Q2 2024 SMART Global Holdings Inc Earnings Call

April 9, 2024

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Operator: Good afternoon, and thank you for joining the Smart Global Holdings second quarter fiscal 2024 earnings call. My name is Kate, and I will be the moderator for today's call.

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None: Good afternoon, and thank you for joining these smart global Holdings second quarter fiscal 2024 earnings call.

Kate: My name is Kate and I will be the moderator for today's call.

Operator: At this time, all lines are in a listen-only mode and will remain so until the question-and-answer portion of the call. I would now like to turn the call over to Suzanne Schmidt, Investor Relations for Smart Global. Suzanne, you may proceed. Thank you, operator. Good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss SGH's second quarter fiscal 2024 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 in the Investor Relations section of our website. We encourage you to visit the site throughout the quarter for the most current information on the company.

Kate: At this time all lines are in a listen only mode and will be until the question and answer portion of the call.

Kate: I would now like to turn the call over to Suzanne Schmidt Investor Relations for Smart Global Suzanne you May proceed.

Suzanne Schmidt: Thank you operator, good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss <unk> second quarter fiscal of 'twenty 'twenty four results on.

Suzanne Schmidt: On the call today are Mark Adams, Chief Executive Officer, Jack Pacheco, Chief operating Officer, and Ken <unk>, Chief Financial Officer.

Suzanne Schmidt: 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.

Operator: I would also like to remind everyone to read the note on the use of forward-looking statements that is included in the press release and the earnings call presentation. Please note that during this conference call, the company will make projections and forward-looking statements, including, but not limited to, statements about the company's growth trajectory and financial outlook. These forward-looking statements are based on current beliefs and assumptions and are not guarantees of future performance, and they are subject to risks and uncertainties, including, without limitation, the risks and uncertainties reflected in the press release and the earnings call presentation filed today, as well as in the company's most recent annual and quarterly reports. Such forward-looking statements are representative only as of the date they are made, and, except as required by applicable law, we assume no responsibility to publicly update We will also discuss both GAAP and non-GAAP financial measures. However, non-GAAP measures should not be considered in isolation from, as a substitute for, or superior to our GAAP results.

Suzanne Schmidt: I would also like to remind everyone to read the note on the use of forward looking statements that is included in the press release and the earnings call presentation.

Suzanne Schmidt: Please note that during this conference call the company will make projections and forward looking statements, including but not limited to statements about the company's growth trajectory and financial outlook.

Suzanne Schmidt: Forward looking statements are based on current beliefs and assumptions and are not guarantees of future performance and are subject to risks and uncertainties, including without limitation, the risks and uncertainties reflected in the press release and the earnings call presentation filed today as well as in the company's most recent.

<unk> annual and quarterly reports.

Suzanne Schmidt: Forward looking statements are representative only as of the date, they are made and except as required by applicable law, we assume no responsibility to publicly update or revise any forward looking statements.

Suzanne Schmidt: 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.

Suzanne Schmidt: We encourage you to consider all measures when analyzing our performance. A reconciliation of the gap to non-gap measures is included in today's press release and accompanying slide presentation. And with that, let me turn the call over to Mark Adams.

Suzanne Schmidt: 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 accompanying slide presentation.

Suzanne Schmidt: And with that let me turn the call over to Mark Adams Mark.

Mark W. Adams: Thank you, Suzanne, and thanks to all of you for joining us today for our fiscal 2024 second quarter earnings call. We delivered solid financial results in the second quarter and continue to make great strides in our transformation into a provider of high-performance, high-availability solutions that enterprise customers need to deploy AI on-premise, at the edge, and in the cloud. As one of the few players in the industry with decades-long experience in high-performance compute and specialty memory, SGH is uniquely positioned to help companies manage the complexity of AI implementation at scale. As a total solution provider, we offer our customers and partners innovative technology-agnostic hardware configurations.

Mark W. Adams: Thank you Suzanne.

Mark W. Adams: Thanks to all of you for joining us today for our fiscal 2024 second quarter earnings call.

Mark W. Adams: We delivered solid financial results in the second quarter.

Mark W. Adams: Continued to make great strides in our transformation into a provider of high performance high availability solutions, but <unk>.

Mark W. Adams: Customers need to deploy AI on premise at the edge and the cloud.

Mark W. Adams: Yeah.

Mark W. Adams: As one of the few players in the industry with a decades long experience in high performance compute specialty memory.

Mark W. Adams: <unk> is uniquely positioned to help companies manage the complexity of AI implementation at scale.

Mark W. Adams: As a total solutions provider, we offer our customers and partners innovative technology agnostic hardware configurations software that manages AI systems for maximum output and availability.

Mark W. Adams: Software that manages AI systems for maximum output and availability, and a professional services suite that enables our customers to achieve best-in-class performance and reliability. Now, let me summarize our operational results for the quarter. Revenues totaled $285 million, in line with the midpoint of our guidance range. Although non-GAF gross margin was at the lower end of our guidance due to a higher portion of the hardware mix, we achieved non-GAF earnings per share of 27 cents, which was above the midpoint of our guidance through better operating expense controls. We exited Q2 with a strong balance sheet. Cash and short-term investments total $466 million.

Mark W. Adams: And our professional services suite that enables our customers to achieve best in class performance and reliability, Let me summarize our operational results for the quarter.

Revenues totaled $285 million in line with the midpoint of our guidance range.

Mark W. Adams: Although non-GAAP gross margin was at the lower end of our guidance due to a higher portion of hardware mix.

We achieved non-GAAP earnings per share of <unk> 27.

Mark W. Adams: Which was above the midpoint of our guidance through better operating expense controls.

Mark W. Adams: We exited Q2 with a strong balance sheet.

Mark W. Adams: Cash and short term investments totaled $466 million.

Mark W. Adams: Now, let me start our business line review with the Intelligent Platform Solutions Group, or IPS. Our IPS team offers a robust solution set of industry-leading hardware, advanced Cluster Management Software, and Best-in-Class Professional Services.

None: Now, let me start our business line review with the intelligent platform solutions group, where Ips.

None: Our Ips team offers a robust solution set of industry, leading hardware <unk>.

None: Vance cluster management software and best in class professional services.

Mark W. Adams: This solution portfolio enables our design, build, deploy, and manage solutions framework for HPC and AI applications on-premise, at the edge, and in the cloud. In Q2, IPS revenue came in at $141 million, up 19% from our prior quarter, representing 50% of total SGH revenue, thus making IPS the largest component of our overall business in Q2. Our vision is clear: partner with our customers and collaborate with them to build the future of AI. The market continues to see strong investment in the deployment of AI infrastructure solutions by hyperscalers and large-scale cloud service providers, or CSPs. The first few months of 2024, however, have confirmed that AI is not just for early adopters anymore.

None: This solution portfolio enables our design build deploy and manage solutions framework for HBC.

Applications on premise at the edge and in the cloud.

None: In Q2, Ips revenue came in at $141 million up 19% from our prior quarter, representing 50% of total SDH revenue, that's making Ips the largest component of our overall business in Q2.

None: Our vision is clear.

None: Partner with our customers and collaborate with them to build the future of AI.

None: The market continues to see strong investment and the deployment of AI infrastructure solutions by Hyperscale.

None: And large scale cloud service providers or <unk>.

None: The first few months of 2024, however have confirm that AI is not just for early adopters anymore.

Mark W. Adams: We are seeing signs of AI adoption by larger enterprises in markets such as finance, oil and gas, defense, education, and digital media, as well as Tier 2 CSPs, with projects ranging from proof of concepts to large-scale deployment. Our engagements with existing and potential AI customers have noticeably picked up in volume over the last few months, reflecting this market dynamic in our conversations with both current and targeted new clients. They have shared the challenges they are facing in deploying AI, trying to manage the complexity that arises as they integrate advanced compute, memory, networking, storage, and cooling, and large-scale data center rollouts. Our customers ultimately must have high-performance compute running workloads at scale in an environment that provides for maximum uptime and overall efficiency.

None: We are seeing signs of AI adoption by larger enterprises in markets, such as financial oil and gas defense education, and digital media as well as tier two csp's with projects ranging from proof of concepts to large scale deployments.

None: Our engagements with existing and potential customers have noticeably picked up in volume over the last few months, reflecting this market dynamic.

None: And our conversations with both current and targeted new clients. They have shared the challenges, they're facing and deploying AI.

And to manage the complexity that it rises as they integrate advanced compute memory networking storage and cooling and large scale data center rollouts.

None: Our customers ultimately must have high performance compute running workloads at scale in an environment that provides for maximum uptime and overall efficiency.

Mark W. Adams: As a total solution provider, we are ready to meet that challenge. We offer our customers a complete solution that combines innovative hardware design, software to manage AI infrastructure for maximum output and availability, and a suite of professional services, all designed to help them achieve best-in-class performance and reliability. With our customer-first approach, we put our customers' priorities at the heart of everything we do, ensuring that each solution we deliver is tailored to their specific requirements and ready to support their success.

None: As a total solution provider.

None: We're ready to meet that challenge.

None: We offer our customers a complete solution that combines innovative hardware design software to manage AI infrastructure for maximum output and availability.

None: And a suite of professional services all designed to help them achieve best in class performance and reliability.

None: With our customer first approach, we put our customers' priorities at the heart of everything we do.

None: Ensuring that each solution, we deliver is tailored to their specific requirements and ready to support their success.

Mark W. Adams: We believe that AI inferencing at the edge will also be a critical market opportunity because it brings intelligence closer to where the information is most valuable, closer to where decisions are being made. We have expanded our capabilities at the edge with our new next-generation fault-tolerant computing platform, the Stratus ZTC Endurance Server. We are seeing strong demand for this platform, which enables our customers to run applications with an unplanned target downtime estimated in minutes per year. We are developing an approach to enable our customers to implement AI at the edge with a high-performance, high-availability platform. The ZTC Endurance Server is another example of the investments we have made and continue to make to support the needs of our customers, whether on-premise, at the edge, or in the cloud. Additionally, today, we are also announcing a new member of our management team. I am pleased to announce that Pete Manka has joined us as President of IPS.

None: We believe that AI inferencing at the edge will also be a critical market opportunity because it brings intelligence closer to where the information is most valuable.

None: To where decisions are being made.

None: We have expanded our capabilities at the edge with our new next generation fault tolerant computing platform, the Stratus VTC endurance server.

None: We are seeing strong demand for this platform, which enables our customers to run applications with an unplanned target downtime estimated and minutes per year.

None: We are developing an approach to enable our customers to implement AI at the edge with a high performance high availability platform.

The DTC endurance server is another example of the investments we have made and continue to make to support the needs of our customers whether on premise at the edge or in the cloud today. We're also announcing a new member of our management team I.

None: I am pleased to announce that <unk> has joined us as president of Ips.

Mark W. Adams: Pete brings a wealth of experience in building businesses that provide high availability, high performance solutions to enterprise customers. Prior to joining our team, Pete served as Senior Vice President and General Manager at Dell Technologies for five years. Managing several large businesses, including Converge Solutions, OEM Solutions, and APEX, Dell's end-to-end portfolio of cloud offerings ranging from storage to high-performance computing to AI services and solutions. Prior to joining Dell, Pete served as President and CEO of eGenera, a leading provider of wholesale cloud computing solutions, underscoring his broad experience and expertise. I am confident that Pete is the right leader to propel the team forward and make the most of the opportunities that are ahead.

None: He brings a wealth of experience in building businesses that provide high availability high performance solutions to enterprise customers.

None: Prior to joining our team Pete served as senior Vice President and general managers at Dell technologies for five years.

None: Managing several large businesses, including converged solutions OEM solutions and apex Dells end to end portfolio of cloud offerings, ranging from storage to high performance computing to AI services and solutions.

None: Prior to Dell Pete served as president and CEO of <unk>, a leading provider of wholesale cloud computing solutions underscoring his broad experience and expertise.

None: I am confident that Peter is the right leader to.

None: Well the team forward and make the most of the opportunities that are ahead.

Mark W. Adams: People work with former IPS President Dave Lorello, who is transitioning into an advisory role. Dave has been an invaluable partner in transforming IPS. With his guidance, IPS has become more effective and efficient across the board from go-to-market to engineering to manufacturing. He is a leader of high integrity with an execution mindset that we will miss. We wish Dave all the best.

None: People work with former Ips President, Dave Lorello, who is transitioning into an advisory role.

None: Dave has been an invaluable partner and transforming Ips with his guidance Ips has become more effective and efficient across the board.

None: Go to market to engineering to manufacturing.

None: He is a leader of high integrity with an execution mindset that we will Miss we wish Dave all the best.

Mark W. Adams: Turning now to Memory, which operates under the Smart Modular brand name. We provide customers with high-performance, high-reliability memory solutions for specialty markets such as supercomputing, networking, and telecom, storage, data centers, industrial, and other specialty applications. For Q2, revenue came in at $83 million, or 29% of total SGH sales. As expected, sales declined slightly from Q1 levels, primarily due to continued elevated inventory levels at a number of our large customers. We continue to see signs that the memory cycle is turning upwards. However, as mentioned on our last earnings call, near-term unit demand still remains challenging at some of our traditional enterprise customers. Nevertheless, we remain confident.

None: Turning now to memory, which operates under the smart modular brand name.

None: We provide customers with high performance high reliability memory solutions for specialty markets such as supercomputing.

None: Networking and telecom storage Datacenters industrial and other specialty applications.

None: For Q2 revenue came in at $83 million or 29% of total SBA sales.

None: As expected <unk>.

None: Sales declined slightly from Q1 levels, primarily due to continued elevated inventory levels at a number of our large customers.

None: We continue to see signs that the memory cycle is turning upwards.

As mentioned on our last earnings call.

None: Near term unit demand still remains challenging as some of our traditional enterprise customers.

None: Nevertheless, we remain confident.

Mark W. Adams: That business will rebound as we move into the second half of our fiscal 24 and expect revenues to grow sequentially in the third quarter. AI is also reshaping the memory market landscape, as the need for higher density and greater bandwidth becomes increasingly critical to system performance required to handle the most advanced compute workloads. We are expanding our product portfolio to capitalize on the convergence of compute and memory in system-level solutions by leveraging Compute Express Link, or CXL memory, expansion, and switching technology, which allows different parts of a computer memory system to communicate faster and more efficiently. We continue to make progress on CXL product development. We have successfully completed the design of our 8-DIMM DDR5 CXL add-in card and anticipate sampling this innovative product to our customers later this year.

None: That business will rebound as we move into the second half of our fiscal 'twenty, four and expect revenues to grow sequentially in the third quarter.

None: AI is also reshaping that memory market landscape.

None: As the need for higher density and greater bandwidth becomes increasingly critical to system performance required to handle the most advanced compute workloads.

None: We are expanding our product portfolio to capitalize on the convergence of compute and memory and system level solutions by leveraging compute express link or CSL memory expansion and switching technology, which allows different parts of the computer memory system to communicate faster and more efficiently.

None: We continued to make progress on CSL product development.

None: We have successfully completed the design of our ATM DDR five CSL add in card.

None: And anticipate sampling this innovative product to our customers later this year.

Mark W. Adams: This high-density solution offers 512 gigabytes of memory, making the system faster and more capable of handling the complex tasks required by large-scale AI and high-performance computing workloads. During the second quarter, we also shipped initial engineering samples of our 4DIMM DDR5 CXL add-in card to a number of our enterprise customers. This product has unique patented technology that keeps its footprint within a single-width PIE slot. This design is exceptionally beneficial for 1U servers because it optimizes space for other PCIe devices, including accelerators and network interface cards. We expect that revenues will begin ramping from this product in early fiscal 2025. Finally, we introduced our Zephyr Z-DIMM memory models with ultra-high reliability for demanding compute applications, and our DDR5 SO-DIMM products continue to gain market momentum, bolstered by our exclusive iTEMP and Zephyr Testing Offerings, which significantly enhance reliability.

None: This high density solution offers 512 gigabytes of memory, making the system faster and more capable of handling the complex task required by large scale AI and high performance computing workloads. During the second quarter. We also shipped initial engineering samples of our afford them DDR five CSL.

None: I'll add in card to a number of our enterprise customers.

None: This product is a unique patented technology that keeps its footprint within a single with pcie slot <unk>.

This design is exceptionally beneficial for one new servers, because it optimizes space for other pcie devices, including accelerators and network interface cards.

None: We expect that revenues will begin ramping from this product in early fiscal 2025.

None: Finally, we introduced our Zephyr <unk> memory modules with ultra high reliability for demanding compute applications and our <unk> five <unk> products continued to gain market momentum bolstered by our exclusive item.

Zephyr testing offerings, which significantly enhanced reliability.

Mark W. Adams: Taken together, these advancements exemplify our ongoing commitment to industry-leading innovation, empowering us to address our customers' needs. Now, turning to Cree LED, which produces application-optimized LEDs for products and markets such as specialty lighting, video screens, outdoor, horticulture, and architectural lighting. In the second quarter of fiscal 2024, LED Solutions revenue totaled $60 million, or 21% of total SGH sales. As anticipated, second quarter sales were lower sequentially, primarily due to seasonality. With the LED demand environment remaining relatively muted in the near term, we continue to manage our Cree LED operations prudently and are aligning our expenses with current business conditions. We are optimistic that demand trends will begin to improve, and currently expect revenues to increase sequentially in the third quarter. Our R&D team has remained diligently focused on driving the technology development needed for CRE to continue leading in high-value specialty applications. During this past quarter, we launched the X-LAMP XP-G4 high-intensity LEDs, which are optimized for indoor directional, aftermarket auto, and portable applications.

Taken together these advancements exemplify our ongoing commitment to industry, leading innovation empowering us to address our customers' needs.

None: Now turning to <unk>.

None: Which produces application optimized leds for products in markets, such as specialty lighting video screens outdoor horticulture and architectural lighting.

None: In the second quarter of our fiscal 2020 for OLED solutions revenue totaled $60 million or 21% of total SBA sales.

None: As anticipated second quarter sales were lower sequentially, primarily due to seasonality.

None: With the led demand environment remaining relatively muted in the near term we continue to manage our Cree led operations prudently and are aligning our expenses with current business conditions.

None: We are optimistic that demand trends will begin to improve.

None: And currently expect revenues to increase sequentially in the third quarter.

None: Our R&D team has remained diligently focused on driving the technology development needed for Cree to continue leading and high value specialty applications.

None: During this past quarter, we launched the excellent SPG for high intensity, Leds, which are optimized for <unk> directional aftermarket auto and portable applications.

Mark W. Adams: We also introduced an extension to our X-LAMP S product line targeting the horticultural sector with products tailored for environments like greenhouses where precision lighting can transform crop growth and yield. As a technology and brand leader with a strong intellectual property portfolio, the Cree LED team continues to lead the charge in lighting innovation. Given our strong R&D and IP portfolio combined with our capital light outsource model, I am confident of increased LED competitiveness and prospects for future success. I'll stop here and hand it over to Ken for a more detailed review of our Q2 financial performance and our guidance for next quarter. Ken?

None: We also introduced an extension to our excellent S product line targeting the horticultural sector with products tailored for environments, like greenhouses, where precision lighting can transport crop growth and yield.

As a technology and brand leader with a strong intellectual property portfolio. The Cree led the team continues to lead the charge in lighting innovation.

None: Given our strong R&D and IP portfolio combined with our capital light outsourced model I am confident increase led competitiveness and prospects for future success.

None: I'll stop here and hand, it over for Ken for a more detailed review of our Q2 financial performance and our guidance for next quarter Ken.

Ken Rizvi: Thanks, Mark. I will focus my remarks on a non-GAAP result that is reconciled to GAAP in our earnings release tables and in the investor materials on our website. Now let me turn to our second quarter results. Total SGH revenues were $285 million at the midpoint of our guidance, and Non-Gap Gross Margin came in at 31.5% at the low end of our guidance, primarily driven by a higher mix of hardware revenue. Non-GAAP diluted earnings per share was $.27 for the second quarter, which was above the midpoint of our guidance and helped by better operating expense controls.

Ken: Thanks, Mark I'll focus my remarks on our non-GAAP results, which.

Ken: Which are reconciled to GAAP in our earnings release tables and in the investor materials on our website.

Ken: Now, let me turn to our second quarter results.

Ken: Total SGA revenues were $285 million at the midpoint of our guidance at.

Ken: non-GAAP gross margin came in at 31, 5% at the low end of our guidance, primarily driven by a higher mix of hardware revenues non.

Ken: non-GAAP diluted earnings per share was 27 for the second quarter, which was above the midpoint of our guidance and helped by better operating expense controls.

Ken Rizvi: In the second quarter, our overall services revenue totaled $49 million, down from $55 million in the year-ago quarter. Product revenues were $235 million. Second quarter revenue by business unit was as follows: IPS at $141 million, memory at $83 million, and LED at $60 million. This translates into a sales mix of 50% IPS, 29% memory, and 21% LED. Non-GAAP gross margin for SGH and Q2 was 31.5%, down from 32.1 percent in the year-ago quarter, driven primarily by lower memory volumes that were partially offset by an improved mix in IPS. Gross margin was down sequentially from 33.3% in the prior quarter, primarily due to a higher mix of hardware revenue. Non- Operating expenses were also down from $68.7 million in the year-ago quarter.

Ken: In the second quarter, our overall services revenue totaled 49 million.

Ken: Down from the $55 million in the year ago quarter.

Ken: Product revenues were $235 million.

Ken: Second quarter revenue by business unit was as follows Ips at $141 million memory at $83 million.

Ken: At $60 million this translates into a sales mix of 50% Ips.

9% memory and 21%.

Ken: non-GAAP gross margin for <unk> in Q2 was 31, 5%.

Ken: Down from 32, 1% in the year ago quarter, driven primarily by lower memory volumes that were partially offset by improved mix and Ips.

Ken: Gross margin was down sequentially from 33, 3% in the prior quarter, primarily due to a higher mix of hardware revenue.

Ken: non-GAAP operating expenses for the second quarter was $63 $2 million.

Ken: <unk> from $64 6 million in the first quarter, primarily due to lower variable expenses and cost reduction actions operating expenses were also down from $68 7 million in the year ago quarter.

Ken Rizvi: Non-GAAP diluted earnings per share for the second quarter of 2024 was $0.27 per share, compared to $0.24 per share last quarter and $0.87 per share in the year-ago quarter. Adjusted EBITDA for the second quarter of 2024 was $33 million, or 12% of sales, compared to 34 million, or 13% of sales in the last quarter, and 65 million, or 17% of sales in the year-ago quarter Turning to balance sheet highlights, for working capital, our net accounts receivable totaled $170 million, slightly lower than the $171 million last quarter. Day sales outstanding came in at 41 days, down from 44 days last quarter, primarily due to the timing of invoicing and collection.

Ken: non-GAAP diluted earnings per share for the second quarter of 2024 was 27 per share compared to 24 per share last quarter and <unk> 87 per share in the year ago quarter.

Ken: And adjusted EBITDA for the second quarter of 2024 was $33 million or 12% of sales compared to $34 million or 13% of sales in the last quarter and $65 million or 17% of sales in the year ago quarter.

Ken: Turning to the balance sheet highlights for working capital our net accounts receivable totaled $170 million slightly lower than the $171 million last quarter.

Ken: The sales outstanding came in at 41 days down from 44 days from last quarter, primarily due to the timing of invoicing and collections.

Ken Rizvi: Inventory totaled $173 million at the end of the second quarter, lower than the $208 million at the end of the prior quarter, and Inventory Turns were 6.8 times in the second quarter, up from 5.8 times in the prior quarter. Consistent with past practice, net accounts receivable, day sales outstanding, and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $375 million and $294 million, respectively, for the second quarter. And as a reminder, the difference between gross and net revenue is related to our logistics services, which are accounted for on an agent basis, meaning that we only recognize the net profit on our logistics services as revenue. Cash and cash equivalents and short-term investments totaled $466 million at the end of the second quarter, down $88 million from $553 million in the prior quarter. In the second quarter, we paid down $50 million for the Stratis earn-out and retired approximately $37 million of our term loan facility. Second quarter cash flows used in operating activities totaled $22 million, compared to $60 million provided by operating activities in the prior quarter.

Ken: Inventory totaled $173 million at the end of the second quarter.

Ken: Lower than the $208 million at the end of the prior quarter and.

Ken: And inventory turns were six eight times in the second quarter up from five eight times in the prior quarter.

Consistent with past practice net accounts receivable days sales outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $375 million and $294 million respectively for the second quarter.

Ken: And as a reminder, the difference between gross and net revenue is related to our logistics services, which is accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as revenue.

Ken: Cash and cash equivalents and short term investments totaled $466 million at the end of the second quarter down $88 million from the $553 million in the prior quarter.

Ken: In the second quarter, we paid down $50 million for the stratus earn outs and retired approximately $37 million of our term loan facility.

Ken: Second quarter cash flows used in operating activities totaled $22 million compared to $60 million provided by operating activities in the prior quarter.

Ken Rizvi: Second quarter cash flows used for operating activities included the $29 million payment of contingent consideration as part of a total of $50 million cash payment for the Stratus Earn Out. Additionally, during the second quarter, we repurchased approximately 106,000 shares of our common stock using $1.9 million. Since our initial repurchase authorization in April of 2022, we have used a total of $72.3 million to repurchase 4.1 million shares through the end of our second quarter. As of the second quarter, we have a total of $78 million available for future repurchases under our authorization. And to remind everyone, our capital allocation strategy remains the same. First and foremost, we will continue to invest in our business as we see significant opportunities for further organic growth.

Ken: Second quarter cash flows used for operating activities included the $29 million payment of contingent consideration as part of a total of $50 million cash payment for the stratus earn out.

Ken: During the second quarter, we repurchased approximately 106000 shares of our common stock using $1 $9 million.

Ken: Since our initial repurchase authorization in April 2022, we have used a total of $72 $3 million to repurchase $4 1 million shares through the end of our second quarter.

Ken: As of our second quarter, we have a total of $78 million available for future repurchases under our authorization.

Ken: And to remind everyone. Our capital allocation strategy remains the same first and foremost we will continue to invest in our business as we see significant opportunities for further organic growth.

Ken Rizvi: Second, we will continue to evaluate acquisition opportunities in a disciplined manner, such as our most recent acquisition of Stratus. And third, the share repurchase authorizations provide us flexibility to return capital to our shareholders in an opportunistic and price-sensitive manner. And finally, we look to retire debt to keep our gross leverage at a reasonable level. We retired $37 million of our term loan in the second quarter.

Second we will continue to evaluate acquisition opportunities in a disciplined manner such as our most recent acquisition of Stratus.

Ken: And third the share repurchase authorizations provide us flexibility to return capital to our shareholders in an opportunistic and price sensitive manner.

And finally, we look to retire debt to keep our gross leverage at reasonable levels.

We retired $37 million of our term loan in the second quarter and subsequent to the quarter end. We retired an additional $75 million term loan.

Ken Rizvi: And subsequent to the quarter end, we retired an additional $75 million of term loans. These payments bring down the principal by $112 million since the first quarter to $425 million outstanding. For those of you tracking capital expenditures and depreciation, capital expenditures were $5.2 million in the second quarter, and depreciation was $7.2 million. Turning to our third fiscal quarter 2024 guidance, we expect that revenues for the third quarter of 2024 will be approximately $300 million at the midpoint, plus or minus $25 million. Our guidance for the third quarter reflects the following. For IPS, we expect revenues to be flat to slightly up at the mid- with additional opportunities that may fall in the third or fourth quarter depending on the timing of deployment.

Ken: These payments, bringing down debt principal by $112 million since the first quarter to $425 million outstanding.

For those of you tracking capital expenditures and depreciation capital expenditures were $5 2 million in the second quarter and depreciation was $7 2 million.

Ken: Turning to our third fiscal quarter 2024 guidance we.

Ken: We expect that revenues for the third quarter of 2024 will be approximately $300 million at the midpoint plus or minus $25 million.

Ken: Our guidance for the third quarter reflects the following.

Ken: For Ips, we expect revenues to be flat to slightly up at the midpoint with additional opportunities that may fall in the third or fourth quarter, depending on the timing of deployments.

Ken Rizvi: For memory, we expect revenues to grow in the high single-digit range sequentially at the midpoint. And for LED, we currently expect revenues to be up in the high single-digit range sequentially at the midpoint as well. Our gap gross margin for the third quarter is expected to be approximately 29% at the midpoint, plus or minus 1.5%. Non-gap gross margin for the third quarter is expected to be approximately 32% at the midpoint, plus or minus 1.5%. Our non-GAAP operating expenses for the third quarter are expected to be approximately $66 million, plus or minus $2 million and slightly up from the prior quarter, primarily due to variable expenses associated with the higher expected revenue. Gap diluted earnings per share for the third quarter are expected to be approximately a 7 cent loss, plus or minus 15 cents.

Ken: For memory, we expect revenues to grow in the high single digit range sequentially at the midpoint.

Ken: And for LCD, we currently expect revenues to be up in the high single digit range sequentially at the midpoint as well.

Ken: Our GAAP gross margin for the third quarter is expected to be approximately 29% at the midpoint plus or minus one 5%.

Ken: non-GAAP gross margin for the third quarter is expected to be approximately 32% at the midpoint plus or minus one 5%.

Ken: Our non-GAAP operating expenses for the third quarter are expected to be approximately $66 million, plus or minus $2 million and slightly up from the prior quarter, primarily due to variable expenses associated with the higher expected revenue.

Ken: GAAP diluted earnings per share for the third quarter is expected to be approximately a seven cent loss plus or minus 15.

Mark W. Adams: 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 $0.30, plus or minus $0.15. Our GAAP diluted share count for the third quarter is expected to be approximately 52.6 million shares based on our current stock price, while our non-GAAP diluted share count is expected to be approximately 54.4 million shares. Cash capital expenditures for the third quarter are expected to be in the range of $4-$6 million. And as a reminder, we are utilizing a long-term projected non-gap tax rate of 28 percent, which reflects currently available information, including the sale of Smart Brazil, which was completed in the first quarter, as well as other factors and assumptions.

Ken: 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 30, plus or minus 15.

Ken: Our GAAP diluted share count for the third quarter is expected to be approximately 52 6 million shares based on our current stock price.

Ken: Our non-GAAP diluted share count is expected to be approximately $54 4 million shares.

Ken: Cash capital expenditures for the third quarter are expected to be in the range of $4 million to $6 million.

Ken: And as a reminder, we are utilizing a long term projected non-GAAP tax rate of 28%, which reflects currently available information, including the sale of smart, Brazil, which was completed in the first quarter as well as other factors and assumptions.

Mark W. Adams: While we expect to use this normalized non-gap tax rate through 2024, the long-term non-gap tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global tax environment, significant changes in our geographic earnings mix, or changes to our strategy or business operations. Our forecast for the third quarter of 2024 is based on the current environment, which contemplates the current global macroeconomic headwinds and ongoing supply chain constraints, especially as it relates to our IPS business. This includes extended lead times for certain components that are incorporated into our overall solutions, impacting how quickly we can ramp up existing and new customer projects. We continue to manage our operations in a prudent manner as we navigate a challenging environment while also investing in our long-term growth. Please refer to the non-GAAP financial information section and reconciliation of GAAP to non-GAAP measure table in our earnings release for further detail. Now, I will turn it over to Mark for a few remarks prior to the Q&A. Thanks, Jen.

Ken: While we expect to use this normalized non-GAAP tax rate through 2020 for the long term non-GAAP tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global tax environment significant changes in our geographic earnings mix or changes to our strategy our business operations.

Ken: Our forecast for the third quarter of 2024 is based on the current environment, which contemplates the current global macroeconomic headwinds and ongoing supply chain constraints, especially as it relates to our Ips dismal.

This includes extended lead times for certain components that are incorporated into our overall solutions impacting how quickly we can ramp existing and new customer projects.

Ken: We continue to manage our operations in a prudent manner as we navigate a challenging environment, while also investing in our long term growth.

Ken: Please refer to the non-GAAP financial information section and reconciliation of GAAP to non-GAAP measure table in.

Ken: Our earnings release for further detail.

Ken: Now, let me turn it over to Mark for a few remarks prior to Q&A.

Ken.

Mark W. Adams: As we are still in the early innings of fully operational AI infrastructure being deployed at scale for most enterprise customers, we're seeing an accelerating need by the market for a trusted advisor to help with the challenges of deploying this new AI infrastructure.

Operator: As we are still in the early innings of fully operational AI infrastructure being deployed at scale for most enterprise customers, we are seeing an increasing need from the market for a trusted advisor to help with the challenges of deploying this new AI infrastructure. Our 25 years of HPC and memory expertise and deployment know-how position us to become a leader in this market by working to solve our customers' most challenging AI infrastructure needs. As our transformation continues, I want to thank our global team members for their efforts this quarter.

Mark W. Adams: Our 25 years, plus of HBC and memory expertise and deployment knowhow position us to become a leader in this market by working to solve our customers' most challenging AI infrastructure needs.

Mark W. Adams: As our transformation continues I want to thank our global team members for their efforts this quarter.

Mark W. Adams: We feel we are well positioned for the exciting market opportunities ahead.

None: Operator, we are now ready for Q&A.

None: Absolutely.

We will now begin the question and answer session.

None: If you would like to ask a question you may do so by pressing star followed by 81 on your telephone keypad.

Operator: We feel we are well positioned for the exciting market opportunities ahead. Operator, we are now ready for Q&A. Absolutely. We will now begin the question and answer session. If you would like to ask a question, you may do so by pressing the star followed by a one on your telephone keypad. If, for any reason, you would like to remove your question, you may do so by pressing the star followed by a two.

If for any reason you would like to remove your question you may do so by pressing star followed by <unk>.

None: As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.

None: Again to ask a question. It is star followed by a one on your telephone keypad.

None: The first question comes from the line of Quinn Bolton with Needham <unk> Company. Your line is now open.

Hey, guys. Congratulations on the nice results and outlook I guess I wanted to start on the Ips business.

Mark W. Adams: As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Again, to ask a question, it is star followed by a one on your telephone keypad. The first question comes from the line of Quinn Bolton with Needham & Company. Quinn, your line is now open. Hey guys, congratulations on the nice results and outlook. I guess I want to start the IPS business. And, Mark, maybe just get your thoughts on the kind of demand across the customer base, between large, you know, CSPs, tier two CSPs, and enterprises where you may be seeing some of the greatest demand for new deployments, you know, as you look out into the second half of calendar 24. And then I've got a couple of follow-ups. No problem.

Nathaniel Quinn Bolton: Mark maybe just get your thoughts kind of demand across the customer base between large CSP tier two <unk> and.

Enterprises, where you may be seeing some of the greatest demand for new deployments as you look out into the second half of calendar 'twenty four and then I've got a couple of follow ups.

Oh no problem. Thanks, Colin for the question by the way.

Mark W. Adams: Yes, so when we think about how our.

None: View of the market is it's based on obviously our.

None: Kind of executive engagements with.

None: The three segments you talked about.

Obviously, the early investors in the market, where the large hyperscale is of which obviously one of the big customer of ours.

None: And then you have the.

Mark W. Adams: Thanks, Quinn, for the question, by the way. Yeah, so when we think about, you know, our Executive Engagements and the three segments you talked about. Obviously, the early investors in the market were the large hyperscalers, of which, obviously, one's a big customer of ours. And then you have the two other segments you mentioned, large enterprises that kind of have an infrastructure requirement in place for AI to enable their future success. And then you have these tier two, what we call tier two CSPs, which are companies that have the infrastructure themselves to offer services that would lead to AI implementations So those three segments are how we look at the market.

None: The two other segments you mentioned.

None: Large enterprises that are kind of have a infrastructure requirement in place for AI to enable their future success and then you have these large.

None: Tier two what we call tier two CSP, which are companies that have.

None: The infrastructure themselves to offer services.

None: That would lead for AI implementations at.

None: A number of different types of vertical so to speak so those three segments are how we look at the market and I would say that.

None: The early investors as I mentioned, where hyperscale. However, what we have seen a major uptick in us.

None: Twofold.

None: Marge enterprises are evaluating their AI strategy and then in that strategy really is do they do it.

Mark W. Adams: And I would say that the early investors, as I mentioned, were hyperscalers. However, what we've seen a major uptick in is twofold. Large enterprises are evaluating their AI strategies. And then in that strategy really is, do they do it? on-premises in their environment? Do they do it in a co-location model where they use an outsourced data center provider for the space and power? Do they have someone like Penguin come in and help them deploy?

None: On Prem in their environment do they do it in a co location model.

None: Were they using outsourced data center provider for the space and power.

None: And do they have someone like Penguin come in and help them deploy.

None: Or do they actually partner with someone in some type of joint JV structure or co investment structure for our future build.

Mark W. Adams: or do they actually partner with someone in some type of JV structure or co-investment structure for a future bill? And we're seeing all those different models, but the level of demand signals from those types of customers on the enterprise side is very high. And then, in addition to that, the hyperscalers are largely building to their own requirements. The Tier 2 CSPs are largely investing in infrastructure for enterprises who don't have access to their own infrastructure, mostly around data centers. One dynamic I just want to reinforce. If you talk to anyone in the power and data center market,

None: And we're seeing all of those different models, but the level of demand signals from those type of customers on the enterprise side is very high.

None: And then in addition to that the Hyperscale is are largely building for their own requirements. The tier two csp's are largely investing in infrastructure for enterprises, who don't have access to their own.

None: Infrastructure, mostly around data centers and one one dynamic I just want to reinforce and if you talk to anyone in the power and data center.

None: Markets.

Mark W. Adams: There's a massive shortage today in available data centers for AI, and the massive shortage really is around the power requirements to run AI. And so today, there's a big pent-up demand for new data center capabilities to drive AI with, you know, gigawatt, megawatt-type performance that allows you to install these types of large-scale cluster AI platforms. That shortfall is causing a lot of activity as far as who can help people enable these systems as quick as possible or in the most rapid time frame possible. And that's where we're seeing a lot of the engagements that we have where customers are saying, hey, we need this space, and we need to be up and running by X. The customers in the enterprise world don't typically have... [inaudible] leading to more clarity around bookings and even future deliveries. It's all heading in the right direction. Excellent.

None: There is a massive shortage today and available data centers for AI.

None: And the massive shortage really is around the power requirements to run AI.

None: And so today.

None: There's a big pent up demand for new data center capabilities to drive AI with gigawatt megawatt type performance.

None: It allows you to install these type of large scale cluster.

None: AI platforms.

None: That shortfall is causing a lot of activity as far as who can help people enable these systems as quick as possible and most.

None: Rapid timeframe possible and Thats, where were seeing a lot of the <unk>.

None: Engagements that we have is where our customers, saying, hey, we need this space and we need to be up and running by X.

None: The customers.

None: Enterprise World. They don't typically have the <unk>.

None: Infrastructure that one of the big four Hyperscale is halved in terms of deployment and they really don't even know what they know in terms of performance uptime liability design uptime and optimization.

These are all things that are critical so the number of engagements we've had designs in the proposals.

None: Leading to more clarity around bookings and even future deliveries, it's all heading in the right direction.

None: Excellent second question is you had mentioned sort of AI at the edge and seem to kind of highlight youre stratus offering I'm wondering are there opportunities for AI at the edge also in the traditional sort of Penguin business, where you may be setting up larger clusters to run <unk>.

Mark W. Adams: The second question is, you mentioned sort of AI at the edge and seemed to kind of highlight your stratus offering. I'm wondering if there are opportunities for AI at the edge also in the traditional sort of penguin business where you may be setting up larger clusters to run LLMs or other AI infrastructure so it's not necessarily just a high reliability deployment, but you may also just say hey, we've got to get the inferencing as close to the end user as possible, and you could see some pretty large deployments for inferencing equipment rather than I think that's right.

None: <unk> or other AI infrastructure, so it's not necessarily just the high reliability deployment, but you may also just say hey, we've got to get the inferencing as close to the end user as possible and you could see some pretty large deployments for inferencing equipment, rather than say, just just training, which I think some of your traditional deploying.

None: It's may have been more focused on.

None: I think thats right. So you really kind of your question really embedded the answer which is we are now developing.

Mark W. Adams: Your question really embedded the answer, which is that we are now developing solutions and investing in development for future integration into our solution roadmap for providing just that. If you look at the prior spend in AI, it was more training versus investing. The train's never going to go away, because when you think about, you know, large language models... there's gonna be a bunch of large language models that people use to then extract their own version of what they need from that large language model. So the training piece will never go away.

None: Solutions and investing in development for future.

None: Integration into our solutions roadmap for providing just that.

None: As you mentioned.

None: If you look at kind of the prior spend an AI it was more training versus embracing.

None: And <unk>.

None: Training is never going to go away because when you think about it.

None: Large language models.

None: There's going to be a bunch of large language models that people use to then extract their own version of what they need from that large language model. So the training piece will go away I think as a percentage of the whole emphasis will obviously take on a greater share in the future and with that as you as you've noted.

Mark W. Adams: I think as a percentage of the whole, inferencing will obviously take on a greater share in the future. And with that, as you noted, the more speed and information availability there is closer to the decision making, that could make or break someone's competitiveness. And so the solutions we're thinking about are, how do we not just, as you said, leverage the platform, but how do we develop and offer our customer base the highest performing, highest reliable systems where there might not be IT resources in that environment, and that's a key part of our strategy. But you could see a day where we might be designing small cluster platforms or single cluster platforms with these platforms from a cost, reliability, and performance perspective that allows them It's just this is the way we're thinking about AI. Clearly, AI at the edge has got a bright future. It's just so early.

None: More.

None: Speed and information availability, there is closer to that this isn't making that could make or break someone's competitiveness.

None: So the solutions, we're thinking about or how do we not just as you said leverage the platform, but how do we do.

None: Develop and offer our customer base, the highest performing highest reliable.

None: Systems, where there might not be it resources.

None: In that environment, and that's a key part of our strategy, but you can see a day, where we might be designing.

None: Small cluster platforms are single cluster platforms.

None: With these with these platform from a cost and reliability and a performance perspective that allows them to be in these.

None: Markets, something like oil and gas maybe on a rig maybe at a retail store maybe about an ATM maybe at.

None: Health care reasonable office, what have you. It's just these are the way we're thinking about AI clearly AI at the edge has got a bright future. It's just so early I mean AI in general is early so we are investing for tomorrow as we think about that solution.

Mark W. Adams: I mean, AI in general is early, so we're investing for tomorrow as we think about that solution. Excellent. And just one last quick one on the memory outlook. You called for growth to be in the high single digits.

None: Platform, we're developing.

None: And then just one last quick one around the memory outlook called for growth to be high single digits. We've heard from a lot of folks in the memory industry to it.

Mark W. Adams: You know, we've heard from a lot of folks in the memory industry that pricing for both DRAM and NAND is moving up pretty quickly here, especially after the earthquake in Taiwan. I was wondering, as you look at that high single-digit growth, is that mostly ASP growth with units still pretty muted? Are you starting to see a unit recovery, but pricing benefits may come in future quarters? Just how are you thinking about units versus ASPs? And I'll go back in the queue.

None: Pricing for both DRAM and NAND is moving up pretty quickly here, especially after the earthquake in Taiwan Wonder. If you just look at that high single digit is that mostly ESP growth with units still pretty muted or you're starting to see a unit recovery, but but pricing benefits may come in future quarters, just how you're thinking about unit.

None: Versus Asps and I'll go back in the queue. Thank you.

Mark W. Adams: Before I get to the specific answer, I just want to highlight, if you go back and look at memory cycles, Unlike the pure play semiconductor companies, we made money through the cycles. Okay, and we do that because we have a differentiated business. And we also see that if you go back and plot this out, we're kind of slower on the front end of feeling the pain of the downturn.

Before I get to the specific yes, I just wanted to highlight if you go back and look at memory cycles.

None: Unlike the pure play semiconductor companies, we've made money through the cycles, Okay, and we do that because we have a differentiated business and.

None: And we also see that if you go back and plot this out.

None: Slower on the front end up feeling the pain of the downturn.

Mark W. Adams: And on the back end, our recovery is a little bit slower because of these inventory corrections of select inventory that customers may be sitting on or holding back from in terms of how they look at acquiring memory. So we are starting to see pricing benefits in our business overall, and we're seeing corner cases of demand requests. I would say that our demand has been somewhat flat of late, but that's better than declining over the last couple of quarters. And if you look back at the last earnings call, I suspected, I projected that my view of the world was that we could probably start to see some more demand in our Q3, Q4 timeframe, because I just thought it was gonna be a little slower. And we're starting to see that turnaround. It's just that it's not here in the Q2 numbers.

And on the backend our recovery is a little bit slower because of these inventory corrections of select inventory that customers may be sitting out or.

None: Holding them back from in terms of how they look at acquiring memory. So.

None: We are starting to see pricing benefits and our business overall and we are seeing corner cases.

None: Demand requests I would say that our demand has been somewhat flat.

None: Late but that's better than declining over the last couple of quarters and if you look back at the last earnings call.

None: I suspected I projected.

None: My view of the World was that we could probably start to see some more demand in our Q3 Q4 timeframe because I just thought I was going to be a little slower and we're starting to see that.

None: Turnaround and it's just it's not here in the Q2 numbers I think in Q3, we're starting to see a little bit more of a demand.

Mark W. Adams: I think in Q3, we're starting to see a little bit more demand, and I think we'll continue to see that through Q4 and early fiscal year 25. Yeah, and Quint, just to highlight Mark's point there in terms of March.

None: And I think we will continue to see that through Q4 and early fiscal year 'twenty five.

None: Just to highlight Mark's point there in terms of the margins and you can look at our operating margins for this business.

Mark W. Adams: We look at our operating margins for this business. Perfect. Thank you. Thank you. The next question comes from the line of Kevin Cassidy with Rosenblatt Securities. Kevin, your line is now open.

None: Even in Q2, which is a softer quarter here.

Margins were just above 7%.

None: And we're starting to see some expectations for growth Thats, what we guided to here for Q3.

None: Sequentially for the memory business as well.

None: Perfect. Thank you.

None: Thank you.

None: The next question comes from the line of Kevin Cassidy with Rosenblatt Securities. Kevin Your line is now open.

Mark W. Adams: Yes, thank you for taking my question and congratulations on the quarter. Can you talk a little more about IPS? You said it'd be flat up, depending on at least one order. And does this include services? And is this part of the guidance for gross margin being 1.5% one way or the other? Can you just give a little more details on that? I'm going to start. I'm going to start and let Ken jump in.

Kevin Edward Cassidy: Yes. Thank you for taking my question and congratulations on the quarter.

Kevin Edward Cassidy: Can you talk a little more about the Ips, we said it would be flat to up depending on at least one order.

Kevin Edward Cassidy: This includes services and is this part of what the.

Kevin Edward Cassidy: Guidance for gross margin.

Kevin Edward Cassidy: 125%, one way or the other.

None: Can you just give a little more details on that question I'm going to start I'm going to start and let Ken jump in.

<unk>.

As we said originally if you go back to our Q1 earnings call.

Mark W. Adams: As we said originally, if you go back to our Q1 earnings call, we saw a stronger second half, and that's in fact what we see playing out. And part of these engagements, you know, the margin move around is kind of muted. It could be mixed issues. It could be hardware early configurations that we then convert services to. And if you look at all of that, we're in a good place. The margins will move around.

None:

We saw a stronger second half and that's in fact, what we see playing out.

None: And part of these engagements.

None: The margin move around is kind of muted.

None: It could be mix issues that could be hardware early configurations that we then convert services too.

None: And if you look at all of that.

None: We're in a good place and the margins will move around as you said I'll, let Ken kind of quantify that a little bit but margins will move around in our business a little bit, but let's not forget.

Mark W. Adams: As you said, I'll let Ken kind of quantify that a little bit. But margins will move around in our business a little bit. But let's not forget.

Mark W. Adams: Gross margins are up from 19.5% three years ago to where we are today, and if a margin moves around a point in a quarter, it's primarily because of the mix of maybe hardware deployments in a quarter and then future quarters where software might be stronger or services might be stronger. And that's just the nature of the business we're in. Very pleased with the team's execution and very confident that we'll continue to see good progress there. Yeah. And if you look at the margin, we provide a little bit more room here in Q4, and part of that's just around the timing of not only the hardware deployments, which we've talked about in the past and making sure we get the appropriate customer acceptance and the like. And those can move, you know, between quarters.

Gross margins are up from 19, 5% three years ago to where we are today.

And our margin was around a point in the quarter.

None: Primarily because of mix of maybe hardware deployments in a quarter and then future quarters, where software might be stronger our services might be stronger and thats just the nature of the business we're in.

None: Very pleased with the team's execution and very confident that we'll continue to see good progress there and.

None: Kevin If you look at the margin, we provided a little bit more room here in Q4 and part of that is just around the timing of not only the hardware deployments, which we've talked about in.

None: In the past.

Making sure we get the appropriate customer acceptance and the like and those can move.

None: Queen quarters, that's why we we outlined that but.

None: If you look at the margin for Q4 and the guidance we have both point in time services and ongoing managed services.

Ken Rizvi: That's why we outlined that. But if you look at the margin for Q4 and the guidance... both point-in-time services and ongoing managed services, and we just wanted to have a little bit more. Okay, great. Thanks for that color.

None: And we just wanted to have a little bit more flexibility.

My assumption is most most of the street will probably end up near the mid point, but I think it gives us a little flex around that.

None: Okay, great thanks for that color and.

None: Maybe as you're saying your visibility or your.

Mark W. Adams: And maybe, as you're saying your visibility or your engagements are increasing, can you talk more about, you know, the potential for expanding your customer base for IPS in particular? Yeah, absolutely. I think so.

None: Engagements are increasing can you talk more about the potential for expanding your customer base for Ips in particular.

None: Yeah, absolutely I think.

Mark W. Adams: Kevin, as you know, this is a business that we've talked about. The business that we say has got customer concentration and can be lumpy; we've invested very heavily over the last fiscal year here, the last 9 to 12 months, in bringing in new go-to-market resources. And to be very honest, I'm super pleased at the progress we're making there in terms of, again, managing major accounts and getting the executive engagement to go market our capabilities to these large enterprises and Tier 2 CSPs. The number of proposals that we have generated.

None: Kevin as you know.

This is a business that we've talked about.

None: Repeatedly was is a business that we have says it's got customer concentration and can be lumpy.

None: We've invested very heavily over the last fiscal year here in the last nine to 12 months.

None: On bringing on new go to market resources.

None: And to be very honest.

None: Super pleased that the progress we're making there in terms of again managing major accounts.

None: And getting the executive engagement to go market our capabilities to these large enterprises and tier two csp's.

The amount of proposals that we have.

Mark W. Adams: And we're looking forward to getting on a path where those convert into bookings and revenue over time. You think about, we get them booked, but again, we have to then go off and then map that out against the supply chain, confirmation of what we can do in our configurations, and then we talk about deployment schedules and the like. And so I do want to call something out because I don't think I've done a good enough job on prior calls. We don't think about our customers, like in a buy-sell relationship. That's not our business.

<unk> generated.

None: <unk> to increase with the opportunities we're seeing.

None: And we're looking forward to to get on a path, where those converted into bookings and revenue over time, you think about we get them booked but again, we have to then go often and then map that against supply chain.

None: The confirmation of what we can do in our configurations and then we talk about deployment schedules and like and so I don't want to call something out, but I don't think I've done a good enough job in prior calls.

None: Sure.

None: We don't think about.

None: Our customers like in a buy sell relationship that's not our business and I know, it's hard because we used to be a memory module company only and it was very very much like the industry is very much to be transactional.

Mark W. Adams: And I know it's hard because, you know, we used to be a memory module company only, and the industry is very much transactional. But our transformation, which we repeatedly talk about in the market, is one of not just going from memory to AI infrastructure and HPC. That's not where it stops; it's really in the terms of how we think about our customer relations. It's more in terms of terms because we're with them for a while. We're not just selling something and disappearing. We design it. We install it, we manage it, and then we make sure it performs well over time. And so that relationship, you know, I think, again, we have clients and engagements. We don't have transactional customers.

None: But our transformation that we repeatedly talked about and the market.

None: As one of not just going from memory to AI infrastructure and HBC, that's not where it stops.

None: It really is in terms of how we think about our customer relationships more in terms of clients and engagements because we are with them for a while we're not just selling something and disappearing we design it.

None: We install it.

None: We manage it and then we make sure it performs over time and so that relationship I think again, we have clients in engagements. We don't have transactional customers. Yes, we have customers, obviously, but those are managed as a client and an engagement and thats, where it shows up in the gross margin line when I compare myself to some of the larger competitors we compete against.

Mark W. Adams: Yeah, we have customers, obviously, but those are managed as a client and an engagement. And that's where it shows up in the gross margin line when I compare myself to some of the larger competitors we compete against, so to speak. And so I'm very pleased with how that process is evolving and playing out. I've also just, like Kevin, if it's okay, just take the opportunity.

None: So to speak and so.

None: I'm very pleased.

None: That processes is evolving and playing out I'd also just like Kevin if it's okay just take the opportunity.

Mark W. Adams: As we're doing that, what's really become apparent is the need for what we offer becoming more and more validated every day. What I mean by that is... Yeah, there have been a lot of GPU sales over the last 12 to some odd months. But as people deploy them, the complexity is not lost on the customer. Where is that complex?

None: We're doing that whats really become apparent.

None: Is the need of what we offer.

None: Is becoming more and more validated every day, what I mean by that is.

None: Yes, there is a lot of GPU sales over the last 12 months.

None: Months.

None: But as people deploy at the complexity is not lost on the customers' whereas that complexity.

Mark W. Adams: Well, in the design of a data center, how do I get the power to the building, to the transformer, to the main system? How do I design each part of the data center from a cold aisle to a hot aisle? How are my racks designed?

None: Well on the design of a data center.

None: How do I get the power to the building to the transformer to the main systems, how do I design each.

None: Part of the data center from our.

None: Carlyle to Ohio.

None: My racks designed how are the Gpus manage how do I maximize uptime and availability.

Mark W. Adams: How are the GPUs managed? How do I maximize uptime and availability? Can I be proactive in detecting future failures?

None: Can I be proactive in detecting future failures, so that saves me downtime.

Mark W. Adams: That saved me downtime. And then in the future, hey, how do I scale? And so we're in a much different consultative advisory sale. And so these executive engagements I'm talking about are reaffirming that there is a need for this type of trusted advisor relationship. And I think we're very well positioned for that after, you know, there couldn't be a better precursor to AI infrastructure than HPC. When you think about HPC, it was really helping people build large multiprocessor architectures inside of data centers, albeit not for AI at the time, but it evolved that way as we got closer to 2018, 19, 20.

None: And then in the future Hey, how do I scale and so we're in a much different consultative advisory sale and so these executive engagements I'm talking about.

None: Our reaffirming that there is a need for this type of a trusted advisor relationship.

None: And I think we're very well positioned in that after there couldnt be a better precursor.

To AI infrastructure than <unk>, when you think about <unk>. It was really helping people build large multiprocessor architectures inside of data centers, albeit not for AI at the time, but it evolve that way as we got closer to 2018 1920, and so there is just not there.

Mark W. Adams: And so there's just not that many companies out there with 25 plus years of deployment knowledge, both in the hardware, the software, and the future add-on services. Okay, great. Thank you. Thank you. The next question comes from the line of Thomas O'Malley with Barclays. Thomas, your line is now open. Hi, this is Scott on behalf of Thomas O'Malley.

None: Many companies out there with 25 plus years and deployment knowledge both at the hardware.

None: Software and the future add on services and I think we're doing a better job of articulating that value to these customers.

None: Okay, great. Thank you.

None: Thank you.

None: Okay.

None: The next question comes from the line of Thomas O'malley with Barclays. Thomas Your line is now open.

None: Hi, This is Scott on for Tom O'malley I wanted to touch on the services line. So it looks like services downtick pretty meaningfully in the quarter.

Ken Rizvi: I wanted to touch on the services line. So it looks like services down ticked pretty meaningfully in the quarter. Should we think about this as sort of the new run rate level, or do you expect that it will tick back up? Thank you.

Scott: Should we think about this as sort of as sort of being due.

Scott: Run rate level or do you expect that it ticks back up thank you.

Ken Rizvi: Yeah, so I think as we look at Q4... I would expect the services to tick off. And as we've highlighted before, within that basket of services that we have, there are Time Services, Design, that we have. So we had fewer point-in-time services here. I would expect that, back up, in Q2, I would expect that number to tick back up, and that was. Thank you. That's helpful.

None: Yes, so I think as we look at Q4.

None: Four I would expect the services to tick up and as we've highlighted before within that basket of services that we have there are kind of point in time services design implementation and the like and there are managed services that we have and so we.

None: We had fewer point in time services here in Q3, I would expect that number to tick back up here.

None: In Q2, I would expect that number to tick back up in Q3.

None: And that was embedded in our guidance.

None: Thank you that's helpful. And then one more if you could touch again on <unk> could you just give us an idea of when you see the market inflicting more meaningfully there and then the types of customers that you see interested whether thats AI and more general purpose.

Jack A. Pacheco: And then one more, if you could touch again on CXL, could you just give us an idea of when you see the market inflecting more meaningfully there and then the types of customers that you see interested, whether that's AI or more general purpose? Why don't I take the first part of that, and I'll let Jack talk about more of the productization and the revenue. So if you talk to leading technology executives and engineering executives on the AI kind of performance curve and AI infrastructure, by far, at the top of the list is Latency and Performance Issues Caused by the Lack of Bandwidth and Availability to Memory from the GPU and CPU.

None: Why don't I take the first part of that and I'll, let Jack talk about more of the product innovation and the revenue.

Jack A. Pacheco: So if you talk to.

None: Leading.

None: Technology executives and an engineering executives.

None: AI kind of performance curve and AI infrastructure.

None: By far at the top of the list.

None: Is latency and performance issues caused by the lack of bandwidth and availability to memory.

From the GPU and CPU and there is an immense amount of capital going into investing in.

Mark W. Adams: And there's an immense amount of capital going into investing in early stage companies as well as some of the larger companies investing in solutions that help solve this bandwidth issue. Like, if you look at the analogy I like to use, if you think about sharing storage in a network, you can do that today. I can't do that in memory. But eventually, you'll have the ability. I think it's within CXL 3.0.

None: Early stage companies as well as some of the larger companies are investing in solutions that help.

None: This bandwidth issue like if you look at the analogy I like to use us.

Think about sharing storage and a network you can do that today, you can't do that in memory.

None: So eventually you will have the capabilities I think it's within CSL three zero out in the future youll be able to spool memory.

Mark W. Adams: Out in the future, you'll be able to spool memory, but that's not enough. The transport layer of memory is another issue that people are trying to tackle with the optical transport layer with CXL on top of it for just maximizing the speed. However, high bandwidth memory is not the only. And there will be other solutions as it relates to how we can enhance the throughput and the latency and the overall system performance of the compute by having more innovative hardware solutions like CXL and like optical transport integrated into such a solution. So I'll let Jack talk about the kind of market dynamics around when we see that starting to be a meaningful construction. Hey, hi.

None: Not enough the transport layer of memory is another issue that people are trying to.

None: Tackle with the with the optical transport layer.

None: <unk> on top of it for just maximizing the speed.

High bandwidth memory is not the only solution and there will be other solutions as it relates to how we can enhance the throughput and latency in the overall system performance of the compute by having more innovative hardware solutions like CSL and like optical transport integrated into such a solution, but I'll, let Jack talk about kind of the market.

Jack A. Pacheco: <unk> dynamics around when we see that starting to be a meaningful contributor.

Jack A. Pacheco: Yeah, as Mark mentioned, right, we talked about the end of this calendar year and Meaningful Shipments and CXL, and it's them both shipping it into kind of your standard server companies, but we also were having conversations, and we're sampling a lot of folks in AI as well that want to have more memory in their AI servers, and as HBM grows, you need to put more and more normal memory in your server, and to do that, you That's very helpful. Thank you. The next question comes from the line of Brian Chin with Stiefel. Brian, your line is now open. Hi, this is Denison speaking for Brian.

Jack A. Pacheco: But as Mark mentioned right. We've talked that you talked about the end of this calendar year, we expect to see some meaningful shipments in <unk>, both we will be shipping it into Canada.

Jack A. Pacheco: Kind of your standard server companies. We also were in conversations and we're sampling a lot of.

Jack A. Pacheco: Different folks in AI as well that want to have more memory and their AI servers H B M grows you need to put more and more normal memory in your server and to do that you start running out of room at the gym slots decrease the faster you need to run this memory. So the only way to get that additional memory is really to use <unk> entre to pop more memory and of that server. So we're.

Jack A. Pacheco: Seeing.

Jack A. Pacheco: Opportunities in both phases of the market.

None: That's very helpful. Thank you.

None: Thank you.

None: The next question comes from the line of Brian Chin with Stifel. Brian. Your line is now open.

None: Yeah.

None: Hi, This is Dennis on for Brian Thanks for letting us with two questions.

Mark W. Adams: Thanks for letting us ask you two questions. Regarding IPS, how has interest in generative AI over the last year or so changed the customer acquisition and eventually product delivery rollout processes? Has it become lengthier or more complex?

Regarding Ips how.

None: As interesting generative AI over the last year or so change the customer acquisition and.

None: Eventually product delivery rollout process has it become a lengthier and more complex and then you had mentioned you have these options like on Prem co location or co investment and how does the customers choice of one of these three impacts either the timeframe for rollout or you just kind of your business in general.

Mark W. Adams: And then you mentioned you have these options like on-premise, co-location, or co-investment. How does the customer's choice of one of these three impact either the timeframe for rollout or your business in general? Yeah, that's a great question and let me just kind of step back a little bit. I remain convinced that we are in the super early innings of AI.

None: Yeah, that's a great question and let me just.

None: Kind of step back a little bit.

None: I remain convinced that we are in the Super early innings of AI.

Mark W. Adams: And all the noise around sales of GPUs and the like, yes, that's a catalyst or a metric for what's ahead. But I would tell you that I think large-scale enterprises are still really crafting their strategy. I think a lot of those GPU sales went to people in the middle who were building the infrastructure. And I don't think the large-scale enterprises really have fully understood how AI is going to change their business and given them a competitive edge. So why I say that is because this is all playing out in real time in front of us. In addition, this is a brand new architecture for any enterprise outside of the big hyperscalers who have been in this for a few years. But there, I mean, there are companies who are household brand names in the industries they compete in that really are struggling with even how to design a data center or how to develop the right solution and why you would do A versus B. And so, when I think of what your question is getting at, what is this doing? It's actually made, I think, adoption, more of a longer-term process.

None: And all of the noise around the sales of Gpus in the Lake, Yes, that's a catalyst or a metric for what's ahead.

None: But I would tell you that I think.

None: Large scale enterprises are still really crafting their strategy on AI I don't think I think a lot of those GPU sales went to people in the middle of building the infrastructure.

None: And I don't think the large scale enterprises really have.

None: Fully defined how AI is going to change their business and give them a strategic advantage. So why I say that is this is all playing out real time in front of us.

None: In addition.

This is a brand new architecture.

None: For any enterprise outside of the Big Hyperscale guys who've been in this for a few years, but.

None: I mean, there are companies who are household brand names.

None: And the industry as they compete in.

None: That really are struggling with even how to design a data center or how to develop the right solution and why you would do a versus b and so what I think what your question.

None: Is getting at is.

None: What is this doing its actually made I think adoption more of a longer term.

None: Assess.

Mark W. Adams: But I also think, as I mentioned earlier in this call, what I have validated through my executive engagements with our sales organization is that large enterprises are starting to get it. They're starting to understand that there is a gap between what they have done from an information technology perspective and the capabilities they will need to deploy AI successfully. And that gap is really the opportunity for a bank. And so from our perspective, yes, it might be a little bit longer, there might be more of an education curve, but that's also leading us to get more sticky and really be able to identify the value that we can provide our partners, our clients that need our help in deploying AI. And I think that's where they are.

None: But I also think as I mentioned earlier on this call what I have validated through my executive engagements with our sales organization is.

None: Large enterprises are starting to get it they're starting to understand that there is a gap between what.

None: They have done from an information technology perspective, and the capabilities they will need to deploy AI successfully and that gap is really the opportunity for Penguin and so from our perspective.

None: Yes, it might be a little bit longer there might be more of an education curve.

None: That's also leading us to get more sticky and really be able to identify the value.

None: That we can provide our partners our clients that need our help in deploying AI and I think thats, where you sense the confidence and the optimism for the second half of our fiscal year.

Mark W. Adams: You sense the confidence and the optimism for the second half of our fiscal year. Great, thank you. And then for my follow-up question, so we recently heard about memory price increases for both DRAM and NAND from all of the big memory suppliers. If prices were to continue to increase, how would you foresee this impacting your future growth margins? We're not going to forecast more than we normally do in a given quarter, so Ken kind of gave me the forecast.

None: Great. Thank you and that's what my follow up.

So we've recently heard about memory price increases.

None: DRAM and NAND from all of the big memory suppliers if.

None: If prices were continuing to increase how would you foresee this impacting your future gross margins.

None: Well, we're not going to forecast.

None: We're not going to forecast more than we normally do in a given quarter, so kind of kind of giving you the forecast.

Mark W. Adams: I will say a couple things. I think... Any such benefits that you've alluded to normally will show up in our top line revenue. But, as we've been clear on in prior calls, our gross margins, you know, will trickle up or down depending on which way pricing goes. Why is that?

None: I will say a couple of things I think.

Any any such benefits that you.

None: Alluded to normally will show up in our top line revenue.

None: But as we've been clear on our prior calls our gross margins will trickle up or down depending on which way pricing goes why is that because when pricing moves are value add doesn't change and our customers realize that and so ironically when our revenues go down our margins stay pretty stable maybe even.

Mark W. Adams: Because when pricing moves, our value add doesn't change, and our customers realize that. And so, ironically, when our revenues go down, our margins stay pretty stable, maybe even trickle up a little bit, just because of the mass of fixed value over declining revenue. And the reverse is true; we might see an impact of down a point or two or whatever as recovery happens. But I don't sense that happening overnight. I don't sense that it's something that's going to change the business dynamic, more often than not, in this type of pricing recovery market. The revenue gain and the Gross Margin Dollar Contribution muffle out any of the gross market percentage impact. What I'd add to that is, revenues start to grow, both from units and ASPs over a period of time. We will see that, at the bottom line, as an improvement in operating income percent. And you can see that just in the past couple of years, this business, for the memory-specific business, was running at operating incomes north of 10 percent, and we're below that now.

None: Trickle up a little bit just because of the math of fixed value over a declining revenue stream and the reverse is true we might see.

None: You might see a impact that data point or two or whatever.

None: Recovery happens I don't sense that happening overnight I don't sense, that's something that's going to change the deposit dynamics, because more often than not and this type of pricing recovery market.

None: The revenue gain of gross margin dollar contribution.

None: <unk> out any of the gross margin percentage impact.

None: Add to that is as we see revenue start to grow both from units and asps over a period of time.

None: We will see that hit the bottom line is an improvement in operating income percent and you can see that just in the past couple of years. This business for the memory specific business.

None: It was running and often comes north of 10%.

None: We're below that analysis as we start to see unit demand improved as well as asps.

It flowed to the bottom.

Ken Rizvi: Great, thank you. Thank you. And team, at this time, we do not have any further questions registered in the queue, so I will turn the call back over to you for any final remarks. All right, great. Thank you all for joining me. Before just closing out the call... I just wanted to let you know that we have plans for an upcoming IR day in the next few months or so, and details will be coming to you soon. In the meantime, I look forward to seeing you at shows and NDRs and the likes, and thanks again for joining us today. Have a great week. That concludes today's call. Thank you all for your participation, and you may now disconnect your lines. That concludes today's call. Thank you all for your participation.

None: Great. Thank you.

None: Thank you.

None: Okay.

None: At this time, we do not have any further questions registered in the queue. So I will turn the call back over for any final remarks.

Oh, great. Thank you all for joining before just closing out the call I just wanted to let you know that we are.

None: We have plans for an upcoming IR day and the in the next few months or so.

None: Details will be coming to you soon in the meantime.

None: <unk> to see you at shows and <unk> and the likes and thanks again for joining today have a great week.

None: That concludes today's call. Thank you all for your participation and you may now disconnect your lines.

None: That concludes today's call. Thank you all for your participation.

Q2 2024 SMART Global Holdings Inc Earnings Call

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