Good afternoon. Thank you for attending the SMART Global Holdings First Quarter Fiscal 2024 Earnings Call. My name is Victoria, and I’ll be your moderator 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 pass the conference over to your host, Suzanne Schmidt. 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 first 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 the accompanying slide presentation. As a reminder, at the end of calendar 2023, SGH completed the sale of an 81% interest in its SMART Brazil operations. Accordingly, SMART Brazil operations are classified as discontinued operations in the company’s financial statements for all periods presented and the following discussion of financial results relates to continuing operations, which excludes SMART Brazil unless otherwise noted. And with that, let me turn the call over to Mark Adams, CEO. Mark?

Thank you, Suzanne, and thanks to all of you for joining us today. I hope you all had a nice holiday season. We have made tremendous progress in our journey towards becoming a high performance, high availability enterprise solutions company. In our first quarter, as part of our continued transformation, we completed the majority divestiture of our Brazil based consumer memory module business. We now have a much higher quality revenue mix than when we started this journey more than three years ago, as demonstrated by our record non-GAAP gross margins in the first quarter. And strategically, we believe that we are uniquely positioned to capitalize on the growing demand for high performance, high availability solutions that enterprise customers need in order to deploy AI on-premise, at the Edge and in the Cloud. In our first quarter of 2024, we delivered strong operating results. Revenues totaled $274 million, in line with the midpoint of our guidance range and we achieved record non-GAAP gross margins for the first quarter of 33.3%, above the high end of our guidance range. Non-GAAP earnings per share was $0.24, which is at the higher end of our guidance range. These achievements were driven by a greater mix of services revenue, which represented approximately 25% of overall SGH revenues, another record, and a demonstration of the value we provide our customers. We generated approximately $60 million in cash flow from operations in the quarter and exited Q1 with a strong balance sheet. Cash and short-term investments totaled a record $553 million. 2023 has been called the iPhone moment and AI. The year was defined by extraordinary advancements in AI, with hyperscalers and other early adopters investing heavily in this new computing paradigm. As we head into 2024, signs of market adoption of AI are expanding to…

Thanks, Mark. We completed the sale of 81% of our SMART Brazil operations at the end of our fiscal first quarter, receiving gross proceeds inclusive of working capital adjustments and less taxes paid of approximately $140 million. As a reminder, Brazil was classified as discontinued operations from the end of our fiscal 2023 and for all periods presented. Beginning in the second quarter of fiscal 2024, SMART Brazil will no longer be consolidated with the results of SGH. Given the completion of the majority sale of Brazil, I will focus my remarks on our non-GAAP results for continuing operations, which are reconciled to GAAP in our earnings release tables and in the investor materials on our website. Now let me turn to our first quarter results from our continuing operations. Total SGH revenues were $274 million and non-GAAP gross margin came in at a record 33.3%, above the high end of our guidance, primarily driven by improved product and service revenue mix. Non-GAAP diluted earnings per share was $0.24 for the first quarter, which was at the higher end of our guidance range. In the first quarter, our overall services revenue totaled $68 million, down from $75 million in the year ago quarter. Product revenues were $206 million. First quarter revenue by business unit was as follows. IPS, $119 million; memory, $86 million; and LED at $70 million. This translates into a sales mix of approximately 43% IPS, 31% memory and 25% LED. Non-GAAP gross margin for SGH in Q1 was 33.3%, up from 31.3% in the year ago quarter, primarily driven by IPS. Non-GAAP operating expenses for the first quarter were $64.6 million, down from $70 million in the fourth quarter of 2023, primarily due to lower variable expenses and cost reduction actions. Operating expenses were down from $71.4…

Thanks Ken. As CEO of SGH, my confidence in our future is based on our past performance and our solid track record of execution. It is also grounded in the measurable advances we have made on our transformation journey. Consider the following milestones we achieved in just over three years; gross margin expansion from below 20% in fiscal year 2020 to 33.3% in Q1 fiscal 2024, a record; cash on the balance sheet of over $550 million, another record. Diversification away from a memory module business to a provider of high performance, high reliability enterprise solutions, memory has gone from 76% of revenue at the end of fiscal year 2020 to 31.3% in our current quarter. Successful M&A as most recently demonstrated by our acquisition of Stratus in August of 2022. This acquisition both added scale for our services capabilities and also expanded our compute solutions to include future AI at the Edge fault tolerant offerings. Divestiture of our consumer module business in Brazil at a valuation of greater than 1.2 times revenue based on the trailing year’s revenue numbers, which is actually higher than our current revenue multiple for all of SGH, an incredible outcome. And most importantly, we have a clear strategy focused on providing differentiated solutions in the early innings of the AI era, on-premise, in the Cloud and at the Edge. Operator, we are now ready for Q&A.

Of course. [Operator Instructions] Our first question comes from line of Kevin Cassidy with Rosenblatt Securities. Your line is now open.

Thank you. Thanks for taking my question and congratulations on the strong results, especially the gross margin. Very impressive. The IPS, you’re guiding that for up 15% quarter-over-quarter, which is great news. But can you talk a little more about the visibility going into the second half of 2024 and even the mix that you’re expecting to see hardware versus software and services?

Hey, Kevin. Happy new year. Thanks for the question. This is Mark. As we articulated on our last call, we’ve really invested pretty heavily in the go-to-market piece of our business. We actually just brought in a new Head of Sales for Penguin and driving a lot of good customer engagement. We’re pretty optimistic about the funnel we’re building in the business. We haven’t really forecasted beyond a quarter in advance. The conversations are exciting. The models are evolving. What I mean by that is, it’s not just purely buy and sell. There’s colocation opportunities for us. There’s opportunities for us to help. One new potential customer has come to us, already bought competitive hardware and said they couldn’t get it to work and they know that our focus is on managed services, software the likes, and so, we remain pretty confident in a strong second half. And again, the difficulty is, we’re not trying to be evasive. The difficulty guys is that, getting things lined up into 13-month periods for this business can be challenging and so that’s why we don’t kind of give numbers, so to speak. We remain pretty confident. We obviously feel pretty strong about Q2, as Ken just guided and in the midst of continued choppiness in LED and memory, IPS is going to, looks, we’re forecasting a pretty strong Q2 and I’m going to leave it at that. But again, I’m excited about the opportunity. I’ve been out with the team in front of a lot of customers, including Supercompute and I remain pretty bullish.

Yeah. And Kevin, on your first question, in terms of the margins as well, it is a record for us, 33.3% and just to add to Mark’s comments earlier, you look at where the business was just a few years ago, that’s a significant delta from three years, four years ago in terms of where the business is. The other thing is mix and that can move around. We had a significant mix associated with services this quarter at about $68 million of service revenue. That comes with it a higher gross margin. You can recall based on our guidance for Q2, the guidance is slightly below at $32.5 million at midpoint and that’s just a factor that we expect to have a little bit higher hardware mix relative to services mix in Q2.

Okay. Great. Thanks for that extra color. And maybe just to talk about the Memory Solutions Group, your specialty memory, a lot of that was just say five-year old type of memories and are you seeing prices changing on those or maybe the question would be what percentage of your business would be affected by the increase in prices we’ve seen the last month or so?

Kevin, we have Jack Pacheco here, he runs the business. I’ll have Jack comment first and maybe Ken can follow-up.

Hello, Kevin. How are you?

Hi, Jack.

So we’re seeing prices go up even on the legacy memory. I mean, we’re seeing 5%, 10% kind of increases on certain types of legacy memory along with leading Edge memory that’s going up in price. But we will -- so we’ll see some revenue go up maybe over time as we start to ship product based on that memory. A lot of stuff we’re shipping today is still bought at the lower price memory that we’re shipping to our customers.

Kevin, I think, if you looked at our commentary earlier in the prepared remarks, for the memory business, we’re expecting that to be relatively flat here sequentially Q1 to Q2. And that just relates to what we’ve discussed in the past, which is in Q1 and continuing here into Q2, not a surprise, some of our customers are still working through some inventory that they purchased in the late summer timeframe. We’d hope that they start to work through that through Q2 and then as we head into Q3, Q4, we’ll start to see a little bit brighter skies out there.

Okay. Great. Thanks and congratulations again.

Thank you.

Thank you for your question. The next question comes from the line of Brian Chin with Stifel. Your line is now open.

Hi, there. Good afternoon. Thanks for allowing us to ask a few questions. Sorry, this one’s kind of pointed, but maybe just to kick start here, relative to how you’ve worked with Meta in the past and there’s been lot of articles and blogs discussing this relationship before, right? But you were a key partner, especially in their initial phases of the RSC buildout. And I guess the question is, do you generally see continuity in this relationship moving forward and how do you envision this relationship maybe evolving over time on successive sort of buildouts expansion?

Yeah. Let me take that one. First of all, think Meta is a true innovator in the space of AI and they’ve been at the bleeding Edge. And I think if you ask me, what company has innovated the most in terms of the commercial side of AI, where there’s a lot of tire kicking. These folks have applications on AI running and generating profitability. I mean, they’re at the forefront. They have used us in the past in certain situations where the complexity of the deployment outstrips their internal capability and that led to some really amazing opportunities last year. We are still doing business with that customer. I’m not going to comment on the nature of the agreement, what have you. We still are in providing support, we’re still talking about expansion opportunities. We won’t get everyone. I don’t think that’s possible. But the relationship is very good. We think they’ve been a great customer to us and I think they’ll still be a great customer to us this year. That’s really all I can tell you.

Okay. No. That’s fair enough. Appreciate that. And then can you provide maybe a little bit more insight into the types of maybe AI oriented applications that you’re engaging with customers across the many verticals that you referenced earlier? Maybe any sort of -- helping us sort of understand sort of what’s contributing to your optimism, not just kind of, fiscal second half of this year, but clearly in the out years as well in terms of the type of funnel that you’re building?

Yeah. If you look at, by the way, my next comment isn’t about stuff we’ve deployed today, but where we’re seeing a lot of discussions around applications with customers. In the energy sector, things like oil and gas exploration. In the financial markets, we all know that the financial markets, a tenth of a second is worth something in the trading world. You think about healthcare and geonetics. You think about applications like retail and ATMs and decision around how to serve their customer. You think about social media and advertising and knowing exactly what your behaviors are and matching that to the buying opportunities out in ecommerce on the web. There’s just endless applications that are in front of us and that’s how we’re working. And by the way, I haven’t even mentioned the federal opportunities around defense and the likes. So I think what I do want to mention, by the way, and it rhymes with what we’ve said on the last call is, I think, 2023, yeah, it was the iPhone moment, but people didn’t really know how to use it till later and that’s true now. I think there was a lot of sales of GPUs to infrastructure, people starting to lay the pipes and I’m not even sure all the people who bought GPUs know how to use them. And I think 2024 and 2025, it’s going to be the year where two things happen, A, businesses get a little bit more clear on what they’re going to get out of AI, and two, they’re going to realize that they need deployment and management expertise to make sure that these AI systems perform as they thought and as they invested in. And so I think that’s going to play very well to us from our managed service and software approach.

Yeah. That’s very helpful. Thanks, Mark.

Of course.

Thank you for your question. [Operator Instructions]

Operator, is there another question here in the queue.

Yes. Yes. Give me one moment. Sorry about that. Our next question comes from the line of Quinn Bolton with Needham. Your line is now open.

Hey, guys. This is Nick Doyle on for Quinn. Thanks for letting us ask a question. Could you give a little more detail on maybe how much inventory is left in the end markets? I know you talked about inventory and memory solutions in the remarks and guide. Maybe is there more in the channel versus end customer and then any detail on LED inventory? I mean, I know we’re going into seasonality next quarter and China has kind of negative news coming out, so not surprising there. But are we still kind of pretty clean inventory on the LED side as well?

Yeah. So let me take the market update on that piece and I’ll hand it to Ken for kind of the quantitative parameters. In the memory side, I’m sticking to what I said on our last quarter’s call that it kind of feels like spring at the earliest when we start to see the demand piece of memory contribute to the recovery. As I said last quarter, the dynamic going on now is just a little bit of game of chicken where pricing is going up on certain skews. There’s inventory in the channel and they’re kind of like slogging it out a little bit in negotiation. I mean, they, the big semiconductor guys. We’re not impacted necessarily as much about the price more on the demand and I see that the inventory, I believe the inventory is like a spring calendar year timing to get back to regular levels. I think we can start to see some good solid foundation and demand generation. On the LED side, it’s actually been less of an inventory in the channel dynamic and more of an end market demand. As a matter of fact, our channel is pretty lean. I’ll let Ken talk to that, so I’ll hand it over to him. But, all in all, obviously, our inventory, we feel pretty good about our own balance sheet, but the memory thing will play out. I speculate it’s probably spring and the LED one more demand generation and some of the things going on in the broader macro environment.

Yeah. So, as Mark outlined and just to give you a data point on the LED side, if we look at the distribution inventory, we probably burned off north of $20 million, getting close to $25 million from -- in the last five quarters or so. And so we’ve leaned out, we’re at now normal turns levels within the distribution channel and that’s essentially around sort of fourth of 4 times. And so, as Mark highlighted, the inventory has leaned out in LED within the distributors and it’s really a function of demand. Q2, however, just one way to think about it is, we do have Chinese New Year. Typically, things shut down for the better part of one week to 10 days and that’s what we’re seeing in terms of the impact of the business Q1 to Q2 in terms of sales and the big driver as we head into Q3 and beyond is going to be demand.

Okay. That makes sense. Looking at IPS, maybe a little different angle. You have this press release last November talking about a partnership with Google Cloud. Could you talk about how that relationship is progressing and maybe where you use that control plane technology?

Yeah. This is Mark. We remain in good partnership with Google Cloud. I think the interesting dynamic for us and it’s early, but the interesting dynamic for us is that, it’s becoming more of a two-way street and the dynamic is, yeah, there’s some companies that have their own on-premise environment and they’re looking for surge capacity out of Google Cloud or the likes. There are other companies who are just figuring this out and want to test some application environment in the Cloud and eventually want to bring things back in-house and have a bit of a hybrid on-prem deployment. And in that situation, I think, Google’s pretty confident with our ability and our relationship that we can be the conduit between the Cloud and delivering on-prem capabilities, as well as bringing some of our customer base into that environment. As I said, it’s early stages of the model, but very happy with the relationship and I think there’s good opportunities to leverage that for future growth.

Thank you.

Thank you for your question. There are no additional questions waiting at this time. I would now like to pass the conference back to Mark Adams for closing remarks.

Well, thanks everyone for attending today’s call. I know there’s a number of events in January. We look forward to seeing you on the road. In the meantime, stay safe. Thank you.

That concludes today’s call. Thank you for your participation and have a good day.