PENG earnings call analysis

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'

NASDAQ:PENG Q2 2025 Earnings Call Transcript Generated on 6/6/2026 Operator | Conference Operator: attending today's Penguin Solutions Q2 Fiscal 2025 Earnings Call. 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 queue for a question on today's call, please dial star 1 on your telephone keypad. I'll now hand the call over to Suzanne Schmidt with Investor Relations to begin. Suzanne, 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 second 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, proposed redomiciliation, 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 accept 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 turn the call over to Mark Adams, CEO. Mark? Thank you, Suzanne. Mark Adams | Chief Executive Officer: I'd like to welcome all of you to our Q2 fiscal 2025 Penguin Solutions earnings call. We are very pleased with our second quarter financial results. Our revenue was $366 million. an increase of 28% compared to the same period last year. Non-GAAP gross margins came in at 30.8%. Non-GAAP earnings per share was 52 cents, a 97% increase year over year. We achieved non-GAAP operating income of 49 million, up 85% from the prior year, and we improved non-GAAP operating income margin to 13.4%, up 4.1 percentage points year over year. All in all, our Q2 results demonstrate the progress we are making and the transformation of Penguin Solutions into a leader in high performance, high availability enterprise infrastructure solutions. The market for artificial intelligence is growing in the enterprise segment across a number of different industries. market research continues to reinforce the strategic value of AI to enhance corporate productivity, decision-making, and customer satisfaction. As we've mentioned in the past, our belief is that the GPU sales the industry saw in 2023 and 2024 would lead to growth in enterprise deployment in 2025 and 2026. As customers move from proof of concept to full-scale AI implementations, we're seeing signs that we have entered the early stages of growth in corporate build-outs at scale and are excited for what lies ahead. Penguin Solutions helps customers manage the complexity of AI adoption by leveraging our proven know-how and advanced cluster implementations in the data center coupled with our differentiated 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 targeting the highest level of performance and availability. Our products and services are primarily sold to hyperscalers, cloud service providers, and Fortune 500 companies in the financial, energy, education, federal, consumer, and manufacturing sectors. Historically, we have sold directly to our end customers. However, we are also expanding our go-to-market breadth by focusing on developing channel partnerships, which we believe will provide new opportunities for growth longer term. The foundation of Penguin Solutions' success is our 25-plus year history of deploying large-scale complex data center clusters originating from our early days in high performance computing, or HPC. This expertise is integral to our AI infrastructure offering. Our experience understanding the complexity of how best to integrate advanced technologies such as power, cooling, AI compute, memory, storage, and networking enables us to deliver high performance high reliability enterprise infrastructure solutions. As we mentioned at the beginning of our fiscal year 2025, we have transitioned from providing a quarterly financial outlook to providing a full year financial outlook. We believe that a full year outlook affords a broader perspective of our business, especially in relation to AI infrastructure, where the timing of actual deployments and associated revenue recognition can be unpredictable. And that aligns well with our emphasis on achieving long-term strategic objectives. We also understand that our investors, customers, and partners appreciate commentary on our progress each quarter, and we intend to offer that as well today. On our Q4 fiscal 2024 call, we forecasted fiscal year 25 revenue to grow 15% at the midpoint. When discussing our full year outlook last quarter, we highlighted that a large advanced computing order would finish shipping in Q2. Due in large part to that shipment, we expect revenue and profits to be more first half weighted when compared to our second half. In light of our strong first half performance, we are raising the midpoint of our revenue outlook for full year fiscal 25 from 15% year over year growth to 17% year-over-year growth, which Nate will discuss in more detail later. Let me now provide more detail on our business segments. Our advanced computing revenue the second quarter of fiscal 2025 was $200 million, up 42% year-over-year when compared to Q2 fiscal 24, representing 55% of Penguin Solutions revenue. We had some exciting wins at our existing customers and added three new logos in the technology, telecom and media, and federal spaces. Our core competency in successfully managing large-scale infrastructure deployments helps customers accelerate their time to successful implementation. We believe our customers value our technology-agnostic approach to creating a unique, overall solution to meet their AI infrastructure needs. As a trusted advisor, we evaluate which technologies would best fit an individual customer requirement. Beyond the technology building blocks, we leverage Penguin's ICE clusterware in working with our clients to design the optimal software stack to enable a robust platform to manage their infrastructure. For many of our key customers, Our Penguin Services organization will help manage post-deployment operations to support continued high performance and availability. We have seen growth in our pipeline during the first half of fiscal year 2025 and remain focused on working to convert these opportunities into bookings over the remainder of the fiscal year and into fiscal year 2026. Integrated memory is represented by our smart modular brand. In our second quarter of fiscal 2025, integrated memory was $105 million, up 26% compared to the same period last year, representing 29% of total Penguin Solutions revenue. Memory is a critical component of our computing, networking, and telecommunications customers platform. Large enterprise require higher performance and higher reliability memory to support complex workloads. In line with this increasing demand for improved memory bandwidth and availability, we are executing on new product development plans for our Compute Express Link or CXL family of products. We are seeing positive momentum in our customer qualification efforts, resulting in sample orders of CXL from OEMs and AI computing companies, which reinforce our optimism about its appeal to a new type of customer. In addition, in March, Dell added Smart's CXL add-in card as part of their server configuration options program. We enter Q3 with a strong backlog buoyed by AI-related demand, improving market conditions and enterprise memory, and more stable inventory levels that keep customers in data center, networking, and telecommunications. Optimized LED operates under the Cree LED brand. In the second quarter of fiscal 2025, optimized LED revenue was flat as compared with the year-ago quarter, while non-GAAP operating margins were up nearly five points comparatively. Q2 has traditionally been a seasonally lower quarter due to the U.S. holidays coupled with the Chinese New Year holiday, and this year was no exception. We believe Cree LED's capital light outsource model was a contributing factor to our improved profitability in the first half of fiscal 2025 and will continue to be a competitive advantage longer term. In early Q2, we announced that we entered into a patent license agreement with Daktronics, a US-based leader in large-scale LED displays. Our strong intellectual property coupled with a cost-effective operating model has led to some exciting new customer design win activity. with larger LED lighting customers in the US and Western Europe. As we continue the transformation of Penguin Solutions, our strategic focus on research and development and partnerships will remain critical to our future success. Let me highlight three of our key initiatives and the progress we are making on each of them. First, in early March, Penguin Solutions announced that it has expanded its ICE Clusterware software platform with multi-tenancy support, streamlined workflows, and enhanced controls. We also announced the launch of ICE Clusterware AIM Service, an advanced optimization service that leverages prediction automation to enhance performance, availability, operational efficiency of our customers' AI infrastructure. These new software capabilities are compatible with multiple chip vendors such as NVIDIA, AMD, and Intel, enhancing our ability to successfully support customers' AI deployments across a broad set of technologies and use cases. Second, in memory, which continues to play an increasingly vital role in AI systems performance, the Smart Modular R&D team is focused on the development of a Smart Modular Optical Memory Appliance, or OMA, addressing the need for greater bandwidth performance and availability to support future AI compute requirements. While in our early stage of development, we believe this to be an exciting new market opportunity with first revenues anticipated to be late calendar 2026 to early calendar 2027. Finally, In the area of strategic partnerships, our relationships with SK and Dell are also expected to provide new opportunities for longer-term growth. We are in discussions with SK Telecom regarding potential collaborations related to their AI strategy, including AI data center infrastructure initiatives. In addition, an already strong relationship between SK Hynix and Smart Modular is evolving as we look at ways to address markets not historically served by SK Hynix in custom low-volume Hynix segments. Regarding the Dell partnership, Penguin's AI software and managed services are now being able to be sold by Dell's worldwide sales force, expanding our market reach. We are in the process of training Dell sales teams and are seeing favorable early response to co-marketing opportunities with large enterprise customers. As part of this relationship, we have also expanded our origin AI offerings to include Dell servers, along with Penguin software and services, which can help expand our customer TAM for future engagements. Combining our unique value proposition with larger go-to-market companies will remain a priority for us. We are evaluating both domestic and international partners who could benefit from working with Penguin Solutions to deliver world-class AI infrastructure solutions. More to come on future calls. We've also recently announced that we intend, subject to court and shareholder approval, to re-domicile our parent company from the Cayman Islands to the United States. We believe this aligns with our strategic objectives and reflect our increased business and operational focus in the United States. Additionally, before we conclude today's call, I'd like to share some important organization news. After close to 25 years with us, Jack Pacheco, our Executive Vice President, Chief Operating Officer, and President of Integrated Memory, has decided to retire at the end of our calendar year. Jack has been instrumental in our company's growth and success, particularly in strengthening our memory solutions business and building an outstanding operations team. We are grateful for Jack's contributions and appreciate his willingness to help with the transition. In closing, I want to thank our global team for the strong results in Q2. We are laser focused on short-term execution in Q3, while also expanding our pipeline for longer-term growth. Our first half results give us the confidence to raise the midpoint of our revenue outlook for the full year, fiscal year 2025. Edwin's value proposition of solving the complexity of AI infrastructure for our customers positions as well to address the increasing market opportunity of enterprise AI adoption at scale. Let me stop here and hand the call over to Nate to 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 second quarter results. Total Penguin Solutions revenues were $366 million, up 28% year-over-year and up sequentially for the fifth consecutive quarter. Non-GAAP gross margin came in at 30.8%, which was down year-over-year and flat sequentially. Non-GAAP operating margin was 13.4%, up 4.1 percentage points versus last year, and non-GAAP diluted earnings per share were 52 cents for the second quarter, nearly double from Q2 last year. In the second quarter of fiscal 2025, our overall services revenue totaled $64 million, up 30% versus Q2 last year. Product revenues were $302 million in the second quarter, up 28% versus the prior year. Second quarter revenue by business segment was as follows. Advanced computing, $200 million, or 55% of our total revenue, and up 42% year over year. Integrated memory, $105 million, which was 29% of our total revenue, and up 26% year over year. And optimized LED, $60 million, or 16% of our total revenue, and flat year over year. Tom Connelly- Non gap gross margin for penguin solutions in the second quarter was 30.8% down 0.7 percentage points, year over year, driven primarily by a higher mix of advanced computing hardware revenue compared to last year partially offset by improved margins in memory and led. Tom Connelly- gross margin was flat sequentially with a higher mix of advanced computing hardware sales offset by higher margin rate in both memory and led. Non-GAAP operating expenses for the second quarter were $63 million, down 0.2% year-over-year and down 1.4% sequentially. Operating expenses as a percentage of sales were down both year-over-year and sequentially, driven by higher revenue volumes and disciplined expense management. Non-GAAP operating income was $49 million, up 85% year-over-year and up 20% versus last quarter. The combination of top line growth and operating expense efficiency is translated into a 4.1 percentage point increase in operating margin versus Q2 last year. Non-GAAP diluted earnings per share for the second quarter of fiscal year 2025 were 52 cents, up 97% versus the prior year and up 7% versus the prior quarter. Adjusted EBITDA for the second quarter was $54 million, up 61% year-over-year. Turning to balance sheet highlights, for working capital, our net accounts receivable totaled $330 million, compared to $170 million a year ago, with the increase driven by higher sales volumes. Base sales outstanding came in at 50 days, up from 42 days in the prior year quarter due to variations in sales linearity across the quarters. Inventory total $200 million at the end of the second quarter, up from 173 million at the end of Q2 a year ago due to higher sales volumes. Days of inventory was 37 days, down from 54 days a year ago, primarily due to the timing of receipts and shipments. Accounts payable were $238 million at the end of the quarter, up from 148 million a year ago to primarily to higher sales volumes. Days payable outstanding was 44 days compared to 46 days last year due to the timing of purchases and payments. Our cash conversion cycle was 43 days, an improvement of six 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 $596 million and $492 million, respectively, in the second quarter. As a reminder, the difference between gross and net revenue is 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 revenue. Cash and cash equivalents and short-term investments totaled $647 million at the end of the second quarter. up 181 million from Q2 last year, and up 253 million sequentially. The year-over-year fluctuation was due primarily to proceeds from the issuance of preferred shares offset by debt repayments for our term loan in fiscal year 2024. Second quarter, cash flows generated from operating activities totaled $73 million, compared to 22 million used by operating activities in the prior year quarter. The increase year over year was due primarily to higher net income, faster inventory turns, and increased deferred revenues from our services business. Additionally, the prior year included a $29 million payment of contingent consideration as part of the Stratus acquisition earn out. We spent approximately $3 million to repurchase 167,000 shares in the second quarter under our share buyback program. Since our initial share repurchase authorization in April 2022, we have used a total of $83 million to repurchase 4.7 million shares through Q2 of fiscal year 2025, and we have $67 million remaining in our authorization. We did not make any debt prepayments in this past quarter, and the principal on our term loan remains at $300 million as of the end of the quarter. Our net debt at the end of Q2 was $23 million. For those of you tracking capital expenditures and depreciation, capital expenditures were $2 million in the second quarter, and depreciation was $5 million. And now turning to our outlook. Given our strong first half performance, we are pleased to raise the midpoint of our revenue outlook for the year, which now calls for growth of 17% year over year, plus or minus three percentage points. Based on a previously mentioned large advanced computing order that shipped in the first half of fiscal year 2025, we expect that second half revenues and profits will be lower than the first half. And this expectation is included in our higher overall outlook for the year. By segment, our full year revenue outlook reflects the following. For advanced computing, we expect full year revenue to grow between 15 and 25% year over year. For memory, we expect revenue to grow between 20 and 30% year over year. And for LED, we expect revenue to be approximately flat year over year. Based on strong hardware sales and faster growth in our lower margin memory business, our non-gap gross margin for the full year is now expected to be 31% plus or minus one percentage point. We expect our non-GAAP operating expenses for the full year will be $265 million, plus or minus $5 million. We are also raising our outlook for non-GAAP full year diluted earnings per share, which is now expected to be approximately $1.60, plus or minus 10 cents. This is up from our prior outlook of $1.50, plus or minus 20 cents. And finally, our non-GAAP diluted share count is now expected to be approximately 55 million shares for the year. As a reminder, we are utilizing a long-term projected non-GAAP tax rate of 28%, 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 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 business. 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 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. Operator | Conference Operator: Thank you. We'll now begin the Q&A session. If you'd like to ask a question, please dial star 1 on your telephone keypad. If for any reason you would like to remove that question, please dial star 2. Again, to ask a question, it is star 1. As a reminder, if you're using a speakerphone on today's call, please remember to pick up your handset before asking your question. We'll pause here briefly to allow questions to generate in the queue. The first question is from the line of Dennis Piechanin with Stiefel. Your line is now open. Dennis Piechanin | Analyst, Stiefel: Hi, good afternoon. Thanks for letting me ask a few questions. This is Dennis on for Brian Chin. Maybe we can start with advanced computing. You know, given the hyperscale of strength in the fiscal first half, maybe you can talk about, you know, which customers or verticals you see driving revenue in the fiscal second half for this segment? Mark Adams | Chief Executive Officer: We typically don't forecast that way, but we would just kind of suggest that The second half is going to be, you know, not driven primarily by that vertical and look to verticals like federal, like financial, energy and the likes. So, but we don't really forecast, you know, obviously inter quarter or that way, especially at the vertical market level. But you can assume embedded in, you know, our commentary um, that, uh, there'll be other places where we, uh, where we're deploying, uh, AI solutions that are, uh, complimentary to, uh, the markets that drove our first half success. Dennis Piechanin | Analyst, Stiefel: Yeah. Great. And then for my follow-up, so it sounds like, you know, federal budget uncertainty isn't impacting the government related projects, but, uh, maybe on the topic of economic uncertainty, um, have you seen any impacts in your engagements with enterprise and cloud customers or, uh, maybe around this like deep seek news and AI capital efficiency, uh, has that been a topic of discussion for you and customers? Have there been any impact on like infrastructure build out plans related to all of that? Mark Adams | Chief Executive Officer: It's pretty dynamic to be honest with you. So, um, we're doing our best to reflect what we see in our business today as best we can. But you know, these are a little bit unprecedented times and, um, You know, we can't sit here and say there will be no future impact. Having said that, you know, current to date, we have not had a lot of those conversations. Dennis Piechanin | Analyst, Stiefel: Great. It's all for me. Thank you. Mark Adams | Chief Executive Officer: Thank you. Operator | Conference Operator: Thank you. The next question is from Semek Chatterjee with JPMorgan. Your line is now open. Semek Chatterjee | Analyst, JPMorgan: Thank you for taking my questions. Maybe if I can start on the topic of tariffs, and I think in your prepared remarks you mentioned you're including the higher tariffs on the LED segment, but if you can just remind us in terms of the manufacturing footprint. for LED related to advanced computing, and how should we think about, given some of the news on the tape right now related to tariffs on more wider breadth of geographies, how should we think about the manufacturing footprint and where your sensitivity to the tariffs would be? Mark Adams | Chief Executive Officer: Thank you, and have a follow-up. The LED supply chain and manufacturing, the design of which happens primarily in North Carolina, our manufacturing is through partners in Taiwan. And then we have, of course, our test assembly and phosphor application facility in Huizhou. By the way, we've been in this environment with this business for some time, so the question around tariffs is something that we've been dealing with for the past couple quarters, so to speak. And I think that the footprint we're looking at to continue to evaluate longer-term solutions, but it's embedded in our number. Ironically, the gross margin in LED was fantastic for the quarter. So, you know, it's something we'll continue to deal with and we'll monitor relative to any changes. But again, it's like my earlier comment, you know, at this point we're digesting news like everybody else and, you know, we'll adjust accordingly as we need to. And for advanced computing? Sorry. Of course, some of the components that we source may or may not be from other regions, but from an integration where we manufacture and build, most of our products are built in the U.S. at our Fremont operations facility. And similarly, with Smart Modular, A lot of our design and manufacturing is in our Newark operation site. We do have a Malaysia operations that complements the smart modular business and some segment of our compute, advanced computing business, which is, you know, more of the embedded edge products. But it's primarily that, that's kind of the footprint we have for advanced computing. and memory. Semek Chatterjee | Analyst, JPMorgan: And for my follow-up, I know you've mentioned that you're trying to sort of look at the, we're in a dynamic environment and you're trying to take the best sort of estimate at this point for the remainder of the year. And you mentioned elevated backlogs as well. But when I think about the revenue forecast for the remainder of the year, particularly when it comes to advanced computing? Can you give us a sense of how much of that revenue is already part of booked backlog or booked orders relative to what is the incremental portion you would have to rely on new orders coming in for the remainder of the year? Just asking from the perspective that given all the changes in the macro, if customers do end up being more cautious about new orders going forward. Thank you. Mark Adams | Chief Executive Officer: Yeah, again, we typically don't break up our forward-looking forecast into that type of segmentation, so to speak, bookings versus required to get. But I would also say we've always taken a very conservative approach relative to that, because you have to remember, in order for us to ship products in a given quarter, given the supply chain limitations, around specifically AI and broader compute, we have to be pretty close to knowing early in the quarter. So I think that we do our best and we plan for what we kind of know to be true without a lot of risk because we sense and we have risk in the actual lumpiness of the orders and the revenue recognition post-deployment with customers, it doesn't always happen perfectly, which we've talked about on a number of our past calls. So I would think that the question around bookings as a percentage of what we think the number to be, I would just go back on our past performances. We're very mindful of that and are pretty conservative in nature. Semek Chatterjee | Analyst, JPMorgan: Thank you. Thanks for taking the question. Operator | Conference Operator: Thank you. The next question is from Alex Valero with Loop Capital. Your line is now open. Alex Valero | Analyst, Loop Capital: Hey, guys. Thank you for taking my question. This is Alex. I actually have a question on SK Telecom. I just wanted to ask about any progress. How's the sentiment? Are you guys more enthusiastic about the partnership now? And also, if you could possibly provide some insights on SK Telecom's goals and any customers they aim to attract. Mark Adams | Chief Executive Officer: What was the last piece? I'm sorry, Alex. Alex Valero | Analyst, Loop Capital: Yeah, the last piece was on if you could provide any insight on SK Telecom's goals with the partnership and any customers they aim to attract. Mark Adams | Chief Executive Officer: I'm not sure I can answer that last piece. I can't speak for them. But relative to the relationship, we continue to have very good dialogue And we're evaluating ways that we can help in really two parts of their business. One is their AI strategy deployment of infrastructure, of which they have a number of good assets to complement our capabilities, both for their internal needs as well as potential joint customer collaboration. And we're optimistic in our ability to work together and to drive future results. Nothing to announce today. But, yeah, good conversations, and I actually had that in my prepared remarks that, you know, that continues to move favorably. And on the memory side, we're working closer with SK Hynix. Now, that has not been a relationship that just started. That relationship's been going on for years, and it's getting stronger, and we're helping SK think about reaching Robert Marlayson, markets that historically they have not had on their radar screen cooperatively working with smart modular on so we're very pleased with the relationship to date, and I think we'll be able to keep updating people. Robert Marlayson, Investors on a quarterly basis, but the directionally seem to be very pleased. Alex Valero | Analyst, Loop Capital: Thank you for that. And I just have a quick follow-up. So my quick follow-up is on your thoughts around the growing Neocloud opportunity and just Penguin's ability to participate there. Mark Adams | Chief Executive Officer: Yeah, I think it's really an interesting segment. You're calling it Neocloud. We've called it, and by the way, it's probably better said Neocloud. We used to call it on our calls Tier 2 Cloud Service Providers. it's a really interesting market because there's a shortage in overall ai ready data center locations and it's primarily driven around a shortage around the power getting to data centers and so with this shortage a number of companies and i mean a large number of these these smaller cloud service providers uh who have uh access to megawatts and up through gigawatt type uh, power into data centers, they're kind of repurposing themselves away from legacy businesses, for example, crypto, and they're driving themselves to offer or partner with people to deliver AI, uh, in some type of rental GPU market or private cloud public cloud type business model. And, um, these businesses have been able to get financing to build this out. What they don't have is they don't have the ability to really develop a plan for managing the complexity part of the deployment, which is the design, build, deploy, and manage framework that we deploy. And so it's really proven to be a very interesting market for us because these older models that they had didn't require sophisticated IT teams. And so we've found it to be a very good market for opportunities for us. and continue to invest in growing our business there in what you're calling NeoCloud. Alex Valero | Analyst, Loop Capital: That's super helpful. I really appreciate the answer. Thank you, guys. Thanks so much. Operator | Conference Operator: Thank you. As a reminder, if you'd like to ask a question, please dial star 1. The next question is from Kevin Gerrigan with Rosenblatt Securities. Your line is now open. Kevin Gargana | Analyst, Rosenblatt Securities: Kevin Gargana, yeah hey good afternoon all this Kevin Gary on for Kevin Cassidy thanks for taking my questions for the first one. Kevin Gargana, We were wondering how moving your your domicile from the Cayman Islands to Delaware changes your federal and state contract opportunities and where some other other benefits from this move. Nate Olmstead | Chief Financial Officer: Kevin Gargana, yeah hey thanks for the question Kevin you know, I think the important thing here to consider is really just our goal is to align our current operations with our future plans. You know, if you look at the structure of the company today versus in 2011 when the Cayman entity was set up, things are really much different for us. Our headquarters, substantial number of our employees, the executive team, and really the majority of our operational assets are in the U.S. So this move simplifies things for us operationally and gets things aligned. In terms of impact for us with federal customers, I don't think that that's really something that we considered. This was really about aligning our operations with the entity structure. Kevin Gargana | Analyst, Rosenblatt Securities: OK, great. And then as a follow up, just kind of looking at some of the trends in the market, co-packaged optics is a big buzzword, if you will. So how do you see this trend kind of changing the need for your memory solutions? Mark Adams | Chief Executive Officer: Well, we've said all along that we were on a path for developing these type of products. First of all, the requirements for AI and memory only keep getting more demanding if you will and the the co-packaged optics as you refer to it is definitely on our roadmap we've made an investment in a partner who we're collaborating collaborating on and designing this optical memory appliance that we've referenced and while it's early and it is we are super excited about this opportunity and and our conversations with customers on design and eventually out in the next 12 months of getting some type of prototypes. And in my commentary, I said earlier, revenue probably earliest at the end of calendar 26, and then maybe that leaks into 27, just depending on, you know, availability of key parts and products and testing and what have you. So, but nonetheless, we think it's a brand new category. We're in great shape with it. We're able to leverage a lot of our capabilities, both on the design side and the customer collaboration for testing and evaluation. So super exciting, and we think it is revolutionary in terms of enhancing the bandwidth and performance that future compute requirements are going to drive on memory for AI in the future. Kevin Gargana | Analyst, Rosenblatt Securities: Okay, perfect. I appreciate that color. Thanks, guys. Operator | Conference Operator: Thank you. The next question is from Nick Doyle with Needham & Company. Your line is now open. Nick Doyle | Analyst, Needham & Company: Hey, guys. Thanks for taking my questions, and best wishes to Jack on his next steps. You talked about the software platform expansion, the new ICE clusterware, and one of the new features discussed was multi-tenancy support. My understanding was that your core business is really focused on single tenants, you know, where their cluster needs to be optimized for their own workloads. So my question is, does this new multi-tenant support signal an openness to support a CSP type customer more than the enterprise customer that you talk about? Thanks. Mark Adams | Chief Executive Officer: Hey, Nick, thanks for the question. That's a good question. I would think it's more additive, and one of the earlier questions, I think it was from Alex from Loop, talked about NeoCloud and what we referred to as Tier 2 cloud service providers. We keep running into companies who are deploying different models to help build out and have these revenue models that in some cases, multi-tenancy is a given, and you have to have it. It skins in the game. It's not an either-or proposition. It's just that with the evolution of some of our key customers, new additions to the portfolio of customers we have, multi-tenancy is a key feature. And even in the enterprise, you know, you can make an argument for how that's segmented, that there's some applicability. But more than not, it's in the cloud service providers. And when I say the enterprise, it could be a private cloud where they're using it internally for some reason. a segmented way. But more often than not, it's back to this hyperscale or Neo cloud capability requirement from the customer. And it's something we really have heard and taken to heart and developed. Nick Doyle | Analyst, Needham & Company: That makes sense. It sounds like you're just kind of listening to your customers and building what they need. So the deferred income had a really big jump. Can you talk more about that line item? You know, it's not typically a focus on these calls, I think. But how should we think about these getting recognized? I know you talk about services contracts are typically a year or so. Yeah, so how should we think about that? Nate Olmstead | Chief Financial Officer: TAB, Mark McIntyre, yeah well you got it right, so the deferred revenue line really relates to our services business, and so what you see there are some customer renewals which often happen early in the calendar year or at the end of the prior calendar year and that's what you see driving the increase this quarter. Nick Doyle | Analyst, Needham & Company: TAB, Mark McIntyre, And it would make sense that it's more it's a it's around a year, I mean can these extend to 235 years. Nate Olmstead | Chief Financial Officer: It does vary. I think one year is typical, but we do see some that extend further than that, more probably to the three-year time period. Nick Doyle | Analyst, Needham & Company: Okay. Thank you. Nate Olmstead | Chief Financial Officer: Yep. Thanks, Nick. Operator | Conference Operator: Thank you. There are no further questions in queue. I'd like to turn the call back over to Mark Adams, CEO, for closing remarks. Mark Adams | Chief Executive Officer: Thank you. And thank you all for joining today's call. As we close, I want to reflect on the progress we have made in the fiscal year to date. The first half has demonstrated our ability to execute our strategic priorities while delivering strong financial results. Our investments in hardware, software, and services have positioned us to address the rapidly growing demand for AI infrastructure on premise, in the cloud, and at the edge. With a growing portfolio of innovative products, a focus on leveraging strategic partnerships and expanding go-to-market strategy, we remain optimistic about our ability to lead in this evolving market and meet our revised growth plan for fiscal 2025. Thank you and have a great day. Operator | Conference Operator: That concludes today's conference call. Thank you for your participation. You may now disconnect your lines. jsPDF 3.0.3 D:20260606090350-00'00'