameters which, combined with our advanced test equipment, enable us to diagnose problems in components as well as in system design and enable us to characterize the performance of new products and to provide high quality products in volume.
For certain of our customers, we employ extensive software-based electrical and thermal simulations and test our designs on high-end functional testers utilizing a broad set of test suites. These tests are designed to meet the quality requirements of enterprise class systems pursuant to stringent specifications required by various high speed and high compute applications. We also conduct design verification testing of hardware and firmware as well as system integration and reliability testing. We work to continually improve our test routines and associated software and, for our specialty memory products, we have developed a high-volume, fully automated reliability testing and screening capability substantially beyond standard industry practices. These practices enable us to reduce the occurrence of early life failures and weak module fallout which can save our customers from the often significant expenses associated with replacing products that fail after their field deployment.
Customers
We believe our customers rely on us as a strategic supplier due to our high-performance, high-availability, application-specific products, quality, technical support and our global footprint. We also provide customized, integrated supply chain services to certain customers to assist them in the management and execution of their procurement and distribution processes. We believe our close collaboration with customers, customer-specific designs, long-lifecycle solutions and proprietary supply chain services create significant customer value. Our products are generally manufactured on a build-to-order basis. Our sales are made primarily pursuant to customer purchase orders and are not based on long-term supply agreements.
We sell our products and solutions both directly and through third-party channels to a diversified base of local and global OEM, enterprise and government customers. In our Memory Solutions group, we sell to OEM customers in industrial, government, networking and communications and enterprise storage, as well as other vertical markets. In IPS, we sell Stratus products and services through direct sales and third-party channels, including distributors, value-added resellers, independent software vendors and systems integrators around the world. We sell Penguin Computing products to government and enterprise customers in financial services, energy, hyperscale and education markets. We sell Penguin Edge products to OEM customers, system integrators and through distribution to government, telecommunications infrastructure, industrial, network edge computing and transportation markets as well as in IoT endpoint applications such as smart city, digital health, digital signage and smart buildings markets. Stratus end user customers represent industries including financial services, telecom, oil and gas, transportation, healthcare, retail and industrial automation. Our LED Solutions group sells LED chips and components to manufacturers and electronic component distributors. Our LED products and solutions are sold on a channel and direct basis to a diverse base of local and global OEM and contract manufactures supporting a broad range of customers.
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We also utilize third-party sales representatives who generally do not maintain product inventory. A substantial portion of our LED Solutions products are sold to distributors, who stock inventory and sell our products to their customer base, which includes value added resellers, manufacturers who incorporate our products into their own manufactured goods and ultimate end users of our products. Similar to other global semiconductor component suppliers, our LED Solutions business has historically experienced, and in the future may experience, seasonally lower sales during the earlier part of the calendar year.
In 2023, 2022 and 2021, sales to our ten largest end customers (including sales to contract manufacturers or original design manufacturers (“ODMs”) at the direction of such end customers) accounted for 60%, 62% and 59% of total net sales, respectively. See “PART II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Concentrations.”
Suppliers
To address the needs of our customers, we have developed and maintained relationships with leading suppliers and contract manufacturers located in Asia, Europe and the Americas. Our semiconductor suppliers include many of the world’s largest memory manufacturers including Samsung Semiconductor, Inc., Micron Technology, Inc., SK hynix, Inc. and Kioxia Holdings Corporation (formerly Toshiba Memory Corporation). They also include some of the world’s largest providers of computing, communications and graphics processers, including Intel Corporation, Advanced Micro Devices, Inc., NVIDIA Corporation and Qualcomm Incorporated; as well as providers of subsystems including Intel and Giga-Byte Technology Co., Ltd.; networking products including Arista Networks, Inc. and suppliers of software products. Our contract manufacturers include NEC Corporation, Advantech Co., Ltd. and Celestica Inc. We frequently work jointly with our suppliers in bidding for customers’ design-in opportunities. We also work closely with our suppliers to better ensure that materials are available and delivered on time. Our established global network of materials sourcing helps to ensure that our pricing remains competitive and that we are able to provide a stable source of supply for our customers.
We believe that our longstanding relationships with leading suppliers put us in a favorable position to procure sufficient quantities of materials, including during periods of industry shortages. Our flexible and responsive global manufacturing capabilities, inventory management systems and global IT system allow us to cost-effectively move materials from one site to another and often deploy what might otherwise be excess inventory among other products and customers. In our Memory Solutions and IPS businesses, we purchase a significant portion of our materials from suppliers on a purchase order basis and generally do not have long-term commitments from our suppliers. Our LED Solutions business has a number of supply agreements with third-party providers for LED chips in wafer or discrete form.
General economic conditions, as well as COVID-19, have resulted in significant supply shortages in the overall supply chain. These shortages have impacted and may in the future impact our ability to manufacture products for our customers and may result in rising prices of the materials we need to manufacture our products. Many of these issues relate to reduced investment in capacity by our suppliers, as well as local government policies that have affected the ability of employees of our suppliers to work. Additionally, the impact over the past year on airline freight capacity affected the timeliness of some deliveries and increased our freight cost.
Sales, Support and Marketing
We sell our products both directly and through third-party channels to global OEMs and to enterprise, government and other end customers located across North America, Asia and Europe. Our sales and marketing efforts are conducted through an integrated process incorporating our direct sales force, e-commerce, customer service representatives and our on-site field application engineers (“FAE”) with a network of independent sales representatives, distributors, integrators and resellers. Our sales and marketing efforts also include a high level of involvement from our senior executives. Larger customers are also often supported by dedicated sales and support teams.
Our on-site FAEs work closely with our sales team to provide product design support to our customers. Our FAEs collaborate with our customers, providing us insight into their business models and product roadmaps and allowing us to identify opportunities at an early stage to help grow our business. The combination of our integrated sales network with our FAEs enables us to be more responsive and successful in navigating through each customer’s unique and oftentimes complex design qualification or bid proposal processes.
Our marketing activities include advertising in technical journals, publishing articles in leading industry periodicals, hyperscale, periodic webinars, publishing white papers, electronic newsletters, blogs and utilizing direct email solicitation.
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In addition, we participate in many industry trade shows worldwide and have active memberships in various industry organizations, including the Joint Electron Device Engineering Council (“JEDEC”), SD Card Association: Storage Networking Industry Association, Gen-Z Consortium, OpenCAPI Consortium, CXL Consortium, Trusted Computing Group, OCP; Sensor Open Systems Architecture, Peripheral Component Interconnect Special Interest Group and Illuminating Engineering Society (“IES”).
Research and Development
The timely development of new products and services is essential to maintaining our competitive position. Our primary research and development activities are conducted at our research and development centers in the United States (Durham, North Carolina; Fremont, California; Irvine, California; Maynard, Massachusetts; Newark, California; Tempe, Arizona and Tewksbury, Massachusetts) and in Huizhou, China; Bangalore, India; New Taipei City, Taiwan; and Penang, Malaysia. Our research and development activities are focused on driving innovation in our products and services as well as continuous process improvement for our procurement, test and manufacturing.
Our product development in Memory Solutions includes innovations for next generation DRAM products, including DDR5, mobile DRAM, hybrid memories such as hybrid volatile and non-volatile DRAM (“NVDIMM”), emerging interconnect standards such as CXL, enterprise memory and Flash-based products, as well as associated firmware development. Our research and product development for IPS includes high availability server architecture and design, high availability software development including virtualization, operating systems and systems management; server selection and occasional design; designs to enable integration of racks and clusters; storage system design and evaluation; high performance network design; component testing for switches; cables and interface devices; development of software-defined storage systems; and embedded computer boards and systems. Research and development in our LED Solutions group includes innovations for next generation LED products including chips, packages for high power general illumination, packages for next generation direct view video displays and packages for specialty applications such as horticulture lighting, architectural, torch, emergency vehicle and other applications. We plan to continue to devote research and development efforts to the innovation and design of these and other new products which address the requirements of our customers, with a focus on the faster growing markets.
We continue to develop a broad offering of Flash-based products targeting the industrial, government, communications and enterprise storage and compute markets. Our engineering team is focused on firmware development, systems engineering and integration, system and platform validation and applications and product and reliability engineering for new products.
Our advanced engineering and design capabilities allow us to address our customers’ increasingly complex needs. We design our products to be compatible with existing industry standards and, where appropriate, develop and promote new standards or provide custom solutions to meet customers’ requirements. An important aspect of our research and development effort is understanding the challenges presented by our customers’ requirements and addressing them by utilizing our industry knowledge, proprietary technologies and technical expertise. By working closely with our customers and suppliers, we are able to deliver technically advanced products designed to meet customer-specific needs with competitive solutions to satisfy our customers’ memory, storage; and compute requirements, shorten their time-to-market; and enhance the performance of our customers’ end products and applications.
Research and development expense was $90.6 million, $77.5 million and $59.9 million in 2023, 2022 and 2021, respectively. As of August 25, 2023, we had approximately 370 research and development personnel worldwide.
Competition
Our diversified businesses compete with numerous global and local companies. The principal competitive factors in our markets include the ability to meet customer-specific requirements and provide high product quality, strong technical support, technologically advanced products and services, advanced testing capabilities, flexible and global delivery options, reliable supply and reasonable pricing.
Within Memory Solutions, we compete against memory module providers, and to a lesser extent, large memory semiconductor manufacturers that utilize a portion of their capacity to manufacture memory modules.
Within our IPS Stratus business, we primarily compete with manufacturers of enterprise servers and industrial computers. For our Penguin Computing business, we compete primarily with global manufacturers of HPC and AI products and services. For Penguin Edge products, we primarily compete with makers of ruggedized computer boards and systems as well as makers of edge computing devices, SoMs and SBCs.
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Within our LED Solutions business, we compete with companies that manufacture and/or sell nitride-based LED chips and those manufacturers of LED components concentrated primarily in indoor and outdoor lighting; specialty lighting, including torch lamps (flashlights), horticulture, color-changing architectural lighting; signs and signals; and transportation.
Our principal competitors include:
• Providers of specialty memory products;
• Memory semiconductor manufacturers that also manufacture DRAM modules and Flash products;
• A broad set of companies in supply chain services, including distributors and third party logistics providers;
• Providers of compute and storage systems;
• Semiconductor and subsystem manufacturers;
• Providers of embedded computing platforms and systems;
• Providers of SOMs and SBCs;
• LED product manufacturers;
• Enterprise IT server vendors; and
• Manufacturers of industrial computers.
Some of our global competitors are large international companies that have substantially greater financial, technical, marketing, distribution and other resources, as well as greater name recognition and longer-standing relationships with customers and suppliers than we do. These competitors are generally focused on higher-volume memory, storage or compute products that are manufactured to industry standard specifications, and they have limited customization and service capabilities. We believe that our close collaboration with customers, customer-specific designs, long-lifecycle solutions, superior products and proprietary supply chain services create significant customer attachment that may provide an advantage when competing with the large international companies.
In addition, some of our competitors are also our suppliers or customers. See “Item 1A. Risk Factors – Risks Related to Our Business – We depend on a select number of customers for a significant portion of our revenue” and “– We depend on a small number of sole or limited source suppliers.”
Intellectual Property
Intellectual property is an important aspect of our business, and we actively seek to protect and leverage our intellectual property to promote our business interests. For example, as of August 25, 2023, we owned or exclusively licensed approximately 1,874 patents that expire from 2023 to 2042 and had 269 pending patent applications. We continually review our development efforts to assess the existence and patentability of new intellectual property, which we actively seek to protect as appropriate. We believe the duration and scope of our most relevant patents are sufficient to support our business, which as a whole is not significantly dependent on any particular patent or other intellectual property rights.
To protect our intellectual property, we rely upon a combination of patent, copyright, trade secret and trademark laws, contractual restrictions such as nondisclosure agreements, licenses and intellectual property assignment agreements and policies and procedures. We pursue the registration of our domain names and trademarks in various jurisdictions, and we register trademarks in the United States and other countries as warranted. We maintain a policy requiring our employees, contractors, consultants and other third parties to enter into confidentiality and proprietary rights agreements to control access to our proprietary information. Additionally, we actively monitor data on our computer networks to assure compliance with data use policies. These laws, procedures and policies provide only limited protection, and any of our intellectual property rights may be challenged, invalidated, infringed or misappropriated. Furthermore, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States, and we therefore may be unable to protect our proprietary technology in certain jurisdictions.
While many of our products contain proprietary aspects and are protected by patents, some of our products are built around mature industry standards and have less patent protection. For these products, we rely on trade secrets and know-how to protect our proprietary interests. The absence of patent protection, however, means that we cannot prevent our competitors from reverse-engineering and duplicating those products. Moreover, some of our product solutions incorporate open source software that is available under public licenses such as the GNU General Public License. We maintain policies and procedures to evaluate open source software used in our products and seek to minimize the risk of our proprietary intellectual property being inadvertently pulled under such licenses.
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Human Capital
At SGH, we put people first, nurturing a culture that supports creativity and growth. We value our employees, and we understand the importance of their contribution and personal development. We believe that at the best workplaces, employees feel inspired, engaged, valued and included. As part of our “people first” mindset, we are dedicated to driving our people strategy which includes developing our talent, maintaining an engaged workforce and offering programs and rewards that attract and retain the best talent. At the core of our people strategy is a commitment to ensuring our workforce represents the diversity of our communities and that we maintain a safe and inclusive culture.
Employees
As of August 25, 2023, we had approximately 3,000 full-time employees (excluding contractors) in locations across the globe, including, among others, the United States, China and Malaysia. We have never experienced a work stoppage in any of our locations worldwide, and we consider our employee relations to be good.
Employee Engagement and Development
Continuous growth requires continued investment in people, innovation and new opportunities. We are always improving upon our communications between employees and management teams to drive our company goals and enhance the employee experience. We aim to develop capable leadership that can meet the challenges of business growth while instilling a supportive and inclusive company culture. At all locations, we provide our employees with performance assessments and evaluations. We place a priority on identifying key talent throughout the organization and providing development and coaching opportunities for them through our newly adopted annual talent calibration and succession planning process. We also provide employees with access to technical and leadership training and training on workplace culture and enrichment, covering topics such as harassment, creating healthy work environments, inclusion and global ethics and compliance.
Diversity, Equity and Inclusion
We are committed to diversity, equity and inclusion, and we believe that it starts at the top, where our executive team includes leaders from diverse backgrounds. We value diversity and inclusion and are proud that our employees represent various races, religious beliefs, genders, ages, national origins and points of view. We know that our diverse teams bring valuable perspectives and backgrounds to our company, helping us consistently raise the bar and drive innovation forward. This philosophy applies to all levels of our organization, including our executive leadership team and our Board of Directors.
We are committed to providing employees with an inclusive and nondiscriminatory work environment, which is outlined in our non-discrimination policy. Through this policy, we articulate people-oriented and fair treatment principles in the recruitment, promotion, performance evaluation, compensation, training and retirement of all employees.
We have established a Global Diversity Council (“GDC”) that focuses on creating a working environment with equal opportunity employment so that workers are treated with fairness and respect. The GDC enables us to expand on our strategy to nurture a diverse and inclusive environment by focusing on initiatives such as employee resource groups and recruiting more diverse leadership.
Wellness, Health and Safety
We strive to provide and maintain a safe work environment, as well as to promote overall wellness among employees. We prioritize employee well-being throughout our operations as well as through wellness programs. Our wellness program is supported by a committee that focuses on providing information and events throughout the year on health, financial and mental well-being. We also support mental health and wellness through our Employee Assistance Program, which offers free and confidential counseling and support for our employees and members of their households.
Compensation and Benefits
We offer compensation and benefits programs designed to motivate and reward our employees through our pay-for-performance philosophy. We are committed to paying market competitive wages to attract key talent and ensure pay equality across our diverse workforce. Our bonus program links employee compensation to SGH’s business performance. We also offer an Employee Stock Purchase Plan, equity compensation, retirement benefits and, in the United States, a 401(k) match program.
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Environmental Regulations
Our operations and properties are subject to various federal, state, local, foreign and international environmental laws and regulations governing, among other things, environmental licensing and registries, protection of flora and fauna, air and noise emissions, use of water resources, wastewater discharges, management and disposal of hazardous and non-hazardous materials and wastes, reverse logistics (take-back policy) and remediation of releases of hazardous materials. The presence of lead in quantities not believed to be significant have been found in the ground under one of the multi-tenant buildings we lease in Brazil. While we did not cause the contamination, we may be held responsible if remediation is required, although we may be entitled to seek indemnification from the responsible parties under Brazilian laws and from our lessor under our lease. In addition, as part of the acquisition of Cree’s LED business, we acquired facilities in China, which could present similar issues. We cannot be certain that identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory agencies, enactment of more stringent laws and regulations or other unanticipated events will not arise in the future and give rise to material environmental liabilities and related costs which could have a material adverse effect on our business, financial condition and results of operations.
Available Information
Our address in the Cayman Islands is c/o Walkers Corporate Limited, 190 Elgin Avenue, George Town, Grand Cayman, Cayman Islands, KY1-9008. Our principal U.S. executive offices are located at 1390 McCarthy Boulevard, Milpitas, California 95035. Our telephone number at this address is (866) 977-4446. Our principal website is http://www.sghcorp.com. The information contained on, or that can be accessed through, our website is not a part of this Annual Report.
We make available, free of charge through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Sections 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after they have been electronically filed with, or furnished to, the SEC.
The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
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