Earnings call transcript: Penguin Solutions Q4 2025 beats EPS forecasts

Penguin Solutions reported a strong financial performance for the fourth quarter of 2025, surpassing earnings per share (EPS) expectations with a non-GAAP diluted EPS of $0.43, compared to the forecasted $0.30. However, the company’s revenue slightly missed projections, coming in at $338 million against a forecast of $339 million. Despite this minor revenue miss, the market reacted positively, with the stock price rising 2.05% in aftermarket trading, reaching $29.90. According to InvestingPro data, the stock appears undervalued based on its Fair Value analysis, with seven analysts recently revising their earnings expectations upward for the upcoming period.

Key Takeaways

• Penguin Solutions exceeded EPS expectations by 43.33%.
• Revenue for Q4 grew 9% year-over-year, totaling $338 million.
• The stock saw a 2.05% increase in aftermarket trading.
• The company continues to expand its AI infrastructure capabilities.
• Penguin Solutions closed a $200 million investment from SK Telecom.

Company Performance

Penguin Solutions demonstrated robust growth in Q4 2025, with revenue increasing by 9% year-over-year to $338 million. The company continues to capitalize on the growing demand for AI infrastructure, evidenced by its first international deployment with SK Telecom. The full-year revenue reached $1.37 billion, marking a 17% increase from the previous year, underscoring the company’s strong market position.

Financial Highlights

• Revenue: $338 million, +9% YoY
• Full Year Revenue: $1.37 billion, +17% YoY
• Non-GAAP Gross Margin: 30.9% (Q4), 31% (Full Year)
• Non-GAAP Operating Margin: 11.6% (Q4), 12.2% (Full Year)
• Non-GAAP Diluted EPS: $0.43 (Q4, +18% YoY), $1.90 (Full Year, +53% YoY)

Earnings vs. Forecast

Penguin Solutions reported an EPS of $0.43, significantly beating the forecasted $0.30, resulting in a 43.33% surprise. While revenue was slightly below expectations by 0.33%, the strong EPS performance highlighted the company’s operational efficiency and cost management.

Market Reaction

Following the earnings announcement, Penguin Solutions’ stock rose by 2.05% in aftermarket trading, reaching $29.90. This movement reflects investor confidence in the company’s ability to deliver strong earnings despite a slight revenue miss. The stock’s performance is notable given its recent 52-week high of $29.80, suggesting a positive market sentiment. InvestingPro data shows impressive momentum, with a 76% return over the past six months and strong performance across multiple timeframes. Subscribers can access 13 additional ProTips and comprehensive valuation metrics through the Pro Research Report.

Outlook & Guidance

For fiscal year 2026, Penguin Solutions anticipates net sales growth of 6% ±10%, with a focus on expanding its enterprise AI infrastructure offerings. The company projects a non-GAAP EPS of $2 ±$0.25, reflecting its confidence in maintaining profitability amidst evolving market conditions.

Executive Commentary

CEO Mark Adams described fiscal 2025 as a "transformational year" for Penguin Solutions, highlighting the company’s strategic initiatives and market positioning. He noted, "We’re now beginning to see indications of this transition with early-stage corporate build-outs taking shape," emphasizing the company’s readiness for future growth.

Risks and Challenges

• Dependence on AI infrastructure demand: A slowdown could impact growth.
• Competition in the AI sector: Increased rivalry may pressure margins.
• Economic uncertainties: Global economic shifts could affect investment.
• Supply chain constraints: Potential disruptions could affect production.
• Regulatory changes: New policies could impact operational flexibility.

Q&A

During the Q&A session, analysts inquired about the company’s strategy in the AI sector, especially concerning the absence of anticipated hardware sales from hyperscalers in FY 2026. Penguin Solutions emphasized its focus on continuing services with existing hyperscale customers and highlighted a strong pipeline in financial, federal, education, and sovereign cloud sectors.

Full transcript - Penguin Solutions Inc (PENG) Q4 2025:

Victoria, Moderator/Operator: Good afternoon. Thank you for attending today’s Penguin Solutions Fourth Quarter and Full Year twenty twenty five 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. I would now like to pass the conference over to our host, Suzanne Smith.

Thank you. You may proceed, Suzanne.

Suzanne Smith, Investor Relations, Penguin Solutions: 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 twenty twenty five 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 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?

Mark Adams, Chief Executive Officer, Penguin Solutions: Thank you, Suzanne. Welcome to Penguin Solutions fourth quarter and fiscal year twenty twenty five 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 twenty twenty five, 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 $200,000,000 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 $338,000,000 an increase of 9% year over year. Non GAAP gross margin was 30.9%.

Non GAAP operating income reached $39,000,000 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 $0.43 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 point dollars 9 an increase of 53% compared to fiscal twenty twenty four. 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, Pendment Solutions was recently selected by a Tier one 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 deployments 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 twenty five 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 2025 was $138,000,000 up 4% sequentially from Q3. For the full fiscal year, advanced computing revenue reached $648,000,000 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 HAN, 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 twenty twenty five, 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 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 continue to invest in our Penguin Ice Clusterware software, a platform that helps customers manage infrastructure assets.

Post deployment, our Penguin solution 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 $132,000,000 in revenue for the fourth quarter and $464,000,000 in revenue for the full fiscal year, representing a 30% increase compared to fiscal twenty twenty four. 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 application. In line with this demand, we are seeing promising early interest in our Compute ExpressLink, 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 and 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’s optical memory appliance, or OMA, with initial product shipments targeted for late calendar twenty twenty six to early twenty twenty seven. 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 $67,000,000 an increase of 9% compared to the prior quarter. Full year revenue was $256,000,000 roughly flat year over year, reflecting a combination of secular and macroeconomic headwinds in the LED market. Despite these challenges, we achieved a two fifty basis point improvement in non GAAP operating margin in fiscal year twenty twenty five.

As we move into fiscal twenty twenty six, Cree is focused on capturing market share, operating efficiently, protecting our intellectual property and driving operating profit growth. Fiscal twenty twenty five 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 twenty twenty six, 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 their 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 ’twenty six and beyond. Let me stop and hand it over to Nate for a detailed review of 2025 financials and our outlook for FY 2026.

Nate Olmstead, Chief Financial Officer, Penguin Solutions: 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 $338,000,000 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 $0.43 up 18% from last year. For the full fiscal year 2025, total company net sales were $1,370,000,000 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 $1.9 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 $63,000,000 up 5% versus the prior year. Product net sales were $275,000,000 in the quarter, up 9% versus the prior year.

Net sales by business segment were as follows. In advanced computing, Q4 net sales were $138,000,000 which was 41% of our total net sales and down 7% year over year. For the full year, advanced computing delivered $648,000,000 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 and 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 $132,000,000 which was 39% of total company net sales and up 38 year over year. For the full year, memory net sales totaled $464,000,000 or 34% of total net sales and up 30% year over year. And in optimized LED, net sales were $67,000,000 or 20% of total company net sales and up 2% year over year. For the full year, LED delivered $256,000,000 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 $65,000,000 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 $257,000,000 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 $39,000,000 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 $168,000,000 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 $0.43 up 18% versus the prior year.

For the full year, non GAAP diluted EPS was 1.9 up 53% versus the prior year and $05 better than the high end of our outlook provided in July. Adjusted EBITDA for the fourth quarter was $43,000,000 up 11% year over year and for the full year was $187,000,000 up 28% versus the prior year. Turning to balance sheet highlights. For working capital, our net accounts receivable totaled $3.00 $8,000,000 compared to $252,000,000 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 fifty one days, up from forty nine days in the prior year quarter.

Inventory totaled $255,000,000 at the end of the fourth quarter, up from $151,000,000 at the end of last year due to higher sales volumes and order linearity. Days of inventory was fifty one days, up from thirty six days a year ago, primarily due to the positioning of inventory for shipment early in Q1 FY ’twenty six. Accounts payable were $267,000,000 at the end of the quarter, up from $182,000,000 a year ago due primarily to higher sales volumes and the timing of purchases and payments. Days payable outstanding was fifty four days compared to forty three days last year due to the timing of purchases and payments. Our cash conversion cycle was forty nine 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 $550,000,000 and $453,000,000 respectively in the fourth quarter. As a reminder, the difference between gross and net sales is primarily related to our memory businesses logistic services, which are accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as net sales. Cash, cash equivalents and short term investments totaled $454,000,000 at the end of the fourth quarter, up $64,000,000 from the prior year and down $282,000,000 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 $70,000,000 compared to $12,000,000 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 FY ’twenty six. For the full fiscal year 2025, operating cash flow from continuing operations was $113,000,000 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 $113,000,000 to repurchase 6,600,000.0 shares through 2025.

Earlier today, we announced that our Board has authorized a $75,000,000 increase in our stock repurchase authorization, bringing our total remaining authorization to $112,000,000 As mentioned in our Q3 earnings call, in Q4, we completed a refinancing of our existing credit facility. We paid off the $300,000,000 remaining on our term loan using $200,000,000 of cash from our balance sheet and $100,000,000 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 $200,000,000 Our net debt at the end of the fiscal year was $16,000,000 For those of you tracking capital expenditures and depreciation, capital expenditures were $3,000,000 in the fourth quarter and $9,000,000 for the full year, and depreciation was $5,000,000 for the quarter and $21,000,000 for the full year. And now turning to our outlook. Coming off a strong fiscal year ’twenty five, we believe that our strategy and execution capabilities position us well for long term profitable growth.

For fiscal ’twenty six, 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 FY twenty twenty six 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 FY ’twenty six, and those sales are included in our outlook. The combined effect of these two assumptions in our FY twenty six 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 enter 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 FY 2025, 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 2025. By comparison, for fiscal twenty twenty six, 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 back end 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 1020% 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 FY 2025 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 $255,000,000 plus or minus $10,000,000 For non GAAP full year diluted earnings per share, we expect approximately $2 plus or minus $0.25 Our FY ’twenty six non GAAP diluted share count is expected to be approximately 55,000,000 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 FY ’26 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 FY ’twenty six 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 twenty twenty six 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 and A.

Victoria, Moderator/Operator: Great. Thank you so much. We will now begin the question and answer session. 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 2025. 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 forecast?

Or should are you still active in potential more hardware deployments?

Mark Adams, Chief Executive Officer, Penguin Solutions: 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 twenty twenty six, 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, Penguin Solutions: Yes, that’s right. I think 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 services revenues continue.

Kevin Cassidy, Analyst, Rosenblatt Securities: Okay, great. Thanks. And also exciting news with the SK Telecom and landing one client with that. And was a lot of news last week about SK Telecom even being awarded some business with OpenAI in Korea. Is there any participation availability for Penguin in that relationship?

Mark Adams, Chief Executive Officer, Penguin Solutions: That’s something we can’t address or talk to today, Kevin. What I would say is the referenced implementation in our prerecorded 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, Penguin Solutions: 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 $34,600,000 Is that will that be recognized over the next couple of quarters? Or when does that get recognized?

Nate Olmstead, Chief Financial Officer, Penguin Solutions: So we recognize that portion in Q4, but we’ll have more in FY ’twenty six.

Victoria, Moderator/Operator: Our next question comes from the line of Michael Ng with Goldman Sachs. Your line is now open.

Michael Ng, Analyst, Goldman Sachs: Hi, good afternoon. Thank you for the question. I wanted to just ask about the Penguin Edge and combined impact with hardware and revenue for next year. I think you mentioned a 14 percentage point headwind to revenue growth to the total company. When I do the math, 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 ex 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 would love to hear your general thoughts there?

Mark Adams, Chief Executive Officer, Penguin Solutions: Thanks for the question, Michael. I’m going to answer the last part of your question first and then hand it over to Nate 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 from a 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 we’re winding down the business.

And over time, we were just getting better visibility towards the end of our fiscal ’twenty five to what the impact would be in ’twenty six. So it wasn’t really a choice of should we stay in a strategic year or not. It was two large customers that were winding down on a prior generation of a product, and then they were not renewing.

Nate Olmstead, Chief Financial Officer, Penguin Solutions: Mike. And so I think on your math, you’re roughly right. 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 FY ’twenty five.

Michael Ng, Analyst, Goldman Sachs: Great. Thank you. And if I could just follow-up, please. So, if the, you know, underlying, you know, is growing closer to 30 to 45, could you just maybe talk about, the key areas of momentum for advanced computing that you’re seeing for next year? Is it just more of those customer wins that you talked about converting into revenue?

And maybe just kind of expand a little bit more in terms of the wideness of the range? I know you had made some comments earlier during the call. Sure.

Mark Adams, Chief Executive Officer, Penguin Solutions: Let me take a shot at that one. When you think about our model, and we’ve talked about customer diversification for some time, we’ve done a pretty good job 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 in 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, Penguin Solutions: Yes. I mean, I think just building on what Mark said, think 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 HPC AI business from non hyperscalers, I think it’s just a really positive data point for us from FY ’twenty five. And we think that we can continue to grow at a very fast clip in those customers in FY ’twenty six.

Victoria, Moderator/Operator: Thank you for your questions. Our next question comes from the line of Samik Chatterjee with JPMorgan. Your line is now open.

Samik 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? Or and what are the margin implications of what we’re seeing on the commodity front, if you’d into your sort of overall systems on the memory side?

Nate Olmstead, Chief Financial Officer, Penguin Solutions: Sure. 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. Mark mentioned about the strength of the pipeline.

And we haven’t converted those into bookings yet. And so the outlook really reflects that, where we have a strong pipeline of 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.

Victoria, Moderator/Operator: Our next question comes from the line of Ananda Barra with Loop Capital Markets. Your line is now open.

Ananda Barra, Analyst, Loop Capital Markets: Yes. Hey, thanks a lot. Yes, thanks guys for taking the question. I have a couple, if I could. So just going back on the apples to apples revenue growth, sort of when you back out the Meta hardware and the Penguin solutions or sorry, the edge business.

So is that to say yes, thanks. So if it’s a 14% impact on year over year growth, is that to say that apples to like on a pro form a basis, you’d really be guiding 20% growth?

Nate Olmstead, Chief Financial Officer, Penguin Solutions: The way I Or think about that number

Ananda Barra, Analyst, Loop Capital Markets: am I totally off?

Nate Olmstead, Chief Financial Officer, Penguin Solutions: Well, let me let me explain it to you this way and and see if it makes sense. 14% of our revenue in f y twenty five came from the Penguin Edge business and the hardware from hyperscalers. Right? So I haven’t included that revenue in the FY twenty six outlook. So yes, if you wanted to remove that from FY twenty five, and have an apples to apples with FY ’26, you would have a calculated growth rate around 20%.

Ananda Barra, Analyst, Loop Capital Markets: It would be. I got it. And that’s helpful. That’s helpful, Nate. And then, Nate, the 75% growth from non hyperscale HPC AI, can you give us a sense I mean, I guess, can we I guess you’re giving us the best we can back into that, I guess, is right.

With the overall with the overall guide, is that something we can back into, or do we need,

Nate Olmstead, Chief Financial Officer, Penguin Solutions: you know, sort of more part You’re talking about how how much revenue would that that generate?

Ananda Barra, Analyst, Loop Capital Markets: I guess.

Samik Chatterjee, Analyst, JPMorgan: I think

Ananda Barra, Analyst, Loop Capital Markets: I think the comment was yeah. I think the comment

Nate Olmstead, Chief Financial Officer, Penguin Solutions: was in ’25. So look if at advanced computing, know, there’s the AI business, HPC AI business, there’s Stratus, there’s Penguin Edge, focusing on the HPC AI 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 ’twenty five. I’m just trying to zero in really on that strategic focus area for us.

Ananda Barra, Analyst, Loop Capital Markets: Totally. And I guess what I’m wondering is, the guidance frame

Michael Ng, Analyst, Goldman Sachs: that you’ve given us for the

Ananda Barra, Analyst, Loop Capital Markets: different businesses for fiscal twenty six, are we able to back into what’s implied for that growth in fiscal twenty twenty six? Or is that something that we need more information to figure out?

Mark Adams, Chief Executive Officer, Penguin Solutions: Think was the ’75 Yes. I think we’re basically discussing a trend that happened in 2025. 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 2026. 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, Penguin Solutions: And 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 we see at tighter ranges on the revenue outlook.

Ananda Barra, 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 that you that drove the describing the the wider range. What would be I guess, like, what aspects of HPC AI business, I guess maybe what end markets or aspects would be the biggest parts of the market that would sort of maybe drive some of the upside? Sure. Like I guess, is it

Mark Adams, Chief Executive Officer, Penguin Solutions: Yes. Yes. What I would say, let me just I’ll 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 FY ’twenty six.

Ananda Barra, Analyst, Loop Capital Markets: That’s super helpful. I got it.

Mark Adams, Chief Executive Officer, Penguin Solutions: 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 star, Tony Fry, who came over from NetApp. And Tony has already brought on team members to target health care and other verticals organizationally to further enhance that. But in terms of ’26 outlook, our pipeline reflects the sectors I talked about being, again, financial, education, federal integrators and government direct as well as sovereign cloud.

Ananda Barra, Analyst, Loop Capital Markets: Thanks, Mark. Thanks, guys.

Nate Olmstead, Chief Financial Officer, Penguin Solutions: Thanks, Ananda.

Victoria, Moderator/Operator: Thank you for your question. Our next question comes from the line of Rustom Kanga with Citizens. Your line is now open.

Rustom Kanga, 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

Mark Adams, Chief Executive Officer, Penguin Solutions: in such

Rustom Kanga, Analyst, Citizens: a short period of time after the initial hardware deal. And I think you guys have historically talked about hardware as a 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 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?

Well,

Mark Adams, Chief Executive Officer, Penguin Solutions: 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 upfront in any deployment. 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 an agreement. And so in this case, like any case, once we install 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 within a certain timeframe right after the other.

Nate Olmstead, Chief Financial Officer, Penguin Solutions: I think also, listen, 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, large deployments. And that was the case with SK Telecom.

Rustom Kanga, Analyst, Citizens: Appreciate you walking through the nuances. That’s great. Thanks.

Victoria, Moderator/Operator: Great. Thank you so much for your questions. Our next question comes from the line of Matt Caltry with Needham and Company. Your line is now open.

Matt Colicci, Analyst, Needham and Company: This is Matt Colicci over at Needham. 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, Penguin Solutions: 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 in that announcement, I think that just goes to show that capital dollars out building on future large language model training environments as well as inferencing implementations. Again, it’s still on the front end or 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 announcements, What I I guess, I would say, when you have a lot of people selling the same thing, it tends to get commoditized pretty quickly. And 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. And so that model is not, in my opinion, is not for everybody, for sure. I think it’s 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 Colicci, Analyst, Needham and Company: That makes makes sense. Very helpful there. 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 the stuff?

Mark Adams, Chief Executive Officer, Penguin Solutions: 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 firmware and software and performance reliability. And so those categories or elements of our differentiation allow us to charge more than the industry charges for the memory itself.

And so it’s largely a differentiation model. If we’re not differentiating on the design wins, we’re not going to get a lot of them.

Victoria, Moderator/Operator: 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, Penguin Solutions: Thank you, operator. Our Q4 and full year results validate that we are on the right path, helping our valued customers solve the complexity of AI infrastructure. Thank you all for joining today’s call.

Victoria, Moderator/Operator: That concludes today’s call. Thank you for your participation, and enjoy the rest of your day.

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