Penguin Solutions, Inc.

Good afternoon. Thank you for attending today's SGH third quarter fiscal 2023 earnings call. My name is Hannah and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1. I would now like to turn the conference over to our host, Suzanne Schmidt with Investor Relations. You may go ahead.

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 2023 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 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. I would also like to remind everyone to read the use of forward-looking statements note 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 statements about the company's growth trajectory and its 2023 financial outlook. 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 annual and quarterly reports. The 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. 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. 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 with that, let me turn the call over to Mark Adams, CEO. Mark?

Thanks, Suzanne, and thank you all for joining us today for our fiscal 2023 third quarter call. Over the past three years, we have made tremendous progress on the transformation of SGH. We have grown our top line, increased our gross margins, delivered strong earnings per share, and strengthen our balance sheet by generating positive operating cash flow. Earlier this month, we announced that we had agreed to divest a majority stake in our Brazil consumer memory business, enabling SGH to shift our business towards high performance, high availability solutions for enterprise customers. Although macroeconomic headwinds persist, We believe we are well positioned for long-term success driven by secular tailwinds in AI, machine learning, and data analytics. While Ken will review the financials in more detail, I would like to call out some highlights from our third quarter performance. Our team achieved strong results for the third quarter in what remains a very challenging global economic environment. Non-GAAP gross margins was 28%, up 230 basis points from the year-ago quarter, and non-GAAP diluted earnings per share totaled 66 cents on sales of $383 million. We generated strong cash flow from operations of approximately $41 million in the quarter and exited Q3 with a strong balance sheet. including record cash and cash equivalents of $401 million. Now, let me review each of our business lines. Starting with IPS, which is comprised of our Penguin Computing and Stratus Technologies brands, we design, manufacture, deploy, and provide managed services for high-performance computing for the data center, the cloud, and the edge. AI, machine learning, and data analytics are becoming foundational technologies for the success of enterprises across a growing set of industries. We believe that Pangolin Computing, which has more than 25 years of experience in the deployment of HPC systems and solutions, is well positioned at the forefront of the generative AI revolution. Our team has designed, built, and managed some of the largest and most powerful supercomputers in the world, including managing a total of more than 50,000 NVIDIA GPUs for AI training at scale. Our engagement model is focused on developing tailored solutions for our customers. We architect a system that integrates technologies such as compute, storage, and networking that optimize for our customers unique HPC and AI workload requirements. Our skilled clusterware software provides an intelligent suite of management functionality, including node provisioning, image customization, and cluster monitoring while serving as a platform for additional software components. What we believe differentiates Penguin Computing from the competition is our ability to work with our customers from the design phase through integration all the way through to implementation and management of large HPC and AI clusters. Additionally, we are able to provide solutions on premise, in the cloud, and at the edge. In the third quarter, IPS sales totaled $171 million, which represented 45% of total SGH sales, reinforcing the transformation we are going through. Compared with the year-ago quarter, IPS sales increased by 31% excluding Stratus technologies and we're up 79% by including Stratus. Our service revenue, the majority of which is generated in IPS, represented 15% of total SGH revenue in the third quarter and reflects the incremental value we are providing to our customers. Our services include point-in-time services, such as design and implementation, as well as longer-term managed services. During the quarter, we continued to introduce new technologies and capabilities in the market. Penguin announced a new version of its flagship skilled clusterware software platform, which is a powerful management and monitoring tool that empowers customers to expand their own HPC clusters. This new version provides greater scalability boosts performance and delivers greater ease of use for users. Stratus announced the next generation of its fault tolerant computing platforms that enable our customers to run business critical applications such as transaction and payment processing to industrial automation at the core in the cloud and at the edge. During the quarter, Meta announced the completion of a second phase build out for their AI research supercluster known as RSC. As their implementation partner, Penguin worked with Meta to design the AI optimized infrastructure that powers their RSC, improving the overall cluster management and implement the system. The Navy DoD Supercomputing Resource Center's newer supercomputer named Nautilus is a Penguin true HPC system. featuring 48 GPU nodes. This HPC system, which completed its final testing in April, enables scientists and researchers to use complex applications to unlock weather patterns and ocean modeling, providing predictive insights about the Earth's climate and sustainability. Today we are also announcing that Dave Lorello, who joined us as CEO of Stratus at the time of the acquisition, will take on an expanded role as president of IPS, replacing Thierry Pellegrino. We believe that Dave's extensive experience building and leading technology teams while serving Fortune 100 enterprises will help us scale our customer engagements and overall operations. Prior to Stratus, Dave also worked in executive roles at Lucent and Digital Equipment Corporation. While there is a heightened level of customer engagement with regards to HPC AI opportunities, we recognize that we are still in the early stages of generative AI and machine learning. As we have noted on prior calls, we expect IPS sales will be lumpy due to the deployment timeline decisions and cycles of large customer installations. Over the long term, under Dave's leadership, we believe we are in a position to capitalize on these emerging market trends. Shifting to memory, our memory solutions group is currently made up of two businesses, Specialty Memory, which is focused on specialty memory applications in the enterprise, and our Brazil module business, primarily serving the consumer market. Overall, third quarter memory revenue came in at 148 million, or 39% of total SGH sales, and was relatively flat with the second quarter. We have a long history of serving enterprise customers in the networking, telecom, and industrial end markets. An area of focus going forward is to leverage this expertise to help drive memory subsystem innovation in AI and machine learning. For example, our CXL offerings remove the performance and latency bottlenecks between GPUs, CPUs, and memory in HPC applications. We are seeing strong design activity and customer interest for our CXL offerings and the wide variety of CXL architectures required by customers plays to our strength. In addition to our development efforts with CXL, we continue to implement leading edge test processes to ensure high levels of quality and reliability for our enterprise customers. Our zero failure rate or Zephyr memory offering is gaining significant interest among major customers as it meaningfully reduces field failures and helps to maximize system utilization. During the quarter, we started shipping DDR5 Zephyr memory models, which, when combined with our DDR4 Zephyr memory models, gives smart modular key differentiation and high availability memory products. Our memory business continues to demonstrate relative stability throughout the current memory cycle due to the specialty nature of our value-add business model. In the third quarter, this translated into operating margins of approximately 8% for our memory business. Now turning to our LED Solutions Group, which operates under the Cree LED brand and produces application optimized LEDs for specialty lighting, video screens, gaming displays, horticulture, outdoor and architectural lighting. For the third quarter of fiscal 2023, LED solutions totaled $64 million, or 17% of overall SDH sales, and we're up 15% sequentially from what could have been the bottom in the second quarter. While customers are continuing to work down inventory levels, we are seeing customer design activity improving. Typically, as we come through these cycles, we look for this as a precursor to demand improving. And while we are still in early days in the cyclical recovery of the LED market, we are optimistic that the business will have a stronger fiscal 2024. Cree continues to be recognized as a leader in customer-focused innovation. During the third quarter, LED Magazine awarded three of Cree's LED's latest product releases with Bright Star Awards for innovative LED products. The XLAMP Element G and Pro9 LEDs were recognized in the LED light sources category, while the PhotoFill Select LEDs were recognized in the horticulture SSL and control systems category. By continuing to invest in advanced LED technology, Cree is able to empower its customers with new and innovative LEDs to achieve remarkable system-level solutions. We believe that the combination of industry-leading technology and IP, a capital light outsourced manufacturing model, and disciplined expense control has positioned Cree well in these challenging times. We are starting to see signs of improving customer demand and expect revenue to be up modestly in the fourth quarter. I'll stop here and hand it over to Ken for a more detailed review of our third quarter financial performance and our guidance for next quarter. Ken?