Penguin Solutions, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the SGH second quarter fiscal 2022 earnings call. All lines being placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Suzanne Schmidt, you may begin your conference.

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 2022 results. Joining me today are Mark Adams, Chief Executive Officer, Jack Pacheco, Chief Operating Officer, and Ken Risvey, Chief Financial Officer. You can find the accompanying slide presentation and earnings press release for this call on the investor relations section of our website. we encourage you to go to this site throughout the quarter for the most current information on the company, including information on the various financial conferences we will attend. I would also like to remind everyone to read the use of forward-looking statements notes that we have included in the earnings press release and the earnings call presentation. Please note that certain of the statements made today may constitute forward-looking statements and that these statements are our present expectations and that actual events or results may differ materially. We also discussed 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. We encourage you to consider all measures when analyzing our performance. A reconciliation of GAAP to non-GAAP measures is included in today's press release. We will begin the call with CEO Mark Adams, who will provide a business update, and then Ken Risby, CFO, will review the financials and forward guidance, after which we will take questions. Mark?

Thank you, Suzanne, and thank you to all who have joined us today. We delivered another strong operating quarter at SGH. with total second quarter revenues of $449 million above the midpoint of our guidance range, non-GAAP gross margins at the high end of our guidance range at 26%, and non-GAAP earnings of 87 cents per share, which also came in well above the midpoint of our guidance. As a reminder, these per share results reflect the two-for-one share split that became effective at the beginning of February. In addition, we made progress in the following areas during the quarter. We strengthened our balance sheet, return loan refinancing, increasing our liquidity, and extending our overall debt maturities. We announced a $75 million share repurchase authorization today, demonstrating confidence in our business and the growth opportunities that we see over the long term. And we continue to improve our corporate governance with the appointment of Penny Hersher as chair of our board of directors. And we now have a fully independent board, except for me and my role as a CEO. Each one of our businesses, Intelligent Platform Solutions, Memory Solutions, and LED Solutions, delivered solid results despite the continuing macroeconomic challenges, including the supply chain constraints facing all companies, the impact of operating in COVID times, and of course, the conflict in Eastern Europe. As many of our peers have also reported, supply chain challenges remain with us, and if anything, have heightened from a few months ago. That said, I am very proud of the operational focus and tireless work of our supply chain teams that set SGAs apart, and importantly, place us in a position to drive continued support for our customers, as well as enabling us to deliver strong results for our shareholders. Let me turn to a review of each of our businesses, starting with Intelligent Platform Solutions Group. or IPS, where revenue came in at $82 million for the second quarter. As we've stated in the past, the quarterly level of business can vary due to the timing of deployments of various projects, and this was the case in Q2. That said, the business is performing very well. With the first half fiscal 2022, IPS revenue just over 200% compared to the first half of fiscal 21. An important part of this growth is our investment in services. Second quarter services revenue grew by 41% compared with Q2 of the prior fiscal year. Overall, services represented approximately 26% of IPS revenue in Q2. IPS continues to expand customer engagement across the ultra-scale government and oil and gas market segments. Specific to the ultra-scale market, Penguin Computing announced its role in providing both optimized AI research super cluster, or RSC. In its final build-out expected for mid-2022, The RSC is expected to utilize more than 16,000 NVIDIA GPUs and one exabyte of storage, which Meta believes will make it the fastest and largest AI supercomputer in the world. The RSC platform was designed to ensure performance, availability, data integrity, and managed security, all critical elements of an AI-optimized infrastructure. This engagement with Meta has been developed over several years and is a testament to Penguin's ability to address the unique needs of significant high-performance and AI compute application environments, highlighting our ability to provide a comprehensive solution of optimized hardware, software, and ongoing services. We also continue to invest in the edge a strategic segment of our business where we've experienced success in the telecommunications market as well as the government sector. We will continue to evolve and grow this business as part of our overall IPS strategy. As we think about our third quarter, component-level supply chain constraints are moving a portion of our expected delivery date out from fiscal Q3 into fiscal Q4 and in certain cases, into our fiscal 2023. As these constraints are industry-wide, this revenue shift is more of a timing issue and not reflective of our customer demand or loss revenue. This will be contemplated as part of our guidance for Q3 that Ken will provide. We also recently announced a new umbrella brand for IPS called Pain One Solutions. our customers will now identify all aspects of ips under the single brand name and we will leverage this new brand to showcase the full breadth of our capabilities we will continue to use the name penguin computing when referring to current hpc products including the servers storage and our data center support we will use the penguin edge name to refer to the new edge-related solutions and legacy embedded and wireless products. The new Penguin Solutions brand also reflects the direction we are taking to innovate and scale our offering, delivering solutions and services that span the continuum of edge, core, to cloud. Overall, we see growth in our new business funnel both in terms of commercial and federal business by expanding existing engagements and focusing on new customer acquisitions. We are expecting a strong second half of fiscal 2022 and continued momentum as we head into 2023. Now turning to LED Solutions. Our LED Solutions Group, which operates under the Cree LED brand, had another strong quarter of operating performance. Revenues were $107 million in Q2, with product revenues up approximately 5% when compared with Q2 fiscal 2021, when this business was still part of Wolfsby. Year-over-year revenue growth is being driven by customer wins with our high-brightness products into the video, architectural, and landscape specialty lighting markets. We continue to execute on our manufacturing transformation plan, which includes the transition from silicon carbide to sapphire wafers, and from a captive manufacturing model to an outsourced capital light model. We expect this transition to be largely completed by calendar fourth quarter. On the product front, the team is delivering innovative application optimized LEDs enabling a variety of lighting designs while achieving the best overall system value. We are seeing good traction with our CV94D products in the video display market, as well as new design wins for the horticultural market, indoor sports lighting, and road signage applications, each representing specialty areas of focus where our technology and product offering differentiate us versus our competitors. It has now been one year since the acquisition of Cree LED, and I continue to be impressed with the team's focus and ability to drive improvements in their product roadmaps, customer engagement, and operational excellence.