Release Date: July 09, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenues totaled $300.6 million, in line with the midpoint of guidance.
- Non-GAAP gross margin of 32.3% was slightly above the midpoint of guidance.
- Non-GAAP EPS of $0.37 was well above the midpoint of guidance.
- Strong balance sheet with cash and short-term investments of $468 million.
- Increased activity and key customer wins in the Penguin business, including a multi-million-dollar non-hardware win.
Negative Points
- Margins in the memory business were lower than expected due to mix and higher price memory purchases.
- GAAP gross margin for the fourth quarter is expected to be approximately 29.5%, indicating a potential decline.
- Non-GAAP operating expenses for the fourth quarter are expected to increase slightly due to variable expenses.
- Extended lead times for certain components impacting the IPS business.
- The broader market environment in LED suggests potential consolidation, which could impact future growth.
Q & A Highlights
Q: Mark, with all the changes in management and the rapidly evolving HPC and AI market, how is IPS's go-to-market strategy changing?
A: Kevin, thanks for the question. Our evolution over the last three-plus years from a memory module company to an infrastructure solutions provider has necessitated changes in talent and capabilities. We've brought on new sales leadership and hired Dave Osborne as SVP of Partnership & Alliances to expand our reach. Our strategy now includes working with industry partners to expand our capabilities and development opportunities.
Q: How can you scale the Penguin products to handle more customers, given the growing interest in AI?
A: We've made significant progress in expanding our customer base and improving our go-to-market strategy. We've added new customers and partnerships, and we're scaling our resources to handle new business opportunities. For example, in Q3, we had a customer engagement that was software and services only, highlighting our value beyond hardware.
Q: Gross margins are guided to take a step back next quarter despite growth driven by IPS. Can you explain the margin pressure?
A: The margin pressure is primarily due to a mix issue. When we ship more hardware in a quarter compared to software and services, it drags down the gross margins. As we grow and take on new engagements, the hardware tends to be upfront, while software and services accumulate over time.
Q: Can you provide an update on the memory business and the impact of CXL products?
A: Our enterprise memory solutions business is less volatile compared to high-volume consumer memory businesses. While we didn't see a severe downturn, our recovery cycle is also more muted. We are starting to see strong demand forecasts for Q4 and beyond. We received our first production order for CXL in Q3, validating our leadership position.
Q: Can you speak more about the largest wins for ztC Edge and Endurance and the verticals adopting these systems?
A: We are seeing success in oil and gas and financial institutions, where high availability and lack of need for on-site support are critical. These environments benefit from our high-reliability solutions, and we believe our platform will be advantageous as AI inferencing at the Edge evolves.
Q: How is progress with new household names interested in HPC and AI systems?
A: We are seeing strong interest from traditional enterprises, financial institutions, oil and gas, and education sectors. We will discuss more about these engagements at our Analyst Day. Our go-to-market strategy is yielding positive results, and we are pleased with the progress in expanding our customer base.
Q: What was Stratus's contribution in the quarter, and how is it trending?
A: We won't break out brands like Stratus separately. However, any product we sell includes software and services along with hardware. The Edge platform from Stratus continues to perform well, and we are excited about the evolution of AI at the Edge over the next two to three years.
Q: Why is specialty memory able to grow in the fiscal fourth quarter despite typical seasonality?
A: The memory cycle was severe, but we are starting to see recovery in memory pricing and normalization of inventories at our largest customers. This recovery, along with new product introductions like CXL and Zephyr, is driving growth in Q4.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
