Penguin Solutions, Inc.

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. At this time, all lines are in a listen-only mode and will be 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 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 but not limited to statements about the company's growth trajectory and 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 accompanying slide presentation. And with that, let me turn the call over to Mark Adams. Mark?

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, 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. Let me summarize our operational results for the quarter. Revenues totaled $285 million, in line with the midpoint of our guidance range. 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 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 totaled $466 million. 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. 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. 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 CSPs, with projects ranging from proof of concepts to large scale deployments. 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 in 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. 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. 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. 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. 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 managers 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 Dell, Pete served as president and CEO of Egenera, a leading provider of wholesale cloud computing solutions, underscoring his broad experience and expertise. I'm confident that Pete is the right leader to propel the team forward and make the most of the opportunities that are ahead. 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. 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 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 and 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. 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 a unique patented technology that keeps its footprint within a single-width PCIe 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 ZDIMM memory models with an ultra-high reliability for demanding compute applications, and our DDR5 SODIMM products continue to gain market momentum, bolstered by our exclusive iTemp and Zephyr testing offerings, which significantly enhance reliability. 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 our 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 Cree 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. 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 in Cree's LED competitiveness and prospects for future success. 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?