Good afternoon. Thank you for attending today’s SGH Third Quarter Fiscal 2023 Earnings Call. My name is Tana, I'll be your operator for today's call. 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. You may go ahead.

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 2023 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 releases 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 use of forward-looking statements note 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 statements about the company's growth trajectory and its 2023 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 or as a substitute for 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 with that, let me turn the call over to Mark Adams, CEO.

Thanks, Suzanne, and thank you all for joining us today for our fiscal 2023 third quarter call. Over the past three years, we have made tremendous progress on the transformation of SGH. We have grown our top line, increased our gross margins, delivered strong earnings per share, and strengthened our balance sheet by generating positive operating cash flow. Earlier this month, we announced that we had agreed to divest a majority stake in our Brazil consumer memory business, enabling SGH to shift our business towards high performance, high availability solutions for enterprise customers. Although macroeconomic headwinds persist, we believe we are well positioned for long-term success, driven by secular tailwinds in AI, machine learning, and data analytics. While Ken will review the financials in more detail, I would like to call out some highlights from our third quarter performance. Our team achieved strong results for the third quarter in what remains a very challenging global economic environment. Non-GAAP gross margin was 28%, up 230 basis points from the year-ago quarter and non-GAAP diluted earnings per share totaled $0.66 on sales of $383 million. We generated strong cash flow from operations of approximately $41 million in the quarter and exited Q3 with a strong balance sheet, including record cash and cash equivalents of $401 million. Now let me review each of our business lines. Starting with IPS, which is comprised of our Penguin Computing and Stratus Technologies brands. We design, manufacture, deploy, and provide managed services for high performance computing for the data center, the cloud, and the edge. AI, machine learning, and data analytics are becoming foundational technologies for the success of enterprises across a growing set of industries. We believe that Penguin Computing, which has more than 25 years of experience in the deployment of HPC systems and solutions, is well positioned at the forefront of the generative AI revolution. Our team has designed, built and managed some of the largest and most powerful supercomputers in the world, including managing a total of more than 50,000 NVIDIA GPUs for AI training at scale. Our engagement model is focused on developing tailored solutions for our customers. We architect a system that integrates technologies such as compute, storage and networking that optimize for our customers' unique HPC and AI workload requirements. Our Scyld ClusterWare software provides an intelligence suite of management functionality including node provisioning, image customization, and cluster monitoring, while serving as a platform for additional software components. What we believe differentiates Penguin Computing from the competition is our ability to work with our customers from the design phase, through integration, all the way through to implementation and management of large HPC and AI clusters. Additionally, we are able to provide solutions on-premise, in the cloud, and at the edge. In the third quarter, IPS sales totaled $171 million, which represented 45% of total SGH sales, reinforcing the transformation we're going through. Compared with the year-ago quarter, IPS sales increased by 31% excluding Stratus Technologies and were up 79% including Stratus. Our service revenue, the majority of which is generated in IPS, represented 15% of total SGH revenue in the third quarter and reflects the incremental value we are providing to our customers. Our services include point-in-time services such as design and implementation, as well as longer-term managed services. During the quarter, we continued to introduce new technologies and capabilities in the market. Penguin announced a new version of its flagship Scyld ClusterWare software platform, which is a powerful management and monitoring tool that empowers customers to expand their own HPC clusters. This new version provides greater scalability, boosts performance, and delivers greater ease-of-use for users. Stratus announced the next generation of its fault-tolerant computing platforms that enable our customers to run business-critical applications such as transaction and payment processing to industrial automation at the core, in the cloud, and at the edge. During the quarter, Meta announced the completion of the second phase buildout for their AI Research SuperCluster known as RSC. As our implementation partner, Penguin worked with Meta to design the AI-optimized infrastructure that powers their RSC, improving the overall cluster management and implementing the system. The Navy DoD Supercomputing Resource Center's newer supercomputer named Nautilus is a Penguin TrueHPC system featuring 48 GPU nodes. This HPC system, which completed its final testing in April, enables scientists and researchers to use complex applications to unlock weather patterns and ocean modeling, providing predictive insights about the earth's climate and sustainability. Today, we're also announcing that Dave Laurello, who joined us as CEO of Stratus at the time of the acquisition, will take on an expanded role as President of IPS, replacing Thierry Pellegrino. We believe that Dave's extensive experience building and leading technology teams, while serving Fortune 100 enterprises, will help us scale our customer engagements and overall operations. Prior to Stratus, Dave also worked in executive roles at Lucent and Digital Equipment Corporation. While there is a heightened level of customer engagement with regards to HPC and AI opportunities, we recognize that we are still in the early stages of generative AI and machine learning. As we have noted on prior calls, we expect IPS sales will be lumpy due to the deployment timelines, decisions and cycles of large customer installations. Over the long term, under Dave's leadership, we believe we're in a position to capitalize on these emerging market trends. Shifting to Memory, our Memory Solutions Group is currently made up of two businesses: Specialty Memory, which is focused on specialty memory applications in the enterprise; and our Brazil Module business, primarily serving the consumer market. Overall, third quarter memory revenue came in at $148 million or 39% of total SGH sales and was relatively flat with the second quarter. We have a long history of serving enterprise customers in the networking, telecom and industrial end-markets. An area of focus going forward is to leverage this expertise to help drive memory subsystem innovation in AI and machine learning. For example, our CXL offerings remove the performance and latency bottlenecks between GPUs, CPUs, and memory in HPC applications. We are seeing strong design activity and customer interest for our CXL offerings and the wide variety of CXL architectures required by customers plays to our strength. In addition to our development efforts with CXL, we continue to implement leading-edge test processes to ensure high levels of quality and reliability for our enterprise customers. Our zero failure rate or Zefr memory offering is gaining significant interest among major customers as it meaningfully reduces field failures and helps to maximize system utilization. During the quarter, we started shipping DDR5 Zefr memory modules, which when combined with our DDR4 Zefr memory modules gives SMART Modular a key differentiation and high-availability memory products. Our memory business continues to demonstrate relative stability throughout the current memory cycle due to the specialty nature of our value-add business model. In the third quarter, this translated into operating margins of approximately 8% for our memory business. Now turning to our LED Solutions Group, which operates under the Cree LED brand and produces application-optimized LEDs for specialty lighting, video screens, gaming displays, horticulture, outdoor and architectural lighting. For the third quarter of fiscal 2023, LED Solutions totaled $64 million or 17% of overall SGH sales and were up 15% sequentially from what could have been the bottom in the second quarter. While customers are continuing to work down inventory levels, we are seeing customer design activity improving. Typically, as we come through these cycles, we look for this as a precursor to demand improving. And while we are still in early days in the cyclical recovery of the LED market, we are optimistic that the business will have a stronger fiscal 2024. Cree continues to be recognized as a leader in customer-focused innovation. During the third quarter, LED Magazine awarded three of Cree LED's latest product releases with BrightStar Awards for innovative LED products. The XLAMP Element G and Pro9 LEDs were recognized in the LED light sources category, while the Photophyll select LEDs were recognized in the horticulture, SSL, and control systems category. By continuing to invest in advanced LED technology, Cree is able to empower its customers with new and innovative LEDs to achieve remarkable system-level solutions. We believe that the combination of industry-leading technology in IP, a capital-light outsourced manufacturing model and disciplined expense control, has positioned Cree well in these challenging times. We are starting to see signs of improving customer demand and expect revenue to be up modestly in the fourth quarter. I'll stop here and hand it over to Ken for a more detailed review of our third quarter financial performance and our guidance for next quarter. Ken?

Thanks, Mark. I will focus my remarks on our non-GAAP results, which are reconciled to GAAP in our earnings release tables. Now let me turn to our fiscal third quarter 2023 results. Total SGH revenues were $383 million and non-GAAP gross margin came in at 28% at the midpoint of our guidance. Non-GAAP diluted earnings per share were $0.66 for the third quarter. In the beginning of this fiscal year, we began providing the breakdown of our overall revenue by product and services. As a reminder, our services revenue includes longer-term services, as well as point-in-time services such as logistics and implementation services. In Q3, our overall services revenue totaled $58 million, up from $48 million in the year-ago quarter and helped by the inclusion of Stratus, which we acquired at the beginning of this fiscal year. Product revenues were $326 million. Third quarter revenue by business unit was as follows: IPS was $171 million; memory was $148 million; and LED came in at $64 million. This translates into a sales mix of approximately 45% IPS, 39% memory and 17% LED. Non-GAAP gross margin for SGH in Q3 was 28%, up from 25.7% in the year-ago quarter, driven primarily by IPS. Non-GAAP operating expenses for the third quarter were $70.9 million, down from $72.5 million in the second quarter of 2023. Operating expenses were down from the prior quarter, primarily due to continued cost containment initiatives, as well as lower bonus accruals. Operating expenses benefited in third quarter of 2023 from $0.4 million in financial credits in Brazil, which was down from $1.4 million in the second quarter of 2023 and down from $3.3 million in the year-ago quarter. This credit is expected to provide minimal benefit in our fourth quarter of 2023. Non-GAAP diluted earnings per share for the third quarter of 2023 was $0.66 per share compared with $0.87 per share in the year-ago quarter. Included in our non-GAAP EPS for the third quarter is a reduction in taxes of approximately $6.5 million or $0.13 per diluted share, as we anticipate using additional prior year net operating losses to offset U.S. taxable income for fiscal 2023, which also has the benefit of reducing our cash taxes for the year. Adjusted EBITDA for the third quarter of 2023 was $45 million or 12% of sales, compared to $64 million or 14% of sales in the year-ago quarter. Turning to balance sheet highlights, our net accounts receivable totaled $244 million, compared with $229 million last quarter. Days sales outstanding came in at 42 days, up six days from the last quarter, primarily due to the timing of invoicing and collections for IPS. Inventory totaled $226 million at the end of the third quarter, down from $294 million at the end of the prior quarter. The decrease in inventory was driven primarily by a reduction in IKEA and memory inventories in the third quarter. Inventory turns were 7.6 times in the third quarter versus 6.3 times in the prior quarter. And consistent with past practice, net accounts receivable, days outstanding and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $526 million and $428 million respectively for the third quarter. 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 totaled a record $401 million at the end of the third quarter, up $25 million, compared with $376 million at the end of the prior quarter. Third quarter cash flows from operating activities totaled $41 million, compared with $101 million in the prior quarter. And for those of you tracking capital expenditures and depreciation, capital expenditures were $13.3 million in the third quarter and depreciation was $9.5 million. Earlier this month, we announced an agreement to divest the majority stake of SMART Modular Brazil. The 81% divestiture of the commodity module business in Brazil will enable SGH to focus on our strategy of delivering high-performance, high-availability solutions to our enterprise customers. The proposed purchase price values 100% of SMART Brazil at an initial enterprise value of $205 million, and values an 81% disposition at $166 million. We will receive an upfront cash payment of approximately $138 million, subject to certain customary adjustments and a deferred cash payment of approximately $28 million to be paid 18 months post-closing. The transaction is expected to close by the end of calendar year 2023, subject to regulatory approvals and satisfaction of customary closing conditions. The parties have also agreed to a put-call feature for the remaining 19%, exercisable during three exercise windows between 2027 and 2029. The put-call values 100% of the Brazil business at 7.5 times its fiscal year net income. For example, if the put-call is exercised in 2027, the reference net income would be fiscal 2026 and SGH would receive 19% of such value at the time of and subject to the exercise of the put or call. For reference, the Brazil business revenue totaled $153 million through the first three quarters of 2023 and approximately $39 million in the third fiscal quarter. Based on current run rates for the business, at closing, we would expect this divestiture to be immediately accretive to our non-GAAP gross margins by over 200 basis points and also neutral to slightly positive to our non-GAAP earnings per share. Now, let me turn to our fourth quarter fiscal 2023 guidance, which includes Brazil. We expect that revenues for the fourth quarter of 2023 will be approximately $375 million at the midpoint plus or minus $25 million. Our guidance for the fourth quarter incorporates the following assumptions. For IPS, which is more project-oriented with variability related to the timing of hardware sales, we expect sequential revenues to be down slightly at the midpoint. For memory, which includes SMART Brazil, we expect total revenues to be relatively flat sequentially. And for LED, we expect revenues to be up modestly in the fourth quarter. Our GAAP gross margin for the fourth quarter is expected to be approximately 26% at the midpoint plus or minus 1%. Non-GAAP gross margin for the fourth quarter is expected to be approximately 28% at the midpoint, plus or minus 1%. Our non-GAAP operating expenses for the fourth quarter are expected to be approximately $71 million plus or minus $2 million. GAAP diluted earnings per share for the fourth quarter is expected to be approximately $0.02 plus or minus $0.15. And on a non-GAAP basis, excluding share-based compensation expense, intangible asset amortization expense, debt discount and other adjustments, we expect diluted earnings per share will be approximately $0.45, plus or minus $0.15. Our GAAP diluted share count for the fourth quarter is expected to be approximately 54.5 million shares based on our current stock price. Our non-GAAP diluted share count is expected to be approximately 52.5 million shares as it includes the benefit of our convertible note capped calls. Cash capital expenditures for the fourth quarter are expected to be in the range of $15 million to $20 million. And our non-GAAP taxes for the fourth quarter are expected to be in the 11% range as we get continued benefit from our U.S. net operating loss carryforwards. However, as we look into fiscal 2024, we will have used the majority of our available U.S. tax attributes and our non-GAAP effective tax rate is expected to increase to the low to mid-20% range. We continue to manage our operations in a prudent manner as we navigate a challenging environment, while also continuing to invest 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. Now let me turn it back over to Mark for a few remarks prior to Q&A.

Thanks Ken. While we are in the early stages of AI, machine learning and data analytics deployment, we feel SGH is well-positioned to grow over the next three to five years. As such, we continue to transform into a business focused on delivering high-availability, high-performance enterprise solutions that help our customers solve for the future. We are not only benefiting from the right secular tailwinds in terms of end markets, but we have an operating model that has performed well throughout the cycle. The combination of our shift towards enterprise solutions and the secular tailwinds, coupled with this discipline on how we operate the company, make us optimistic about the future and our ability to deliver long-term value to our shareholders. With that operator, we are now ready for Q&A.

Certainly. The first question is from the line of Kevin Cassidy with Rosenblatt Securities. You may proceed.

Hi, excuse me. Thanks for taking my question and congratulations on the great results and good guidance. Maybe, there's of course a lot of questions around the IPS business right now and the interest in AI. Can you say how your RFQ funnel or maybe opportunity funnel has grown, say since the beginning of the year and how are you addressing it? I guess, how are you choosing which customers to pursue?

Yes, great. Kevin, this is Mark, thanks for the question. Well, needless to say, the level of activity is noticeably on the uptick. And the second part of your question is really an opportunity and a challenge for us because our model is a bit different. We're looking for customer relationships that really want us from a trusted adviser role and all the way from the beginning of our engagement on designing systems and solutions to implementing them and then managing them post deployment, if you will, post installation. And so, the criteria around how we do it just given the level of activity is really what's the best fit in terms of a partnership model with the customer and what role we can play. And so that's how we're looking at it, because, as you might imagine, if it's just a hardware play, that's a game we don't want to be in and we're trying to select the type of relationships we engage with to be those that are a little bit more full service oriented.

And maybe just add on to that, what interest are you seeing from various vertical markets? It's more than just cloud or are you seeing broad interest?

Yes, that's also interesting because it has really taken off in terms of the vertical kind of expansion. Certainly, the cloud hyperscalers were early to market on some of this and I'll come back to that in a second, because it's just not the big names. There's a class of what I would call Tier 2, Tier 3 cloud providers that are building out data centers for custom type application environments, which is obviously very interesting to us. But I think financial and healthcare are two that are very interesting for us. Oil and gas continues to be one that's very interesting to watch. And I'd say, one we continue to take a look at is education and research, while that was kind of the original market segment for HPC to expand over the years. AI is taking on a new definition of what that opportunity looks like in terms of science and research and what have you. And so, I know that sounds like a lot, but I mean, everyone is taking a look at how they can enable AI in their enterprise. So, it's been an interesting year to watch the horizontal expansion of customer interest.

Great. Thanks, Mark.

Thank you, Mr. Cassidy. Our next question is from the line of Tom O'Malley with Barclays. Please proceed.

Good afternoon, and thanks for taking the question. I wanted to revisit the AI topic, as it's clearly very important right now. You have some exposure to AI in the Specialty Memory business and also with Penguin. If you had to assign a percentage for AI as a share of total revenue today, could you estimate that for us?

That's a tougher one for us to answer. In my script I talked about our deployment of GPUs at scale, roughly over 50,000 GPUs. If you play that out across the industry, you can see that level of scale. It's hard because I have to take liberties with definitions when we talk about an AI system, since that could include the networking component, the storage component, the services component, or just the platform, so we don't really have a good metric and I don't want to mislead you. But the figure I just gave you of 50,000 NVIDIA GPUs under management should indicate that we're looking to continue to grow and invest in that area. Ken will add more.

Yes, Tom, it's a good question. I think if you look at it, and as Mark mentioned, it's tough to decipher one for one, but if I look at systems that either use a lot of GPUs or systems that in Jack's business and Specialty Memory that are going into the data center for these generative AI applications and the like, my guess is that number for our fiscal 2023 is probably trending north of $250 million in aggregate, could be north of $300 million if we look at it on a blended basis.

So you're saying fiscal 2023, the AI exposure is greater than $300 million?

I'd say greater than $250 million, approaching the $300 million.

Got it, helpful. And then Mark, you made the comment that Q2, looking back, may have been the bottom for the LED business. Could you talk about what you've seen in terms of changing trends there. Obviously there were some tough times in China, but could you just remark on what's gotten better?

Sure. I think the primary index for us has been, despite some continued channel burn, the customer design activity, which is a good precursor and index for us. The customer design activity is up and positive. And look, I don't want to celebrate too much from the bottom, but revenue quarter-over-quarter was up about 15% and that at a time where there was still more channel burn. So, we're not building inventory in the channel to achieve revenue growth. We got good revenue growth from the bottom at a time where the channel is still burning some inventory. So I would just say overall, that coupled with the design activity, is very favorable. The other thing I would say is, this LED market environment is not specific to Cree. As a matter of fact, I would encourage you to benchmark Cree's performance relative to the competitive landscape. Cree has done a great job and it's just been a tough business very similar to the memory environment, Tom. Cree has done a great job navigating some really tough headwinds during the macroeconomic environment they faced and I'm just really impressed how they've navigated and gotten to today.

Helpful and then just if I could sneak in one more. Traditionally, you see some very strong seasonality for your IPS business into the November quarter. You commented in your slides for IPS that you just completed the second phase with Meta on the SuperCluster. Is there any reason why November seasonality would be any different than what you've seen historically there just given some of the programs have wound down?

Well, it's kind of a loaded question, but I'm going to try to answer, but it's a tough question given that the timing of these deployments, when you're growing like we've grown, because we've been able to navigate a lot, the timing of somebody's deployments— not just the budgeting piece upfront with our customers or even the large-scale customers and other allocating budgets, but also just once you get the orders, when those get installed and how they get installed, the supply-chain challenges. The supply-chain has improved broadly, but if you look at certain key technologies and networking component of these installations, the GPU availability at the leading-edge GPUs in the industry, I just can't commit that everything is going to be the same as the prior year, given all the factors that I just went through: lumpiness, concentration, deployment timing, capital budgets, supply-chain. We are long-term believers. We think we're in a really good place, but I want to stop short of calling quarters that far in advance.

Really appreciate all the color. Thank you guys.

Thank you, Mr. O'Malley. The next question is from the line of Sidney Ho with Deutsche Bank. You may proceed.

Thank you. It's great to hear about the demand strength that you guys have seen in AI. So a couple of quick questions here. One, do you see the demand for these AI servers crowding out spending on traditional servers, meaning it's coming out from the same fixed budget, but that may not be impacting you guys? And the second question I have, if you can give us an update on your Penguin on-demand solution, that would be great. What kind of customer appetite are you seeing for consumption models versus the traditional CapEx model, particularly as it relates to HPC and AI market?

Can you just repeat, restate the first part of the question?

Yes, the first part is just trying to figure out, everybody is spending a lot more money in AI and of course, you see a big uptick in the demand strength. But do you see that as basically coming from the fixed IT budget such that some of the money is being pulled from traditional spending on traditional servers?

I'm not sure that I can really give you a definitive answer there. I guess, I would say, we have seen in fiscal 2023 money reallocated when there is commercial success in the deployment in the production side of the house for these type of systems. As far as next year's budget process and obviously our fiscal years are off-cycle with the budget process of our largest enterprise customers, I think if I had to guess, I would say, yes, probably, there would be some shifting of budgets toward this. But, you're talking about different types of customer environments and the ultra-scale, hyperscale customers obviously have a lot of infrastructure, they have to build-out not just AI, but just pure cloud resource capabilities. And in some of the newer verticals, I think the map heads up and we have to remember that we're not quite out of the woods on the overall macroeconomic headwinds. So I'm guessing that there'll be money that needs to be shifted appropriately, but it's just such a broad question that I want to just cautiously answer a little bit. On Penguin on-demand, for us, it is something that we're shifting slightly in our model on demand. We announced this year in fiscal 2023 our partnership with Google Cloud as an HPC partnership model with them. And so while we do have cycles being used on our Penguin on-demand platform, our strategy really is to leverage some of their capabilities in infrastructure with our Google partnership and in addition to that, leverage our control-plane software, the Scyld ClusterWare software platform that allows people to run their workloads in a hybrid environment, both on-prem and in the cloud. We are really focused on workload optimization, not necessarily carrying where that workload is being processed.

Okay, great. Maybe a follow-up question. Looking at the Brazil memory divestiture, you talked about EPS being neutral to slightly positive. Can you talk about what's included in that assumption in terms of the use of proceeds from the divestiture and kind of relate to that now that you have divested the Brazil memory business to focus on enterprise solutions, how are you thinking about other non-enterprise driven businesses and maybe touch on your M&A strategy going forward?

Thank you. Yes, sure, good question, Sidney. So if we look at the accretion dilution, one, we said on the formal portion of the transcript that we would expect the gross margin accretion would be north of 200 basis points and the transaction—based on the current run rates—to be kind of neutral to slightly positive to our non-GAAP EPS. That does not include the net proceeds that we would receive. And so it is just based on the current state and run-rate of the Brazil business. If we look at the net proceeds, in terms of how we look at and where we will deploy that, we said we really have three to four vectors in terms of how we think about capital allocation. First and foremost, continue to invest in the business. I think Mark highlighted in his formal comments continued investment in the IPS segment. There's lots of opportunities as you could imagine with our platform and our ability to grow longer-term in that segment. Number two is to look at M&A and inorganic opportunities similar to Stratus, which we closed earlier this fiscal year. Those have been great additions to our overall business line. Number three is returning capital back to shareholders. If you looked over the last 12 months or so, we've returned about $58 million in terms of share repurchases. And then also I would say four is looking at reducing our gross debt levels. Our net-debt levels are very reasonable, but just looking at potentially reducing gross debt. So in terms of the net proceeds from Brazil, once that transaction closes, we would look at those opportunities.

Thank you, Mr. Ho. Our next question is from the line of Raji Gill with Needham and Co. You may proceed.

Yes, thank you and congrats as well on great results. A question again on the AI business, the IPS business. So you mentioned it grew 31% year-over-year excluding Stratus. When we're thinking about the overall market size for this opportunity, is there a way to think about it from a bottoms-up view? How are you kind of valuing the overall market opportunity? Are you kind of valuing it in terms of potential projects based on certain verticals that you're targeting? You mentioned conceptually some of these verticals here you're focusing on, financial services, healthcare. Any thoughts on long-term in terms of how you're identifying and quantifying the size of the market and how that leads into your pipeline of business that you want to try to go after?

Sure, I'll start and let Ken jump in as warranted. Raji, thanks for the question. I think the best way to think about it is that there is a broad market opportunity that you can size up for AI and one way we look at it is there are large companies that will deploy the technologies and systems and not really need or want initial outside services and capabilities that we'd like to provide. As I've mentioned before, and you can see from a comparison on where our gross margins are relative to our competitors, we're just not going to play that game. That's just not a good game for us to be in. That's not what we're good at. I'd like to think of us as a subset of the AI market where we're really playing the role of not just the system designer and developer, but the service and trusted adviser consulting type model that we're full-service end-to-end. That's a smaller subset of the bigger pie, because there are large companies that are looking to deploy with their in-house capabilities and that's something that some of our customers will eventually look for us to do more or don't build their own capabilities and we have to continue to bring on new customers that way. And that's the dynamic nature of the business. There's so much activity that way that we're excited about our go-forward business. But we're not the whole AI market and I want to be transparent. We're going to be disciplined because at the end of the day, I just don't want to take us through a hardware-only business. That's not going to be one we're going to be very profitable in nor are we going to be as competitive as we are in the core trusted adviser model.

Got it. I think that's really helpful to try to understand the distinction between your model versus others. Just with respect to the competitive advantage and again you mentioned your focus being on more, kind of, smaller customized solutions. Where do you think Penguin Computing's ultimate competitive advantage is relative to the other competitors and can you talk about who are you competing with head-to-head. Is that changing at all, given the deployment of AI inside companies? Are you seeing the competitive landscape change? Any thoughts in terms of Penguin Computing's competitive advantage, and why are you winning. And if you do lose, what are the reasons why you might lose? Thank you.

Yes, let me do my best with that. If I broke down the pyramid of engagements that we have and that we're targeting, the top-tier or the major enterprises looking to deploy AI, in the middle tier might be significantly large enterprises but not necessarily with the spend at the level of a Tier 1 project. And then there's kind of early-stage technology deployment more for testing applications and getting feet wet. If you think of three different tiers, we look at each of the opportunities and how we play in them. I think the differentiation and you asked about competitors. The primary competitors we see out there are Dell, HP, and Supermicro. Each one of those is a large-scale hardware player with margins substantially lower than us in the business today. Now, I'm not here to try to argue whose model per se is better. It's just what we're good at and what we're focused on. Of course, the three companies I mentioned are not the only companies, but they are examples of who we compete against. If someone is trying to roll their own internal AI deployments and it's a hardware-only game, those folks have the margin structure to win on that model. For us, what we're good at—and it comes with 25 years of history of deploying these type of systems—is that we're not talking about one server and a generic software application. Just yesterday, I was over—we have one of the earliest deployments of liquid immersion technology for a big customer of ours. That's in our lab, and our differentiation is we're out in front of the technology, we're learning about it, so we can bring it to market and we can design it for an environment that we've seen before, because over 25 years there's a lot of organizational know-how. Whether it's on the design side or the actual deployment side, when you think of data centers and the complexity of connecting massive amounts of compute power with memory, storage and networking and making sure the right power infrastructure is in place—this is not easy. When you combine all that, our value-add is how to design them for a customer's environment, how to deploy it and how to manage it.

I appreciate that insight. And just last question, Ken, on the model. You mentioned that the IP business ex-Stratus grew 31% so maybe just do the basic math, it looks like Stratus might have been around like $45 million in the quarter. Is that kind of the run-rate that you guys are thinking about, $45 million a quarter? And are there growth drivers in the Stratus business?

Yes, so to put it in perspective, last quarter it did closer to $41 million, this quarter it's closer to that $45 million, $46 million range. So it does move around a little bit quarter-to-quarter based on some of these hardware deployments relative to Stratus specifically as well. Where that business has been growing is primarily at the edge where they have a leading solution for high availability fault tolerant applications. If you are trying to run an application and it can't go down for more than five minutes a year, you go to Stratus and those types of applications can be in the oil refining area, oil and gas, in retail, on oil rigs, or in water treatment plants—areas where you require a business-critical compute system to run those applications. That's where that business has been growing over the last 12 months.

And the follow-on, I'd just like to add one more comment, Raji. We've said all along that, sure, AI and the HPC environment on-premise is where a lot of the early movement is going to be. But over the long term, we believe AI will be more broadly deployed throughout the enterprise and certainly at the edge. What Ken just described gives us an opportunity to extend the AI and the enterprise customer relationships we have.

Thank you, Mr. Gill. Our next question is from the line of Mark Lipacis with Jefferies. You may proceed.

Hi, thanks for taking my question. Mark, for the IPS business, you described it as lumpy. Can you describe the process that you expect to undertake to transition that to a less lumpy business? And I'm wondering, is it that each time you do a project it ends up being a recurring service or management stream over a multi-year period and then these just kind of stack-up on top of one another for each project that you do? Or do you become the in-house provider?

Thanks very much for that question. It's a great question and it really reinforces the differentiation I think we are achieving with our capabilities and the byproduct of that should help us on some of the lumpiness over the long term. As you said, because of our strategy, our aspiration is to build out these services over time that become more and more recurring and predictable. Remember we're early on—about two years into this. If you look at the services, they have grown dramatically and we're excited about that. Our focus is on selecting the right engagements with our customers so we can continue to build recurring services. Given that we have been growing substantially, yes, services are up, but it's going to take time to build a steady, recurring base. If you think about where we've come from, with the divestiture of Brazil, we've got a business that is now a compute story, with gross margin percentages dramatically up and operating income performance that has been strong through a difficult cycle. The memory business has been through a tough cycle. Generating cash and investing in this transformation is our focus. The Specialty Memory business really plays well into the enterprise solutions for AI, machine learning and data analytics because the biggest bottleneck right now in high-performance compute AI is the memory connectivity and I think SMART Modular is a leader. Put it all together, we have a bright future. It might not be perfect every quarter because of lumpiness, but as we design and get our customer relationships more aligned to a full engagement model with solutions and services over the long term, I think we can mitigate some of the lumpiness and concentration issues we've had in the past.

Got you. And appreciate you're only a couple of years into this. Do you have the starting base of services and management and would you care to break it out?

I think if you look over the last nine months or so, services are up about 60% year-over-year for the first nine months versus the first nine months last year. Within that, there are point-in-time services like logistics and design and implementation, and then there are ongoing services that we've been growing over time as well.

One more comment: the discipline is to stay away from hardware bidding one-offs. Do what you're good at—stick to your knitting—and focus on services and full engagements. That's how we intend to expand IPS.

Got you. Thank you.

Thank you, Mr. Lipacis. Our last question is from the line of Brian Chin with Stifel. You may proceed.

Hi, great, thank you. Good afternoon, nice job. Maybe backtrack to Brazil, any consideration to reporting Brazil in discontinued ops, and I guess I'm a bit surprised by the limited EPS impact when you strip out Brazil. So basically, Brazil was operating at a slight loss in Specialty Memory. Op margins seemed to be in the low-to-mid teens historically. Also thinking across the cycle, what were the op margins in Brazil when the business was operating at peak revenue run rates maybe four to five quarters ago?

If you look at the Brazil business and where it is today, we tried to outline the first three quarters and the current run-rate was about $39 million in revenues in Q3. The margin profile for that business is lower than where it was a year ago. Historically, this has always been a business with lower margins relative to SGH's corporate average and well below the company average even at peak times. Where we've done better in terms of both margin profile and operating margin is in the Specialty segment where we are targeting enterprise solutions and higher-value added solutions for our customer base. In terms of discontinued ops, we will evaluate whether the Brazil business will be available-for-sale/discontinued operations as we head through the end of Q4 and make that determination as we exit Q4.

Okay, fair enough. And then maybe be a bit direct on IPS. Broadly speaking, are you starting to rebuild the funnel there in IPS and rather than ask you about a quarter, how are you thinking about IPS growth rates in fiscal 2024 based on current visibility?

We're seeing a lot of activity right now. It's difficult to forecast given the timing of budgets and deployments and how those align with our fiscal year. There are supply-chain considerations and broader macro trends; I'm not sure we're fully out of the woods on macro. We're trying to be careful not to overstate where things are. We're long-term bullish and will provide more color as we get closer to customers' budgeting processes and see future Q1 and Q2 activity.

On the discontinued operations question, as I mentioned, we announced the deal in Q4 and we'll evaluate at the end of Q4 whether the Brazil business meets the criteria to be classified as held-for-sale or discontinued operations.

Okay, that makes sense. And then maybe lastly, to hone in back on the discussion around AI, when you think about the duration of your sales cycle, the sales, design, and implementation cycle, as well as possible supply constraints, is mid-next year a reasonable point to expect some of this upswing in AI engagement to translate into revenue?

I think that's fair as we sit here today. I'm not trying to over-hedge, but based on what we're seeing in terms of core technology lead times and manufacturing ramps and some of the newer launches in the industry, I would anticipate by the middle of next year we start to see a more favorable condition for availability of supply.

All right. That’s helpful. Thanks.

Thank you, Mr. Chin. That concludes the question-and-answer session. I will now turn the call over to Mark Adams for any further remarks.

Well, thank you all for joining today. We are continuing to be very positive about the business. If you look back over the last three years, we feel like we're way ahead of where the transformation might have been when we started in August of 2020. A lot of good things going on here at the company. We're excited for both ourselves and our Brazil team on the path that we have for each other going in different directions, but supporting each other through the process. We like the secular tailwinds we have in AI, machine-learning, and data analytics to drive our future and we appreciate you attending today's call. Thank you.

That concludes the SGH third quarter fiscal 2023 earnings call. Thank you for your participation. You may now disconnect your lines.