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Revenue: $285 million, in line with the midpoint of guidance.
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Non-GAAP Gross Margin: 31.5%, at the lower end of guidance due to higher hardware mix.
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Non-GAAP Earnings Per Share (EPS): $0.27, above the midpoint of guidance.
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Cash and Short-Term Investments: $466 million.
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Intelligent Platform Solutions (IPS) Revenue: $141 million, up 19% from prior quarter, 50% of total SGH revenue.
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Memory Revenue: $83 million, 29% of total SGH sales, slight decline from Q1.
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LED Solutions Revenue: $60 million, 21% of total SGH sales, lower sequentially due to seasonality.
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Non-GAAP Operating Expenses: $63.2 million, down from $64.6 million in Q1.
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Adjusted EBITDA: $33 million, or 12% of sales.
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Net Accounts Receivable: $170 million, with Days Sales Outstanding at 41 days.
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Inventory: $173 million, with inventory turns at 6.8 times.
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Share Repurchase: Approximately 106,000 shares repurchased using $1.9 million.
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Term Loan Facility: Approximately $37 million retired in Q2.
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Capital Expenditures: $5.2 million in Q2.
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Depreciation: $7.2 million in Q2.
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Q3 Fiscal 2024 Revenue Guidance: Approximately $300 million at the midpoint, plus or minus $25 million.
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Q3 Fiscal 2024 Non-GAAP Gross Margin Guidance: Approximately 32% at the midpoint, plus or minus 1.5%.
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Q3 Fiscal 2024 Non-GAAP Operating Expenses Guidance: Approximately $66 million, plus or minus $2 million.
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Q3 Fiscal 2024 Non-GAAP Diluted EPS Guidance: Approximately $0.30, plus or minus $0.15.
Release Date: April 09, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
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Revenues totaled $285 million, in line with the midpoint of guidance.
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Non-GAAP earnings per share of $0.27, above the midpoint of guidance.
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Strong balance sheet with cash and short-term investments totaling $466 million.
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Intelligent Platform Solutions Group (IPS) revenue up 19% from prior quarter, representing 50% of total SGH revenue.
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Expanded capabilities at the edge with the new Stratus ZTC, the endurance server, seeing strong demand.
Negative Points
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Non-GAAP gross margin was at the lower end of guidance due to a higher portion of hardware mix.
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Services revenue totaled $49 million, down from the $55 million in the year-ago quarter.
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Memory revenue declined slightly from Q1 levels due to elevated inventory levels at large customers.
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LED Solutions revenue was lower sequentially, primarily due to seasonality.
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Cash flows used in operating activities totaled $22 million compared to $60 million provided by operating activities in the prior quarter.
Q & A Highlights
Q: Can you discuss the demand across the customer base between large CSPs, tier two CSPs, and enterprises for IPS business? A: (Mark Adams – President, CEO, Director) Demand signals from large enterprises evaluating their AI strategy are very high. There’s a pent-up demand for new data center capabilities to drive AI with significant power requirements. Engagements with customers have picked up, reflecting market dynamics. The complexity of deploying AI infrastructure is a challenge for enterprises, and SGH is positioned to help manage this. AI inferencing at the edge is also a critical market opportunity, and SGH is developing solutions for high-performance, high-availability platforms at the edge.
Q: Can you provide insights into the opportunities for AI at the edge in the traditional Penguin business? A: (Mark Adams – President, CEO, Director) SGH is investing in solutions for AI at the edge, including small cluster platforms with high reliability for environments without IT resources. The goal is to design systems that bring intelligence closer to where decisions are made, which could be critical for competitiveness.
Q: Regarding the memory outlook, is the expected high single-digit growth mostly ASP growth with units still pretty muted, or are you starting to see a unit recovery? A: (Mark Adams – President, CEO, Director) SGH is starting to see pricing benefits and corner cases of demand requests. Demand has been flat but is better than declining. Expectations are for demand to increase in Q3 and Q4, with a turnaround in the memory cycle.
Q: Can you give more details on the IPS business and the impact of one order on the guidance for gross margin? A: (Mark Adams – President, CEO, Director) SGH expects a stronger second half for the IPS business. Margins may fluctuate due to mix issues or hardware deployments in a quarter. SGH is investing heavily in go-to-market resources to expand the customer base and convert proposals into bookings and revenue.
Q: Can you talk more about the potential for expanding your customer base for IPS? A: (Mark Adams – President, CEO, Director) SGH is making progress in managing major accounts and engaging with large enterprises and tier two CSPs. The number of proposals has increased, and SGH is transitioning from transactional relationships to more client and engagement-focused ones, which leads to stickier relationships and validates the need for SGH’s offerings.
Q: Can you touch on the services line and whether the downtick in the quarter is a new run rate level or if it’s expected to tick back up? A: (Ken Rizvi – CFO) SGH expects services to tick back up in Q3. The downtick in Q2 was due to fewer point-in-time services, and the guidance for Q3 reflects an expectation for an increase in services.
Q: Can you give us an idea of when you see the market for CXL becoming more meaningful and the types of customers interested in it? A: (Mark Adams – President, CEO, Director) The need for higher density and greater bandwidth memory is critical for AI and HPC workloads. SGH is developing CXL products and expects meaningful shipments by the end of the calendar year. Customers interested include standard server companies and those in AI who need more memory in their servers.
Q: Has the customer acquisition and product delivery process for IPS changed with the rise of generative AI? A: (Mark Adams – President, CEO, Director) The adoption process for AI infrastructure has become longer and more complex. Enterprises are still defining how AI will change their business. SGH’s role as a trusted advisor is becoming more validated, leading to longer-term engagements and opportunities.
Q: How would memory price increases impact future gross margins? A: (Mark Adams – President, CEO, Director) SGH does not forecast beyond the current quarter, but any price benefits typically show up in top-line revenue. Gross margins may fluctuate slightly with pricing changes, but the value add remains consistent, and SGH has historically maintained stable margins through memory cycles.
This article first appeared on GuruFocus.
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