SMART Global Holdings, Inc. (SGH) Q3 2023 Earnings Call Transcript Summary

1. SGH's Q3 2023 financial results showed growth in services revenue, improvement in non-GAAP gross margins, and efficient management of working capital and inventory.

2. SGH expects Q4 2023 revenues to be around $375 million, with IPS revenues slightly decreasing, memory revenues remaining relatively flat, and LED revenues modestly increasing.

3. For Q4 2023, SGH anticipates GAAP diluted earnings per share to be around $0.02, while non-GAAP diluted earnings per share are expected to be approximately $0.45, with non-GAAP taxes projected to be in the 11% range.

SGH reported their Q3 2023 financial results with total revenues of $383 million and non-GAAP gross margins at 28% on average. The company's services revenue increased to $58 million from $48 million in the prior year quarter, helped by the inclusion of Stratus which was acquired earlier this fiscal year. Product revenues were $326 million. The sales mix for the quarter was approximately 45% IPS, 39% memory, and 17% LED. The non-GAAP gross margin improved YoY from 25.7% to 28%, primarily driven by IPS. Non-GAAP operating expenses were down from the previous quarter at $70.9 million due to continued cost containment initiatives.

SGH's net accounts receivable increased to $244 million from $229 million last quarter, while days sales outstanding increased to 42 days. Inventory totaled $226 million, down from $294 million in the previous quarter due to a reduction in IKEA and Memory inventories. The company's inventory turns were 7.6 times in Q3, up from 6.3 times in the prior quarter. 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.

Lastly, cash and cash equivalents at the end of Q3 increased to $401 million, up $25 million from the previous quarter. Cash flows from operating activities in the third quarter totaled $41 million, down from $101 million in the prior quarter. Capital expenditures were $13.3 million in the third quarter, and depreciation was $9.5 million. Overall, SGH demonstrated growth in its services revenue and improvement in non-GAAP gross margins while maintaining efficient management of its working capital and inventory.

SGH provided their Q4 fiscal 2023 guidance, which includes Brazil. The company expects revenues for the quarter to be around $375 million, with IPS sequential revenues expected to slightly decrease at the midpoint, memory total revenues to remain relatively flat sequentially, and LED revenues expected to modestly increase. GAAP gross margin is estimated to be approximately 26% at the midpoint, while non-GAAP gross margin is expected to be around 28%. Non-GAAP operating expenses are projected to be about $71 million, and cash capital expenditures for the quarter are anticipated to range between $15 million to $20 million.

For GAAP diluted earnings per share in Q4, SGH expects it to be roughly $0.02 at the midpoint, while non-GAAP diluted earnings per share, excluding adjustments such as share-based compensation expense, intangible asset amortization expense, and debt discount, is expected to be around $0.45. The GAAP diluted share count is predicted to be about 54.5 million shares based on current stock price, while the non-GAAP diluted share count will include the benefit of convertible note capped calls and is expected to be around 52.5 million shares. Finally, non-GAAP taxes for the fourth quarter are expected to be in the 11% range, with an anticipated increase to the low to mid-20% range for fiscal 2024 as SGH uses up the majority of its available U.S. tax attributes.