Penguin Solutions, Inc.

Victoria, Welcome to the smart global holdings fourth quarter and full year fiscal 2023 earnings call my name is Victoria and i'll be your moderator today. Victoria, All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end, I would now like to pass the conference over to your host Suzanne Schmidt with investor relations, thank you, you may proceed Suzanne.

Thank you, operator. Good afternoon and thank you for joining us on today's earnings conference call and webcast to discuss SGH's fourth quarter and full year 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 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 statements about the company's growth trajectory and financial outlook. Forward-looking statements are based on current beliefs and assumptions 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 accompanying slide presentation. As a reminder, on June 13, 2023, we entered into an agreement to sell an 81% interest in our Smart Brazil operations. The transaction is expected to close at the end of calendar 23 or early 24, subject to required regulatory approvals and satisfaction of customary closing conditions. Accordingly, Smart Brazil operations are classified as discontinued operations in our financial statements for all periods presented and the following discussion of our financial results relates to our continuing operations, which excludes Smart Brazil unless otherwise noted. And with that, let me turn the call over to Mark Adams, CEO. Mark?

Thanks, Suzanne. Over the last few years, we've been on a journey to transform SGH from a memory module company into an enterprise solutions company focused on high performance, high availability solutions for our valued customers. I am proud of what we accomplished in fiscal 2023, and I look forward to sharing how we are positioned for the opportunities ahead. In fiscal 2023, two important transactions furthered our transformation. In the beginning of this fiscal year, We acquired Stratus Technologies, a leading provider of high availability fault-tolerant computing platforms, software, and services. This transaction expanded our IPS offerings at the edge and core, added to our large scale global customer base, and delivered significant high margin recurring services revenue. In June 2023, we announced an agreement to divest an 81% stake in Smart Brazil. Smart Brazil manufactures high-volume, standards-based memory products for consumer electronics sold in Brazil. The completion of this transaction would further align our resources and investments towards developing high-performance, high-availability enterprise solutions. And from a reporting perspective, because we anticipate closing the Brazil divestiture in calendar 2023 or early 2024, we are now reporting the results of the Brazil business as discontinued operations for all periods presented in today's earnings announcement. Our commentary today, including comparisons to past period, will focus on SGH excluding Brazil, which we will refer to as our continuing operations. Ken will provide more detail. As we enter fiscal 2024, we are continuing our transformation. At the time of SDH's IPO in May 2017, Memory Solutions represented 100% of our revenue. Today, we have significantly expanded beyond memory. Of the $1.44 billion in total SDH sales for fiscal 2023, 52% came from IPS, 31% came from memory solutions, and 17% from LED solutions. In addition, services revenue is now a much larger portion of our total revenue. It has grown from $148 million, or 11% of overall sales in fiscal year 22, to $248 million, or 17% of SDH sales, inclusive of Stratus services and FY23. Gross profit margins have also improved as we prioritize growing customer engagements where we provide differentiated solutions. Non-GAAP gross margins increased from 29.2% in FY22 to 31.7% in FY23, a record for SGH. As part of our strategy to provide high performance, high availability enterprise solutions, We are aligning each of our three businesses to best serve our customers. For IPS, we design, build, deploy, and manage high-performance, high-availability computing solutions that span the edge, core, and cloud. We continue to build our capabilities internally and through partnerships to meet our customers' advanced computing needs. For our memory solutions business, We provide customers with high-performance, high-reliability memory solutions for specialty markets such as telecom, datacom, storage, data center, industrial, and other applications. We are making investments in technologies such as Compute Express Link, or CXL, and high bandwidth memory, or HBM, to capture opportunities in the most advanced memory applications. For LED solutions, we are focused on delivering high performance, high reliability LEDs to our enterprise customers, leveraging our commitment to innovation, research and development, and our strong intellectual property portfolio. Now let me turn to our results for the fourth quarter. Sales totaled $317 million, excluding Brazil. Non-GAAP gross margin was 31.7%, up 460 basis points from the year-ago quarter, and non-GAAP diluted earnings per share totaled $0.35. We generated approximately $38 million in cash flow from operations in the quarter and exited Q4 with a strong balance sheet, including cash and cash equivalents and short-term investments of $391 million. Now let me review each of our business lines. Starting with IPS, which is made up of our Penguin Solutions and Stratus Technology product lines. We design, build, deploy, and provide managed services for both high performance computing and high reliability fault tolerance solutions on premise, at the edge, and in the cloud. Our business model centers on building customer relationships, where we serve as a trusted advisor, providing solutions for customer specific workloads and IT environments. Our goal is to sell a total infrastructure solution from planning all the way through post-installation managed services. As we have discussed on prior calls, our revenues may fluctuate from quarter to quarter depending on factors such as customer engagements, deployment schedules, product scope, supply chain lead times, and capital budgets. We also can have revenue move between quarters from time to time. For example, we received an IPS order in the first week of fiscal 2024, rather than in the last week of fiscal 2023, as we had previously expected. In the fourth quarter, IPS sales totaled $145 million, which represented 46% of total SGH sales. Our services revenue, the majority of which is generated at IPS, represented 19% of total SGH revenue in the quarter. Our services include point-in-time services, such as design and implementation, as well as longer-term managed services that are typically subject to renewal after an initial term of a year or sometimes longer. Penguin Solutions continues to focus on expanding its customer reach and mix in markets such as ultra-scale, financial services, government, healthcare, education, research, and oil and gas. Across each of these verticals, We're seeing interest in next-generation AI platforms, and we believe Penguin is positioned to provide these solutions given our extensive experience in HPC, partnering with some of the leading companies in AI. As an example of our strong partnerships, last month, Penguin Solutions was named a channel partner by NVIDIA under the NVIDIA DGX Ready Managed Services program. Through this program, Penguin Solutions will be able to help customers deploy and manage advanced supercomputing platforms for large-scale AI deployments. Customers will benefit from the leadership class performance of DGX platforms combined with an innovative, customer-first, service-oriented approach that Penguin Solutions strives to deliver. Moving on to Stratus Technologies, which continues to perform well with new customer wins for the ZTC Edge product, a secure, rugged, and highly automated computing platform that runs business-critical applications quickly, reliably, and efficiently. Additionally, a new generation of Stratus fault-tolerant computing platforms is targeted for launch later this calendar year. Looking ahead, Stratus is well-positioned to leverage its longstanding expertise in advanced, highly reliable edge computing to develop AI solutions at the edge. As I have mentioned on prior calls, our IPS business, specifically with regards to HPC, is lumpy in nature with high customer concentration. While we continue to deeply engage with our existing customers, we are also focused on reducing customer concentration over the next few years. We are prioritizing driving higher quality revenue through a customer-focused products and services approach. We anticipate IPS revenue will be somewhat weighted towards the second half of fiscal year 2024 based on our current visibility, which is affected by factors such as timing of customer deployments, supply chain challenge, and customer capital budgets. Shifting to memory. Our memory solutions group, which operates under the Smart Modular brand, is focused on enterprise specialty memory applications. As a reminder, my comments today are limited to our continuing operations and therefore pertain to specialty memory only, excluding Brazil. In the fourth quarter, specialty memory revenue came in at $105 million, or 33% of total SGH sales, and was relatively flat with the third quarter. While we are starting to see some early signs of price stabilization in the memory markets going into the first quarter of fiscal 2024, Demand for specialty products is lower than expected. Inventories are elevated at a number of our key customers, and lead times are lower, affecting customers' buying patterns and making forecasting difficult. That said, qualifications of new products are progressing, both for our 64-gigabyte DDR4 and our 32-gigabyte DDR5 very low-profile, or VLP, RDIMM products. Our growth strategy remains in place to focus on hyperscalers and data centers, in addition to our current customer base, and more specifically, AI, machine learning, and data analytics applications, where high performance memory is essential. CXL remains a key technology standard for memory expansion and memory pooling, facilitating breakthrough performance for data intensive usage models. One example of how we are leveraging our know-how is Smart's CXL Type 3 memory products, which address the industry's need for more memory per processor core. This approach allows for a more flexible and scalable memory architecture, where memory devices can be added or removed as needed without the need to replace or upgrade the entire system. We are also releasing new specialty products for the data center, including Smart's DC4800 data center SSDs, a family of PCIe Gen 4 data center class drives designed to the Open Compute Project, or OCP, standards. This design expands the base of potential customers and helps drive a greater level of standardization for data center and even classic enterprise storage applications. Despite continued headwinds in memory overall, we believe our specialty memory business performed well financially, achieving 14% operating margins in the fourth quarter. 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 fourth quarter of fiscal 2023, LED Solutions totaled 66 million, or 21% of overall SGH sales, and we're up 3% sequentially. We continue to see customer design activity improving heading into fiscal year 24. In particular, the product launch of our XLAMP XP-G4 is another innovation in a long line of high performance LEDs from Cree. The XP-G4 provides improved performance for a wide range of both indoor and outdoor directional lighting applications, requiring precise light control, long-term reliability, and exceptional color over angle performance. With Creed's LED's commitment to customer-focused innovation, we are confident that our technology leadership, strong IP, and capital light outsourced manufacturing model, combined with a disciplined expense management, has positioned the business to succeed as the market recovers. Before I hand it over to Ken, I'd like to call your attention to our third annual ESG report which was published last week and is available now on our website. I am proud of the team's progress towards achieving our goal of net zero carbon emissions by 2030. And now Ken will provide a more detailed review of our fourth quarter and full year fiscal 2023 financial performance and our guidance for next quarter. Ken?