Q2 2024 SMART Global Holdings Inc. Earnings Call

Participants

Suzanne Schmidt; Investor Relations; SMART Global Holdings Inc.

Mark Adams; President, Chief Executive Officer, Director; SMART Global Holdings Inc.

Ken Rizvi; Chief Financial Officer; SMART Global Holdings Inc.

Jack Pacheco; Chief Operating Officer, President - Memory Solutions; SMART Global Holdings Inc.

Quinn Bolton; Senior Analyst; Needham & Company LLC

Kevin Cassidy; Analyst; Rosenblatt Securities Inc.

Presentation

Operator

Good afternoon, and thank you for joining the SMART Global Holdings Second Quarter Fiscal 2024 earnings call. My name is Kate, and I will be the moderator for today's call. At this time, all lines are in a listen only mode and will be until the question-and-answer portion of the call. So I would now like to turn the call over to Suzanne Schmidt, Investor Relations are smart global, so that you may proceed.

Suzanne Schmidt

Thank you, operator. Good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss SGH's Second Quarter Fiscal 2024 results. On the call today are Mark Adams, Chief Executive Officer; Jack Pacheco, Chief Operating Officer; and Ken Rizvi, Chief Financial Officer. You can find the accompanying slide presentation and press release for this call on the Investor Relations section of our website. We encourage you to go to the site throughout the quarter for the most current information on the Company.
I would also like to remind everyone to read the note on the use of forward-looking statements that is included in the press release in the earnings call presentation. Please note that during this conference call, the Company will make projections and forward-looking statements, including but not limited to, statements about the Company's growth trajectory and financial outlook. Forward looking statements are based on current beliefs and assumptions and are not guarantees of future performance and are subject to risks and uncertainties, including without limitation, the risks and uncertainties reflected in the press release and the earnings call presentation filed today as well as in the company's much recent annual and quarterly reports.
The forward-looking statements are representative only as of the date they're made and except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements. We will discuss both GAAP and non-GAAP financial. Non-gaap measures should not be considered in isolation from as a substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing our performance. A reconciliation of GAAP to non-GAAP measures is included in today's press release and accompanying slide presentation. And with that, let me turn the call over to Mark Adams. Mark?

Mark Adams

Thank you, Suzanne. And thanks to all of you for joining us today for our fiscal 2020 for second quarter earnings call. We delivered solid financial results in the second quarter and continued to make great strides in our transformation into a provider of high performance. High availability solutions for enterprise customers need to deploy AI on premise at the edge and in the cloud.
As one of the few players in the industry with decades-long experience in High Performance Compute, Specialty Memory, SGH is uniquely positioned to help companies manage the complexity of AI implementation at scale. As a total solution provider, we offer our customers and partners innovative technology agnostic hardware configurations, software that manages AI systems and ensure maximum output and availability and the professional services suite that enables our customers to achieve best-in-class performance and reliability.
Let me summarize our operational results for the quarter. Revenues totaled $285 million, in line with the midpoint of our guidance range. Although non-GAAP gross margin was at the lower end of our guidance due to a higher portion of hardware mix, we achieved non-GAAP earnings per share of $0.27, which was above the midpoint of our guidance. We exited Q2 with a strong balance sheet. Cash and short-term investments totaled $466 million.
Now let me start our business line review with Intelligent Platform Solutions Group or IPS. Our IPS team offers robust solution set of industry leading hardware, advanced cluster management software, our best-in-class professional services. This solution portfolio enables our design, build, deploy and manage solutions framework for HPC and AI applications on-premises at the edge and in the cloud.
In Q2, IPS revenue came in at $141 million, up 19% from our prior quarter, representing 50% of total SGH revenue, thus making IPS. The largest component of our overall business in Q2. Our vision is clear partner with our customers and collaborate with them to build the future of AI. The market continues to see strong investment in the deployment of AIinfrastructure solutions, hyperscalers and large scale cloud service providers or CSPs.
The first few months of 2024, however, have confirmed that AI is not just for early adopters anymore. We are seeing signs of AI adoption by larger enterprises in markets such as financial oil and gas, defense, education and digital media, as well as tier two CSTs with projects ranging from proof of concepts, large scale deployments, our engagements with existing and potential customers of noticeably picked up in volume over the last few months, reflecting this market dynamic in our conversations with both current and targeted new clients, they have share of the challenges they're facing and deploying AInage the complexity that arises as they integrate advance compute, memory, networking and storage and cooling and large scale data center rollouts.
Our customers ultimately must have high performance compute running workloads that scale and the environment that provides for maximum uptime and overall efficiency. As a total solution provider, we are ready to meet that challenge. We offer our customers a complete solution that combines innovative hardware design software to manage AI infrastructure for maximum output and availability and a suite of professional services all designed to help them achieve best in class performance and reliability. With our customer first approach, we put our customers' priorities at the heart of everything we do, ensuring that each solution we deliver is tailored to their specific requirements and ready to support their success.
We believe that AI inferencing at the edge will also be a critical market opportunity because it brings intelligence closer to where the information is most valuable closer to where decisions are being made. We have expanded our capabilities at the edge with our new next-generation fault-tolerant computing platform. The Stratus ZTC, the endurance server. We are seeing strong demand for this platform, which enables our customers to run applications with an unplanned target downtime estimated in minutes per year. We are developing an approach to enable our customers to implement AI at the edge with a high-performance high availability platform. The ZTC endurance server is another example of the investments we have made and continue to make to support the needs of our customers, whether on-premises at the edge or in the cloud.
Today, we are also announcing a new member of our management team. I am pleased to announce that Pete Manca has joined us as President of IP. Yes, Pete brings a wealth of experience in building businesses that provide high availability, high performance solutions to enterprise customers. Prior to joining our team. Pete served as Senior Vice President and General Managers at Dell Technologies for five years, managing several large businesses, including converged solutions, OEM solutions and Apex, Dell's and portfolio of cloud offerings, ranging from storage to high-performance computing to AI services and solutions targeted Dell.
Pete served as President and CEO of a generic, a leading provider of wholesale cloud computing solutions, underscoring has broad experience and expertise. I am confident that Pete is the right leader to propel the team forward and make the most of the opportunities that are ahead. People work with former IPS, President, Dave Longfellow was transitioning into an advisory role. Dave has been an invaluable partner and transforming. I guess with this guidance, IPS has become more effective and efficient across the board from go to market to engineering to manufacturing. He is a leader of high integrity with an execution mindset that we will miss. We wish Dave all the best.
Turning now to memory, which operates under the SMART Modular brand name, we provide customers with high performance, high reliability memory solutions for specialty markets such as supercomputing, networking and telecom storage, data centers, industrial and other specialty applications. For Q2, revenue came in at $83 million or 29% of total SGH sales. As expected, sales declined slightly from Q1 levels, primarily due to continued elevated inventory levels. At a number of our large customers. We continue to see signs that the memory cycle is turning upwards.
However, as mentioned on our last earnings call, near term, unit demand still remains challenging as some of our traditional enterprise customers. Nevertheless, we remain confident that business will rebound as we move into the second half of our fiscal '24 and expect revenues to grow sequentially in the third quarter. AI is also reshaping the memory market landscape as the need for higher density and greater bandwidth becomes increasingly critical to system performance required to handle the most advanced compute workloads.
We are expanding our product portfolio to capitalize on the convergence of compute and memory and system level solutions by leveraging compute expressed link or CXL memory expansion and switching technology, which allows different parts of the computer memory system to communicate faster and more efficiently. We continued to make progress on CXL product development.
We have successfully completed the design of our MDDR. five CXL. add-in card and anticipate sampling this innovative product to our customers later this year. This high density solution offers 512 gigabytes of memory, making the system faster and more capable of handling the complex tasks required by large scale, AI and high-performance computing workloads.
During the second quarter, we also shipped initial engineering samples of our four DMDDRS five CXL add-in card to a number of our enterprise customers. This product as a unique patented technology that keeps its footprint within a single with PIA slot. This design is exceptionally beneficial for one new servers because it optimizes spaced for other PCIE devices, including accelerators and network interface cards. We expect that revenues will begin ramping from this product in early fiscal 2025.
Finally, we introduced our Zephyr Z and memory modules with the ultra high reliability for demanding compute applications in our DDR. five S ODM products continue to guide and Zephyr testing offerings with signage, they enhance reliability. Taken together, these advancements exemplify our ongoing commitment to industry-leading innovation, empowering us to address our customers' needs.
Now turning to Cree LED, which produces application optimized LEDs for products and markets such as specialty lighting, video screens, outdoor horticulture and architectural lighting. In the second quarter of our fiscal 2024, LED Solutions revenue totaled $60 million or 21% of total SGH sales.
As anticipated, second quarter sales were lower sequentially, primarily due to seasonality with the LED demand environment remaining relatively muted in the near term. We continue to manage our Cree LED operations prudently and are aligning our expenses with current business conditions. We are optimistic that demand trends will begin to improve and currently expect revenues to increase sequentially in the third quarter. Our R&D team as remain diligently focused on driving the technology development needed for Cree to continue leading in high value specialty applications.
During this past quarter, we launched the XLamp XPG four high-intensity LEDs, which are optimized for Endo, directional aftermarket, auto and portable applications. We also introduced extension to our XLamp S. product line, targeting the horticultural sector with products tailored for environments like greenhouses, where precision lighting can transform our crop growth and yield as a technology and brand leader with a strong intellectual property portfolio. The Cree LED team continues to lead the charge in lighting innovation. Given our strong R&D and IP portfolio, combined with our capital light source model, I am confident increased LED competitiveness and prospects for future success.
I'll stop here and hand it over for Ken for more detailed review of our Q2 financial performance in our guidance for next quarter. Ken?

Ken Rizvi

Thanks, Mark. I will focus my remarks on our non-GAAP results, which are reconciled to GAAP in our earnings release tables and in the investor materials on our website. Now let me turn to our second quarter results.
Total SGH revenues were $285 million at the midpoint of our guidance, and non-GAAP gross margin came in at 31.5% at the low end of our guidance, primarily driven by a higher mix of hardware revenues. Non-GAAP diluted earnings per share was $0.27 for the second quarter, which was above the midpoint of our guidance and help by better operating expense controls.
In the second quarter. our overall services revenue totaled $49 million, down from the $55 million in the year-ago quarter. Product revenues were $235 million. Second quarter revenue by business unit was as follows: IPS at $141 million, memory at $83 million and LED at $60 million. This translates into a sales mix of 50% IPS, 29% memory and 21% LED. Non-GAAP gross margin for SGH in Q2 was 31.5%, down from 32.1% in the year-ago quarter, driven primarily by lower memory volumes that were partially offset by improved mix in IPS.
Gross margin was down sequentially from 33.3% in the prior quarter, primarily due to a higher mix of hardware revenue. Non-GAAP operating expenses for the second quarter were $63.2 million, down from $64.6 million IN the first quarter, primarily due to lower variable expenses and cost reduction actions. Operating expenses were also down from $68.7 million in the year ago quarter. Non-GAAP diluted earnings per share for the second quarter of 2024 was $0.27 per share compared to $0.24 per share last quarter and $0.87 per share in the year ago quarter. And adjusted EBITDA for the second quarter of 2024 was $33 million or 12% of sales, compared to $34 million or 13% of sales in the last quarter and $65 million or 17% of sales in the year ago quarter.
Turning to the balance sheet highlights. For working capital, net accounts receivable totaled $170 million, slightly lower than the $171 million last quarter. Days sales outstanding came in at 41 days, down from 44 days from last quarter, primarily due to the timing of invoicing and collections. Inventory totaled $173 million at the end of the second quarter, lower than the $208 million at the end of the prior quarter. And inventory turns were 6.8 times in the second quarter, up from 5.8 times in the prior quarter.
Consistent with past practice, net accounts receivable days sales outstanding, and inventory turnover are calculated on a gross sales and cost of goods sold basis, which were $375 million and $294 million, respectively, for the second quarter. And as a reminder, the difference between gross and net revenue related to our logistics services, which is accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as revenue. Cash and cash equivalents and short-term investments totaled $466 million at the end of the second quarter, down $88 million from the $553 million in the prior quarter.
In the second quarter, we paid down $50 million for the Stratus earn-out and retired approximately $37 million of our term loan facility. Second quarter cash flows used in operating activities totaled $22 million compared to $60 million provided by operating activities in the prior quarter. Second quarter cash flows used for operating activities included the $29 million payment of contingent consideration as part of a total of $50 million cash payment for the Stratus earnout. During the second quarter, we repurchased approximately 106,000 shares of our common stock using $1.9 million. Since our initial repurchase authorization in April of 2022, we have used a total of $72.3 million to repurchase 4.1 million shares through the end of our second quarter.
As of our second quarter, we have a total of $78 million available for future repurchases under our authorization. To remind everyone, our capital allocation strategy remains the same. First and foremost, we will continue to invest in our business as we see significant opportunities for further organic growth. Second, we will continue to evaluate acquisition opportunities in a disciplined manner such as our most recent acquisition of Stratos.
And third, the share repurchase authorizations provide us flexibility to return capital to our shareholders in an opportunistic and price sensitive manner. And finally, we look to retire debt to keep our gross leverage at reasonable levels. We retired $37 million of our term loan in the second quarter and subsequent to the quarter end, we retired an additional $75 million of term loan. These payments bring down the principal by $112 million since the first quarter to $425 million outstanding.
For those of you tracking capital expenditures and depreciation, capital expenditures were $5.2 million in the second quarter, and depreciation was $7.2 million. Turning to our third fiscal quarter 2024 guidance, we expect that revenues for the third quarter of 2024 will be approximately $300 million at the midpoint, plus or minus $25 million.
Our guidance for the third quarter reflects the following: for IPS, we expect revenues to be flat to slightly up at the midpoint, with additional opportunities that may fall in the third or fourth quarter, depending on the timing of deployments. For memory, we expect revenues to grow in the high single digit range sequentially at the midpoint, and for LED, we currently expect revenues to be up in the high single digit range sequentially at the midpoint as well. Our GAAP gross margin for the third quarter is expected to be approximately 29% at the midpoint, plus or minus 1.5%. Non-GAAP gross margin for the third quarter is expected to be approximately 32% at the midpoint, plus or minus 1.5%.
Our non-GAAP operating expenses for the third quarter are expected to be approximately $66 million, plus or minus $2 million and slightly up from the prior quarter, primarily due to variable expenses associated with the higher expected revenue. GAAO diluted earnings per share for the third quarter is expected to be approximately a $0.07 loss plus or minus $0.15.
On a non-GAAP basis, excluding share-based compensation expense, intangible asset amortization expense, that discount and other adjustments, we expect diluted earnings per share will be approximately $0.30 plus minus $0.15. Our GAAP diluted share count for the third quarter is expected to be approximately 52.6 million shares based on our current stock price. While our non-GAAP diluted share count is expected to be approximately 54.4 million shares. Cash capital expenditures for the third quarter expected to be in the range of $4 million to $6 million.
And as a reminder, we are utilizing a long-term projected non-GAAP tax rate of 28%, which reflects currently available information, including the sale of smart Brazil, which was completed in the first quarter, as well as other factors and assumptions. While we expect to use this normalized non-GAAP tax rate through 2024, the long term, non-GAAP tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global tax environment, significant changes in our geographic earnings mix or changes to our strategy or business operations.
Our forecast for the third quarter of 2024 is based on the current environment, which contemplates the current global macroeconomic headwinds in ongoing supply chain constraints, especially as it relates to our IPS business. This includes extended lead times for certain components that are incorporated into our all solutions impacting how quickly we can ramp existing and new customer projects. We continue to manage our operations in a prudent manner as we navigate the challenging environment while also investing in our long-term growth. Please refer to the non-GAAP financial information section and reconciliation of GAAP to non-GAAP measure table in our earnings release for further details.
Now let me turn it over to Mark for a few remarks prior to Q&A.

Mark Adams

Thanks, Ken. As we are still in the early innings of fully operational AI infrastructure being deployed at scale for most enterprise customers, we are seeing an accelerating need by the market for a trusted advisor to help with the challenges of deploying this new AI infrastructure. Our 25 years plus of HPC and memory expertise and deployment know-how position us to become a leader in this market by working to solve our customers' most challenging AI infrastructure needs. As our transformation continues, I want to thank our global team members for their efforts this quarter. We feel we are well-positioned for the exciting market opportunities ahead.
Operator, we are now ready for Q&A.

Question and Answer Session

Operator

(Operator Instructions) Quinn Bolton, Needham & Company.

Quinn Bolton

Hey, guys, congratulations on nice results and outlook. I just wanted to start on the IPS business. And Mark, maybe just get your thoughts kind of demand across the customer base between large CSPs, tier two CSP.s and enterprises, where you may be seeing some of the greatest demand for mid appointments as you look out into the second half of calendar '24. And then I've got a couple of follow-ups.

Mark Adams

No problem. Thanks, Quinn, to the question right away. Yeah. So when we think about how our view of the market is based on obviously are kind of executive engagements with the three segments you talked about, obviously the early investors in the market where the large hyperscalers have, which obviously was a big customer of ours. And then you have the two other segments. You mentioned large enterprises that are kind of have AI infrastructure requirement in place for AI to enable their future success.
And then you have these large. These are tier two, what we call tier two CSPs, which are companies that have the infrastructure themselves to offer services that would lead for AI implementations at a number of different type of verticals, so to speak. So those three segments are how we look at them market. And I would say that the early investors, as I mentioned, were hyperscalers. However, what we've seen a major uptick in is twofold.
Large enterprises are evaluating their AI strategy. And then in that strategy really is do they do it on for them in their environment. Do they do it in a co-location model where they use an outsourced data center provider for the space and power, and do they have someone like Penguin come in and help them deploy or do they actually partner with someone and some type of joint JV structure or co-investment structure for our future build. And we're seeing all those different models. But then the level of demand signals from those type of customers on the enterprise side is very high.
And then in addition to that, the hyperscalers are largely building their own requirements are investing in infrastructure for enterprises who don't have access to their own infrastructure, mostly around this -- one dynamic I just want to reinforce, and if you talk to anyone in the power and data center markets, there's a massive shortage today and available data centers for AI and the massive sort of really are around the power requirements to run AI.
And so today, there's a big pent-up demand for our new data center capabilities to drive AI with a gigawatt megawatt type performance that allows you to install these type of large-scale cluster AI platforms. That shortfall is causing a lot of activities of ours who can help people enable these systems as quick as possible or in most rapid timeframe possible. And that's where we're seeing a lot of the engagements that we have is where our customers saying, hey, we need this space and we need to be up and running by x. They don't know that the customers in the enterprise world, they don't typically have the infrastructure that we're in the Big four hyperscale we have in terms of deployment.
And I really don't even know what they know in terms of performance, uptime, reliability, design, uptime and optimization. These are all things that are critical. So the number of engagements we've had designs and that proposals leading to more clarity around bookings and even future deliveries. It's all heading in the right direction.

Quinn Bolton

Excellent. The second question, as you mentioned, sort of AI at the edge and seem to kind of highlight your Stratus offering. And I'm wondering, are there opportunities for I at the edge also in the traditional sort of Penguin business where you may be setting up larger clusters to run a lot Lam's or other AI infrastructure. So it's not necessarily be just a high reliability deployment, but you may also just say, hey, we've got to get the inference seen as closely and user as possible. And you can see some pretty large deployments for inferencing equipment rather than, say, just training, which I think some of your true additional deployments may have been more focused on.

Mark Adams

I think that's right. If you really kind of your question really embedded the answer, which is we are now developing solutions and investing in development for future integration into our solution roadmap for providing just that, as you mentioned, if you look at kind of the prior spend than AI it was more training versus insourcing and training is never going to go away because when you think about large language models, there's going to be a bunch of large language models that people used to then extract their own version of what they need from that large language model.
So the training piece will go away. I think as a percentage of the whole and for saying we'll obviously take on a greater share in the future. And with that, as you noted, the more speed and information availability there is closer to the decision making that could make or break someone's competitiveness. And so the solutions we're thinking about our how do we not just, as you said, leverage the platform, but how do we develop and offer our customer base, the highest-performing, highly reliable systems where there might not be IT resources in that environment. And that's a key part of our strategy.
But you could see a day where we might be designing small cluster platforms are single cluster platforms with these with this platform from a cost and reliability and a performance perspective that allows them to be in these end markets, something like oil and gas, maybe on a rig, maybe at a retail store, maybe it at an ATM or maybe at healthcare, regional office, what have you. It's just these are the way we're thinking about AI clearly at the Edge has got a bright future. It's just so early AI generals early. So we are investing for tomorrow. As we think about that, that solution platform are developing.

Quinn Bolton

So just one last quick one on the memory outlook called for growth to be high single digits. We've heard from a lot of folks in the memory industry to some pricing for both DRAM and is moving up pretty quickly here, especially after the earthquake in Taiwan. Wondering who is look at that high single digits, is that mostly ASP. growth with units still pretty muted? Are you starting to see a unit recovery, but pricing benefits may come in future quarters? Just how are you thinking about units versus ASPs? And I'll be back in the queue. Thank you.

Mark Adams

Before I get to the specific, as I just want to highlight, if you go back and look at memory cycles, unlike the pure play semiconductor companies, we made money through the cycles, okay? And we do that because we have a differentiated business. And we also see that if you go back and plot this out, we're kind of slower on the front end of feeling the pain of the downturn. And on the back end or recovery is a little bit slower because of these inventory corrections of select inventory that customers may be sitting on our holding back from in terms of how they look at acquiring memory.
So we are starting to see pricing benefits in our business overall, and we're seeing corner cases of demand requests. I would say that our demand has been somewhat flat of late, but that's better than declining over the last couple of quarters. And if you look back at the last earnings call, I suspected I projected that my view of the world was that we could probably start to see some more demand in our Q3, , Q4 timeframe because I just thought was going to be a little slower and we're starting to see that turnaround. It's just that here in the Q2 numbers. I think in Q3 we're starting to see it little bit more of a demand. I think we'll continue to see that through Q4 and early fiscal year '25.

Ken Rizvi

And Quinn, I highlighted Mark's point there in terms of margins, you can look at our operating margins for this business even in Q2, which was a softer quarter here, op margins or just above 7%. And we're starting to see some expectations for growth. That's what we guided to here for two three sequentially for the memory business as well.

Quinn Bolton

Perfect. Thank you.

Operator

Kevin Cassidy, Rosenblatt Securities.

Kevin Cassidy

Yes. Thank you for taking my question and congratulations on the quarter. Can you talk a little more about that? Yes, you said it would be flat to up depending on at least one order and business includes services. And this is part of what the guidance for gross margin being the 1.5%, one way or the other. And you've got a little more details on the --?

Mark Adams

I'm going to start. Let Ken jump in. As we said originally, we had to go back to our Q1 earnings call. We saw a stronger second half, and that's in fact what we see playing out. And part of these engagements, the margin move around is kind of muted. It could be mix issues that could be hardware early configurations that we then convert services to them. And if you look at all of that, where we're in a good place in all, I can quantify that a little bit, but margins will move around our business a little bit.
But let's not forget, gross margins are up from 19.5% three years ago to where we are today. And EBIT margin was about a point in the quarter. It's look, it's primarily because of mix of maybe hardware deployments in a quarter and then future quarters where software might be stronger, our services might be stronger, and that's just the nature of the business we're in. Very pleased with the team's execution and very confident that we'll continue to see good progress there.

Ken Rizvi

Yeah. And Kevin, if you look at the margin, we provide a little bit more room here in Q4. And in part of that's just around the timing of not only the hardware deployments, which we've talked about in the past and making sure we get the appropriate customer acceptance and the like, and those can move between quarters. That's why we win outline that. But if you look at the margin for Q4 and the guidance, we have both point in time services and ongoing managed services, and we just wanted to have a little bit more flexibility. My assumption is most of the Street will probably end up near the midpoint, but that gives us a little flex around that.

Kevin Cassidy

Okay, great. Thanks for that color. And maybe as you're saying, your visibility or your engagements are increasing? And can you talk more about the potential for expanding your customer base for IPS in particular?

Mark Adams

Yes, absolutely. I think, Kevin, as you know, this is a business that we've talked about repeatedly. There was a business that we've says he's got customer concentration and can be lumpy. We've invested very heavily over the last fiscal year or less 9 to 12 months on bringing on new go-to-market resources. And to be very honest, I'm super pleased that the progress we're making there in terms of, again managing major accounts and getting the executive engagement to go market.
Our capabilities to these large enterprises and tier two CSPs. The amount of proposals that we have generated continues to increase with the opportunities we're seeing and we're looking forward to to get on a path where those converted into bookings and revenue over time, we think about we get them booked. But again, we have to then go off. And then Matt, that against supply chain, a confirmation of what we can do in our configurations. And then we talk about deployment schedules and like and so I do want to call something out, but I don't think I've done a good enough job in prior calls. We don't think about our customers like it, a buy-sell relationship. That's not our business.
And I know it's hard because we used to be a memory module company only. And it was very, very much like the industry, very much to be transactional. But our transformation that we repeatedly can talk about the market is one of not just going from memory to AI infrastructure and HPC. That's not where it stops. It really is in terms of how we think about our customer relations is more in terms of clients and engagements because we're with them for a while. We're not just selling something and disappearing. We design it, we install it, we manage it and then we make sure it performs over time.
And so that relationship, I think, again, as we have clients engagements, we don't have transactional customers that we have customers obviously, but those are managed as a client and an engagement. And that's where it shows up in the gross margin line. When I compare myself to from a larger competitors, we compete against, so to speak.
And so I'm very pleased how that process is evolving and playing out. I've also just like, Kevin, if it's okay just take the opportunity as we're doing that, what's really become apparent the need of what we offer is becoming more and more validated every day. What I mean by that is, yes, there's a lot of GPUs sales over the last 12 to saw months. But as people deploy at the complexity is not lost on the customers, whereas that complexity well on the design of a data center, how do I get the power to the building to the transformer to the main systems out of our design part of the data center from a cold out to a high out.
I'll have my racks designed how the GPUs manage, how do I maximize uptime and availability? Can I be proactive in detecting future failures that save me downtime? And then in the future, hey, how do I scale? And so we're in a much different consult of advisory sale. And so these executive engagements I'm talking about, we are reaffirming that there is a need for this type of trusted advisor relationship.
And I think we're very well positioned in that. After you know, there couldn't be a better precursor to AI infrastructure than HPC. When you think about HPC, it was really helping people build large multi processor architectures inside data centers, albeit not for AI have the time, but it evolve that way as we got closer to 2018, 1920. And so there's just not that many companies out there with 25 plus years and deployment knowledge, both at the hardware, the software we're in the future add-on services. And I think we're doing a better job of articulating that value to these customers.

Kevin Cassidy

Okay, great. Thank you.

Operator

Thomas O’Malley, Barclays.

Hi, this is Scott on for Tom O'Malley. I wanted to touch on the services line. So it looks like services downticks pretty meaningfully in the quarter. Should we think about this has served as a sort of the do some run rate level or do you expect that it ticks back up? Thank you.

Ken Rizvi

Yeah. So I think as we look at Q4, I would expect services to tick up. And as we've highlighted before, within that basket of services that we have, there are kind of point in time services design implementation and the like. And there are managed services that we have. And so we had fewer point in time services here in Q3. I would expect that number to tick back up here -- I'm sorry, in Q2. I would expect that number to tick back up in Q3, and that was embedded in our guidance.

Thank you. That's helpful. And then one more, if you could touch again on CXL. Could you just give us idea of when you see the market and collecting more meaningfully there and then the types of customers that you see interested whether it's AI or for more general purpose?

Mark Adams

I'll take the first part of that, and I'll let Jack talk about more of the productization and the revenue. So if you talk to a leading technology executives and engineering executive, the AI kind of performance curve and AI infrastructure by far, the top of the list is latency and performance issues caused by the lack of bandwidth and availability to memory from the GPU and CPU. And there's an immense amount of capital going into investing in early-stage companies as well as some of the larger companies are investing in solutions that help solve this values. If you think about sharing storage and network, you can do that today. You can't do that in memory.
So eventually you'll have the capability that I think it's within CXL 3.0 in the future, you'll be able to us for memory, but that's not enough. The transport layer of memory is another issue that people are trying to tackle with the with optical transport layer with CXL on top of it for just maximizing the speed high bandwidth memory is not the only solution, and that will be other solutions as it relates to how we can enter Hansen throughput and latency and the overall system performance of the compute by having more innovative hardware solutions like CXL and like optical transport integrated into such a solution. But I'll let Jack talk about kind of the market dynamics around what we see that starting to be a meaningful contributor.

Jack Pacheco

Yeah. So as Mark mentioned, right, we've talked to you talked about the end of kind of this calendar year. We expect to see some meaningful shipments and CXL in some both we will be submitted into kind of your standard server companies. We also were in conversations, and we're sampling a lot of folks in a high as well that want to have more memory in their AI servers and HPM grows. You need to put more and more normal memory in your server into do that you start running out a room at the gym slots, decrease, the faster you need to run this memory. So the only way to get that additional memory is really to use CXL. I'm trying to pump more memory into that server. So we're seeing up opportunities in both phases of the market.

That's very helpful. Thank you.

Operator

Brian Chin, Stifel.

Hi, this is Dennis on for Brian, and thanks for letting us with two questions. So regarding IPS has interesting generative AI over the last year, so changed the customer acquisition into eventually product and delivery of rollout process hasn't become lengthier are more complex. And then here, you mentioned you have these options like on-prem co-location or a co-investment. And how does the customer's choice of one of these three impact either the timeframe for rollout or kind of your business in general?

Mark Adams

Yeah, that's a great question. And let me just add a kind of step back a little bit. I remain convinced that we are in the certainly super early innings of AI am and all the noise around sales of GPUs and the like. Yes, that's a catalyst or metric for what's ahead. But I would tell you that I think large-scale enterprises are still really crafting their strategy on AI don't think I think a lot of those GPU sales went to people in the middle of 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 as 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. We've been in this for a few years. But there 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 does this doing? It's actually made, I think, adoption more of a longer-term process. But I also think as I mentioned earlier on this call, what I have validated through my executive engagements with our sales organization is large enterprises are starting to get it there start 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 Bangladesh. And so from our perspective, yes, it might be a little bit longer than might be more of an education curve, but that's also leading us to get more sticky. And it really be able to identify the value that we can provide. Our partners are clients that need our help and deploying AI and I think that's where you sense, the competence and the optimism for the second half of our fiscal year.

Great. Thank you for my follow-up on. So we recently heard about memory price increases on both DRAM and then from all of the big memory suppliers on if prices were continue to increase some, how would you first see this impacting your future gross margins?

Mark Adams

We're not going to forecast more than we normally do in a given quarter. So can kind of giving you the forecast. I will say a couple of things. I think any any such benefits that you've had you've alluded to normally will show up in our top line revenue. But as we've been clear 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 radically when our revenues go down, our margins stay pretty stable, maybe even triple 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 you might see an impact a data point or two or whatever as recovery happens. I don't sense that happening overnight. I don't sense that's something that's going to change that dynamic because more often than not in this type of pricing recovery market, the revenue gain, a gross margin dollar contribution news out any of the gross margin percentage impact.

Ken Rizvi

What I'd add to that, as we see revenues start to grow both from units and ASPs over a period of time, we will see that at the bottom line is an improvement in operating income percent. And you can see that just in the past couple of years, this business for the memory specific business was running and often comes to north of 10% or below that analysis as we start to see unit demand improve through as well as ASPs that should flow to the buyback.

Great. Thank you.

Operator

Thank you. At this time, we do not have any further questions registered and again, I will turn the call back over for any final remarks.

Mark Adams

Okay. Thank you all for joining. Before just closing out the call, I just wanted to let you know that we have plans for an upcoming IR Day in the next few months or so, and details will be coming to you soon. In the meantime, I look forward to seeing you at shows and NDR and the likes and and thanks again for joining today. Have a great week.

Operator

That concludes today's call. Thank you all for your participation. You may now disconnect your lines .