Good afternoon. Thank you for attending today's SGH Third Quarter Final 2024 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. 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 third 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. 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, CEO. Mark?

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 third quarter. Our financial results are clear evidence of our transformation into a high performance, high availability enterprise solutions provider. 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 third quarter financial results. All key metrics came in at or above the midpoint of our guide. Revenues totaled $300.6 million, 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 million. Looking ahead, we 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. We have a proven record of accelerating time to deployment, maximizing the…

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 third quarter results. Total SGH revenues were $301 million 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 third quarter, which was above the midpoint of our guidance, helped by our continued control of expenses. In the third quarter, our overall services revenue totaled $67 million or 22% of revenue, up from $49 million or 17% of revenue in the prior quarter. Product revenues were $233 million in the third quarter. Third quarter revenue by business unit was as follows: IPS, $145 million; Memory, $92 million; and LED, $64 million. This translates into a sales mix of 48% 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. Non-GAAP operating expenses for the third quarter were $63.6 million relatively flat compared to $63.2 million in the second quarter. Operating expenses were also down from $66.7 million in the year ago quarter, primarily due to lower variable expenses and cost reduction actions. Non-GAAP diluted earnings per share for the third quarter 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 third quarter of 2024 was $39 million or 13% of…

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 HPC and AI and we look forward to sharing more detail of our growth strategy at the upcoming Analyst Day. As we continue to innovate and strengthen our position in AI and HPC, we are committed to delivering exceptional value to our customers and stakeholders. Operator, we are now ready for Q&A.

We will now begin our question-and-answer session. [Operator Instructions] Our first question is from Kevin Cassidy with the company, Rosenblatt. Kevin, your line is now open.

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?

Kevin, thanks for the question. It's really, really a good question for where we sit today. If you look back at our evolution over the last 3-plus years, from a memory module company to an 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. And so, if you think about last quarter, when we named Pete Manca 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 six months 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. 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 in 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.

I guess, another part of my question is the -- maybe you have, I think, somewhere -- 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.

Well, I'll tell you, I'm -- Kevin, I'm pretty pleased from where we were just six months to nine 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 the right engagement. Secondly, when I mentioned partnerships, there are definitely customers who are working with other companies who don't quite have the skillset in 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 two to three years. 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, in an environment where the customer couldn't stand up 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 Penguin for, but more on the software and services.

Okay. Great. Thank you.

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

Hi. This is Scott on for Tom. I noticed the 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 just give us an idea of the puts and takes of the margin pressure you're seeing?

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

That will be the case -- sorry, 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 advance notice on the guide to get you there.

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?

Yeah. As we've always said that our enterprise Memory Solutions business is kind of less volatile than what I would say, I describe as the -- high-volume consumer business in memory. And so there -- 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. 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. 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.

Great. Thank you.

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

Hi. This is Dennis on for Brian. I just wanted to ask about these largest wins for ztC Edge and Endurance. Could you speak more about which verticals are adopting these systems and what the time frame for implementation for these is?

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, you think of things like oil rigs and just remote locations. This type of reliability is a necessity to help people compete. And again, it really -- it's kind of proven to be our hallmark of offering these 5 9s and 7 9s (ph) type availability where the system will go down for 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.

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?

Yeah. 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, 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 -- they're almost a vehicle for traditional enterprises. So they're working together and needing the deployment expertise and help in the design expertise, 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.

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

Thank you.

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

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

Yeah. 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 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. 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, I think we're really in good position as that market evolves over the next two to three years.

Thanks. And then normally, Specialty Memory is seasonally down in the fiscal fourth quarter, 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 offset, and then at the same time -- are the memory gross margins able to expand with new product introductions like CXL and Zephyr? Thanks.

Yeah. 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 billion, down below $4 billion in just two to three quarters. And so -- and again, that was just a proxy for everybody else's challenges as well. And if you look at what's going on in the business today, memory pricing has started to recover. And for us, our largest customer's 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 the inventory is starting to normalize at some of our largest customers heading into Q4.

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.

Thank you. Before closing, I wanted to remind everyone that we will be holding our Investor Day on July 16 in New York City at the NASDAQ MarketSite. 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. Thank you all again for joining today.

That will conclude today's conference call. Thank you for your participation, and enjoy the rest of your day.