Penguin Solutions Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 9, 2024

There are 9 speakers on the call.

Operator

Good afternoon. Thank you for attending today's SGH Third Quarter Final 20 24 Earnings Call. My name is Jaylen, and I'll be your moderator for today. 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 turn the conference over to our host, Suzanne Schmidt with Investor Relations.

Operator

Suzanne, you may proceed.

Speaker 1

Thank you, operator. Good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss SGH's 3rd quarter fiscal 2024 results. On the call today are Mark Adams, Chief Executive Officer Jack Pacheco, Chief Operating Officer and Nate Olmstead, 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.

Speaker 1

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.

Speaker 1

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, CEO. Mark?

Speaker 2

Thanks, Suzanne. Welcome and thank you all for joining our fiscal 2024 Q3 earnings call. We hope you had a nice July 4th holiday. I am very pleased with the execution by our team in the 3rd quarter. Our financial results are clear evidence of our transformation into a high performance, high availability enterprise solutions provider.

Speaker 2

We continue to make progress in areas such as growing new customer engagements, advancing our software and service offerings and driving operational efficiency. We believe we are uniquely positioned to enable companies across the technology ecosystem from hyperscalers to corporate enterprises to emerging cloud service providers in their AI design, build, deploy and management. We have 25 years of deep experience in high performance computing or HPC, which is the very foundation upon which AI technologies like advanced multiprocessor cluster computing were built. With our heritage in the deployment of complex HPC infrastructure solutions, we have the expertise and know how to address the complexity that businesses face when implementing AI at scale. Let me turn to our Q3 financial results.

Speaker 2

All key metrics came in at or above the midpoint of our guide. Revenues totaled $300, 600, 000 in line with the midpoint of our guidance range. Non GAAP gross margin of 32.3% was slightly above the midpoint of our guide and we achieved non GAAP EPS of $0.37 which was well above the midpoint of our guidance range. We exited Q3 with a strong balance sheet with cash and short term investments of $468, 000, 000 Looking ahead, are excited about the opportunities for us to serve new and existing customers in HPC and AI. I have mentioned our deep experience, which differentiates us as a partner that can rapidly and reliably deploy advanced systems.

Speaker 2

We have a proven record of accelerating time to deployment, maximizing the potential of a given system, creating unique software to manage elements of a customer's infrastructure environment and even expanding systems already in production with almost no downtime. Many of our customers work with us from the design phase of their AI journey, but we have also seen an increase in interest from customers who have started a deployment and face challenges that they then turn to us to solve. From initial data center design to systems level architecture development to the integration of complex technologies such as compute, memory, storage, networking and cooling to post implementation management leveraging our software and service portfolio, we serve the role of a trusted partner in the development and deployment of these complex AI solutions. We'll share more detail in our positioning and growth strategy at NetSuite's Analyst Day in New York City. Before I review our individual business lines performance, I wanted to take the opportunity to welcome Nate Olmstead as our CFO.

Speaker 2

Nate was most recently CFO of Logitech, a multibillion dollar international technology company. While at Logitech, he managed a business that scaled from $2, 800, 000, 000 to $4, 500, 000, 000 in revenue and from approximately $6, 000, 000, 000 to $10, 000, 000, 000 in market cap. Prior to joining Logitech, Nate spent 16 years at HP and HPE in various executive roles where he had responsibilities spanning from business planning to investor relations to operational finance. Now on to our individual business line performance. Starting with our Intelligent Platform Solutions or IPS business featuring our Penguin branded solutions.

Speaker 2

Our Penguin team has decades of experience with a wide range of HCC infrastructure solutions, enabling us to address the complex needs of our customers. We are sometimes compared to high revenue, low margin, hardware oriented businesses, a baseline that doesn't align with our solutions oriented engagement model. Today, we design, build, deploy and manage a complex portfolio of hardware, software and managed services for HPC solutions and AI applications on premise, at the edge and in the cloud. In Q3, 48 percent of our overall revenues come from IPS, which totaled $145, 000, 000 in the quarter and was the largest component of our overall revenue. We are seeing increased activity in our Penguin business with some key customer wins, including a multimillion dollar non hardware win, meaning that Penguin was brought in to provide software and managed services only.

Speaker 2

We've also secured follow on orders from customers across the hyperscaler, defense and education verticals. In addition, we've achieved our biggest wins to date with our ZTC Edge and ZTC Endurance fault tolerant computing platform, both of which address the critical need for reliable solutions at the edge. Last month, we announced our Origin AI solution, Penguin's AI factory offering, which prioritizes our decades of knowledge and learnings to simplify and accelerate the deployment and management of GPUs at scale. This platform integrates Penguin's intelligent cluster management software and expertise with proven AI architectures, enabling enterprises to harness the power of AI without the time and resource investment typically required to build and manage AI infrastructure from scratch. You will hear more about this at our Analyst Day next week and hear from some of the new executives we brought on board to bolster our go to market and sales development capabilities.

Speaker 2

This quarter's achievement highlight the pivotal role we can play in advancing AI and HPC. We believe we are in the early stages of this transformative market opportunity. Our unique experience is vital to enable customers who are looking for reliable and scalable AI solutions. Turning to our memory business, which operates under the Smart Modular brand. Working closely with our customers in the areas of HPC and AI, supercomputing, network and telecom, storage and data centers, we develop and manufacture high performance, high reliability memory solutions that leverage our decades of expertise in advanced memory technology.

Speaker 2

For Q3, revenue came in at $92, 000, 000 or 30% of total SGA sales. Sales improved from Q2 levels as we expected and we believe we'll continue to improve from here. Margins were lower than we expected due to mix and higher priced memory purchases. During the quarter, we achieved a number of important milestones in product development and customer engagement in our advanced memory solutions. In the area of new product development, we saw strong design in and customer sampling activity for our new 8 BIM DDR5 CXL add in card, which enables compute performance by increasing memory capacity and speed.

Speaker 2

And we achieved an important milestone with our 4 DIMM add in card, which was the 1st add in card to pass the Spanish test set forth by the CXL Consortium Industry Group. Importantly, this ensures compatibility and reliability for customers using CXL technology. In Q3, we also received our first ATEM CXL add in card production sale to an AI compute vendor. In addition, we introduced our E3.s nonvolatile CXL design, combining DRAM and NAND devices. This new design operates like a DRAM module, but retains data even when powered off, thanks to our custom backup and restore architecture that leverages NAND non volatile capabilities.

Speaker 2

This is especially important for AI and high performance computing applications as it ensures that critical data is not lost, making these systems more reliable and efficient. Our accomplishments this past quarter not only reinforce our leadership in advanced memory solutions, but also underscores the indispensable role of memory in HPC and AI. Efficient high capacity memory is essential to unlocking the power of GPUs based processors in AI and to manage the vast amount of data and complex computations required by AI applications. Smart's heritage in the design, manufacture and deployment for high performance, high availability memory solutions positions us well to enhance the overall performance of our customers' AI systems. Finally, our Cree LED business, which produces application optimized LEDs for products and markets such as specialty lighting, video screens, gaming displays, outdoor horticulture and architectural lighting.

Speaker 2

In the 3rd fiscal quarter of 2024, LED Solutions revenue grew by 6% sequentially to a total of $64, 000, 000 or 21% of total SGH sales. Backlog and channel visibility are improving and the team is continuing to innovate for its customers while keeping operating expenses in line with current business scale. During the quarter, the team also continued to focus on developing advanced lighting solutions. Cree LED announced its new Xlamp XFL LED family designed for peak performance in flashlights and portable lighting. Each LED in the XFL family is tailored for specific lumen targets, accelerating the design process for manufacturers and enabling quicker market delivery of high value products.

Speaker 2

This innovation underscores our commitment to advanced lighting technology and supporting our customer success. Importantly, Creo AD's advanced R and D capabilities and robust IP portfolio generated through decades of technology leadership set the stage for sustained innovation and future growth. Ongoing IP assertion activities across multiple LED applications support and facilitate these growth opportunities. The broader market environment in LED continues to suggest that consolidation is likely in the sector at some point. Cree's outsourced manufacturing capital light model positions us very well competitively as we return to profitability with strong gross margin performance visavisour competitors.

Speaker 2

In light of the fact that Nate just joined us as CFO 2 weeks ago, I've asked Jack to review our Q3 financial performance and our guidance for next quarter. Jack?

Speaker 3

Thanks, Mark. I will focus my remarks on our non GAAP results, which are reconciled to GAAP in our earnings release tables and in the investor materials on our website. Now let me turn to our Q3 results. Total SG and A revenues were $301, 000, 000 at the midpoint of our guidance and non GAAP gross margin came in at 32.3%, also at the midpoint of our guidance. Non GAAP diluted earnings per share was $0.37 for the 3rd quarter, which was above the midpoint of our guidance, helped by our continued control of expenses.

Speaker 3

In the 3rd quarter, our overall services revenue totaled $67, 000, 000 or 22 percent of revenue, up from $49, 000, 000 or 17% of revenue in the prior quarter. Product revenues were $233, 000, 000 in the Q3. 3rd quarter revenue by business unit was as follows: IPS $145, 000, 000 Memory $92, 000, 000 and LED 64, 000, 000 dollars This translates into a sales mix of 48 percent IPS, 30% memory and 21% LED. Non GAAP gross margins for SGH in Q3 was 32.3%, up from 31.6% in the year ago quarter, driven primarily by lower memory volumes that were offset by improved mix within IPS. Gross margin was up sequentially from 31.5% in the prior quarter, primarily due to a higher mix of service revenue.

Speaker 3

Non GAAP operating expenses for the Q3 were $63, 600, 000 relatively flat compared to $63, 200, 000 in the 2nd quarter. Operating expenses were also down from $66, 700, 000 in the year ago quarter, primarily due to lower variable expenses and cost reduction actions. Non GAAP diluted earnings per share for the Q3 of 2024 was $0.37 per share compared to $0.27 per share last quarter and $0.57 per share in the year ago quarter. Adjusted EBITDA for the Q3 of 2024 was $39, 000, 000 or 13% of sales compared to $33, 000, 000 or 12 percent of sales in the last quarter and $49, 000, 000 or 14% of sales in the year ago quarter. Turning to balance sheet highlights.

Speaker 3

For working capital, our net accounts receivable totaled $212, 000, 000 compared to $170, 000, 000 last quarter. Day sales outstanding came in at 41.8 days, slightly up from 41.1 days in the prior quarter. Inventory totaled $177, 000, 000 at the end of the 3rd quarter, higher than $173, 000, 000 at the end of the prior quarter. Inventory turns were 8.4x in the 3rd quarter, up from 6.8x in the prior quarter, primarily due to timing of receipts and shipments. Consistent with past practice, net accounts receivables, days outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $461, 000, 000 $372, 000, 000 respectively for the Q3.

Speaker 3

As a reminder, the difference between gross and net revenue is related to our logistics services, which is accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as revenue. Cash and cash equivalents and short term investments totaled $468, 000, 000 at the end of the 3rd quarter, up $2, 000, 000 from $466, 000, 000 at the end of the prior quarter. 3rd quarter cash flows generated from operating activities totaled $80, 000, 000 dollars compared to $22, 000, 000 used from operating activities in the prior quarter. We didn't have any share repurchases in our Q3 from our share buyback program. Since our initial share repurchase authorization in April 2022, we've used a total of 72, 300, 000 to repurchase 4, 100, 000 shares through the end of the Q3.

Speaker 3

As of the end of our Q3, we have $77, 700, 000 available for future repurchases under our authorizations. To remind everyone, our capital allocation strategy remains the same. First and foremost, we will continue to invest in our business as we see significant opportunities for further organic growth. 2nd, we will continue to evaluate acquisition opportunities in a disciplined manner. 3rd, the incremental share repurchase authorization provides us flexibility to return capital to our shareholders in an opportunistic and price sensitive manner.

Speaker 3

And finally, we would look to retire debt as appropriate to keep our gross leverage at reasonable levels. We retired $75, 000, 000 of our term loan in the 3rd quarter, bringing down the principal amount by $112, 000, 000 since the Q1 to $425, 000, 000 For those of you tracking capital expenditures and depreciation, capital expenditures were $3, 800, 000 in the 3rd quarter and depreciation was $5, 600, 000 Turning to our 4th fiscal quarter of 2024 guidance. We expect that revenues for the Q4 of 2024 will be approximately $325, 000, 000 at the midpoint, plus or minus $25, 000, 000 Our guidance for the Q4 reflects the following. For IPS, we expect revenues to be up in the low double digits sequentially at the midpoint due to timing of deployments. For memory, we expect revenues to be up slightly in the low single digit sequentially at the midpoint.

Speaker 3

And for LED, we currently expect revenues to be up slightly in the low single digit range sequentially at the midpoint. Our GAAP gross margin for the 4th quarter is expected to be approximately 29.5% at the midpoint, plus or minus 1.5%. Non GAAP gross margin for the 4th quarter is expected to be approximately 31.5% at the midpoint, plus or minus 1.5%. Our non GAAP operating expenses for the 4th quarter are expected to be approximately $66, 000, 000 plus or minus $2, 000, 000 slightly up from the prior quarter, primarily due to variable expenses associated with our higher expected revenue. GAAP diluted earnings per share

Speaker 4

for the Q4 is expected to

Speaker 3

be approximately $0.03 plus or minus $0.15 On a non GAAP basis, excluding share based compensation expense, intangible asset amortization expense, debt discounts and other adjustments, we expect diluted earnings per share will be approximately $0.40 plus or minus $0.15 Our GAAP diluted share count for the 4th quarter, we expect to be approximately 55, 700, 000 shares based on our current stock price, while non GAAP diluted share count is expected to be approximately 54, 700, 000 shares. Cash capital expenditures for the Q4 are expected to be in the range of $4, 000, 000 to $6, 000, 000 As a reminder, we are utilizing a long term projected non GAAP tax rate of 28%, which reflects currently available information, including the sale of Smart Brazil, which was completed in the Q1, as well as other factors and assumptions. We expect to use this normalized non GAAP tax rate through 2024. The long term non GAAP tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global tax environment, significant changes in our geographic earnings mix or changes to our strategy or business operations. Our forecast for the Q4 of 2024 is based on the current environment, which contemplates the global macroeconomic headwinds and ongoing supply chain constraints, especially as it relates to our IPS business.

Speaker 3

This includes extended lead times for certain components that are incorporated into our overall solutions, impacting how quickly we can rent existing and new customer projects. We continue to manage our operations in a prudent manner as we navigate a challenging environment while also investing in our long term growth. Please refer to the non GAAP financial information section and the reconciliation of GAAP to non GAAP measures tables in our earnings release for further details. Let me turn it over to Mark for a few remarks prior to Q and A.

Speaker 2

Thanks, Jack. Before turning to your questions, I'd like to reiterate how proud I am of our team and their accomplishments to date. We continue to advance our offerings and drive operational efficiency in support of our customers and their AI deployments. Our deep expertise in HPC and specialty memory honed over 25 years equips us to address the complexity of AI implementation across various environments. We are excited about the future opportunities in HCC and AI and we look forward to sharing more detail of our growth strategy at the upcoming Analyst Day.

Speaker 2

As we continue to innovate and strengthen our position in AI and HCC, we are committed to delivering exceptional value to our customers and stakeholders. Operator, we are now ready for Q and A.

Operator

Our first question is from Kevin Cassidy with the company, Rosenblatt. Kevin, your line is now open.

Speaker 5

Thank you and congratulations on the good results. And Mark, with all the you've made changes in management and also the HPC and AI market is changing rapidly. How is IPS' go to market strategy changing?

Speaker 4

Kevin, thanks for the question. It's a really, really good question for where we sit today. If you look at back at our evolution over the last 3 plus years from a memory module company to a infrastructure solutions, high reliability, high performance company. The nature of what we do is evolving and transforming. And as we do that, it's the talent and the capabilities that we need are evolving as well.

Speaker 4

And so, if you think about last quarter when we named Pete Menka as the President of IPS Penguin. And of course, we just named a new CFO in Nate. These are continued growth opportunities for us as a company to mature and expand our capabilities from a scale and a process standpoint. Specific to go to market, we brought on new sales leadership over the last 6 to 12 months. Recently, we just hired Dave Osborne, who's SVP of Partnership and Alliances after spending over 16 years at SAP in an executive role there and helping us build out partnerships because historically we've been mostly a B2B direct sales company and that's still a very key part of our strategy.

Speaker 4

But working with industry partners to expand our reach and expand our capabilities and development opportunities will be critical for us as we continue to grow. So, a lot changing as we're looking for new talent to come in and blend with our existing team to build out. And I actually think it's a really big responsibility for the CEO to review this and make sure we're always improving, whether it's internally through development capabilities or bringing the right talent in and a new leader as a CFO or a new head of the business in Pete Manca and Penguin. We always have to be getting better and make sure we don't assume that we're going to get there in a static way. We have to be reinventing ourselves all the time.

Speaker 5

Thanks for all that. I guess another part of my question is the maybe you have I think, somewhere a little over 10 customers for your Penguin products. How can we get this to be more scalable to be able to handle, say, 50 customers? It seems that AI is going to be going out to corporate and other parts of the industry?

Speaker 4

Well, I'll tell you, I am Kevin, I'm pretty pleased from where we were just 6 to 9 months ago relative to that expansion. And first of all, I think we've done a better job getting the right people in place to go out and build these relationships and target these the right engagements. Secondly, when I mentioned partnerships, there are definitely customers who are working with other companies who don't quite have the skill set and software and managed services that Penguin has. And so, when we talked about the customer base just back in the fall, we're already adding new customers and I would say at a pace that I'm very comfortable with as it relates to the business expansion. Part of it for us is going to be how do we scale the resources in the company to take on the new business opportunities over the next 2 to 3 years.

Speaker 4

And we mentioned that as kind of a horizon for expanding our customer base and trying to start to tease out some of the lumpiness in the business. And I'm really pleased with where we are today. I think you heard in my script, we in the quarter Q3, we had a customer that was a software and services only, meaning we didn't sell the hardware. We actually got called in an environment where the customer couldn't stand up to the data center infrastructure they bought and they've asked us to come in with our software and our managed services to help them get their data center up and running, which is a great testament to our value add, not just on the systems level that people know Penman for, but more on the software and services.

Speaker 5

Okay, great. Thank

Speaker 4

you.

Operator

Our next question comes from Thomas O'Malley with the company Barclays. Thomas, your line is now open.

Speaker 6

Hi. Yes, this is Scott on for Tom. I noticed that gross margins are guided to take a step back next quarter, but the sequential growth will be driven by IPS and as you guys are talking about more software and service revenue coming on there. So can you

Speaker 3

just give us an idea of the

Speaker 6

puts and takes of the margin pressure you're seeing?

Speaker 3

Yes. I mean, if we ship a little more hardware in a quarter than software services, it will drive the gross margins down a little bit, in the business. So more of a mix issue in the quarter than anything else.

Speaker 4

That will be the case.

Speaker 3

Got you. And that Yes, sorry.

Speaker 4

I was going to say that will be the case as we grow. When we're taking on new engagements, the software and services kind of accumulates over time. The hardware tends to be upfront in our deployment. And so margins can move around a little bit, but we try to give the Street enough advanced notice on the guide to get you there.

Speaker 6

Great. Thank you. And then on the memory side, you guys guided to slight growth there. Obviously, elsewhere in the memory industry, you're seeing improving fundamentals as well as the CXL product that you guys are layering on later this year. Can you give us an idea of, I guess, what you're seeing near term and then further out?

Speaker 4

Yes. As we've always said that our enterprise memory solutions business is less volatile than what I would say I describe as the high volume consumer business in memory. And so, the volatility works both in our favor, but we also don't see a snapback as much because we didn't really decline as much. And so if you think about price reductions and revenue kind of in the 50%, 55% in the broader semi perspective, We didn't see that severe downturn. We saw some and some of it was units, some of it was pricing.

Speaker 4

And so on the recovery cycle, ours will be a little bit more muted than the large scale memory folks when they see the pricing switch back. We believe it will switch back. We're starting to see demand forecasts for Q4 and beyond look pretty strong going in the back half of the year. You mentioned CXL, we're excited to get our first production order in the quarter in Q3. It's an early validation of our leadership position.

Speaker 4

So obviously, we'd love the memory business to be further ahead in the recovery cycle, but we know it's on track and the customer design wins are fairly healthy. So I think it's just a matter of the nature of our enterprise business is a little bit less volatile on the downturn and the recovery cycle pace.

Speaker 6

Great. Thank you.

Operator

Thomas, our next question comes from Brian Chin with the company Stifel. Brian, your line is now open.

Speaker 7

Hi, thanks. This is Dennis on for Brian. I just want to ask about these largest wins for ZTC Edge Endurance. Could you speak more about which verticals are adopting these systems and what the timeframe for implementation for these is?

Speaker 4

Sure. We are seeing success in oil and gas and financial institutions are the primary markets, although we've got a broader set of markets we attract to. These type of environments are really where the availability and lack of need for on-site support are critical. And if you think about financial environments, trading desks or even point of sale ATM type environments, as well as in the oil and gas energy sector, I think of things like oil rigs and just remote locations. This type of reliability is a necessity to help people compete.

Speaker 4

And again, it really is it's kind of proven to be our hallmark of offering these 5 nines and 7 nines type availability where the system will go down 4 minutes a year. It's really it's a great platform as we think about the evolution of the edge and the evolution towards AI inferencing in the future. It's a nascent market today, but the platform we have will be a great benefit for customers who are looking to build those type of platforms in the future.

Speaker 7

Great. And then on a similar note, I think you've previously also spoken about some new household names. I don't think you said who it was, but they were taking an interest in HPC and AI systems. Can you say more about how progress is going with those customers and maybe kind of what industries they're from?

Speaker 4

Yes. Actually, we're seeing strong interest from, I would say, with the traditional enterprise and that could be large scale software data center type companies, that could be financial institutions, it definitely is oil and gas and education as well. A number of really good engagements. And I think you'll see us continue to talk to that at our Analyst Day next week. As I mentioned earlier, when Kevin asked the question about our go to market, we're very pleased with the progress we're making.

Speaker 4

As I said, in terms of the wins we've had, we'll speak to some of those next week. But I would just say across the broader enterprise space, beyond hyperscalers where the initial investment was going in this industry. Enterprise is now kind of in the mix. And a subset we talked about on the last call was Tier 2 cloud service providers are almost a vehicle for traditional enterprises. So they're working together and needing the deployment expertise and help and the design expertise.

Speaker 4

And that's where we come in as part of a solution provider. So, I think the verticals again are financial and oil and gas, education, as I mentioned. And I think that you'll see more of that in the coming quarters as we matriculate some of these opportunities we've been engaged in.

Speaker 7

Great. Thank you for the detailed answer. That's it for me.

Speaker 4

Thank you.

Operator

Thank you, Brian. Our next question is from Nick Doyle with the company Needham. Nick, your line is now open.

Speaker 8

Hey, guys, and welcome, Nate. What was Stratus' contribution in the quarter and has it been trending in that $40, 000, 000 to $45, 000, 000 range? Just wondering if these fall tolerant wins that you're talking about, is that going to be associated with Stratus? And I guess, is that a hardware or software and services type product?

Speaker 4

Yes, let me just say, we're not going to break out kind of brands like that in terms of the business on a go forward basis. I can tell you that any product we sell at the edge and back in the data center on prem environment, We sell software and services along with our hardware platform and that's a business that we're going to be disciplined in how we bid out our capabilities. We do not we want to be in just a hardware only game. The Edge platform that you're referring to that we got from the Stratus acquisition continues to perform very well. Gross margins are accretive to the overall gross margin of the company.

Speaker 4

And I think we're really excited about the evolution of AI at the edge. Now I don't think that's a market that's here in 2024, but I think the opportunity for developing solutions and platforms that provide high availability, high performance compute capability at the edge, think we're really in good position as that market evolves over the next 2 to 3 years.

Speaker 8

Thanks. And then normally specialty memory is seasonally down in the fiscal Q4. Why are you able to grow low single digits? Is that just the memory up cycle and inventory getting in a better place and some of the other demand drivers you've discussed to offset? And then at the same time, are the memory gross margins able to expand with new product introductions like CXL and Zephyr?

Speaker 8

Thanks.

Speaker 4

Yes. Thanks for the question. Yes, I think you kind of nailed it on the front end, which is the severity of the memory cycle in terms of dollars, it was probably the worst memory cycle on record and even bright price declines were significant. If you use a data point of publicly available information, Micron's revenue fell from over $8, 000, 000, 000 down below $4, 000, 000, 000 in just 2 to 3 quarters. And so, and again, that was just a proxy for everybody else's challenges as well.

Speaker 4

And if you look at what's going on in the business today, memory pricing has started to recover. And for us, our largest customers inventory has been a little bit of a headwind over the last couple of quarters, but we're starting to see that alleviate. And despite the seasonality that you referenced in terms of Q4, we're coming from such a low base that we expect the growth that Jack acknowledged in our Q4. So it's really just a market recovery story and inventory is starting to normalize at some of our largest customers heading into Q4.

Operator

Thank you, Nick. At this time, there are no other questions registered in queue. So I'd like to pass the conference back over to our managing team for closing remarks.

Speaker 4

Thank you. Before closing, I wanted to remind everyone that we will be holding our Investor Day on July 16th in New York City at the NASDAQ Market Site. We hope many of you will be able to join us in person. And for those not able to be in person, we look forward to joining having you join via our webcast. Please contact Suzanne for more information on how to register.

Speaker 4

Thank you all again for joining today.

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Key Takeaways

  • SGH reported Q3 fiscal 2024 revenues of $300.6 million with a non-GAAP gross margin of 32.3% and non-GAAP EPS of $0.37, all at or above the midpoint of guidance, ending the quarter with $468 million in cash and short-term investments.
  • The IPS segment generated 48% of revenues ($145 million) and secured multimillion-dollar software and managed services-only wins, launched the Origin AI platform, and rolled out ZTC Edge and Endurance fault-tolerant offerings for critical edge deployments.
  • Under the Smart Modular memory business, Q3 revenue rose to $92 million (30% of sales) with key product milestones including sampling of an 8-DIMM DDR5 CXL add-in card, a 4-DIMM CXL module passing consortium tests, the first production sale of ATEM CXL cards, and introduction of an E3.S nonvolatile CXL design.
  • Cree LED solutions revenue increased 6% sequentially to $64 million (21% of sales) as backlog and channel visibility improved, highlighted by the launch of the Xlamp XFL LED family for portable lighting and ongoing R&D and IP initiatives to drive future growth.
  • For Q4, SGH anticipates revenue of $325 million±$25 million, non-GAAP gross margin of ~31.5%, and non-GAAP EPS of ~$0.40±$0.15, while prioritizing investments in organic growth, disciplined M&A, and opportunistic share repurchases, supported by new CFO Nate Olmstead and an upcoming Analyst Day on its HPC and AI strategy.
A.I. generated. May contain errors.
Earnings Conference Call
Penguin Solutions Q3 2024
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