FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Smart Modular Technologies, Inc.
4305 Cushing Parkway
Fremont, CA 94538
(510) 623-1231
http://www3.techstocks.com/profiles/SMOD.html

UNION CITY, Ca., December 9, 1996/FOOLWIRE/ --- Smart Modular Technologies reported fiscal year 1996 results last week. The company reported net sales for the fourth quarter of $106.3 million, a 32% increase compared to net sales of $80.5 million in Q4 1995. For the whole fiscal year, net sales totalled $401.8 million, a 46% increase compared to net sales of $274.6 million in fiscal 1995.

GEOGRAPHIC BREAKDOWN OF SALES. The US accounted for approximately 91% of revenues in the fourth quarter, Europe was 8% and the rest of the world was 1%. In the same quarter of 1995, the US accounted for 87%, Europe accounted for 12% and the rest of the world was 1%. For the full year 1996, the US accounted for 91%, Europe for 8%, and the rest of the world 1%. For fiscal year 1995, the US accounted for 86%, Europe was 14%, and the rest of the world was not a factor.

GROSS PROFIT. Gross profit in Q4 totalled $19.4 million or 18.2% of sales, up 23% compared to $15.8 million or 19.6% of net sales in Q4 1995. The change in gross margin is primarily due to a different mix between turnkey and consigned in the respective quarters. In Q4 1995, the level of consigned business was much higher than they generally experience. This mix does not significantly affect the absolute dollars of gross profit but does cause the margin percentage to be higher. For the fiscal year, gross profit was $72.1 million or 18% of net sales, up 45% compared to $49.7 million or 18.1% of net sales last fiscal year.

OPERATING EXPENSES. Operating expenses in the fourth quarter were $8.9 million compared to $8.1 million in the fourth quarter last year. As a percentage of sales, operating expenses for the fourth quarter of FY 1996 and FY 1995 were 8.4% and 10.1% respectively. For the fiscal year 1996, operating expenses were $34.5 million compared to $29.2 million in fiscal 1995, representing 8.6% and 10.6% of net sales respectively. As these results indicate, the company has effected a significant improvement in operating leverage during fiscal 1996. The increases in absolute dollars of spending for fiscal 1996 compared to the same periods in 1995 are due primarily to increases in headcount, facilities, equipment, insurance, and sales related costs such as marketing, advertising, and commissions.

OPERATING INCOME. Operating income was $10.5 million in the fourth quarter of 1996, up 36.8% compared to $7.7 million in Q4 last year. For the full year, operating income increased 84.3% to $37.7 million from $20.4 million in fiscal year 1995.

OTHER INCOME. Other income totalled $810,000 for the quarter versus an expense of $57,000 in the fourth quarter last year. The change is due primarily to investing the proceeds from the company's IPO, completed in November of 1995, as well as cash generated from operations. In addition, the company benefitted in the quarter from foreign exchange gains of approximately $200,000 on funds temporarily invested in the UK in connection with opening their factory in Scotland. For the full fiscal year, other income was $2.2 million versus an expense of $500,000 last year. Again the change was driven by investment of proceeds from the IPO as well as internally generated cash.

TAXES AND NET INCOME. Income taxes were provided at 37% in Q4 1996 versus 35% in Q4 1995. The rate for the full year was 37% both this year and last year. Net income for the fourth quarter was $7.1 million compared to $4.9 million in Q4 last year, an increase of 45%. For the full year, net income increased 100% over the prior fiscal year to $25.1 million from $12.6 million. Net income for 1996 represented 6.3% of sales, up from 4.6% in fiscal 1995. This is a substantial improvement in the overall model and reflects the company's ability to improve its operating leverage. Earnings per share for the fourth quarter were $0.34 per share, up 21% from $0.28 per share recorded in Q4 last year. For the full year, earnings per share were $1.20, up 67% compared to $0.72 earned in fiscal 1995. Weighted average shares in the fourth quarter were 21.1 million versus 17.7 million in Q4 1995. For the fiscal year 1996, the weighted average shares outstanding were 20.9 million compared to 17.6 million in fiscal 1995. These year over year increases reflect primarily shares issued in connection with the company's IPO completed in November 1995.

BALANCE SHEET HIGHLIGHTS. CASH. The company ended the year with $60 million of cash, cash equivalents, and investments. This is up from $55 million at the end of Q3 and $13 million at the end of fiscal 1995. The year over year increase is a function of both the IPO in November of 1995 which raised approximately $33 million and internally generated cash. Operations generated approximately $27 million in cash before capital additions and repayment of debt which aggregated approximately $13 million.

ACCOUNTS RECEIVABLE AND INVENTORY. Net accounts receivable totalled $52.8 million and the associated DSOs were approximately 36 days. Inventories at the end of the year were $39 million composed of raw materials of $21.6 million, work in process of $9.3 million, and finished goods of $8.2 million.

CAPITAL EXPENDITURES. Capital expenditures for the quarter and year were approximately $5.1 million and $9 million respectively. Looking ahead, they are currently planning in the range of $10 million. Last year they were planning in the range of $5 million, so they will vary depending upon what business circumstances dictate.

They have completed what they believe is a particularly successful quarter and a very successful fiscal 1996. In an environment where they have seen massive price reductions, particularly for memory products, they have been able to grow their sales by 46% and their net income by over 100%. So they are proud of this particular year given the operating environment in the marketplace.

Q4 OPERATIONS OVERVIEW. The company had strengths in the desktop PC segment, given the seasonal nature of that business and, therefore, their standard memory module marketplace was somewhat above their normal run rates and contributed significantly to their success in the quarter. The fact that they had strength in all segments of their business including specialty memory products, PC card products, and embedded computing modules, they did see some weakness in their European sales efforts and they hope to rectify that through the new facility they have opened in Scotland.

EXPANSION. They commenced shipments during the quarter on a new memory options fulfillment program with a major PC manufacturer. They also expanded manufacturing and test capacity. Capital expenditures for the quarter were over $5 million and that included expenditures involved in a new facility in Scotland with two manufacturing lines and an additional two manufacturing lines in both their Fremont California and Puerto Rico facilities as well as significantly increased test capacity in all of these locations. This was their accelerated effort to keep up with increased unit demand and product complexity that they are experiencing.

MPEG-1 PRODUCTS SHIPPING. In addition, during the quarter they introduced many new products including their family of synchronous graphic grand modules. They commenced shipments of their MPEG-1 PC card products. These go into notebooks having the ZZ port which has just started to ship and they expect that, as these notebooks ramp up into volume, their MPEG-1 card will do better.

NEW DESIGN WINS. They also secured many new design wins for their products in the embedded modules as well as in memory modules with customers in the consumer, industrial, and networking fields. They did have some revenues from a RISC-embedded computer modules group. They had approximately 1% of their sales come from that group in the last quarter. They expect for that to grow significantly. The kinds of products they manufacture go into applications that are quite diverse. They don't go into traditional computing applications. They do go into, in one example, an ATM switch manufacturer's box where they provide the computing functions. In another case, they go into a financial transaction processing environment where they provide the computing power for that customer's application. Some of their newer applications are interesting. In one case they go into a semiconductor equipment manufacturer's products. In another case, they go into a TV as an Internet access device in a RISC processor environment for a consumer electronics manufacturer.

NEW DEVELOPMENT. They continued product development in many of their newer memory products. They are also working on new datacom products, particularly with an emphasis on 56K data transmission. And they are working on new PCI bus based embedded computing boards.

Q1 OUTLOOK. They expect, particularly the low-end desktop PC marketplace to start to reduce in terms of unit volumes towards the December/January timeframe, although right now it doesn't feel like that. The server marketplace doesn't do quite the same kind of dip. The expectation would be that SMOD's specialty business would be a higher percentage in their fiscal first quarter. It is hard to predict exactly where that will go though. From a margin standpoint, they don't think they have any significant shifts in margin that will come from that. They expect, in absolute dollar terms to continue to see some increase in expenses. From a model standpoint in terms of Q1, they wouldn't expect much change there because they will be adding some expenses in connection with opening the facility in Scotland and expanding their operation in Puerto Rick. Looking further out than that, their goal would be to continue to realize some improved leverage on the overall operating expense structure of the company.

MEMORY PRICING. There is no shortage on an overall basis. Certain specific parts they use are not as readily available, so they have to plan those and maintain inventories of those. SRAM and FLASH availability has remained very good. While there were some periods during the last quarter where there was talk of tightening, they didn't see any impact from that.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.