PENG earnings call analysis

NASDAQ:PENG Q1 2026 Earnings Call Transcript Generated on 6/6/2026 Operator | Conference Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Penguin Solutions first quarter fiscal year 2026 financial results call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand. To withdraw your question, please press star 1 again. I will now hand the conference over to Suzanne Schmidt with Investor Relations.

Please go ahead. Suzanne Schmidt | Investor Relations

Thank you, operator. Good afternoon and thank you for joining us on today's earnings conference call and webcast to discuss Penguin Solutions first quarter fiscal 2026 results. On the call today are Mark Adams, Chief Executive Officer, and Nate Olmstead, 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 and 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, business plans and strategy, market demand and shifts, strategic agreements, and existing and potential collaborations. Forward-looking statements are based on current beliefs and assumptions, 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 most recent annual and quarterly reports. The forward-looking statements are representative only as of the date they are made and except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements. We will also discuss both GAAP and non-GAAP financial measures. 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 the GAAP to non-GAAP measures is included in today's press release and accompanying slide presentation. And with that, let me now turn the call over to Mark Adams, CEO. Mark?

Mark Adams | Chief Executive Officer

Thank you, Suzanne. We hope you all have a nice holiday season and appreciate your attending our first quarter fiscal 2026 earnings call. We are happy with our Q1 results. On our last call, we mentioned some headwinds we anticipated in the first half of our fiscal year. Despite these challenges, revenue came in at 343 million in Q1, up 2% sequentially and 1% year over year. We view this as significant, as we were able to perform well in the first quarter, despite not recognizing any hyperscale hardware revenue, which had been a meaningful contributor in the prior year period. Non-GAAP gross margins were 30%, which compares favorably to the midpoint of our full year outlook, reflecting favorable mix and execution in the quarter. As a reminder, our full-year outlook incorporates expected variability across the year. Non-GAAP operating income was 42 million, up 1% year-over-year, which led to non-GAAP diluting earnings per share of 49 cents. We continue to see indications of a broader market shift from hyperscaler deployments and early corporate pilot programs. toward wider enterprise adoption and more production scale implementations. Within this broader transition, there are early signs that some workloads are evolving from training-centric environments toward inference-oriented use cases as organizations operationalize AI across the enterprise. As AI systems move into full production, Enterprises are increasingly focused on performance, reliability, bandwidth, and overall system efficiency, areas where Penguin's ability to design tailored systems can help customers address their specific workload requirements. We believe enterprises are looking for partners who can deliver complete production-ready platforms spanning infrastructure, software orchestration, and advanced AI tooling. supported with deep technical expertise. Penguin Solutions brings over 25 years of experience in this arena, starting in high-performance computing, or HPC, and expanding in the last five years to include large-scale AI factory build-outs. This expertise enables us to design, build, deploy, and manage complex infrastructure solutions that align with the needs of our enterprise customers. During the transformation of our company into a leading provider of infrastructure solutions, we have communicated the challenges we faced from having a lumpy revenue model with customer concentration. Our fiscal year 2026 guidance was developed with our ongoing focus on new business development and customer diversification in mind, while recognizing that the timing of new customer deployments can vary. We are encouraged by the customer diversification progress we are making and will share additional detail later in the call. Let me now speak to the performance of each of our lines of business. Our advanced computing business achieved revenue of 151 million, up 9% compared to last quarter. We had several customer bookings in Q1, including two new paying customers, one in the defense sector and another in the education and research sector. In addition, we continue to see our pipeline expand into new customer opportunities in the financial services, oil and gas, telecommunications, manufacturing, and education sectors. We're also currently engaged in a number of discussions with sovereign cloud customers outside the US regarding potential large-scale AI deployments. This increase in sovereign AI opportunities internationally reinforces the need for Pangolin's rapid deployment solutions and services, which enable faster time to production and thus enable a quicker return on AI capital investments. As customers evaluate the transition from proof of concept initiatives to larger production deployments, we believe the complexity of these environments underscores the need for a trusted partner with deep technical expertise across multiple technology domains, combined with proven experiences integrating an array of technology building blocks to deliver high-performing and highly reliable AI infrastructure. In support of this need, we have recently launched the Penguin Solutions Rabbit Development Workshop Program, which brings together our architecture leaders, software developers, managed service team members, and supply chain experts to help potential customers better understand and plan for the complexity of implementing AI at scale. Tangwin's design, build, deploy, and manage framework is a proven methodology for high-performing, high-reliability AI factory deployments. Tangwin's decades of experience in complex, large data center installations is at the heart of what differentiates us from many of our hardware-centric competitors. The combination of our architectural design know-how, our ice clusterware software platform, and our managed services offerings reinforces Penguin Solutions' role as a value partner in helping our customers manage the complexity of AI. Our integrated memory business recorded 137 million of revenue in Q1, up 3% compared to the prior quarter, and up 41% compared to Q1 2025. As we head into our second quarter, demand signals for our memory portfolio are strong across our networking, telecommunications, and computing customers. One of the key performance challenges in implementing AI across both training and inference workloads is the limitation of GPU and CPU memory bandwidth. We have been an early developer of Compute Express Link or CXL solutions. We provide an open standard interconnect for high-speed, high-capacity GPU and CPU to device and GPU and CPU to memory connections designed for high-performance data center systems, including those built for AI computing. We are currently shipping early production units through our OEM partners while continuing to expand end-user qualification efforts. Looking ahead, future versions of CXL are expected to emphasize memory pooling, enabling blocks of memory to be dynamically allocated to specific system resources. In parallel, we continue to invest in the design of our optical memory appliance, or OMA, in collaboration with key technology partners, leveraging a photonic transport layer to further increase the performance of GPU, CPU, and memory interconnects. We are seeing increasing memory demand as customers are looking for unique custom solutions to address their needs in supporting AI workloads. Beyond the core customer migration to DDR5 technology, our customers are evaluating how to best utilize memory to optimize the performance of their AI compute needs. In addition to our legacy OEM customers, we are seeing sales growth in direct to enterprise customer engagements and in large hyperscale customers. We believe that our over 30 years of developing specialty memory products, originally under the Smart Modular brand for large Fortune 500 customers, has positioned us well to capitalize on a new wave of higher performing and higher reliability memory for the AI era. We believe we are well positioned for future growth, leveraging our early investments in new technology to expand our addressable market. The optimized LED business operating under the Cree LED brand generated revenue of $55 million in the first quarter, down 18% sequentially. We are seeing weak demand in our China business, along with pockets of softness among certain large US OEM customers. We remain focused on driving profitability in our LED business by leveraging our specialty product portfolio, industry-leading intellectual property, and Capital Light outsource front end operating model. Despite the top line revenue headwind, operating income was 3.5 million, representing an increase of 24% sequentially. As part of our transition from a holding company to an AI solutions provider, we continue to streamline our corporate structure. To that end, in late December, we signed an agreement to sell our remaining 19% stake in Zillia Technologies, formerly Smart Modular Brazil, for $46 million. We expect this transaction to close in our third quarter of fiscal 2026. As we look forward, we remain focused on strengthening our partnerships with ecosystem partners such as NVIDIA, AMD, and CDW. As the volume of corporate deployments accelerates, Tenra solutions can provide our white glove design and implementation services to support our customer success. We are also customizing our ICE clusterware platform to be compatible with other open source energy software products, enabling a more robust infrastructure solution for managing large AI deployments at scale. We believe that the combination of our investments in technologies such as Inference systems level products, memory advancements, and our ICE software, together with our trusted design and managed services capabilities, positions Pangolin Solutions as an ideal partner to help customers manage the complexity associated with implementing AI infrastructure. With a strong balance sheet, a growing customer base, continued investments in differentiated solutions, and an experienced team that helps customers design, build, deploy, and manage AI environments at scale, we remain confident in our position for long-term future success. Let me stop now and hand the call to Nate for a more detailed review of our financial performance. Nate?

Nate Olmstead | Chief Financial Officer

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 relations materials available on our website. Now let me turn to our first quarter results. In the quarter, total Penguin Solutions net sales were $343 million, up 1% year over year. Non-GAAP gross margin came in at 30%, which was down 0.8 percentage points versus Q1 last year. Non-GAAP operating margin was 12.1%, up 0.1 percentage points versus last year, and non-GAAP diluted earnings per share were 49 cents, flat year over year. In the first quarter of fiscal 2026, our overall services net sales totaled $65 million, down 9% versus the prior year. Product net sales were $279 million in the quarter, up 3% versus the prior year. Net sales by business segment were as follows. In advanced computing, Q1 net sales were $151 million, which was 44% of total company net sales and down 15% year over year. This sales decline reflects both the wind down of our Penguin Edge business and hyperscale hardware sales in Q1 last year, which did not recur in Q1 this year. Q1 2026 advanced computing net sales excluding Penguin Edge and hyperscale hardware net sales grew 52% year over year. In integrated memory, Q1 net sales were $137 million, which was 40% of total company net sales and up 41% year-over-year. And in optimized LED, Q1 net sales were $55 million, which was 16% of total company net sales and down 18% year-over-year. Non-GAAP gross margin for Penguin Solutions in the first quarter was 30%, down 0.8 percentage points year-over-year and 0.9 percentage points sequentially, primarily due to the wind down of our high margin Penguin Edge business as we described last quarter. Non-GAAP operating expenses for the first quarter were $61 million, down 4% year-over-year and down 6% sequentially. Operating expenses as a percentage of net sales were down both year-over-year and quarter-over-quarter, driven by lower personnel-related expenses as well as lower subcontract services costs following the completion of our U.S. domestication in the fourth quarter of fiscal 2025. Q1 non-GAAP operating income was $42 million, up 1% year over year and up 6% versus last quarter. The combination of net sales growth and operating expense management translated into a 0.1 percentage point increase in non-GAAP operating margin versus Q1 last year. This is our sixth consecutive quarter of non-GAAP operating margin expansion year over year. Non-GAAP diluted earnings per share for the first quarter were 49 cents, flat versus Q1 last year, and up 14% versus the prior quarter. Adjusted EBITDA for the first quarter was $45 million, up 1% year over year. Turning to balance sheet highlights, for working capital, our net accounts receivable totaled $342 million compared to $276 million a year ago, with the increase driven by higher sales volumes and variations in sales linearity across the quarters. Day sales outstanding came in at 51 days, up from 45 days in the prior year quarter and flat with last quarter. Inventory totaled $213 million at the end of the first quarter, down from $247 million a year ago, due to order and shipment linearity. Days of inventory was 38 days, down from 49 days a year ago and down from 51 days last quarter, primarily due to the timing of receipts and shipments. Accounts payable were $305 million at the end of the quarter, up from $244 million a year ago, due primarily to higher sales volumes and the timing of purchases and payments. Days payable outstanding was 55 days compared to 49 days last year and 54 days last quarter. The year-over-year and quarter-over-quarter movements were due to the timing of purchases and payments. Our cash conversion cycle was 35 days, a decrease of 11 days compared to Q1 last year, and down 14 days versus last quarter due to faster inventory turns resulting from materials shipped during the quarter and the timing of purchases and payments. Consistent with past practice, day sales outstanding, days payables outstanding, and inventory days are calculated on a gross sales and gross cost of goods sold basis, which were $605 million and $509 million, respectively, in the first quarter. As a reminder, the difference between gross and net sales is primarily related to our memory businesses' logistics services, which are accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as net sales. Cash, cash equivalents, and short-term investments totaled $461 million at the end of the first quarter, up $68 million from Q1 last year, and up $8 million sequentially. The year-over-year fluctuation was primarily due to free cash flow generated by the business over the past year. First quarter cash flows provided by operating activities increased by 125% to $31 million, compared to $14 million provided by operating activities in Q1 of last year. The increased cash flow in the quarter versus last year was due primarily to lower investments in networking capital. We spent $15 million to repurchase approximately 791,000 shares in the first quarter under our stock repurchase program. As of November 28, 2025, an aggregate of $96.5 million remained available for the repurchase of our common stock under the current authorizations. For those of you tracking capital expenditures and depreciation, capital expenditures were $3 million in the quarter and depreciation was $5 million for the quarter. And now turning to our outlook. Given our solid Q1 performance, we are pleased to confirm our full company net sales and non-GAAP diluted EPS outlook for the year, which at the midpoint calls for 6% net sales growth and $2 of non-GAAP diluted EPS. Consistent with the outlook we provided last quarter, our full year outlook assumes that we will continue to diversify our customer sales mix and does not include any advanced computing hardware sales to hyperscale customers. and also consistent with our assumptions from last quarter, our FY26 financial outlook reflects the wind down of our high margin Penguin Edge business. We expect sales from this business to essentially cease by the end of fiscal 2026. The combined effect of these two assumptions in our FY26 outlook remains approximately a 14 percentage point unfavorable year over year impact to our total company net sales growth and approximately a 30 percentage point unfavorable impact to advanced computing. Regarding sales linearity during the year and consistent with our commentary last quarter, we continue to expect second half sales to be stronger than first half sales. At the midpoint of our full year net sales outlook, We expect approximately 53 to 54% of total company net sales to come in the second half of the year as AI opportunities currently in our pipeline are assumed to book and ship in the second half. With that said, our full year net sales outlook reflects the following full year growth ranges by segment. For advanced computing, we continue to expect full year net sales to change between minus 15 and plus 15% year over year. As it has previously, this outlook reflects the Penguin Edge and hyperscale hardware sales impacts mentioned earlier. For memory, we now expect net sales to grow between 20 and 35% year-over-year. And for LED, we now expect net sales to decline between minus 15 and minus 5% year-over-year. Our non-GAAP gross margin outlook for the full year is now 29% plus or minus one percentage point. We adjusted our gross margin outlook down by 50 basis points to account for a higher mix of memory sales, which have a lower gross margin than our company average. For non-GAAP operating expenses, we now expect a full year total of $250 million plus or minus $10 million. For non-GAAP full year diluted earnings per share, we still expect approximately $2 plus or minus 25 cents. Our FY26 non-GAAP diluted share count is still expected to be approximately 55 million shares, and our FY26 non-GAAP tax rate is still forecasted to be 22%. While we expect to use this normalized non-GAAP tax rate throughout FY26 and beyond, the long-term non-GAAP tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global and U.S. tax environment, significant changes in our geographic earnings mix, or changes to our strategy or business operations. Our outlook for fiscal year 2026 is based on the current environment, which contemplates, among other things, the global macroeconomic environment and ongoing supply chain constraints, especially as they relate to our advanced computing and integrated memory businesses. This includes extended lead times for certain components that are incorporated into our overall solutions impacting how quickly we can ramp existing and new customer projects and fulfill customer orders. Overall, we believe our focused execution, disciplined expense management, and balance sheet strength provide a strong foundation for sustained profitable growth. We expect these qualities to support our continued progress as we pursue opportunities to enhance long-term shareholder value. Please refer to the non-GAAP financial information section and the reconciliation of GAAP to non-GAAP measures tables in our earnings release and the investor materials on our website for further details. With that, operator, we are ready for Q&A.

Operator | Conference Operator

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brian Chin with Stifel. Brian, your line is open.

Please go ahead. Brian Chin | Analyst, Stifel

a few questions. Maybe just first with the maintaining the outlook, although changing the components a little bit. Firstly, fiscal first half versus fiscal second half guidance. Does that suggest that this February quarter, revenues down, maybe low, low to mid-single digits, and kind of which of these segments is driving that sequential decline? And then also for the full year, raising the memory revenue growth to 20% to 35% year over year. Certainly pricing should be a favorable tailwind. Curious if there are any kind of challenges or constraints shipping product, given sort of how constrained some of the memory weight for supply is at the moment.

Mark Adams | Chief Executive Officer

Hey, Brian, thanks for the question. I'll take the first end of it, and then I'll hand it over to Nate. There's two questions. implications to to the kind of forward-looking assumptions to speak to the memory one we continue to do a fairly good job navigating the supply constraints you're alluding to and you know that allowed us to think through kind of how that business should perform going forward and so we haven't seen anything material impacting that business, which allowed us to kind of get more granularity on the forward-looking projection, so to speak. On the advanced computing piece, and we'll talk about some of this through the call, but when we're winning these new customers, there's a process of kind of getting the award and then Since they're new customers, in many cases, we have to negotiate a master agreement. And then from there, you know, that gets converted into a purchase order. There's just more timing involved in new customers. Now, the exciting news is we are winning more new customers. But the predictability gets a little bit tougher for us in a given quarter, so to speak. And that's where I guess we're a little bit more cautious. I would say just, you know, we talked about an award with a major financial institution last quarter. I'm happy to announce that we've signed that agreement and we expect a PO here shortly this week or worst case next. You know, I can also tell you that we have the same, we have a major new oil and gas customer that we've also signed a master agreement with and expecting a PO in here shortly, as in the next week or so. And so as we go through that, the timing of then getting the POs in the system and then going out and sourcing components and staging the equipment, all of that becomes just tougher for a first-time customer in the model. And that's where you may sense a little bit of caution as we think about our Nate Olmstead | Chief Financial Officer: know q2 and even you know back half uh guidance to when things will hit nate yeah i mean i would say um when you think about the full year outlook obviously the most significant changes would be memory looking a little bit stronger as you alluded to due to some benefits from pricing primarily although the overall demand remains very strong and healthy there but um Our ability to procure supply is going to be one of the key variables to think about the memory outlook for the full year. And then LED looks like it's going to be weaker. That was fairly broad-based across the regions in Q1. Q2 is always a little bit softer in LED because of Chinese New Year, so I'd expect some sequential pressure probably in the LED business. I also expect sequentially advanced computing to be down Q1 to Q2, but that's what we expected when we laid things out last quarter. I think Q1 came in right about where we thought. Q2 looks similar to what we thought. And in the back half of the year, we expect some strength due to the, you know, some of the opportunities we've seen in the pipeline and bookings that are starting to shape up.

Brian Chin | Analyst, Stifel

Great. Maybe just for a quick follow-up, in terms of the pipeline and advanced computing, can you maybe elaborate on how some of your expansive channel partnerships, you know, Dell, CDW, you've got sort of the strategic partners relationship with SKT. I think you alluded to maybe future cloud opportunities on a sovereign basis, and maybe that's contributing to the potentials for a fiscal second half. Can you kind of expand on how some of those partnerships are helping with the pipeline?

Mark Adams | Chief Executive Officer

Yeah, I think across the board, most of what you talked about have been fairly exciting for us to engage with and representing as much stronger pipeline for us. You know, I'll try to break it down in terms of CDW had mentioned our capabilities in, you know, kind of the AI factory environment and large scale deployments. is a great addition to CDW's capabilities and competencies. And we've got some good customer opportunities just in our managed services and software solution set that we can bring to customers that are of large scale. And they're definitely represented in our pipeline. If you contemplate, you know, our relationship with NVIDIA, It continues to get stronger and stronger as the enterprise deployments scale and grow in number. You know, being a services solutions provider for NVIDIA-based AI factories, Penguins are very well positioned there, and we continue to strengthen that partnership and evaluating how we can bring the best of what we do with NVIDIA to form a strategic solution offering for our customers long term. And so the engagements with NVIDIA continue to strengthen. SKT is an exciting partnership we've talked about on prior calls. There continues to be opportunities with them both in Korea and outside of Korea. And then we've mentioned in my prepared remarks, we've had a couple of few new sovereign cloud opportunities of large scale that are in the pipeline. And, you know, very exciting just because given the raw investment that is going to go into each of these deployments, we stand to benefit from our involvement. and hopefully we'll be able to update you on future calls here.

Operator | Conference Operator

Your next question comes from the line of Samik Chatterjee with JP Morgan.

Please go ahead. MP | Analyst, J.P. Morgan

Hi, thank you for taking my question. This is MP on behalf of Samik Chatterjee. So firstly, I wanted to ask about the enterprise engagements like you have been talking about the shift from hyperscalers towards then enterprises deploying for pilot programs and then towards broader enterprise-wide applications. Can you please help us understand, like, what exactly are you seeing, which is helping you, say, clearly mark that trend out? And then other than that, I wanted you to double-click a bit on your diversification efforts.

Sure. Mark Adams | Chief Executive Officer

Let me start with your first question. If I look back over the last – you know, three or four years, most of the capital expenditure dollars of massive, you know, of large scale deployments was in the area of large language model training at large hyperscales for the most part. Okay, I don't want to be universal and saying 100%, but a majority of the spend that we saw was in a very consolidated set of customers. And if you If you want to triangulate that data with what's going on in the market, look at where NVIDIA was selling their GPUs as an example. You'll see that their major customers were consolidated to a few large hyperscale type environments. We saw the same thing. I'd say over the last six to 12 months, we've seen the beginning of an evolution where enterprise opportunities are accelerating in terms of just raw volume of enterprise opportunities. And I would say the capital behind that and the planning for future growth expansion in our customer relationships in the enterprise back that up. And so it's really been an evolution, a shift from early stage large language model training to corporate enterprise rollout. And just based on our own pipeline activity, but also just raw market data in terms of where the products are going. We're fairly bullish on the enterprise environment as well we are on these larger sovereign AI deals. The combination of that, you know, makes us feel pretty strong on our pipeline development and diversification efforts.

Operator | Conference Operator

Your next question comes from the line of Matthew Colitri with Needham and Company, LLC.

Please go ahead. Matthew Colitri | Analyst, Needham & Company, LLC

Great. Hey, guys. This is Matt Colitri over at Needham. Thanks for taking our question. Last quarter, you noted an inventory increase to support shipments at the start of 1QFY26. And while inventory declined sequentially, it still remains elevated. How should we think about inventory levels as a leading indicator for future shipments? And how is your visibility into the remainder of the year?

Nate Olmstead | Chief Financial Officer

Yeah, you're right. Last quarter we exited the quarter with some inventory that was both in memory where the price increases. You know, when the prices go up, you're going to see that reflected in inventory. The cost of the goods goes up. And we also had some shipments in advanced computing, which shipped early this past quarter in Q1. So, I think, you know, inventory being higher than where it was a year ago is not surprising given that the overall business is larger, especially in memory. It was up 41% year over year. But if you look at the inventory days or the inventory turns, they're in a very healthy position. So, certainly no concerns there, returning inventory quickly. Our business model is not one where we're buying really ahead of orders. We're buying to orders rather than to forecast generally. Now, in today's constrained memory environment, you know, we'll look for opportunities where we can secure some supply that takes some risk off the table, and we have a strong balance sheet that, you know, we intend to put to use if the opportunity is out there for us to do that. Got it. Very helpful. Thank you. Back half of the year, I think Mark talked, you know, already about some of the opportunities in the pipeline. It remains consistent with what we mentioned last quarter. We expect the second half of the year to be stronger than the first half. That will be especially true in advanced computing, perhaps in memory as well, again, contingent upon us being able to secure supply. But that's consistent with what we said last quarter.

Matthew Colitri | Analyst, Needham & Company, LLC

Okay, great. Thank you. And then can you expand a little bit upon I think, in the prepared remarks, you, you mentioned some work being done to customize ice to be compatible with other open source platforms? What exactly are you guys working on there?

Mark Adams | Chief Executive Officer

As we think about the software stack for AI factory rollouts, there's different layers of software Like, for example, there's cluster management layers, there's security layers, there's orchestration layers. And so what we're trying to do is build a standalone stack, which is, you know, partly our IT platform and then partly best of breed of open software stacking components that allow us to have a unique solution and that we can manage all of it as opposed to our customer's having to go out and pick pieces to it. And we're working with customers to define what that might look like in a Penguin stack that's partially our own developed ICE platform and partially best-in-class third-party software that gives the customer the best software features. By the way, that includes working with companies like NVIDIA to have their software as part of a customized platform for future development deployments.

Matthew Colitri | Analyst, Needham & Company, LLC

Excellent, very helpful, thank you.

Operator | Conference Operator

A reminder, if you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. Your next question comes from the line of Maddie DePaola with Rosenblatt Securities. Your line is open, please go ahead.

Maddie DePaola | Analyst, Rosenblatt Securities

Hi, this is Maddie calling on behalf of Kevin Cassidy. I was just wondering, given the recent Marvell acquisition of Celestial AI and just broader shift toward optical fabrics, are you seeing any change in optical memory and related technologies?

Mark Adams | Chief Executive Officer

I wouldn't say we're seeing any changes. I think it's a strong validation of the market opportunity, you know, broad macro opportunity. People are definitely looking at this dynamic of enhancing the bandwidth performance between memory and GPUs slash CPUs. So when I think about an established company like Marvell making such an investment that's publicly been announced, it makes me feel good about the direction and the strategy that we're deploying here and developing that type of system-level product in memory.

Maddie DePaola | Analyst, Rosenblatt Securities

Okay, great.

Thank you. Operator | Conference Operator

There are no further questions at this time. I will now hand it back to Mark Adams, CEO for closing remarks.

Mark Adams | Chief Executive Officer

Thank you, operator. I would like to thank our worldwide employees for their dedication and commitment. Our Q1 results reinforce that we are on the right path. And we continue to grow our pipeline of new opportunities helping our valued customers manage the complexity of their AI infrastructure. Thank you all for joining today's call.

Operator | Conference Operator

This concludes today's call. Thank you for attending. You may now disconnect. jsPDF 3.0.3 D:20260606090346-00'00'

NASDAQ:PENG Q4 2025 Earnings Call Transcript Generated on 6/6/2026 Victoria | Conference Moderator: Good afternoon. Thank you for attending today's Penguin Solutions fourth quarter and full year 2025 financial results. My name is Victoria and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, Suzanne Smith. Thank you. You may proceed, Suzanne.

Suzanne Smith | Host

Thank you, operator. Good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss Penguin Solutions' fourth quarter and full year fiscal 2025 results. On the call today are Mark Adams, Chief Executive Officer, and Nate Olmstead, 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 and 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, business plans and strategy, and existing and potential collaborations. 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 most recent annual and quarterly reports. The forward-looking statements are representative only as of the date they are made and, except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements. We will also discuss both GAAP and non-GAAP financial measures. 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 on analyzing our performance. A reconciliation of the 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, CEO. Mark?

Mark Adams | Chief Executive Officer

Thank you, Suzanne. Welcome to Penguin Solutions' fourth quarter and fiscal year 2025 earnings call. Today, I'll walk through both our Q4 and full year results, providing updates on each of our business segments and sharing how we are positioning the company for long-term growth. Fiscal 2025, the transformational year for Penguin Solutions as we continue to evolve from a holding company structure into a leading provider of AI infrastructure solutions. In addition to delivering 17% top-line growth, 190 basis points of non-GAAP operating margin expansion, and a 53% increase in non-GAAP diluted EPS, we made meaningful progress positioning the company for long-term success. Key accomplishments included expanding our advanced computing pipeline and adding several new customers to the Penguin Solutions franchise. supporting our ongoing customer diversification strategy, deploying our first international AI infrastructure implementation, developing and expanding key partnerships with Nvidia, CDW, Insight, and Dell, rebranding the company as Penguin Solutions, moving our corporate domicile to the United States, closing a $200 million investment from SK Telecom, refinancing our debt to strengthen the balance sheet, and strengthening our leadership team with the appointments of Tony Fry, formerly of NetApp, as our SVP and Chief Revenue Officer, and Ted Gillick, formerly of Dell, as our SVP of Strategy and Corporate Development. I'll now turn to our financial results for the fourth quarter and full year. We delivered solid fourth quarter financial results. Revenue for Q4 was $338 million, an increase of 9% year-over-year. Non-GAAP gross margin was 30.9%. Non-GAAP operating income reached $39 million, a 16% increase year-over-year with non-GAAP operating margin at 11.6%, up 80 basis points. Non-GAAP diluted earnings per share was 43 cents, up 18% from the prior year. Our fourth quarter performance rounded out a strong fiscal year. For the full year, revenue grew 17% year over year. Non-GAAP gross margin remained steady at 31%, and non-GAAP operating margin improved by 190 basis points to 12.2%. Non-GAAP diluted EPS was $1.90, an increase of 53% compared to fiscal 2024. We continue to see signs of broad AI adoption, particularly within verticals such as financial services, energy, federal, and education. As we've noted previously, our expectation has been that the AI pilot systems deployed across industries in 2023 and 2024 could lay the groundwork for broader production scale rollouts in the years ahead. We're now beginning to see indications of this transition with early stage corporate build outs taking shape. Notably, Penguin Solutions was recently selected by a Tier 1 U.S. financial institution to manage an AI infrastructure deployment, the institution's first on-premise gen AI data center implementation. We believe this win reflects the growing confidence enterprises have in our ability to deliver scalable, high-performance infrastructure, and we look forward to formalizing this engagement in due course. At Penguin Solutions, we support customers in navigating the complexity of AI adoption by combining deep technical expertise in advanced cluster implementations with a comprehensive portfolio of hardware, software, and managed services. We collaborate with customers to design, deploy, and operate these environments with a focus on time to revenue, performance, availability, and long-term reliability. Our solutions are primarily targeted at deployment serving Fortune 500 enterprises, educational institutions, government entities, and systems integrators, and neo-cloud service providers. While our go-to-market strategy has traditionally focused on direct customer relationships, we are actively investing in forming strategic partnerships that we believe can expand our reach and open new long-term growth opportunities. Our foundation is built on over 25 years of experience in large scale deployments, beginning with our roots in high performance computing, or HPC. We believe this expertise gives us an advantage in integrating complex AI building blocks, such as power and cooling systems, compute, memory, storage, and networking. This foundation enables us to deliver the kind of infrastructure that today's enterprise customers need to drive innovation, scale efficiently, and stay ahead of the curve in enterprise AI. I'd like to provide additional detail on our business segments. Advanced computing revenue for the fourth quarter of fiscal 2025 was $138 million, up 4% sequentially from Q3. For the full fiscal year, advanced computing revenue reached $648 million, reflecting 17% year-over-year growth. Within advanced computing, our HPC AI revenue from non-hyperscalers increased 75% year-over-year, highlighting progress on our customer diversification strategy. Since our last call, We completed the design, build, and deployment of HAON, one of South Korea's largest and most powerful GPU as a service systems developed by SK Telecom for the Korea Ministry of Science and Technology as a key element in the country's sovereign AI initiative. We now manage the system on an ongoing basis. We also launched several new AI projects, including with a Fortune Global 500 multinational consumer products company, a Fortune 100 federal systems integrator, and a Fortune 50 financial institution. This last project is in addition to the win from a different tier one financial institution that I mentioned earlier. We're also pleased with the growth in our new customer opportunities. In fiscal 2025, pipeline bookings and revenue from new customers grew nicely, reflecting the ongoing demand for our expertise and solutions. As we've noted on prior calls, revenue in this segment can be lumpy, with large deployments in one period not necessarily reoccurring in the next. That said, we remain encouraged by the level of customer interest in our solutions and the long-term growth potential of these relationships. Our core competency and successfully managing large-scale AI infrastructure build-outs helps customers accelerate their time to a live production environment. We believe our customers value our technology agnostic approach, which allows us to create a unique overall solution that meets their specific AI infrastructure needs. Beyond our hardware building blocks, we continue to invest in our Penguin ICE clusterware software. a platform that helps customers manage infrastructure assets. Post deployment, our Penguin Solutions Services Organization can provide ongoing operational support to sustain the high performance and high availability of their systems. Our integrated memory segment, which sells products under the Smart Modular brand, delivered $132 million in revenue for the fourth quarter and $464 million in revenue for the full fiscal year, representing a 30% increase compared to fiscal 2024. This growth was driven by strong demand from customers in computing, networking, and telecommunications. We are optimistic about our memory demand in the near term as large enterprises seek out higher performance and reliability memory solutions to support both traditional use cases and increasingly complex AI applications. In line with this demand, we are seeing promising early interest in our compute express link or CXL family of products. As customer qualification efforts continue to expand, we believe we are well positioned for growth as adoption of CXL scales. In memory, our R&D investments are focused on next generation technologies. One key area is memory pooling. which has the potential to significantly expand bandwidth and improve memory capacities in GPU environments. We continue to invest in the design of smart optical memory appliance, or OMA, with initial product shipments targeted for late calendar 2026 to early 2027. This new offering will be designed to enable memory scaling of the industry's fastest high bandwidth memory, or HBM, which is today a limiting factor in AI cluster performance and efficiency. With a strong backlog, ongoing technology transitions such as DDR4 to DDR5, and a roadmap that includes innovations like CXL and OMA, we believe memory will be an important growth engine for Penguin Solutions. Optimize LED under the Cree LED brand. Cree's fourth quarter revenue came in at $67 million, an increase of 9% compared to the prior quarter. Full year revenue was $256 million, roughly flat year over year, reflecting a combination of secular and macroeconomic headwinds in the LED market. Despite these challenges, we achieved a 250 basis point improvement in non-GAAP operating margin in fiscal year 2025. As we move into fiscal 2026, Prius focused on capturing market share, operating efficiently, protecting our intellectual property, and driving operating profit growth. Fiscal 2025 was a defining year for Penguin Solutions. We took meaningful steps to transform the company and sharpen our focus on becoming a leading provider of AI infrastructure solutions. We believe that these efforts have strengthened our foundation and positioned us well for long-term success. Looking ahead to fiscal 2026, we believe we can sustain our growth momentum with the following strategic priorities. Growing our enterprise customer base and AI infrastructure deployments. Driving innovation across our hardware, software, and services portfolio to create sustainable differentiation. expanding our strategic partnerships to enhance Penguin's go-to-market efforts, operating with discipline and efficiency to position the company for long-term success, and further strengthening our balance sheet to support investments in scale and new capabilities. In setting these priorities, our intention was to align with the long-term interest of our shareholders, customers, and employees. In closing, I want to thank our global team for the dedication and performance in FY 2025. We delivered top line growth, improved profitability, strengthened our balance sheet, and expanded the Penguin Solutions customer base. We believe we are well positioned for future success in FY 26 and beyond. Let me stop and hand it over to Nate for a detailed review of 2025 financials. and their outlook for FY2026.

Nate Olmstead | Chief Financial Officer

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 available on our website. Now let me turn to our fourth quarter and full year results. In the quarter, total Penguin Solutions net sales were $338 million, up 9% year over year. Non-GAAP gross margin came in at 30.9%, which was flat year over year. Non-GAAP operating margin was 11.6%, up 0.8 percentage points versus last year, and non-GAAP diluted earnings per share were 43 cents, up 18% from last year. For the full fiscal year 2025, total company net sales were $1.37 billion, up 17% year over year. and aligned with the outlook we initially provided in April and better than the outlook we provided at the start of the fiscal year. Full year non-GAAP EPS was $1.90, up 53% versus the prior year and better than the increased outlook we provided last quarter. In the fourth quarter, our overall services net sales totaled $63 million, up 5% versus the prior year. Product net sales were $275 million in the quarter, up 9% versus the prior year. Net sales by business segment were as follows. In advanced computing, Q4 net sales were $138 million, which was 41% of our total net sales and down 7% year over year. For the full year, advanced computing delivered $648 million of net sales, or 47% of total company net sales and up 17% year over year. Our strong full-year advanced computing growth was driven by our HPC and AI business, which grew 34%. Notably, within our HPC AI business, product and services sales to our non-hyperscale customers were up 75% for the full fiscal year. For integrated memory, in Q4, net sales were $132 million, which was 39% of total company net sales and up 38% year-over-year. For the full year, memory net sales totaled $464 million or 34% of total net sales and up 30% year-over-year. And in optimized LED, net sales were $67 million or 20% of total company net sales and up 2% year-over-year. For the full year, LED delivered $256 million of net sales or 19% of total company and down 1% versus the prior year. Non-GAAP gross margin for Penguin Solutions in the fourth quarter was 30.9% flat year over year with margin pressure from a higher mix of integrated memory net sales offset by improved margin rate across all three business segments. Non-GAAP gross margin was down 0.8 percentage points sequentially with lower margin rates in advanced computing partially offset by higher margin rates in both integrated memory and optimized LED. For the full fiscal year, gross margins were 31% in line with our prior outlook and down 0.9 percentage points year-over-year due to growth in our memory and AI hardware businesses, which have lower than company average margins but are addressing fast-growing market opportunities. Non-GAAP operating expenses for the fourth quarter were $65 million, up 5% year over year, and up 1% sequentially. Operating expenses as a percentage of net sales were down both year over year and quarter over quarter, driven by higher net sales volumes and modest spending increases. For the full fiscal year, non-GAAP operating expenses were $257 million, up 1% year over year, and down 2.9 percentage points as a percent of net sales due primarily to strong top line growth and disciplined expense management. Q4 non-GAAP operating income was $39 million, up 16% year over year and up 2% versus last quarter. The combination of net sales growth and operating expense management translated into a 0.8 percentage point increase in operating margin versus Q4 last year. This is our fifth consecutive quarter of non-GAAP operating margin expansion year over year. For the full fiscal year, non-GAAP operating income was $168 million, up 39% year over year, and non-GAAP operating margin improved 1.9 percentage points to 12.2% of net sales. Non-GAAP diluted earnings per share for the fourth quarter were 43 cents, up 18% versus the prior year. For the full year, non-GAAP diluted EPS was $1.90, up 53% versus the prior year, and 5 cents better than the high end of our outlook provided in July. Adjusted EBITDA for the fourth quarter was $43 million, up 11% year over year, and for the full year was $187 million, up 28% versus the prior year. Turning to balance sheet highlights, for working capital, our net accounts receivable totaled $308 million, compared to $252 million a year ago, with the increase driven by higher sales volumes and variations in sales linearity across the quarters. Days sales outstanding came in at 51 days, up from 49 days in the prior year quarter. Inventory totaled $255 million at the end of the fourth quarter, up from 151 million at the end of last year due to higher sales volumes and ordered linearity. Days of inventory was 51 days, up from 36 days a year ago, primarily due to the positioning of inventory for shipment early in Q1 FY26. Accounts payable were $267 million at the end of the quarter, up from $182 million a year ago due primarily to higher sales volumes and the timing of purchases and payments. Days payable outstanding was 54 days compared to 43 days last year due to the timing of purchases and payments. Our cash conversion cycle was 49 days, an increase of seven days compared to last year due to slower inventory turns resulting from materials positioned for shipment early next quarter. Consistent with past practice, days sales outstanding, days payables outstanding, and inventory days are calculated on a gross sales and gross cost of goods sold basis, which were $550 million and $453 million, respectively, in the fourth quarter. As a reminder, the difference between gross and net sales is primarily related to our memory business's logistics services, which are accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as net sales. Cash, cash equivalents, and short-term investments total $454 million at the end of the fourth quarter, up $64 million from the prior year and down $282 million sequentially. The year-over-year fluctuation was due primarily to proceeds from the issuance of preferred shares, cash generated by the business, and the repayment of our term loan in Q4. The sequential decline was primarily driven by the repayment of our term loan. Fourth quarter cash flows used by operating activities from continuing operations totaled $70 million, compared to $12 million used by operating activities from continuing operations in the prior year quarter. The increased use of cash in the quarter versus last year was due primarily to investments in inventory to support shipments at the start of Q1 FY26. For the full fiscal year 2025, operating cash flow from continuing operations was $113 million, an increase of 8% versus the prior fiscal year. We spent approximately $296,000 to repurchase 16,000 shares in the fourth quarter under our stock repurchase program. Since our initial stock repurchase authorization in April 2022, we have used a total of $113 million to repurchase 6.6 million shares through 2025. Earlier today, we announced that our board has authorized a $75 million increase in our stock repurchase authorization bringing our total remaining authorization to $112 million. As mentioned in our Q3 earnings call, in Q4, we completed a refinancing of our existing credit facility. We paid off the $300 million remaining on our term loan using $200 million of cash from our balance sheet and $100 million of borrowings from a new revolving credit facility. This refinancing transaction significantly reduced our leverage, extended our debt maturities, and is expected to lower our debt service costs as we reduced our total gross debt by $200 million. Our net debt at the end of the fiscal year was $16 million. For those of you tracking capital expenditures and depreciation, capital expenditures were $3 million in the fourth quarter and $9 million for the full year. And depreciation was $5 million for the quarter and $21 million for the full year. And now turning to our outlook. Coming off a strong fiscal year 25, we believe that our strategy and execution capabilities position us well for long term profitable growth. For fiscal 26, we are initiating an outlook for net sales to grow 6% plus or minus 10% versus the prior year. There are a few important assumptions to keep in mind with regard to this outlook. First, As previously disclosed in our annual and quarterly filings, we are in the process of winding down our Penguin Edge business, which is part of our advanced computing segment. We expect sales from these Penguin Edge products to essentially cease at the end of this calendar year and have included this assumption in our outlook. While this will result in the phase out of some profitable business, Penguin Edge has become a smaller portion of our overall portfolio and in the long term, we do not expect a material impact to our growth trajectory. Second, we believe that we will continue to diversify our customer sales mix, and we have assumed zero hardware sales in FY26 to hyperscale customers, as we don't currently have line of sight to such business in this fiscal year. To be clear, and importantly, we do expect our hyperscale services business to continue in FY26, and those sales are included in our outlook. The combined effect of these two assumptions in our FY26 outlook is a 14 percentage point unfavorable year-over-year impact to our total company net sales growth. Last, you may notice that the net sales growth range in our outlook is wider than last year. While we entered this year with a stronger pipeline of AI compute opportunities than last year, we expect our sales volumes to be higher in the second half of the year than in the first half. You'll recall that in FY25, the opposite was true as we had a strong first half of hardware shipments to our large hyperscale customer. That shipment timing led to approximately 52% of our total company sales coming in the first half of fiscal 2025. By comparison, for fiscal 26, the midpoint of our outlook assumes approximately 46% of our sales come in the first half of the year. So with our growing base of AI compute opportunities and our expectation of a more backend loaded year, we felt a wider net sales outlook range was prudent to reflect a broader set of potential outcomes. With that said, our full year net sales outlook reflects the following by segment. For advanced computing, we expect full year net sales to change between minus 15 and plus 15% year over year. This outlook includes the Penguin Edge and hyperscale hardware sales impact mentioned earlier. For memory, we expect net sales to grow between 10 and 20% year over year. And for LED, we expect net sales change between minus 5 and plus 5% year over year. Our non-GAAP gross margin outlook for the full year is 29.5%, plus or minus one percentage point. The decline in gross margin outlook versus FY25 is primarily due to the wind down of the high margin Penguin Edge business, as well as growth in lower margin businesses such as memory and AI hardware. New AI customer wins typically begin with upfront hardware net sales at lower margin during the implementation phase, and we aim to follow those engagements with higher margin recurring software and services sales. As a result, we anticipate some near-term gross margin pressure as we engage in initial infrastructure deployments, but we view these upfront investments as an important foundation for durable high margin growth over time. For non-GAAP operating expenses, we expect a full year total of $255 million, plus or minus $10 million. For non-GAAP full-year diluted earnings per share, we expect approximately $2, plus or minus 25 cents. Our FY26 non-GAAP diluted share count is expected to be approximately 55 million shares. Due primarily to changes in the geographic mix of our earnings and benefits from our recently completed U.S. redomiciliation, we are lowering our FY26 and long-term non-GAAP tax rate to 22%. which reflects currently available information. While we expect to use this normalized non-GAAP tax rate throughout FY26 and beyond, the long-term non-GAAP tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global and U.S. tax environment, significant changes in our geographic earnings mix, or changes to our strategy or business operations. Our outlook for fiscal year 2026 is based on the current environment, which contemplates, among other things, the global macroeconomic environment and ongoing supply chain constraints, especially as they relate to our advanced computing and optimized LED businesses. This includes extended lead times for certain components that are incorporated into our overall solutions, impacting how quickly we can ramp existing and new customer projects. Overall, we believe our focused execution, disciplined expense management, and balance sheet strength provide a strong foundation for sustained profitable growth. We expect these qualities to support our continued progress as we pursue opportunities to enhance long-term shareholder value. Please refer to the non-GAAP financial information section and the reconciliation of GAAP to non-GAAP measures tables in our earnings release and the investor materials on our website for further details. With that operator, we are ready for Q&A.

Victoria | Conference Moderator

Great. Thank you so much. We will now begin the question and answer session. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking a question. We'll pause here briefly as questions are registered. All right, our first question comes from the line of Kevin Cassidy. with Rosenblatt Securities. Your line is now open.

Kevin Cassidy | Analyst, Rosenblatt Securities

Thank you. Thanks for letting me ask a question, and congratulations on the strong fiscal year 25. Thank you for the information about your hyperscale customer, but can you say, is their project over, and would you say that, you know, going forward, we should just take them out of the the forecast, or are you still active in potential more hardware deployments?

Mark Adams | Chief Executive Officer

Kevin, thanks for the question. We don't look at it like the project's over. We have ongoing services with the customer and still are in discussions for future development opportunities. It's just that in our outlook for the year fiscal 2026. We don't anticipate any non-service revenue or systems hardware revenue in the year.

I'll let Nate comment. Nate Olmstead | Chief Financial Officer

Yeah, that's right. I think, you know, last year we entered the year with some visibility to some hardware shipments from the hyperscalers and just wasn't the case this year. So coming into this year, we thought it made sense to just make the assumption that we wouldn't have any hardware revenue from hyperscalers this year. But as Mark said, we continue to have very good relationship with them and the services revenues continue.

Kevin Cassidy | Analyst, Rosenblatt Securities

Okay, great. Thanks. And, you know, also exciting news with the SK Telecom and landing one client with that. And there was a lot of news last week about SK Telecom even being awarded or some business with OpenAI in Berea. Is there any participation availability for Penguin in that relationship?

Mark Adams | Chief Executive Officer

That's something we can't address or talk to today, Kevin. What I would say is the referenced implementation in our pre-recorded material was a great opportunity for the company. It's our first international deployment of significant scale. And we went from order to go live in just about two months. And it was a significant validation of our capabilities, our rapid deployment framework. And we really value the relationship with SK Telecom, but we're not able to comment on any future opportunities at this time.

Nate Olmstead | Chief Financial Officer

Kevin, I'll just add to that. Last quarter, You saw in our filings when we initially booked the deal, it was for hardware. Since then, we've also added services as well. So it's great to see that part of that transaction and the relationship with SK being strong.

Kevin Cassidy | Analyst, Rosenblatt Securities

Okay. And maybe just to add on to that a little bit, in the filing, I think it was $34.6 million. Will that be recognized over the next couple quarters, or when does that get recognized?

Nate Olmstead | Chief Financial Officer

So we recognize that portion in Q4, but we'll have more in FY26.

Kevin Cassidy | Analyst, Rosenblatt Securities

Okay, great. I'll get back in the queue.

Thanks. Victoria | Conference Moderator

Thank you for your questions. Our next question comes from the line of Michael Ink with Goldman Sachs. Your line is now open.

Michael Ink | Analyst, Goldman Sachs

Hi. Good afternoon. Thank you for the question. I wanted to just ask about the penguin edge and combined impact with with hardware and revenue for next year, I think you mentioned a 14 percentage point headwind to revenue growth to the total company. You know when I when I do the math I think that implies a 28 percentage point impact to advanced computing. Is that the right way to think about it? How would you think about advanced computing growth next year? Kind of X these items. And could you just remind us why it kind of strategically makes sense to exit the Penguin Edge business, which I think was about 10% of the segment. But we'd love to hear your general thoughts there.

Thank you. Mark Adams | Chief Executive Officer

Thanks for the question, Michael. I'm going to answer the last part of your question first and then hand it over to Nape. to talk about the financial impact and your question on impact of the other elements. It really wasn't a decision that we could stay or not stay. We had two clients in our Penguin Edge business that made up a significant part of that business. And as we announced in our filings, we were going through some last-time buys and were winding down the business. And over time, we were just getting better visibility towards the end of our fiscal 25 to what the impact would be in 26. So it wasn't really a choice of should we stay in a strategic area or not. It was two large customers that were winding down on a prior generation of a product and that they were not renewing.

Nate Olmstead | Chief Financial Officer

Yeah. Hey, Mike. And so I think on your math, you're roughly right. You know, advanced computing is about 47% or 50% of total company sales. So that 14 points all sits within advanced computing, which means it's about 28 to 30% of advanced computing revenue from FY25.

Michael Ink | Analyst, Goldman Sachs

Great. Thank you. And if I could just follow up, please. Um, so if the, you know, underlying, um, you know, is growing closer to the 30 to 45, um, could you just maybe talk about, you know, the key areas of momentum for advanced competing that you're seeing for next year? Is it just, you know, more of those customer wins that you talked about, um, you know, converting into revenue and, um, maybe just kind of expand a little bit more in terms of the, the wideness of the range. I know you had made some comments earlier during the call.

Thank you. Mark Adams | Chief Executive Officer

Sure. Let me, let me take a shot at that one. When you think about our model and, and we've talked about customer diversification for some time, we've done a pretty good job at the, at the launching of going to market resources into a broader set of customers and Those target enterprise customers plus federal opportunities and those in the education sector, when you combine that into a target set of customers for us, we engage with these customers. We bring them the value proposition we have. We try to identify funded projects that would allow us to utilize our capabilities in helping accelerate our customers' AI implementation. once we get that opportunity to bid on a proposal or a request for proposal, we deliver that, and that starts the beginning of a pipeline opportunity, and our pipeline is growing. Now, pipeline is not a booking, as we all know, but the pipeline opportunities are growing as are just the number of customers that we're engaged with, And so as you talk about the offset to some of these headwinds, we're continuing to add customers to the franchise and some really notable global brands and their respective industries. And we're excited about the direction we're heading. And we're looking to convert those pipeline opportunities into bookings and eventually revenue.

Nate Olmstead | Chief Financial Officer

Yeah, I mean, I think just like building on what Mark said, I think, you know, it's part of our diversification of our customer base is what you're seeing reflected in the outlook. And as I mentioned in my prepared remarks too, 75% growth in the HPCAI business from non-hyperscalers, I think it's just a really positive data point for us from FY25. And, you know, we think that we can continue to grow at a very fast clip in those customers in FY26.

Michael Ink | Analyst, Goldman Sachs

Great. Thank you, Mark. Thank you, Nate.

Thank you. Victoria | Conference Moderator

Thank you for your questions. Our next question comes from the line of Sumit Chatterjee with JP Morgan. Your line is now open.

Sumit Chatterjee | Analyst, JPMorgan

Hi. Thank you. Thanks for taking my questions. I have a couple, and maybe I'll sort of give you both at the same time. You did mention better second half compared to the first half, and maybe just if you can dive into what's giving you that visibility with some of your customers, and is it really more coming from advanced computing visibility, or is it more memory-driven? And then just specific to memory, when you are guiding to 10% to 20% growth, just curious how much of that is maybe somewhat pricing-driven, given sort of what's happened with the underlying commodities here, and what are the margin implications of what we're seeing on the commodity front feed into your sort of overall systems on the memory side?

Thank you. Nate Olmstead | Chief Financial Officer

Let me take the memory one first. So you're right, obviously prices are starting to increase, and that affects a portion of our portfolio. It's not all of it. Important to keep in mind that we generally operate in memory on a value-add basis, right? And so as memory prices increase, we can generally pass along those price increases, but we don't get additional margin from that. So you would see an increase in revenue, but you would see a decrease in margin rate or really no increase in profit dollars. because we operate on this value-add basis. I would say in terms of the outlook, listen, I think I put a little bit of price increase probably into the high end of the range for memory, but not a lot. We'll see how things play out there. I think currently we feel good about the backlog that we've been able to build for memory going into Q1. And we have pretty good visibility, I'd say, into the first half on memory. You mentioned the second half being stronger than the first half. in our outlook, and mostly that reflects the AI business. You know, Mark mentioned about the strength of the pipeline, and, you know, we haven't converted those into bookings yet, and so the outlook really reflects that, where we have a strong pipeline and some good opportunities, some of which we expect to convert into bookings, but they will be booked later in the first half into the second half and expect revenue in the second half of the year.

Thank you. Victoria | Conference Moderator

Thank you for your questions. Our next question comes from a line in Andabara with Loop Capital Markets.

Your line is now open. Andabara | Analyst, Loop Capital Markets

Yeah. Hey, thanks a lot. Yeah, thanks, guys, for taking the question. I have a couple if I could. So just going back on the apples to apples revenue growth, you know, sort of when you back out, back out the meta hardware and the Penguin solutions or the, sorry, the edge business. So is that to say, yeah, thanks. So if it's a 14% impact a year over year growth, is that to say that Apple's dad, like on a pro forma basis, you'd really be guiding 20% growth?

Nate Olmstead | Chief Financial Officer

Yeah, the way I think about it.

Andabara | Analyst, Loop Capital Markets

Am I totally off?

Nate Olmstead | Chief Financial Officer

Well, let me explain it to you this way and see if it makes sense. 14% of our revenue in FY25 came from the Penguin Edge business and the hardware from hyperscalers, right? So having included that revenue in the FY26 outlook. So yes, if you wanted to remove that from FY25 and have apples to apples with FY26, you would have a calculated growth rate around 20%.

Andabara | Analyst, Loop Capital Markets

It would be. I got it. And that's helpful. That's helpful, Nate. Thanks. And then, Nate, the 75% growth from non-hyperscale HPCAI, can you give us a sense? I mean, I guess you're giving us the bits we can back into that, I guess, right, with the overall guide. Is that something we can back into, or do we need sort of more parts?

Nate Olmstead | Chief Financial Officer

You're talking about how much revenue that generates?

Andabara | Analyst, Loop Capital Markets

I guess, I think the comment was, yeah, I think the comment was in 2025.

Nate Olmstead | Chief Financial Officer

Yeah, so if you look at advanced computing, you know, there's the AI business, HPCAI business, there's Stratus, and there's Penguin Edge. Focusing on the HPCAI business, which is obviously our strategic focus, within that you have sort of hyperscale business and non-hyperscale business. And the non-hyperscale portion of that grew 75% in fiscal year 2025. I'm just trying to zero in really on that strategic focus area for us.

Andabara | Analyst, Loop Capital Markets

Totally. And I guess what I'm wondering is, given the guidance parameters you've given us for the different businesses for fiscal 26, are we able to back into what's implied for that growth in fiscal 26? Or is that something that we need more information to figure out?

Mark Adams | Chief Executive Officer

I think we're basically discussing a trend that happened in 25. And what we're suggesting is that with that focus, we're trying to leverage that and build off that to deliver on the plan for 26. I don't think there's an implied association with what happened in the report for the 25 outcome in the 26 number.

Nate Olmstead | Chief Financial Officer

Yeah. Ananda, I think you can kind of get to a range with data that we've given you. But the other thing I would just add to that is, you know, most of the guidance range mostly reflects opportunity in that HPC AI space for non-hyperscale customers. So that's where we're seeing that pipeline build, right? And so it's a wide range on advanced computing because of that. We have visibility to opportunities, but not visibility yet to the bookings. And so I left the range wider for advanced computing than I did on LED or memory, which you see have tighter ranges on the revenue outlook.

Andabara | Analyst, Loop Capital Markets

And Mark, actually Nate and Mark, like Nate to sort of, to the variance that's left in the bookings that you, that drove the, describing the wider range. What would be, I guess, like what aspects of HBCI business, maybe what end markets or aspects, you know, would be the biggest parts of the market that would sort of maybe drive some of the upside?

Mark Adams | Chief Executive Officer

Sure.

Andabara | Analyst, Loop Capital Markets

Yeah.

Mark Adams | Chief Executive Officer

Yeah. What I would say, let me just try to answer that. The market opportunities that we're seeing the most near-term customer engagements are in the financial sector, the federal sector, which includes both government and federal integrators. There are some education opportunities that are interesting, but also sovereign cloud opportunities. Those are the four that I think can drive us to a successful market. That's super helpful. Now, by the way, just to fully answer, in addition to that, those markets, I think we mentioned in our script, we've had a new CRO start, Tony Fry, who came over from NetApp. And Tony's already brought on team members to target healthcare and other verticals organizationally. Mark Broughton- To to further enhance that, but in terms of 26 outlook our pipeline reflects the the sectors, I talked about being again. Mark Broughton- Financial education federal integrators and government direct, as well as sovereign cloud.

Andabara | Analyst, Loop Capital Markets

Thanks mark.

Nate Olmstead | Chief Financial Officer

Mark Broughton- Thanks guys.

Thanks. Victoria | Conference Moderator

Ananda. Thank you for your question. Our next question comes from the line of Rustin Kinga with Citizens. Your line is now open.

Rustin Kinga | Analyst, Citizens

Hey, guys. Congrats on the strong close to the year and great to hear about Penguin's pivotal role in South Korean sovereign AI plans. I just had one follow-up. Nate, it was great to hear you kind of call out that you were able to add the services revenue in such a short period of time after the initial hardware deal. And, you know, I think you guys have historically talked about hardware as a as a, you know, you lead with the hardware and then services follow on. I'm just wondering, is it too large of a leap to make to say that in this instance, you know, you were able to sort of accelerate the time to services from an initial hardware implementation? Is that something that you're seeing or is that just a one off?

Thanks. Mark Adams | Chief Executive Officer

Well, I think it's We've got to be careful and be clear here. The overall solution, and as it was commented on in our recorded scripts, the overall solution contemplates hardware systems, software, and services. And the timing of when the revenue gets recognized is different. And so the more hardware-oriented deals we take revenue credit on, that's normally up front in any deployment. Um, the software and services bookings and revenue is, is typically ratified. So if we get a booking, that doesn't mean that we get the revenue upfront, as you know, the revenue happens over the lifetime of a, of an agreement. And so, um, in this case, um, like any case, once we, once we install, uh, or deploy a systems into a data center environment, for example, the hardware gets booked right away, relatively speaking, and we start the clock on software and services that are contracted to, and that happens over time. So this wasn't that different than other deployments. It's just that we got both agreements, you know, within a certain timeframe right after the other.

Nate Olmstead | Chief Financial Officer

I think also it's, you know, each deal can be different than the next, but when we have large hardware deployments, the value proposition for our services tends to be higher, and so we do tend to see good services attached to those large deployments, and that was the case with SK Telecom.

Rustin Kinga | Analyst, Citizens

Appreciate you walking through the nuances.

That's great. Thanks. Victoria | Conference Moderator

Great. Thank you so much for your questions. Our next question comes from the line of Matt Caltry with Needham & Company. Your line is now open.

Matt Caltry | Analyst, Needham & Company

Hey, guys. This is Matt Caltry over at Needham. Thanks for taking our questions. There's obviously no shortage of conversation around AI, and lately we've heard quite a bit of discourse around how CapEx and revenue seems to be rotating between just a few companies. And then this week we've had reports out about AMD getting involved in chip shipments with OpenAI and another report today questioning the profitability of Oracle's GPU strategy. Just curious what your thoughts are on how build outs are and will progress in this space and what you're seeing in the broader market.

Mark Adams | Chief Executive Officer

Well, implied in our earlier comments, Matt, is that we still think we're in the relatively early innings of broad enterprise rollouts. If I separate your questions to AMD and OpenAI and that announcement, I think that just goes to show that the capital dollars out building on future large language model training environments, as well as inferencing implementations, again, it's still on the front end, the early end of the market opportunity there, buoyed by enterprise adoption of AI, which is different than the earlier stages that were primarily large hyperscalers making significant investments in their training. We're seeing and we're starting to see big pickup in terms of enterprise engagements and the pipeline growing there. Now, relative to your reference to the GPU gross margin announcement. I guess I would say when you have a lot of people selling the same thing, it tends to get commoditized pretty quickly. I'm not commenting on today's announcement only, but if you look at the gross margin of the hardware-only companies that are the large OEMs in the business, their gross margins have been significantly impacted over time. That model is not, in my opinion, is not for everybody for sure. I think it will get commoditized if you're selling the same basic underlying solution or chip in this case. So I think there are two different issues you raised. I definitely think the market is on the early stage of deployments, especially around the enterprise opportunity. And I think the announcement with AMD and OpenAI that was in the press this week, certainly another good example of the CapEx spending. Today's announcement that you're referring to on the gross margin piece is something that we see when there's large hardware-only type environments and competitors.

Matt Caltry | Analyst, Needham & Company

That makes sense. That makes sense. Very, very helpful there. Thank you. And then as the memory market seems to be heating up here, and good commentary from you guys there and guidance there, how are you differentiating your offering there? Or to a certain extent, is it just a matter of who has availability to ship this stuff?

Mark Adams | Chief Executive Officer

Well, and Matt, I know you're relatively new to our story from Needham, and thanks again for jumping on the call today. Our business is largely is differentiation because we buy our supply of memory silicon from the likes of SK Hynix and others. And we deliver a value add in terms of a system or subsystem level solution. And we get margin above the industry gross margin for the commodity itself being the memory chip. And so we differentiate ourselves both through design and uh firmware and software and performance reliability and so those categories are elements of our differentiation allow us to charge more than the industry charges for the memory itself um and so it's it's largely a differentiation model if we're not differentiation differentiating um on the design wins we're not going to get a lot of them understood thanks so much you got it Victoria | Conference Moderator: Thank you for your questions, Matt. There are no additional questions waiting at this time. I would now like to pass the conference back to Mark Adams, CEO, for closing remarks.

Mark Adams | Chief Executive Officer

Thank you, operator. Our Q4 and full year results validate that we are on the right path, helping our value customers solve the complexity of AI infrastructure. Thank you all for joining today's call.

Victoria | Conference Moderator

That concludes today's call. Thank you for your participation and enjoy the rest of your day. jsPDF 3.0.3 D:20260606090347-00'00'

NASDAQ:PENG Q3 2025 Earnings Call Transcript Generated on 6/6/2026 Cameron | Conference Call Operator: Good afternoon. Thank you for attending the Penguin Solutions Third Quarter Fiscal Year 2025 Earning Result Conference Call. My name is Cameron and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. And I would now like to pass the conference over to your host, Suzanne Schmidt with Investor Relations.

You may proceed. Suzanne Schmidt | Investor Relations

Thank you, Operator. Good afternoon and thank you for joining us on today's earnings conference call and webcast to discuss Penguin Solutions' third quarter fiscal 2025 results. On the call today are Mark Adams, Chief Executive Officer, and Nate Olmstead, 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 and 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, business plans and strategy, and existing and potential collaborations. Forward-looking statements are based on current beliefs and assumptions, 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 most recent annual and quarterly reports. The forward-looking statements are representative Only as of the date they are made and except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements. We also discuss both GAAP and non-GAAP financial measures. 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 the GAAP to non-GAAP measures is included in today's press release and the accompanying slide presentation. And with that, let me turn the call over to Mark Adams, CEO. Mark?

Mark Adams | Chief Executive Officer

Thank you, Suzanne. I'd like to welcome all of you to our third quarter fiscal 2025 Penguin Solutions earnings call. We are pleased with our Q3 financial results. Our revenue was $324 million. an increase of 7.9% compared to Q3 of fiscal year 2024. Non-GAAP gross margins came in at 31.7%. Non-GAAP diluted earnings per share was 47 cents, a 25% increase year over year. We achieved non-GAAP operating income of $38 million, up 15% from the prior year, And we delivered non-GAAP operating income margin of 11.9%. All in all, our Q3 results attest to our progress in transforming Penguin Solutions into a leader in high performance, high availability, enterprise infrastructure solutions. We continue to see signs of early stage enterprise AI adoption across vertical markets, such as financial services, energy, defense, education, and neo-cloud segments. As we have mentioned in the past, our belief is that the investment of AI pilot systems deployed throughout the industry in 23 and 24 would lead to growth in full production installs in 2025 and 2026. We are now seeing signs that we have entered the initial stages of that growth in corporate build-outs at scale. Penguin Solutions helps customers manage the complexity of AI adoption by leveraging both our proven know-how and advanced cluster build-outs and our portfolio of hardware, software, and managed services. We work with our customers to design, build, deploy, and manage these environments with a focus on time to revenue and reliability, while also targeting the highest level of performance and availability. Our products and services are primarily marketed to hyperscalers, NeoCloud service providers, and Fortune 500 companies. Historically, we have sold directly to our end customers. However, we are also investing in channel partnerships that we believe will provide new opportunities for growth over the long term. The foundation of Penguin Solutions' success is our expertise in large-scale deployments, which has been developed over a 25-plus year history implementing complex data-centered clusters beginning with our early days in high-performance computing, or HPC. Our expertise integrating advanced technologies such as power, cooling, AI compute, memory, storage, and networking enable us to deliver high-performance, high-reliability enterprise infrastructure solutions for our customers. As we've mentioned at the beginning of our fiscal 2025, we have transitioned from providing a quarterly financial outlook to providing a full year financial outlook. We believe that a full year outlook provides a broader perspective of our business, especially with regards to AI infrastructure engagements, where the timing of actual deployments and associated revenue recognition can be unpredictable and concentrated. This approach aligns well with our focus on long-term strategic objectives. At the same time, We know that our stakeholders appreciate commentary on our progress each quarter, and we will offer that today as well. On our Q2 fiscal year 2025 call in April, we raised our full year revenue growth outlook from 15% to 17% at the midpoint. Today, we are reaffirming that outlook. In addition, we are raising our full year non-GAAP diluted earnings per share outlook from $1.60 to $1.80 per share at the midpoint. As a reminder, we have shared previously that revenue and profits are likely to be weighted more towards the first half rather than the second half of fiscal 2025. I'd like to now provide additional detail on our business segments. Our advanced computing revenue for the third quarter of fiscal 2025 was $132 million, down compared to the prior quarter as expected. As we often highlight on our earnings calls, revenue recognition in advanced computing tends to be lumpy. This is due to factors like customer concentration, the timing of large project implementation for our major customers, and the timing and discretionary nature of our customer renewals. The decline in Q3 when compared to the prior quarter was largely due to the timing of a major deployment at a large hyperscale customer where we recognized the revenue in our second quarter. That said, this quarter we had some exciting wins at our existing customers and closed five new customer bookings, highlighted by wins in the federal, energy, and biotech segments. We continue to see increased interest at enterprise customers, as well as in NeoCloud customer opportunities, exemplifying the increased investments being made in large-scale AI infrastructure. Our core competency in successfully managing large-scale AI infrastructure build-outs helps customers accelerate their time to a live production environment. We believe our customers value our technology-agnostic approach, which allows us to create a unique overall solution that meets their specific AI infrastructure needs. Beyond our hardware building blocks, we are investing in the development of Penguin Ice Clusterware, a software platform that helps customers manage their infrastructure assets. Our Penguin Solutions Service Organization can assist companies in managing their post-deployment operations, supporting the high performance and high availability of their systems. Overall, we have seen growth in new customer bookings and have continued to expand our pipeline during the first three quarters of FOI 2025. Integrated memory under the Smart Modular brand achieved $130 million in revenue in Q3, up 24% compared to the prior quarter. We saw strong demand from our computing, networking, and telecommunications customers. Pricing in both DRAM and NAND appears relatively stable, and inventory levels appear balanced at our major customers. We are optimistic about memory demand in the near term, as large enterprises seek out higher performance and higher reliability memory to support both established workloads and new complex AI workloads. In line with this increasing demand for improved memory bandwidth and availability, we are seeing early adoption of our Compute Express Link or CXL family of products. Thanks in part to positive momentum in our customer qualification efforts, We have received early production orders of CXL from OEMs and an AI computing customer, which reinforces our optimism about CXL's appeal to new types of customers. From an R&D perspective, we are focused on products that enable higher bandwidth and larger memory access to and from a GPU via memory pooling. We continue to invest in the design of smart optical memory appliance, or OMA, with first product shipments targeted for late 2026, early 2027. Given the importance of memory to the AI ecosystem, we feel confident that smart modular continued to play a key role fulfilling our customers integrated memory requirements in the future. Optimized LED operates under the Cree LED brand. Cree's revenue came in at $62 million of slightly compared to the prior quarter. Our top line was constrained during the second half of Q3, largely due to increased cost and uncertainty related to tariffs on products shipped out of our Weizhou, China facility. Despite macro uncertainty in the LED market, we remain confident in our high-performance product portfolio, our strong intellectual property, and our cost-effective capital light operating models. In December of 2024, we closed a $200 million investment from SK Telecom. At the time, we explained that in addition to the investment, the opportunities to partner with SK Group and more specifically, SK Telecom and SK Hynix could offer strategic commercial benefits as well. We are making progress with SK Telecom on opportunities related to their AI strategy, including their AI data center infrastructure initiatives. The already strong relationship between SK Hynix and Smart Modular is evolving as we look at new ways to address markets with system level products and custom high value add memory related segments. Since our last call, there have been two other company developments that I would like to mention. First, on June 26th, we announced a refinancing that further strengthens our balance sheet by reducing our gross leverage and extending our overall debt maturity while establishing a $400 million credit facility. Nate will provide more details in his comments. Second, on June 30th, we completed the re-domiciliation of Penguin Solutions, Inc. from the Cayman Islands to the United States as a Delaware corporation. While our past structure served us well, we look forward to being a U.S.-based company as we continue our transformation. In closing, I want to thank our team for delivering strong results during a time of macro uncertainty. For Q4, we remain focused on short-term execution while also continuing to invest for longer-term growth. Penguin's value proposition of solving the complexity of AI infrastructure for our customers positions us well to address the increasing market opportunity being created by enterprise adoption at scale. Let me stop here and hand the call over to Nate, who will provide more color on our performance and outlook for the remainder of fiscal 2025. Nate?

Nate Olmstead | Chief Financial Officer

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 third quarter results. Total Penguin Solutions net sales were $324 million, up 7.9% year over year. Non-GAAP gross margin came in at 31.7%, which was down year over year and up sequentially. Non-GAAP operating margin was 11.9%, up 0.8 percentage points versus last year, and non-GAAP diluted earnings per share were 47 cents for the quarter, up 25% from Q3 last year. In the third quarter of fiscal 2025, our overall services net sales totaled $66 million, down 3% versus Q3 last year. Product net sales were $259 million in the third quarter, up 11% versus the prior year. Third quarter net sales by business segment were as follows. Advanced computing, $132 million, or 41% of our total net sales, and down 9% year over year. Integrated memory, $130 million, which was 40% of our total net sales and up 42% year over year. And optimized LED, $62 million or 19% of our total net sales and down 4% year over year. Non-GAAP gross margin for Penguin Solutions in the third quarter was 31.7%, down 0.6 percentage points year over year, driven primarily by a higher mix of integrated memory net sales compared to last year. partially offset by improved margin rate in integrated memory and optimized LED. Gross margin was up 0.9 percentage points sequentially, with higher margin rates in advanced computing partially offset by a higher mix of integrated memory net sales. Non-GAAP operating expenses for the third quarter were $64 million, up 1% year-over-year and up 2% sequentially. Operating expenses as a percentage of net sales were down year over year, driven by higher net sales volumes and stable spending levels. Non-GAAP operating income was $38 million, up 15% year over year and down 22% versus last quarter. The combination of top line growth and operating expense discipline translated into a 0.8 percentage point increase in operating margin versus Q3 last year. This is our fourth consecutive quarter of non-GAAP operating margin expansion year over year. Non-GAAP diluted earnings per share for the third quarter of fiscal 2025 were 47 cents, up 25% versus the prior year and down 10% versus prior quarter. Adjusted EBITDA for the third quarter was $45 million, up 15% year over year. Turning to balance sheet highlights, For working capital, our net accounts receivables total $293 million, compared to $212 million a year ago, with the increase driven by higher sales volumes. Days sales outstanding came in at 47 days, up from 42 days in the prior year quarter, due to variations in sales linearity across the quarters. Inventory totaled $184 million at the end of the third quarter, UP FROM 177 MILLION AT THE END OF Q3 A YEAR AGO DUE TO HIGHER SALES VOLUMES. DAYS OF INVENTORY WERE 36 DAYS DOWN FROM 44 DAYS A YEAR AGO PRIMARILY DUE TO THE TIMING OF RECEIPTS AND CHIPMENTS. ACCOUNTS PAYABLE WERE $272 MILLION AT THE END OF THE QUARTER UP FROM 192 MILLION A YEAR AGO DUE PRIMARILY TO HIGHER SALES VOLUMES. DAYS PAYABLE OUTSTANDING WAS 53 days compared to 47 days last year due to the timing of purchases and payments. Our cash conversion cycle was 30 days, an improvement of 8 days compared to last year due to faster inventory turns. Consistent with past practice, days sales outstanding, days payables outstanding, and inventory days are calculated on a gross sales and gross cost of goods sold basis. which were $563 million and $468 million, respectively, in the third quarter. As a reminder, the difference between gross and net sales is primarily related to our memory businesses, logistics services, which are accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as net sales. Cash and cash equivalents and short-term investments total $736 million at the end of the third quarter, up $268 million from Q3 last year and up $89 million sequentially. The year-over-year fluctuation was due primarily to proceeds from the issuance of preferred shares and cash generated by the business. Third quarter cash flows generated from operating activities totaled $97 million compared to $80 million generated from operating activities in the prior year quarter. The increase year-over-year was due primarily to improved working capital efficiency. We spent approximately $30 million to repurchase 1.8 million shares in the third quarter under our share buyback program. Since our initial share repurchase authorization in April 2022, we have used a total of $113 million to repurchase 6.6 million shares through Q3 of fiscal year 2025, and we have $37 million remaining in our authorization. We did not make any debt prepayments in this past quarter, and the principal on our term loan was at $300 million as of the end of the quarter. Our net debt at the end of Q3 was negative $66 million. Subsequent to the end of the quarter, we completed a refinancing of our existing credit facility. We paid off the $300 million remaining on our term loan using $200 million of cash from our balance sheet and $100 million of borrowing from a new revolving credit facility. This refinancing transaction significantly reduced our leverage, extended our debt maturities, and is expected to reduce our debt service costs as we reduced our total growth debt by $200 million. For those of you tracking capital expenditures and depreciation, capital expenditures were $2 million in the third quarter and depreciation was $5 million. And now turning to our outlook. Given our strong year-to-date performance, we are maintaining the midpoint of our net sales outlook for the year at 17% year-over-year and tightening the range to plus or minus two percentage points. By segment, our full-year net sales outlook reflects the following. For advanced computing, we continue to expect full-year net sales to grow between 15% and 25% year-over-year. For memory, we now expect net sales to grow between 25% and 30% year-over-year. And for LED, we continue to expect net sales to be approximately flat year over year. Our non-GAAP gross margin outlook for the full year remains 31% with a tighter range of plus or minus 0.5 percentage points. We now expect our non-GAAP operating expenses for the full year will be $260 million plus or minus $5 million. We are also raising our outlook for our non-GAAP full year diluted earnings per share which is now expected to be approximately $1.80 plus or minus 5 cents. This is up from our prior outlook of $1.60 plus or minus 10 cents. And finally, our non-GAAP diluted share count is now expected to be approximately 54 million shares for the year. Due primarily to changes in our geographic mix of our earnings, we are lowering our FY25 non-GAAP tax rate to 25%. which reflects currently available information. While we expect to use this normalized non-GAAP tax rate through 2025, the long-term non-GAAP tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global and U.S. tax environment, significant changes in our geographic earnings mix, or changes to our strategy or business operations. Our outlook for fiscal year 2025 is based on the current environment, which contemplates, among other things, the global macroeconomic environment and ongoing supply chain constraints, especially as they relate to our advanced computing and optimized LED businesses. This includes extended lead times for certain components that are incorporated into our overall solutions, impacting how quickly we can ramp existing and new customer projects and higher tariffs in our optimized LED business. We believe we are continuing to manage our operations in a prudent manner as we navigate a challenging environment while also investing in our long-term growth. Please refer to the non-GAAP financial information section and the reconciliation of GAAP to non-GAAP measures tables in our earnings release and the investor materials on our website for further details. With that, operator, we are ready for Q&A.

Cameron | Conference Call Operator

Thank you. We'll now begin the question and answer session. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. And as a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question, and we will pause here briefly as questions are registered. The first question is from the line of Kevin Cassidy with Rosen Securities.

You may proceed. Kevin Cassidy | Analyst, Rosen Securities

Yes, thanks for taking my question. Congratulations on the good results. And in particular, the five new customer bookings. I wonder if you could give us a little more details on that. Are these, you know, customers that you got through partnerships? maybe how long they've been working on booking these new customers, and is it software and services or hardware or both? Maybe just a few questions about that.

Mark Adams | Chief Executive Officer

Hey, Kevin. Thanks. It's Mark. Let me see if I can break this down for you. The length of these sales motions typically are in the 12 to 18-month range from the time we engage the customers to the time we ship and the bookings kind of come somewhere around the 12-month mark. And I would say some of the new bookings were kind of along that framework. And you asked specifically about software and services relative to hardware. And we've mentioned on previous calls that the hardware is typically something that we recognize revenue upfront. And the way software and services, that category is recognized as more ratified over time. And so when we get these bundled solutions, so to speak, these integrated solutions of hardware, software, and services, they typically are hardware upfront and have characteristics of being lower margin in nature. And then the software and services come to us over time. And that's consistent with some of our more recent bookings.

Kevin Cassidy | Analyst, Rosen Securities

Okay, great. And maybe you said a little bit about the SK Telecom collaboration. I mean, maybe generating new customers. Can you talk more about where you're seeing that?

Sure. Mark Adams | Chief Executive Officer

Yeah, absolutely. You know, at the time of the investment, when we closed it back in December of 24, we highlighted that this was really a relationship that was transcending, you know, the financial investment element of it. And we were excited about working with SK and more specifically SK Telecom and SK Hynix. We've had some early wins on the memory side, and we look forward to broadening that relationship with Hynex over time, more system-related products and helping enable some of their memory technologies to new application environments. We've talked about higher bandwidth opportunities like the OMA we mentioned, but we've actually had some early success on business opportunities with Hynex to date. We are making really good progress with SK Telecom as well. We are certainly very optimistic about the opportunities ahead with them in terms of AI data center infrastructure solutions. By the way, you know, the efforts that we have there are really global in nature, not just domestic, but also in other parts of the world. And, you know, again, we're pleased about the progress we're seeing on their AI data center initiatives, and we're exploiting multiple joint opportunities with them. So, overall, the relationship with SK is positive, and we're pleased with the progress. Okay, great.

Kevin Cassidy | Analyst, Rosen Securities

Thanks for answering the question.

Cameron | Conference Call Operator

The next question is from the line of Tom O'Malley with Barclays.

You may proceed. Tom O'Malley | Analyst, Barclays

Hey, guys, thanks for taking my questions. My first is on the memory side. I think that's the one segment that you're actually taking a bit higher for the full year. You saw some strong growth in the May quarter. August for your full year guide is implied kind of down in the mid single digits range. Can you kind of talk about the dynamic of potential pull forwards? If we look at some other companies in the ecosystem, you've seen some really strong consumer demand in the most recent quarter. You didn't call that out. You kind of called out abroad. breath of strength. But do you know if you're seeing any pull forwards? Are you protecting against that with the guide in August? Any color there would be helpful.

Mark Adams | Chief Executive Officer

Sure. And, Tom, I think just one correction. I think if you said that memory was the only one that was growing in the year, did I misunderstand?

Tom O'Malley | Analyst, Barclays

No. You raised memory from, I think, prior. Your range for the full year, I think, moved a little higher from 25% to 30%. Correct. So you took that up a little bit.

Mark Adams | Chief Executive Officer

Right. Okay. Yeah. And advanced computing is up in the range, I guess it's 15 to 25%, I believe. So on the memory side, we are not seeing any necessary pull forward, so to speak. As we commented on back in the fall, there was some inventory that we were working through. And this quarter, I think we were really pleased with the growth opportunities as people started to get back in ordering. But we don't see any significant inventory builds or what have you. And yeah, we watch that from a customer discussion standpoint on their ordering patterns and what their requirements are and their forecasts. And our pipeline in Q4 remains pretty healthy. So we're generally very pleased with the direction of the business overall.

Tom O'Malley | Analyst, Barclays

And then on the advanced computing side, you know, historically these are big projects, big customers. They tend to slide around one to two quarters, which is, you know, why I think the four-year guidance is useful. But when you look at the fourth quarter, is the big acceleration again important? a timing of an order, or are you seeing kind of broad-based strength across different customers kind of implied in your full-year guide as a nice mid-teens growth sequentially into the August quarter? So just trying to understand what's contributing to that strength in Q4.

Mark Adams | Chief Executive Officer

You know, we're doing, as we mentioned, we're seeing some uptick in terms of bookings, some of which we'll be looking to recognize the revenue through deployments by the end of the quarter. But this quarter isn't necessarily one major deployment. That's not what we're suggesting. We've got a little more diversity in the quarter, although I'll let Nate talk to a specific outlook. But this quarter is not like we commented on in Q2 earlier in my script. This is more a number of customers. And again, we run into the situation where the bookings come at a certain time, our supply chain goes out and acquires accordingly. And we look to install and it's really done at the customer and our pace relative to the business we do with them and not necessarily to the end of a fiscal quarter. So this is where we run into that same lumpiness in terms of revenue. Having said that, As I want to reinforce, it's not about one customer per se.

It's a little more diversified. Cameron | Conference Call Operator

The next question is from the line of Sameek Chatterjee with JP Morgan.

You may proceed. Sameek Chatterjee | Analyst, J.P. Morgan

Hey, guys. Thanks for taking my questions. Maybe if I can start on advanced computing, and you talked about sort of the deployments for fiscal 4Q not being driven by like one lumpy deployment but more broad-based. But can you talk about the mix a bit in terms of what you're seeing in those incremental deployments? I know you've talked about the neocloud opportunity, but any sense that you can give us in terms of what you're incrementally seeing in the mix sort of rotating more towards the neoclouds or any more visibility as you look forward into that? And I will follow up.

Thank you. Mark Adams | Chief Executive Officer

Sure. I think as I commented on earlier in my preferred comments, we've seen, in addition to neocloud, we've seen some strength in federal and energy how to win in biotech, and we're seeing a lot more inbound signals relative to interest in the financial sector as well. Those are kind of the top segments that we're playing in today.

Sameek Chatterjee | Analyst, J.P. Morgan

Okay, got it. And then maybe on the sort of, I know it's too early to talk about the next fiscal year, but when you think about sort of the new customers that you've signed up, that you talked about, the five new customers, as well as the opportunity that you're now seeing in the pipeline, just help us think about maybe from a fiscal 26 perspective for advanced computing, what should we keep in mind relative to fiscal 25, the growth rate that you have in that sort of 15 to 25% range, how should we think about what are the puts and takes for fiscal 26?

Mark Adams | Chief Executive Officer

Yeah, unfortunately, we're not providing any of that guidance today. It's just too dynamic an environment with all the puts and takes. There's a number of factors that we and other companies are dealing with right now. One good example is the tariff situation and how dynamic that changes over time. Certainly, you know, very happy and proud of the way the team navigated that in Q3 and delivered strong results. But we're going to stop from commenting on FY26 in any way, shape, or form today. Okay. No, I appreciate it.

Sameek Chatterjee | Analyst, J.P. Morgan

Thank you. Thanks for taking the questions.

Nick Doyle | Analyst, Needham

Thank you.

Cameron | Conference Call Operator

The next question is from the line of Nick Doyle with Needham.

You may proceed. Nick Doyle | Analyst, Needham

Hey, guys. Thanks for taking my questions. First, could you give any details on the CDW agreement or partnership? Just maybe talking about how that approach is different than with Dell and if you expect any kind of, you know, similar contributions or customer-type wins in fiscal 26.

Thanks. Mark Adams | Chief Executive Officer

Sure. Again, we're going to – sorry, Nick. We're going to hold up on any 26 commentary, but the framework that we're – working on right now is we're starting to invest in partnerships outside of our direct customer engagement. And you've mentioned two of them today. The idea being that we can scale to a larger set of customers through some of these partnerships and really focus on our value add. And we've seen some early proof of concept success stories in in both partners that you mentioned. But again, it's early stage and it's the right thing for us to be thinking about as we expand, not just in terms of customers here in the US, but as we think about a broader go-to-market internationally.

Nick Doyle | Analyst, Needham

Got it. For my second question, services revenue grew quarter over quarter, you know, while overall advanced compute declined sharply. So was that driven more by these point-in-time services, or did those larger hardware deals in the first half translate to this, you know, kind of slower, steady revenue growth that we saw this quarter?

Mark Adams | Chief Executive Officer

You know, I think that it's a mixture of everything what you just said. It is a mixture of, you know, Service revenue ratified over time and recognized over multiple periods, so to speak. And the mix of hardware in Q3 was lower than, say, Q2. And so the combination of that contributes to the services mix. As you know, we recognize services the way we do, but they are renewed annually. And then in the middle of the fiscal year, if we get a new order, we begin that recognition at the time of a shipment slash signed order for those services. And so that's a positive, and we continue to try to add to that quarter to quarter.

Thank you. Cameron | Conference Call Operator

Brief reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. And as a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. The next question is from the line of Brian Chin with Spiegel. You may proceed. for Brian Chin\ Hi, this is Dennis on for Brian. Thanks for taking our questions. My first one is on advanced compute. For the five new customers that you want, are you expecting any change in the hardware and software mix proportions over the life of these customers?

Mark Adams | Chief Executive Officer

Well, typically what happens or what we've seen happen with our customer engagements with new customers is, again, the revenue recognition for the new customers up front is hardware-related. just because that's what we install and that's what we design a solution for. And then our services and software mix happens over time. Now, we've had a number of instances where customers increased the footprint of their rollout or of their implementation, and that can be a time when they actually order more hardware along the way, But typically, the flow of revenue recognition and type of product is hardware early on in the cycle of a new customer acquisition and software and services over time. And we continue to try to be very disciplined and making sure that we're not doing any hardware-only deals. As you all can see from our competitor announcements, without being specific, The hardware market itself is super competitive from a margin standpoint. And quite frankly, I think our value add is in the services area and the software and services that we offer our customers. And, you know, of course, our hardware is best in class from a design and performance standpoint. But the hardware market tends to be lower in gross margin. And thus, we tend to propose and look at our business from a solutions standpoint. mindset, not in any one component of hardware-only sales. for Brian Chin\ Would you say that the majority of this 66 million of services sales comes from advanced computing, or is there a good bit from the other segments too?

Mark Adams | Chief Executive Officer

A majority of the services, like a healthy majority, I'll let Nate see if he can give me the actual number here, but the majority of services is all advanced computing.

Nate Olmstead | Chief Financial Officer

Yeah, the great majority. Got a little bit in memory, but it's really mostly advanced compute. for Brian Chin\ Great. And then for my second question, so for memory, could you discuss the strength in this quarter from a product and a vertical perspective? And how does the strength in DRAM pricing impact your memory gross margins? And then maybe you could also talk about the attach rate of your memory products to your advanced computing products.

Mark Adams | Chief Executive Officer

Okay, so the first, the pricing in DRAM has been relatively stable in the quarter. What I would say is the memory gross margin question, ironically, when memory pricing goes up, the gross margins are impacted slightly in a negative way because DRAM then becomes a higher percentage of the whole value add that we give. Um, but it's just a directional, uh, trend, but the, um, uh, the mix of products, um, uh, and the unit growth was substantial as well in the quarter, which led to a combined, uh, high growth quarter in memory. Um, on the attach rate, we continue to work, um, and use smart modular and the penguin platform, uh, that we do sell. And, um, We're continuing to develop on new products that we think will be very valuable in terms of the AI ecosystem, as we've talked about, CXL and our optical memory appliance development, which is a long-term initiative for us to help provide better memory, advanced memory solutions for advanced workloads. So it is a priority of ours, and we do a good job on the Penguin systems itself, and we're looking to develop more sophisticated, higher bandwidth memory end products going forward. for Brian Chin\ That's it for me.

Thank you. Cameron | Conference Call Operator

Thank you. And for our last question, we have a follow-up from Nick Doyle with Needham.

You may proceed. Nick Doyle | Analyst, Needham

All right. Thank you. Just kind of a bigger picture question. We're hearing about this idea of production inference, and I think that really requires this truly tier one grade, high availability, you know, server solution. So if you take out the hyperscalers just because that's not where you generally play, how much market capacity today is operating at that level and kind of ready to service production inference today? and how much is left, where you guys can go in and really increase that utilization and get the high availability ready to go.

Mark Adams | Chief Executive Officer

Thanks. Nick, I'm not sure I totally understood your question. We have a high availability edge server platform that we use. We've talked about developing products for inferencing over time. In the data center, you know, we're starting to see more of the trend line to be a hybrid training and inferencing demand thesis. But I'm not sure, again, if I'm quite getting your question. Can you restate it?

Nick Doyle | Analyst, Needham

Yeah, just pointing out that when guys want to do this kind of production level inference, there's a thinking that it really requires high availability versus more traditional cloud. And, and to do that, you know, you need a, a higher level server and that's what you guys can provide. So maybe the market just isn't there and you can kind of help the market move towards a solution that, you know, works for everybody and wonder.

Mark Adams | Chief Executive Officer

Great. Got it. So I understand. I apologize. I misunderstood because we, when you said inferencing, I initially went to, our edge platform and what we're trying to build for future edge implementations. But in the environment you're talking about, you're exactly right. There's, and by the way, that's a lot of has to do with our software and services that we provide to be able to make sure that not only is the design performance we get up front in our systems critical, but it's also the availability and uptime through diagnostics and fault, fault repair capabilities in the data center that allow us to have the maximum uptime. And that's a really critical metric when you think about the capital investments into AI infrastructure, making sure people have high reliability, high availability, along with the high performance. And quite frankly, when you come from a high performance compute background like us, we've seen the levers that allow for the most optimal performance in a data center. And I think that has played well and will continue to play well for us as true enterprise rollout production environments for inferencing.

Nick Doyle | Analyst, Needham

Thanks, Mark.

Mark Adams | Chief Executive Officer

Thank you.

Cameron | Conference Call Operator

That concludes the Q&A session. I would now like to pass the conference back over to Mark Adams, the CEO, for any closing remarks.

Mark Adams | Chief Executive Officer

Thank you, Operator. And just in closing, we are pleased with our results. through the third quarter. On today's call, we reconfirmed the midpoint of our revenue guidance, which we raised to 17% on our last call. And we raised today our earnings per share guidance range for fiscal 2025. We have strengthened our balance sheet and remain committed to our long-term investments in hardware, software, and services, positioning us to address the rapidly growing market demand for AI infrastructure solutions on premise, in the cloud, and at the edge. Thank you all for joining today's call.

Cameron | Conference Call Operator

That concludes today's call. Thank you for your participation and enjoy the rest of your day. jsPDF 3.0.3 D:20260606090349-00'00'