Penguin Solutions, Inc.

Thank you, operator. Good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss SGH's third quarter fiscal 2022 results and the company's entry into a definitive agreement to acquire Stratus Technologies. Joining me today are Mark Adams, Chief Executive Officer, Jack Pacheco, Chief Operating Officer, and Ken Rizvi, Chief Financial Officer. You can find the accompanying slide presentations and press releases 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, 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 note 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 will also discuss both GAAP and non-GAAP financial measures. Non-GAAP measures should not be considered in isolation sums as a substitute for or superior to our GAAP results. 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. With that, let me turn the call over to Mark Adams, CEO.

Mark? Thank you, Suzanne, and thank you to all who have joined us today. We are excited to share our third quarter results and to discuss SGH's planned acquisition of Stratus Technologies. I will start today's call with a review of our operating results for the third quarter. Ken will cover our Q3 financials and our guidance for next quarter. We will then provide an overview of the planned acquisition of Stratus before opening the call for Q&A. Q3 was another strong quarter as we delivered our ninth consecutive quarter of year-over-year top line growth with revenue of $463 million above the midpoint of our guidance range. In addition, non-GAAP gross margins were at the high end of our guidance range at 25.7%, and non-GAAP EPS came in above the high end of the guidance range at 87 cents per share. Stepping back from our quarterly performance, I want to highlight what we have accomplished in the early stages of our transformation at SGH. In less than two years, we have grown top line revenue from 1.1 billion to over 1.8 billion over the last four quarters. Expanded our gross margins from 19.8% to over 25%. Diversified our revenue with the organic growth of IPS and with the acquisition of Cree LED. strengthen our balance sheet, leveraging our strong cash flow generation, and continue to invest in our long-term success, as demonstrated by our announcement today of the planned acquisition of Stratus Technologies. More on that in a bit. Now let me turn to a brief review of each of our businesses. Starting with IPS, revenue came in at $95 million for the third quarter, up 16% sequentially, and approximately flat for the third quarter of 2021. In addition, we expanded service revenue in the third quarter to $34 million, up 105% compared with Q3 of the prior fiscal year. Services revenue represented approximately 36% of IPS revenue in Q3 of 2022, a record for services as a percent of total revenue for IPS. Heading into our fourth quarter, we're seeing strong sequential demand for IPS driven primarily by growth in sales to our commercial customer base. Based on our backlog, our Q4 top line is anticipated to grow north of 30% sequentially quarter over quarter. While we benefited from a strong mix of services in Q3, Our growth in Q4 is driven by new project rollouts that are more hardware-intensive. Looking out into the first half of fiscal 2023, we are seeing strong demand continue as we ramp new customers and expand projects at our existing customers. While we are not providing guidance, ITS's current backlog is approximately half of a billion dollars in all-time high. Now turning to our LED solution group. Pre-LED had another strong quarter of operating performance. Revenue was 101 million in Q3, helped by strong performance in the Americas and EMEA, which partially offset demand softness in the greater China, Southeast Asia region, which continues to be hampered by COVID-related policies affecting supply chain networks. Cree LED continues its focus on innovation by delivering differentiated solutions with a strong technology and value proposition to its customers. Just last week at LightBear 2022, Cree LED's XE-G LED family of products were recognized by the Edison Report as a top 10 must-see product, delivering significant performance advantage in color mixing applications. we remain confident in the long-term operating performance of the LED business. In our memory solutions group operating under the Smart Modular brand name, revenue came in at $266 million, a year-over-year growth of 11%. Demand for our core specialty memory offerings such as DDR3, DDR4, and flash memory products from customers in the enterprise computing, networking, telecom, and storage segments was key to our strong performance. In Brazil, we experienced softness driven by a decline in consumer demand for smartphones and PCs, and we anticipate this will persist into the fourth quarter. We remain disciplined in managing our operating expense and capital expenditures as we continue to focus on generating cash from our Brazil operations. Our consolidated results for the third quarter demonstrate the benefits of our growth and diversification strategy. We believe we are in the right markets, benefiting from long-term secular growth drivers such as AI, machine learning, data analytics, cloud, and high-performance computing. I want to recognize our nearly 4,000 employees worldwide for a strong third quarter. We are in the beginning stages of a major transformation, and I couldn't be more excited about the future of SCH. And now I'll hand it over to Ken for a more detailed review of our Q3 financial performance and our guidance for next quarter. We will then provide an overview of our announced acquisition of Stratus before opening the lines for Q&A. Ken?

Thanks, Mark. I will focus my remarks on our non-GAAP results, which are reconciled to GAAP in our earnings release table. The third quarter of 2022 is the ninth consecutive quarter of year-over-year growth for SGH, demonstrating how our strategy continues to yield positive results and benefits from our diversified revenue stream. We see tremendous opportunities ahead for SGH to deliver advanced technology solutions for our customers across all three of our businesses. Now let me turn to our detailed results for the third quarter of fiscal 2022. We reported another strong quarter. Net sales were $463 million, a 6% increase year-over-year from the third quarter of fiscal 2021. In addition, non-GAAP growth margins came in at 25.7% at the high end of our guidance range, and non-GAAP diluted earnings per share was 87 cents for the third quarter, above the high end of our guidance range. Our gross margin and earnings per share were higher in the third quarter, in part due to the timing of higher margin service revenue for IPS, which was originally expected in the fourth quarter. For the third quarter, IPS had revenue of $95 billion, up approximately 16% sequentially, driven by growth in commercial and federal sales. In addition, we had record services revenue in IPS in the third quarter, which helps the overall margin profile for SPH. We continue to see strong demand for IPS into the fourth quarter of 2022, and demand trends remain strong as we look into the first half of 2023, as Mark highlighted earlier. We expect fourth quarter IPS revenue to have a greater mix of hardware. Our LED solutions group had revenues of $101 million in the third quarter, which was relatively flat with the same quarter a year ago. Sales were impacted from lower demand in the Greater China and Southeast Asia region, which represented over 35% of LED sales this quarter. Our memory solutions group had revenues of $256 million in the third quarter, which was 11% higher than the third quarter of the previous fiscal year, driven by growth in our specialty memory business. Non-GAAP growth margin for SGH in the third quarter of 2022 was 25.7%, up from 21.9% in the year-ago quarter. Non-GAAP operating expenses for the third quarter were $64.6 million, up from approximately $52 million in the third quarter of 2021. Operating expenses were up primarily due to the continued investments across all three of our businesses, as well as a reduction from financial credit in Brazil. Operating expenses benefited in the third quarter of 2022 from 3.3 million in financial credits in Brazil, which was down from $6 million in the second quarter. This credit is expected to provide approximately $2 million of benefit in our fourth quarter of 2022. Non-GAAP deleted earnings per share for the third quarter of 2022 was 87 cents per share, up 24% from 70 cents per share in the year-ago quarter. Adjusted EBITDA for the third quarter of 2022 was $64 million, or 14% of sales, compared to $51 million, or 12% of sales, in the year-ago quarter. Now turning to working capital. Our net accounts receivable totaled $357 million, compared with $386 million last quarter. And day sales outstanding came in at 31 days, down 13 days from the last quarter. Inventory totaled $365 million at the end of the third quarter. up from $334 million at the end of the prior quarter. This growth was driven primarily by higher inventory for IPS as we prepare for bills in the fourth quarter and into the first half of fiscal 2023. Inventory turns were 10.1 times in the third quarter versus 8.1 times in the prior quarter. And consistent with past practice, accounts receivable stays outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $1.037 billion and $922 million, respectively, for the third quarter. As a reminder, the difference between gross revenue and net sales is related to our logistics business, which is accounted for on an agent basis, meaning that we only recognize the net profit on the logistics services as net sales. Cash and equivalents totaled a record $387 million at the end of the third quarter, compared with $366 million at the end of the prior quarter. Third quarter cash flow from operations totaled $36.7 million, compared with $32.2 million in the prior quarter. With the continued global electronics supply chain constraints, as well as the inventory required to support IPS demand. More of our capital has been tied up in working capital over the past year. For those of you tracking CapEx and depreciation, CapEx was $9.2 million in the third quarter, and depreciation was $10.6 million. In the third quarter, we repurchased 448,000 shares, spending approximately $10.2 million during the quarter, under our $75 million share repurchase authorization. and we continue to repurchase shares into the fourth quarter. As a reminder, our capital allocation strategy is as follows. First and foremost, we will continue to invest in our businesses as we see significant opportunities for further organic growth in each of our three business segments. Second, we will continue to review and seek acquisition opportunities such as Stratus for further scale and diversification in a disciplined manner. And finally, the share repurchases provide us flexibility to return capital to our shareholders in an opportunistic and price-sensitive manner. With the opportunity ahead of us to acquire Stratus Technologies, we have suspended our share repurchase authorization effective today to align our capital resources towards the strategic acquisition. Now, let me turn to our fourth quarter guidance. We expect that our net sales for the fourth quarter of 2022 will range from approximately $420 million to $460 million, or approximately $440 million at the midpoint. Our guidance incorporates the strong demand in our IPS business, but an offset primarily by slower demand in memory. Our GAAP gross margin for the fourth quarter is expected to be between 22.5 and 24.5%. Non-GAAP gross margin for the fourth quarter is expected to be approximately 23.5 to 25.5%, in part due to the greater mix of hardware in our IPS business in the fourth quarter, as mentioned earlier. Our non-GAAP operating expenses for the fourth quarter are expected to be approximately $62 million to $66 million. GAAP diluted earnings per share for the fourth quarter is expected to be approximately 22 cents, plus or minus 10 cents. On a non-GAAP basis, excluding share-based compensation expense and tangible amortization expense, debt discount and other adjustments, we expect non-GAAP diluted earnings per share will be approximately 65 cents plus or minus 10 cents. Cash capital expenditures for the fourth quarter are expected to be in the range of $9 to $12 million in approximately $38 to $41 million for fiscal 2022. Our gas diluted share count for the fourth quarter is expected to be approximately 55 million shares based on our current stock price. And our non-GAAP diluted share count is expected to be approximately 53 million shares, as it includes the benefit of our convertible note cap call. Our forecast for the fourth quarter of fiscal 22 is based on the current environment, which contemplates the global economic environment and ongoing supply chain constraints. Please refer to our non-GAAP financial information section and the reconciliation of GAAP to non-GAAP measured tables, in our earnings release for the further details. Now let's turn to the exciting news regarding the announced acquisition of Stratus.