Good day and thank you for standing by. Welcome to the SGH Third Quarter Fiscal 2021 Earnings Call. At this time, all participants are in a listen-only mode. Operator instructions were provided. I would now like to hand the conference over to your speaker today, Suzanne Schmidt with Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and thank you for joining us on today’s earnings conference call to discuss SMART Global Holdings third quarter fiscal 2021 results. On the call with me today are Mark Adams, Chief Executive Officer; Jack Pacheco, Chief Operating Officer; and Ken Rizvi, Chief Financial Officer. This call is being webcast from our website at smartgh.com. In addition, our website contains an accompanying slide presentation and the earnings press release. We encourage you to go to our website throughout the quarter for the most current information on the Company, including information on the various financial conferences we will be attending. Before we begin the call, I would like to remind everyone to read the forward-looking statements information that we have included in the earnings press release and the earnings call presentation. Please note that certain of these statements made today may constitute forward-looking statements and that these statements are our present expectations and that actual events or results may differ materially. 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 GAAP to non-GAAP measures is included in today’s press release. We will begin the call with CEO, Mark Adams, who will provide a business update and then Ken Rizvi, CFO, will review the financials and forward guidance, after which we will take questions. Mark?

Thank you, Suzanne. We hope our US listeners enjoyed the Fourth of July weekend and appreciate all of you joining today’s call. We are excited to present our fiscal third quarter results and share with you our outlook for the fourth fiscal quarter. Business execution was strong across all of our companies as our financial results exceeded expectations. We achieved record quarterly revenues of approximately $438 million. We improved non-GAAP gross margins to approximately 22%, up from 19.5% in Q2 and we generated $1.39 in non-GAAP earnings per share for the quarter compared to $0.87 per share last quarter. Our team remains focused on the execution of our growth and diversification strategy. In our first full quarter with Cree LED as part of SGH, we are reporting a more diversified revenue mix. Memory Solutions, which includes Specialty Memory and Brazil, accounted for 55% of total revenues. Within Memory Solutions, Specialty Memory was 28% of total SGH revenues and Brazil was 27% of total SGH revenues. LED Solutions came in at 23% of total revenues and Intelligent Platform Solutions, or IPS, was 22% of revenues in Q3. Let me now cover some highlights for each of our businesses. Our IPS Group turned in another strong quarter with revenue of approximately $96 million, which was 12% higher than last quarter, in line with our expectations for double-digit growth and 57% higher than the same quarter a year ago. These results reflect growth across our key focus areas of core, edge and cloud. For reference, IPS includes Penguin Computing and Penguin Edge, which is our new brand comprising the former SMART Embedded and SMART Wireless businesses. Gross margin percentage was down sequentially due to a larger mix of hardware sales in the quarter. On prior earnings calls, we have discussed the potential variability of IPS gross margin percentages due to software and services movement quarter-to-quarter. That said, the IPS team is making very good progress on expanding software and services, which represents 20% of Penguin Computing’s revenue on a year-to-date basis, up from the low teens in the prior year-to-date period. Our Penguin Computing team has a robust solutions roadmap focused on core, data center, edge and cloud offerings, targeting customer requirements in AI, high-performance data analytics and traditional HPC workloads. We have a number of new platforms and solutions planned for introduction in the second half of calendar year 2021, including Penguin Computing’s OriginAI, an AI platform targeting customer needs at the core datacenter for upscale training and inference. Additionally, Penguin Edge released the PCIe-8130, which is a high-performance server add-in card used to accelerate and facilitate voice over 5G and LTE. IPS continues to focus on growing Penguin’s cloud-based solutions business, as evidenced by expanding engagements with existing and new customers in the financial, oil and gas and federal sectors. We will continue to scale our investments in Penguin On Demand, or POD, and government POD cloud-based solutions to capitalize on future on-demand opportunities which have the potential to drive recurring revenues for IPS. We are excited about the recent performance of IPS and continue to strengthen our new business funnel to drive future growth potential in Q4 and beyond. Now turning to the Memory Solutions Group, which encompasses Specialty Memory and our operations in Brazil. Revenue grew by over 10% sequentially to reach $240 million in Q3 and by 9% year-over-year in the same quarter. Gross margins expanded 240 basis points sequentially to 18.1% in the quarter, largely due to improved pricing and mix. Our Specialty Memory business executed well in a challenging supply environment. Beyond our core business with traditional customers in telecom, networking and the enterprise, we are gaining traction in more data-intensive applications where new standards such as OpenCAPI are helping to drive performance improvements. OpenCAPI is an open interface architecture standard which supports very low latency and high bandwidth memory. We are seeing our DRAM OpenCAPI modules moving into production for compute-intensive applications and expect to ramp this business as we move into fiscal year 2022. Backlog for our flash product portfolio grew nicely in the quarter and we anticipate strong quarter-over-quarter revenue performance in Q4. We are expanding our product development focus for customers across new end markets to meet their application-specific needs. We are in early production of mini and very low-powered DIMM modules for use in cybersecurity applications and custom SSD products used in surveillance as well as the transportation sector. Each of these areas represents new segment opportunities for Specialty Memory. Our strong results in Brazil were due primarily to increasing unit demand in PC notebook and server, which grew 26% from the previous quarter. Demand for mobile memory remained stable, while ASPs increased slightly when compared to Q2 ASPs. Additionally, our plans to build SSDs in country remain on track and we are optimistic about this new catalyst for growth in revenues during our next fiscal year. Now turning to Cree LED which exceeded expectations recording revenue of $102 million versus a guide of $90 million to $95 million. Non-GAAP gross margins were almost 30%, well ahead of guidance despite operating in a supply-constrained environment, a testament to the team’s focus and ability to execute. The manufacturing transformation that Claude outlined during our recent Analyst Day is progressing well with the transition from silicon carbide to sapphire wafers and the migration to a fab-light model with our key strategic partners driving our operating performance. The LED team continued to drive technology leadership across their product portfolio. For example, Cree LED’s flagship outdoor lighting LED product, the XLamp XP-G3 S Line, is one of the brightest and most reliable LEDs available in its class. This product line is optimized for directional, high lumen lighting applications where efficacy and optical control are critical. Demand across Cree LED’s targeted end market segments continues to improve. We saw new customer wins in general lighting, specialty lighting, video and horticulture lighting. We remain confident in the team’s ability to deliver strong results and couldn’t be more excited to have the Cree team onboard, fully engaged in driving growth and profitability as part of SGH. Let me stop here and hand the call over to Ken for a detailed look at our Q3 financials and Q4 forecast. Ken?

Thanks, Mark. At our Analyst Day in April, we outlined our strategy to continue to grow and diversify our business. The third fiscal quarter of 2021 demonstrates how our strategy is playing out with strong performance across all of our businesses, Intelligent Platform Solutions, Memory Solutions and LED Solutions. As Mark mentioned earlier, we reported a strong quarter with all key metrics above our guidance range. Net sales for the third fiscal quarter of 2021 were approximately $438 million, an increase of 56% year-over-year from the third fiscal quarter of 2020 and 44% sequentially, a record result for the Company. In addition, non-GAAP gross margin came in at 21.9% and non-GAAP diluted earnings per share was $1.39 for the third fiscal quarter of 2021, both above our guidance range. Now turning to highlights from our non-GAAP income statement. On a year-over-year basis, total SGH revenues grew by approximately 56%. This growth was driven primarily by the incorporation of Cree LED into SGH which added approximately $102 million of sales in our third fiscal quarter. Excluding Cree LED, our revenues grew by approximately 19% on a year-over-year basis, mainly driven by IPS which grew by approximately 57% and Memory Solutions, which grew by approximately 9%. For the third fiscal quarter IPS had revenues on a quarterly basis of approximately $96 million, a record for that business. Our Memory Solutions Group had revenues of approximately $240 million in the third fiscal quarter of 2021. Within the Memory Solutions Group, Specialty Memory reported revenues of approximately $122 million in the third fiscal quarter while Brazil reported revenues of $118 million. Gross margin for the third fiscal quarter of 2021 was 21.9%, up from the 19.5% in the prior quarter and up from 19.9% in the third fiscal quarter of 2020 and helped by the performance of the LED Solutions Group. Gross margin for IPS was 23.1% in the third fiscal quarter of 2021, down from the same period in the prior year, primarily due to a higher mix of hardware sales. As we have discussed previously, we expect some quarter-to-quarter variability in gross margin for IPS, based on the timing of solutions and services revenue. We are expecting, however, to see an uptick in gross margin for IPS in the fourth fiscal quarter of 2021. Gross margin for our Memory Solutions Group was 18.1%, up approximately 240 basis points from the second fiscal quarter and relatively flat with the year-over-year period. Gross margin for LED Solutions was 29.6% in the third fiscal quarter. Operating expenses for the third fiscal quarter of 2021 were approximately $52.4 million, up from the $35.5 million in the third fiscal quarter of 2020. Operating expenses were up primarily due to the inclusion of LED solutions, continued investments in IPS, as well as increased bonus in the third fiscal quarter of 2021. In addition, operating expenses benefited from approximately $8.2 million in financial credits in Brazil. This helped to offset our Brazil R&D spending, which is required to benefit from this credit. As discussed during our last earnings call, the current law related to these specific financial credits is expected to expire in the beginning of calendar year 2022. Non-GAAP diluted earnings per share for the third fiscal quarter of 2021 was $1.39 per share compared with $0.87 per share in the second fiscal quarter and almost double from $0.70 per share in the third fiscal quarter of 2020. Adjusted EBITDA for the third fiscal quarter of 2021 was $51.4 million or approximately 12% of sales compared to $25.4 million or approximately 9% of sales in the third fiscal quarter of 2020. Our breakdown of net sales by end market for the third fiscal quarter of 2021 was as follows. Mobile and PCs was 24%; network and telecom, 15%; server and storage, 12%; advanced lighting, 23%; and industrial defense and other, 26%. Turning to working capital. Our net accounts receivables totaled $274.9 million compared with $203.4 million last quarter. The increase was largely driven by the addition of LED solutions. Days sales outstanding came in at 39 days compared with 41 days last quarter. Inventory totaled $289 million at the end of the third fiscal quarter compared with $189.3 million at the end of the prior quarter, driven by the addition of LED solutions as well as strategic inventory build during the quarter in preparation for a higher revenue ramp in our fourth fiscal quarter. Inventory turns were 7.7 times in the third fiscal quarter versus 8.3 times in the prior quarter. Consistent with past practices, accounts receivables, days outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $643.3 million and $558.8 million respectively for the third fiscal quarter. As a reminder, the difference between gross revenue and net sales is related to our supply chain services business, which is accounted for on an agency basis meaning that we only recognize as net sales, the net profit on a supply chain services transaction. Cash and equivalents totaled $189 million at the end of the third fiscal quarter which was $49.2 million higher than the previous quarter. Third quarter cash flow from operations totaled $49.3 million compared with $20.4 million in the prior quarter and was up sequentially from the second quarter, primarily due to the inclusion of LED solutions. On a trailing 12-month basis, cash flow from operations totaled $130.3 million. For those of you tracking capex and depreciation, capex was $5.2 million for the quarter and depreciation was $9.1 million. And now turning to our fiscal fourth quarter 2021 guidance. We expect our net sales for the fourth quarter of 2021 will range from approximately $440 million to $480 million, an increase of approximately 55% year-over-year at the midpoint of our guidance. Our GAAP and non-GAAP gross margin for the fourth quarter of 2021 is expected to be approximately 22% to 24%. Our non-GAAP operating expenses are expected to be in the range of $55 million to $60 million in the fourth quarter of 2021. The sequential increase is in line with our comments from the last earnings call and driven primarily by Cree LED having an additional week of expenses in the fourth fiscal quarter versus the third fiscal quarter as well as additional investments to support the growth in our Intelligent Platform Solutions Group. GAAP earnings per diluted share is expected to be approximately $0.95 plus or minus $0.15. On a non-GAAP basis, excluding share-based compensation expense, intangible asset amortization expense and convertible debt discount, we expect non-GAAP earnings per diluted share will be in the range of $1.60 plus or minus $0.15. Cash capital expenditures for the fourth fiscal quarter are expected to be in the range of $10 million to $12 million. Our GAAP diluted share count for the fourth quarter of fiscal 2021 is expected to be approximately 27 million shares based on our current stock price. Our non-GAAP diluted share count for the fourth quarter of fiscal 2021 is expected to be approximately 26 million shares, as it includes the benefit of our convertible note capped calls. Our forecast for the fourth fiscal quarter is based on the current environment, which contemplates the constraints in the global supply chain. Please refer to our non-GAAP financial information section and the reconciliation of non-GAAP financial measures to GAAP results and the reconciliation of GAAP net income to adjusted EBITDA tables in our earnings press release for further details. With that, let me turn the call back to Mark for some concluding comments before we open the call to questions. Mark?

Thanks, Ken. Before opening the call for Q&A, I would like to end my prepared remarks with a few additional comments. First, I’d like to acknowledge that we are making good progress on our environmental sustainability and corporate governance or ESG disclosures and we will be providing updates in the coming quarters. Secondly, I want to recognize all of our factory workers around the globe who have done a fantastic job of keeping our sites operating at a high level of performance while maintaining a safe and healthy environment. Our operating teams at Cree LED, SMART Modular and Penguin have performed extremely well during these uncertain times considering the COVID pandemic situation and broad electronic supply shortages. With new COVID outbreaks in Brazil and Asia, we are continuing to maintain strict employee safety measures and have not had any major operational issues in our facilities to date. As outlined during our Analyst Day back in April, our key strategic objectives are to drive shareholder value by growing our business both organically and inorganically. When you couple the outstanding results from Cree LED with the growth in Penguin Computing and strong operating performance at SMART Modular, I hope you see evidence of this strategy playing out. While we are proud of our third quarter results, we feel we have tremendous opportunity for growth in the future. Operator, we are now ready to take questions.

Operator instructions were provided. We do have a question from Tom O’Malley from Barclays. You’re now live.

Hey. Good afternoon. Thanks for taking my question and congrats on the nice results. My first question was on the LED business, obviously a really strong contribution in the quarter. When you guys first did the deal you kind of laid out $350 million to $400 million of contribution and the run rate in the quarter was even a little bit ahead of that. Can you talk about what happened during the quarter to kind of get you outside of that run rate and do you kind of see that higher run rate sustainable in the near future?

Yes. Tom, this is Mark. Yes, I think we’re pleased with the demand profile and the business in the broader LED sector and certainly in the markets we play in. The LED industry experienced a downturn for about the last two or three years and there have been some positive signals on the demand side. Of course the operations team at Cree LED did a great job in reacting accordingly. We think we may be bottoming out of the trough and there is some upside growth as we forecasted at the Analyst Day — mid single-digit growth, 4% or 5%. And like I said, we are investing in this business; we want to grow it, we didn’t just buy to harvest it. Initially we were looking at a business that was traditionally doing about $100 million a quarter. But the market is starting to turn a bit more favorable on the demand signals and we are bullish on the opportunity to grow from here.

Great. That’s helpful. And then in your prepared remarks you talked about going into August and seeing — I think your particular comment was Specialty Memory will be strong quarter-over-quarter. Obviously, you have a big sequential increase in revenue. Can you talk through some of the moving parts? What’s really driving this increase outside of the Specialty Memory data point you gave us already?

Are you asking about the whole business or just memory? Broadly, demand across the sectors is doing very well driven by different dynamics. For IPS and Penguin Computing and Penguin Edge, things like edge computing and IoT are catalysts. Penguin Computing’s growth is driven primarily by AI initiatives at many of our customers; some are in early-stage development and some are rolling out. The dynamics in the HPC sector around AI are very strong and traditional workload optimizations in many application sectors are continuing to be strong. On the Memory side, broader indicators show high-performance compute and memory computing, enterprise storage and other trends are driving higher memory consumption in the cloud and data center hyperscalers. We’re starting to see new market opportunities. Coupled with a generally positive economic situation in Brazil despite COVID implications — economic indicators there are largely favorable — servers and IT spending in Brazil are positive. So you couple that with new memory applications in Specialty Memory, plus IPS and Cree LED, and demand across our sectors is relatively robust. That’s the phenomenon we’ve seen strengthen over the last nine months and we think there’s more growth from here.

Great. Congrats again, guys.

Next one on the queue we do have Brian Chin from Stifel. You are now live.

Hi there. Good afternoon. Congratulations on the results and thanks for allowing us to ask a few questions. Maybe first on gross margin. Very good sequential improvement clearly. Are the improvements here in memory, but particularly in LED, sustainable or is this a little bit above trend line based on the current progress you’re making on outsourcing and the conversion to sapphire wafers?

Well, I think there is improvement in front of us still. We were trying to suggest that we are gaining some momentum from the demand picture I painted and in addition some operating efficiencies across all of our businesses. With the exception that Ken called out for IPS, which had some mix-related margin pressure, broadly speaking our mix was favorable and the transformation at Cree has progressed on plan. If you combine mix and pricing benefits, it shows strength. We think there is improvement from here, but more incremental than what we experienced in Q3. On memory, our biggest opportunity is new market traction. We think memory margins could improve, particularly as Brazil moves from flat to slightly up. Broadly, memory can improve and LED can improve, and we are confident IPS will improve in Q4 given the expected better mix of services going forward.

Yes. Hey, Brian. Thanks for the question. If we look at the Q3 margin profile on a non-GAAP basis, we guided from 19% up to 21% and we exceeded that. That outperformance was driven by a couple of factors, one of which is the performance of Cree LED, which had very good margins on a non-GAAP basis at 29.6%, higher than what we expected. That helped drive the outperformance. As we look into Q4, we’re seeing nice trends overall across the three segments, Memory Solutions, IPS and Cree LED, that should drive us to the 22% to 24% gross margin range overall. I’d also like to highlight one item. As we move from Q3 into Q4, within our Memory Solutions Group we have a logistics business where historically we’ve taken revenue on a net basis. There is one customer, however, that we have migrated now from a gross basis to a net basis. This has a couple of effects. One, on an apples-to-apples basis Q4 revenues would be closer to $490 million at the midpoint if we kept that customer on a gross basis, but we have moved that customer to a net basis and that is embedded in our guidance range of $440 million to $480 million. The other effect that flows through the P&L is that by taking that customer on a net basis, the margins improve a bit, and that is why we feel comfortable with the 22% to 24% non-GAAP guidance for Q4.

Okay. Got it. So if I heard you correctly, it’s sort of like a $30 million at the midpoint benefit — I guess, reduction in the fiscal 4Q revenue. Can you quantify what the margin impact was then associated with that?

Yes. It is about a 70 basis points to 100 basis points benefit as we move into Q4 from Q3.

Okay. Okay. I appreciate that. Just a couple of more questions. But just going into IPS, undoubtedly coming up. You are tracking a strong growth year here in fiscal 2021. But Mark curious even if the IPS business can sustain double-digit growth coming out such a strong year in your fiscal 2022 and I guess with that are you already building any sort of meaningful backlog that’s shippable in the next fiscal year?

Yes. So I’ll comment aligned to what we outlined at the Analyst Day. We said on a longer-term basis we believe we can sustain a double-digit CAGR for that business. Any given year we’re not providing guidance for 2022. But we do have good backlog as we head into Q1. Obviously, we’ll have to see what the global economy looks like in 2022. But that business continues to have good momentum. If we looked on a quarter-to-quarter basis or year-over-year basis, strong momentum, especially on the commercial side of that business.

Okay. Great. And real last quick one just on cash flow. Really good operating and free cash flow generation in the quarter. I guess the higher expected revenue levels in fiscal 4Q. Do you think the free cash kind of around similar levels? Thanks.

Yes, I would expect as we look at the free cash or you can look at EBITDA maybe as a proxy EBITDA minus capex, we would expect equivalent type of free cash flows or slightly higher based on the guidance Q4 to Q3.

Great. Thank you.

Thank you.

Next one on the queue is Sidney Ho from Deutsche Bank. You’re now live.

Great. Thanks for taking my questions and congrats on the solid results. A couple of questions on the memory side. Last quarter you said the mobile units in Brazil was not a source of upside and notebook SSD should benefit in fiscal 2022. Are you starting to see an acceleration of these drivers now that it seems like retail sales are improving, COVID cases are declining? And are you seeing — it sounds like you’re seeing a little bit of higher ASP as well. My follow-up to that is I guess related to the Specialty Memory. You talked about good progress in data centers and some recovery in industrial last quarter. Curious how much of that business would you say is tied to the traditional IT enterprise spending, which I would think is also starting to recover. I have a follow-up question on that. Thanks.

So I’ll start and let Jack jump in. I think to your second question first, we are definitely starting to see the traditional customer base increase demand. Memory is a category that is tight in supply relative to broader supply conditions, but the demand profile we’re seeing is strong for our core customers as well as some of the new markets we highlighted. Regarding Brazil and SSDs, there is growth in the category and earlier-stage penetration in notebook, desktop and server markets. We are focused on in-country manufacturing to take advantage of the infrastructure we have there, leverage our capital in place and benefit from the incentive system to drive SSD adoption and growth as the largest memory player in Brazil. Jack, any commentary from you around the question?

Yes. In Brazil, Sidney, the real growth right now is units in the PC, notebook and server area. Mobile has been fairly flat quarter-to-quarter. So we are seeing growth in that part of the business in Brazil. ASPs have been up a little bit, but it’s more the unit growth driving Brazil in that area.

Okay. That’s helpful. Maybe my follow-up question is on the supply chain. Ken you mentioned your guidance contemplated some supply constraints in there. Can you give us a little more color which businesses will likely be more impacted? How are you thinking about the impact of these new lockdowns in Asia that may have on your Memory or Intelligent Platform Solutions? I think those are the two things manufactured there. Is that more related to availability of parts or is it more COVID-related gross margin headwind that you’re thinking about? Thanks.

Let me make a comment before Ken contributes. The nice part about the businesses we’re in is they are essential in nature. Our Malaysia and Brazil operations have been up and running. We are being careful to maintain operations at the capacity we need and many of our manufacturing assets are based in the US. From an operational standpoint, we are not being hit so much in terms of production capability. I’ll let Ken address the rest.

Sure. If we look at our inventory we talked about this on the previous earnings call — inventory went up this quarter for two or three reasons. One, we included Cree LED which was a large portion of the increase from Q2 to Q3. Second, as we were able to find inventory to secure parts for our revenue in Q3, Q4 and into Q1, we took the opportunity to secure that inventory. Excluding Cree, the areas that saw growth were primarily around our Memory business and that constituted probably two-thirds of the increase, excluding Cree, in terms of the growth quarter-to-quarter in our inventory. That was just to secure supply as we look at both the Brazil and Specialty businesses.

Great. Thank you.

Next one on the line is Raji Gill from Needham & Company. You’re now live.

Yes. Thank you and congrats on great momentum across the board, very impressive. Mark, I was wondering if you could talk a little bit about the growth you’re seeing in some of these end markets. If you break down mobile, networking, server, storage, it looks like the server and storage business more than doubled year-over-year in terms of growth. And then you’re seeing strong growth in industrial and defense and at the same time, mobile PC continues to grow. But I’m wondering if you can maybe comment on server and storage and industrial because those seem to be kind of the outliers on an end market basis.

Sure. When you think about server and storage, each has clear catalysts. The data explosion is driving high growth in storage — both SSDs and traditional storage. The amount of data being stored and generated is significant and the market demand supports it. On the server side, hyperscale and cloud businesses, edge computing and core-to-edge architectures are driving investments. Data analytics, AI and machine learning investments at enterprise and federal levels are also driving demand for server and storage content. Those combined factors lead to the strong growth we’re seeing in both server and storage.

And just another question on the revenue growth. So if you look at the IPS business, it grew 57% year-over-year off a very tough compare in May of 2020 which grew — that business grew 70% year-over-year. And so pretty strong growth off tough compares. Wondering maybe if you could characterize what specifically you’re seeing in terms of customer trends and also could you talk about the change, the shift in the business model that you’ve developed to focus more on services and how does that help that business as it progresses forward?

Sure. The catalyst is that we’re selling compute capabilities and solutions around that platform as well as storage. AI, data analytics, workflow optimization and allocation provisioning are all favorable drivers. Importantly, we’re seeing an increase in services. Larger enterprises are looking for partners like Penguin to be their outsourced integration solution provider. They want experts to design systems at the hardware and operating system security level, and they prefer to invest their capital in application layer capabilities. So we’re seeing design, deployment and post-sale maintenance and services growing. That dynamic was slightly accelerated by COVID when customers didn’t have the right resources in-house and preferred a hardware, OS and layered software partner like Penguin to do that work in an advisory, consulting way.

And for my last question, Ken. Great job on the gross margins in the quarter and congratulations on the guide, 23%, but a question on the volatility in the IPS segment. I know you touched upon it, but the gross margin for IPS was down about 620 basis points quarter-over-quarter. It’s going to go back up again in Q4. How do we think about the components of mix of services and hardware? How does that — what is the percentage of revenue that is services or hardware? How does it vary quarter-by-quarter? Is there some sort of seasonality in services and hardware quarter-to-quarter as we try to model that segment going forward? Thanks.

There is seasonality in that business because we have federal-related business versus commercial and federal can have incremental sales heading into our fiscal Q1. Software and services include longer-term managed services but also installation services when we install large systems. That is where there can be lumpiness quarter-to-quarter. Q3 was more hardware-oriented. In Q4 there will be some incremental services which is why we expect margins for IPS to uptick from Q3 to Q4. Overall on a long-term basis we highlighted that business can be around 25% gross margin plus or minus. But longer term at Analyst Day we are targeting driving that business toward 30% plus as we add more services and software into it.

Next one on the queue we do have Kevin Cassidy from Rosenblatt Securities. You are now live.

Hi. Thanks for taking my question and congratulations on the great results. I’m going to ask more about the software services also. Just — that’s great, that’s moved up. It’s growing faster than the Group overall going from low teens to 20%. But in your funnel of sales coming in do you expect this to continue to outgrow? And is this going to be 50% of the Group’s revenue? Maybe just to understand how many opportunities you’re looking at for this.

I think there is still growth to come. On the percentage basis we stopped short of saying 50%. Given timing of deployments and mix, I think it is reasonable to expect we can get higher than 20%, perhaps into the mid to high 20% range over the next 12 to 18 months.

Okay. And that you renamed the products, the edge products to Penguin Edge, how many of the opportunities lumped in the edge, along with the core?

I don’t have an exact breakdown of opportunities, but roughly think of revenue mix as about 70% Penguin Computing (high-performance computing) and about 30% Penguin Edge.

Okay. Good luck. That helps. All right. Congratulations again. Thanks.

Yes. Thanks, Kevin.

There are no further questions on the queue. I will now turn it back to the presenters.

Great. Well, again, we’d like to thank you all for joining us on today’s call. While we’re very excited about the results we announced today, we continue to be focused on our strategy and continue to focus on delivering great results in Q4. Have a great day. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.