SMART Global Holdings, Inc. (NASDAQ:SGH) Q2 2023 Earnings Call Transcript

Ken Rizvi: And Brian, as you look at the guidance that we provided and even the strength that we had in Q2, where we had record gross margins at 28.9% and our guidance, even though we have revenues coming down in Q3, the margins just still remain very healthy at that 20% on a non-GAAP basis. A lot of that is driven by what Mark just mentioned the combination of solution sales within IPS and a large portion of services, big services component. Now there’s always going to be some lumpiness that we talked about in terms of having hardware sales or more hardware centric quarters, and that can move the margins around a bit, but I think what you’ve seen over the last couple of quarters is that we’ve been able to maintain these margins in part due to the overall services mix, which is primarily focused around IPS.

Brian Chin : Maybe just quickly on LEDs, since you mentioned recovery there. At this stage have you pretty much drawn down that channel inventory that you spoke about in terms of channel-in versus channel-out, and is that sort of allowing you to think you can kind of grow with whatever recovery and demand occurs in that market.

Ken Rizvi: Yeah I think, Brian I think that’s spot on. So if you look at it over the last two quarters and we talked about it a couple of quarters ago that typically if you look at where we are in the cycle, it takes in that neighborhood of two to three quarters to burn down the inventory in the channel. We’ve seen that over the last two quarters. We’ve probably burned down close to $12 million of inventory in the channel. So that means that the sell-in is less than the sell-through. As we head into Q3, we are seeing more stabilization. There could be a little bit of channel burn, but back to normalized levels, and so we should start to get back to a demand environment and a revenue environment where our revenues equal end demand, and we’re starting to see an uptick at least as we look at Q3. We’re expecting revenues to be modestly up from Q2 levels, which is a good sign.

Brian Chin : Great, thank you.

Operator: Thank you. Our next question is from the line of Sidney Ho with Deutsche Bank. Please go ahead.

Sidney Ho: Thank you. Maybe a couple of questions. First on the IPS side, I think last quarter you guys talk about first half or is the second half being 60/40 or 55/45. What is your view now, maybe you can double click on it and highlight what has changed and maybe as part of that, you guys are talking about software. I guess software and services mix is kind of lower this quarter. If my math is right, it’s about 20% IPS versus a quarter ago it’s like 32%. How are you thinking about the software services mix going forward for the back half of the year?

Ken Rizvi : Yeah, so Sydney, thanks for the question, it’s Ken. In terms of that range, I think that still is true, as we look at the back half of the year relative to the first half of the year for IPS specifically. We had a number of great projects in Q1 and Q2 and we tried to highlight the fact that it was going to be more of a front half loaded year, although still continued strength in the second half for IPS, especially if you looked relative to where that business was a year or two years ago. On the services piece, as I mentioned last quarter is that there’s two components. There is some ongoing services where we have visibility, call it up to a year, sometimes even beyond that, and then there are services that are more what I would classify as point-in-time services, those can be designed.