Tom O’Malley: And just one more. When most peers generally don’t take out businesses until the full sale is complete. You guys decided to move the Brazil business into discontinued operations. Can you just walk through the rationale for that decision, inter quarter? Thank you.
Mark Adams: Yes, sure, Tom. So a couple things. One, there’s kind of a two-step process. One, we look at held for sale and look at the asset as such. And then there’s another step in terms of looking at the significance and likelihood to close the transaction. And those are the two factors from an accounting standpoint that drives this business migrating towards so to discontinued operations. And that’s part of the reason why in Q4 it is now discontinued operations. And that’s part of the reason also why we’ve recast the historicals and the go-forwards for the continuing operations of the business.
Tom O’Malley: Thank you.
Mark Adams: Thanks, Tom.
Operator: Thank you for your question. The next question comes from the line of Quinn Bolton with Needham. Your line is now open.
Quinn Bolton: Hi guys, thanks for taking my questions. I guess just thinking through the comments, obviously you’ve talked about based on customer budgets and visibility, think IPS is probably stronger the second half of the fiscal year versus the first. Your comments around inventory burn on memory, you know, taking another quarter to make me think that memory solutions probably also better in the second half versus the first half, but wondering if you would comment on that. And then similarly, the Cree or the LED business looks like it’s more stable here in the near term but do you have any sort of first half versus second half commentary you can give on the LED business.
Mark Adams: Let me start again. I’ll have Ken jump in. Let me just tackle memory first. Memory pricing, vectored into the memory reporting public reports on earnings and what have you. Memory pricing is reflected as down significantly. And revenues at the memory players down, some is down as much as over 50% revenue in negative gross margins and negative EPS. When we see memory pricing stabilizing, it takes a little time to flow through to the performance. And so I think on the memory perspective, while we’re not going to forecast the number, we would agree with your sentiment that second half could potentially be better than the first half. LED, similarly is trending better for us than, say, Q2 of ’23, and we’re hopeful that that will continue.
I think we do see that sometimes there is a little bit more cyclicality in the LED business given some of the regional holidays and how they line up and the likes, speaking more towards, again, not forecasting, but just the trends we’ve seen in the past in Q2. But again, that business is recovering. We’ve seen back-to-back quarters of some incremental growth, and we’re favorable on the design improvements with some of our customers. So again, that’s what we’re counting on and then hopeful for that the LED business will continue to rebound from where it is today. And then on IPS, the market is favorable that way and given the lumpiness of the business and the timing of deployments and some of the variables that go in, including things like supply chain, yes, we’re signaling that our current view of the world is that the second half will be better than the first half.
Ken Rizvi: Yes, and the only thing there on the LED side, Quinn, is that if we looked in 2023, we did see the distribution network reduce inventories quite a bit in the neighborhood of call it $18 million. And that is now at a more normalized level. So that’s helping us and it’s a healthy entry point as we head into 2024 for LED specifically.
Mark Adams: Yes, I guess I would also add, as I listened to Ken’s commentary, that inventory level is not contributing at all to any of the revenue growth that Cree’s generating from Q2 to Q3, Q3 to Q4.
Quinn Bolton: Got it. Okay. But the second question maybe for Ken, now that you’ve classified the Brazil, SMART Brazil as discontinue operations, can you give us sort of new targets for long-term gross margin and an op margin excluding SMART Brazil?
Mark Adams: Yes, so we haven’t outlined the long-term margin expectations. I think the thought will be as we move into calendar year ’24, we’ll outline that once that transaction closes. But I think what you can see, and even if you look at the recasting of our historicals, is that in the last year, we’re running north of that 30% margin level, which is a substantial improvement relative to where we were a couple of years ago, inclusive or exclusive or excluding Brazil. And so the business is just a much different business model today, not only from the overall margin perspective, but also if you look at the services component, which last year was running close to a $0.25 billion, that margin profile is in that 55%, 60% range, plus or minus a bit as well.
So that’s fairly healthy. And that provides some stickiness in the sense that we have reasonable visibility on a large portion of that services revenue up to a year and sometimes a bit longer. So we will, as we are able to execute and finalize the Brazil transaction, we’ll come back to investors after that and we can outline where our targets are. But I think based on where the business is, we’d shoot for something higher than where we are today. And as revenues grow, we would expect that we can also scale not only the gross margins, but have reasonable fall through down to the op income margins as well.
Quinn Bolton: Got it. And then lastly maybe a longer term question, you mentioned CXL and the prepared comments. Is there any way that you guys could size that opportunity you know, do you think it ramps with CXL 1.1, you know is those processors ramped. Do you need to wait for CXL Version 2 with [Granite Rapids] next year before you start to see, you know, that business really beginning to ramp any thoughts on timing as to when you start to monetize the CXL opportunity. Thanks.
Mark Adams: Well, yes, based on our – first of all, I think we’re in a really good position, a very unique position for us to drive revenue growth. I think as I think about it, your question is a really good one around is there kind of an overnight sensation or is it an evolution to new product development and revenue recognition? That’s how I interpreted your question and what I would say is it’s probably more evolutionary in ’25, ’26, meaningful revenue. We’ve got some good early qualifications on products, on test products. And we’re encouraged by where we sit in terms of the development timeline but because of processor and memory delivery and some of the new memory architectures that are needed to support this, Version 1, Version 2, Version 3 of CXL will only add to what I think will be a growing TAM. And I’ll let Jack, if you have any other comments around it, go ahead.
