SMART Global Holdings, Inc. (NASDAQ:SGH) Q2 2024 Earnings Call Transcript

Jack Pacheco: Hi. Yeah, as Mark mentioned, right, we talked — he talked about the end of kind of this calendar year, we expect to see some meaningful shipments in CXL. And so both, we will be shipping it into kind of your standard server companies. We also were in conversations and we’re sampling a lot of different folks in AI as well that want to have more memory in their AI servers. I mean, as HBM grows, you need to put more and more normal memory in your server. And to do that, you start running out of room at the DIMM slots decrease the faster you need to run this memory. So the only way to get that additional memory is really to use CXL and try to pop more memory into that server. So we’re seeing opportunities in both phases of the market.

Unidentified Analyst: That’s very helpful. Thank you.

Mark Adams: Thank you.

Operator: The next question comes from the line of Brian Chin with Stifel. Brian, your line is now open.

Denis Pyatchanin: Hi. This is Denis on for Brian. Thanks for letting us ask a few questions. So regarding IPS, how has interest in generative AI over the last year or so changed the customer acquisition into eventually product delivery rollout process? Has it become lengthier or more complex? And then you mentioned you have these options like on-prem, co-location or co-investment. How does the customer’s choice of one of these three impact either the timeframe for a rollout or kind of your business in general?

Mark Adams: Yeah, that’s a great question, and let me just kind of step back a little bit. I remain convinced that we are in the super early innings of AI. And all the noise around sales of GPUs and the like, yes, that’s a catalyst or a metric for what’s ahead. But I would tell you that I think large-scale enterprises are still really crafting their strategy on AI. I don’t think — I think a lot of those GPU sales went to people in the middle who were building the infrastructure. And I don’t think the large-scale enterprises really have fully defined how AI is going to change their business and give them a strategic advantage. So why I say that is this is all playing out real time in front of us. In addition, this is a brand new architecture for any enterprise outside of the big hyperscalers who have been in this for a few years.

But, I mean, there are companies who are household brand names in the industries they compete in that really are struggling with even how to design a data center or how to develop the right solution and why you would do a versus b. And so when I think of what your question is getting at is, what is this doing? It’s actually made, I think, adoption more of a longer-term process. But I also think, as I mentioned earlier in this call, what I have validated through my executive engagements with our sales organization is large enterprises are starting to get it. They’re starting to understand that there is a gap between what they have done from an information technology perspective and the capabilities they will need to deploy AI successfully. And that gap is really the opportunity for a Penguin.

And so, from our perspective, yes, it might be a little bit longer, there might be more of an education curve, but that’s also leading us to get more sticky and really be able to identify the value that we can provide our partners, our clients that need our help in deploying AI. And I think that’s where you sense the confidence and the optimism for the second half of our fiscal year.

Denis Pyatchanin: Great. Thank you. And then for my follow-up. So, we recently heard about memory price increases, both DRAM and NAND from all of the big memory suppliers. If prices were continue to increase, how would you foresee this impacting your future gross margins?

Mark Adams: We’re not going to forecast more than we normally do in a given quarter. So Ken’s kind of giving you the forecast. I will say a couple of things. I think any such benefits that you’ve alluded to normally will show up in our top line revenue. But as we’ve been clear on, on prior calls, our gross margins will trickle up or down depending on which way pricing goes. Why is that? Because when pricing moves, our value add doesn’t change and our customers realize that. And so, ironically, when our revenues go down, our margins stay pretty stable, maybe even trickle up a little bit just because of the math of fixed value over a declining revenue stream. And the reverse is true. We might see impact down a point or two or whatever as recovery happens.