Penguin Solutions Q4 2025 Earnings Call Transcript

Quartr
Provided by Quartr
October 7, 2025

Key Takeaways

  • Positive Sentiment: Penguin Solutions delivered 17% top-line growth, expanded non-GAAP operating margin by 190 basis points, and achieved a 53% increase in non-GAAP diluted EPS in FY 2025.
  • Positive Sentiment: The company added a Tier 1 U.S. financial institution for its first on-prem Gen AI data center and completed its first international AI deployment in South Korea in partnership with SK Telecom.
  • Positive Sentiment: Integrated Memory revenue rose 30% YoY, with growing customer interest in CXL products and development of an Optical Memory Appliance targeting HBM scaling by late 2026.
  • Negative Sentiment: FY 2026 gross margin is guided to 29.5% (±1%), down from 31%, due to the wind-down of the high-margin Penguin Edge business and growth in lower-margin segments.
  • Negative Sentiment: Net sales guidance of +6% (±10%) for FY 2026 assumes a 14 percentage point drag from exiting Penguin Edge and no hyperscale hardware sales, leading to an advanced computing range of –15% to +15%.
AI Generated. May Contain Errors.
Earnings Conference Call
Penguin Solutions Q4 2025
00:00 / 00:00

Transcript Sections

Skip to Participants
Moderator

Good afternoon. Thank you for attending today's Penguin Solutions' Quarterly 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 would 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 Schmidt. Thank you. You may proceed, Suzanne.

Suzanne Schmidt
Suzanne Schmidt
Head of Investor Relations at 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' Quarterly and Full-Year 2025 Financial 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.

Suzanne Schmidt
Suzanne Schmidt
Head of Investor Relations at Penguin Solutions

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.

Suzanne Schmidt
Suzanne Schmidt
Head of Investor Relations at Penguin Solutions

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. With that, let me turn the call over to Mark Adams, CEO. Mark?

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

Thank you, Suzanne. Welcome to Penguin Solutions' Quarterly 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.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

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%.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

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 $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 $1.90, 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-powered 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 buildouts taking shape.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

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, systems integrators, and neo-cloud service providers.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

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.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

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 the different Tier 1 financial institution that I mentioned earlier. We're also pleased with the growth in our new customer opportunities.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

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 in successfully managing large-scale AI infrastructure buildouts 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.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

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.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

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. Optimized 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.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

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 the non-GAAP operating margin in fiscal year 2025. As we move into fiscal 2026, Cree is 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.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

Looking ahead to fiscal 2026, we believe we can sustain our growth momentum with the following strategic priorities: growing our enterprise customer base in AI infrastructure deployments, driving innovation across our hardware, software, and services portfolio to create sustainable differentiation, expanding our strategic partnerships to enhance Penguin Solutions' 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 2026 and beyond.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

Let me stop and hand it over to Nate for a detailed review of 2025 financials and their outlook for FY 2026.

Nate Olmstead
Nate Olmstead
SVP and CFO at 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 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 $0.43, 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.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

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 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.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

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. 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.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

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.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

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 $0.43, up 18% versus the prior year. For the full year, non-GAAP diluted EPS was $1.90, up 53% versus the prior year and $0.05 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.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

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. Day 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 order 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 FY 26. 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.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

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.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

Cash, cash equivalents, and short-term investments totaled $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 FY 26.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

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.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

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. Now turning to our outlook. Coming off a strong fiscal year 2025, we believe that our strategy and execution capabilities position us well for long-term profitable growth. For fiscal 2026, we are initiating an outlook for net sales to grow 6%, ±10% versus the prior year. There are a few important assumptions to keep in mind with regard to this outlook.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

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 2026 to hyperscale customers, as we don't currently have line of sight to such business in this fiscal year.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

To be clear and importantly, we do expect our hyperscale services business to continue in FY 2026, and those sales are included in our outlook. The combined effect of these two assumptions in our FY 2026 outlook is a 14% 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 first half of fiscal 2025.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

By comparison, for fiscal 2026, the midpoint of our outlook assumes approximately 46% of our sales come in the first half of the year. 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. 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 -15% and +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. For LED, we expect net sales to change between -5% and +5% year-over-year. Our non-GAAP gross margin outlook for the full year is 29.5%, ±1 percentage point.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

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 million, ± $10 million. For non-GAAP full-year diluted EPS, we expect approximately $2, ± $0.25. Our FY 2026 non-GAAP diluted share count is expected to be approximately 55 million shares.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

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 2026 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 2026 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.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

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.

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 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. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. We will pause here briefly as questions are registered. All right. Our first question comes from a line of Kevin Cassidy with Rosenblatt Securities Inc. Your line is now open.

Kevin Cassidy
Senior Research Analyst at Rosenblatt Securities Inc.

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. Can you say, is their project over? Would you say that, going forward, we should just take them out of the forecast, or are you still active in potential more hardware deployments?

Mark Adams
Mark Adams
President and CEO at 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 2026, we don't anticipate any non-service revenue or systems hardware revenue in the year. I'll let Nate comment.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

Yeah, that's right. I think last year we entered the year with some visibility to some hardware shipments from the hyperscalers, and it just wasn't the case this year. 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. As Mark said, we continue to have a very good relationship with them, and the services revenues continue.

Kevin Cassidy
Senior Research Analyst at Rosenblatt Securities Inc.

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

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

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. 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. We really value the relationship with SK Telecom, but we're not able to comment on any future opportunities at this time.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

Kevin, I'll just add for that, you know, 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. It's great to see that part of that transaction and the relationship with SK being strong.

Kevin Cassidy
Senior Research Analyst at Rosenblatt Securities Inc.

Okay. 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 of quarters, or when does that get recognized?

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

We recognize that portion in Q4, but we'll have more in FY 2026.

Kevin Cassidy
Senior Research Analyst at Rosenblatt Securities Inc.

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

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

Thanks.

Moderator

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

Michael Ng
Michael Ng
Equity Research Analyst at 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% headwind to revenue growth to the total company. You know, when I do the math, I think that implies a 28% 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 exceeds items? 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
Mark Adams
President and CEO at 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 the 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. As we announced in our filings, we were going through some last-time buys and were winding down the business. Over time, we were just getting better visibility towards the end of our fiscal 2025 to what the impact would be in 2026. It wasn't really a choice of should we stay in strategically 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
Nate Olmstead
SVP and CFO at Penguin Solutions

Yeah. Hey, Mike. I think on your math, you're roughly right. You know, Advanced Computing is about 47% or 50% of total company sales. That 14 points all sits within Advanced Computing, which means it's about 28%-30% of Advanced Computing revenue from FY 2025.

Michael Ng
Michael Ng
Equity Research Analyst at Goldman Sachs

Great. Thank you. If I could just follow up, please. If the underlying is growing closer to the 30%-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. Thank you.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

Sure. 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. Those target enterprise customers, plus, you know, 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.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

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. 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. 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
Nate Olmstead
SVP and CFO at Penguin Solutions

Yeah, I mean, I think just building on what Mark said, I think it's part of our diversification of our customer base is what you're seeing reflected in the outlook. 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 2025. We think that we can continue to grow at a very fast clip in those customers in FY 2026.

Michael Ng
Michael Ng
Equity Research Analyst at Goldman Sachs

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

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

Thank you.

Moderator

Thank you for your questions. Our next question comes from a line of Samik Chatterjee with JPMorgan. Your line is now open.

Samik Chatterjee
Samik Chatterjee
Senior Equity Research Analyst at 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? Then just specific to memory, when you are guiding to 10%-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, if it feeds into your sort of overall systems on the memory side. Thank you.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

Sure. Let me take the memory one first. You're right. Obviously, prices are starting to increase, and that affects the portion of our portfolio. It's not all of it. It's important to keep in mind that we generally operate in memory on a value-add basis, right? As memory prices increase, we can generally pass along those price increases, but we don't get additional margin from that. 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, 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.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

I think currently we feel good about the backlog that we've been able to build for memory going into Q1. 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 the strength of the pipeline, and we haven't converted those into bookings yet. 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. Okay. Thank you.

Moderator

Thank you for your questions. Our next question comes from the line of Ananda Baruah with Loop Capital Markets. Your line is now open.

Ananda Baruah
Ananda Baruah
Senior Equity Analyst at Loop Capital Markets

Yeah. Hey, thanks a lot. Yeah, thanks, guys, for taking the question. I have a couple if I could. Just going back on the apples-to-apples revenue growth, you know, in your back out the meta hardware and the Penguin Edge business. Is that to say, yes, thanks. If it's a 14% impact on year-over-year growth, is that to say that apples to, like, on a pro forma basis, you'd really be guiding 20% growth?

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

Yeah, the way I think about it now.

Ananda Baruah
Ananda Baruah
Senior Equity Analyst at Loop Capital Markets

Am I totally off?

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

Let me explain to you this way and see if it makes sense. 14% of our revenue in FY 2025 came from the Penguin Edge business and the hardware from hyperscalers, right? I haven't included that revenue in the FY 2026 outlook. Yes, if you wanted to remove that from FY 2025 and have an apples-to-apples with FY 2026, you would have a calculated growth rate around 20%.

Ananda Baruah
Ananda Baruah
Senior Equity Analyst at Loop Capital Markets

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

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

You're talking about how much revenue that generated?

Ananda Baruah
Ananda Baruah
Senior Equity Analyst at Loop Capital Markets

I think the comment was, yeah, I think the comment was.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

Yeah, the comment was if you look at Advanced Computing, if you look at Advanced Computing and not with, you know, there's the AI business, the HPC AI business, there's Stratus, and 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 2025.

Ananda Baruah
Ananda Baruah
Senior Equity Analyst at Loop Capital Markets

And.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

It's just trying to zero in really on that strategic focus area for us.

Ananda Baruah
Ananda Baruah
Senior Equity Analyst at Loop Capital Markets

Totally. I guess what I'm wondering is, given the guidance frame that you've given us for the different businesses for fiscal 2026, are we able to back into what's implied for that growth in fiscal 2026, or is that something that we need more information to figure out?

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

I think that.

Ananda Baruah
Ananda Baruah
Senior Equity Analyst at Loop Capital Markets

The 75%.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

Yeah, I think we're basically discussing a trend that happened in 2025. 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 2025 outcome and the 2026 number.

Nate Olmstead
Nate Olmstead
SVP and CFO at Penguin Solutions

Yeah, I think you can kind of get to a range with data that we've given you. 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. That's where we're seeing that pipeline build, right? It's a wide range on advanced computing because of that. We have visibility to opportunities, but not visibility yet to the bookings. 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.

Ananda Baruah
Ananda Baruah
Senior Equity Analyst at Loop Capital Markets

Mark, actually Nate and Mark, like Nate to sort of to the variance that's left in the bookings that drove the describing the wider range.

Ananda Baruah
Ananda Baruah
Senior Equity Analyst at Loop Capital Markets

What would be, I guess, like what aspects of HPC AI business, I guess maybe what end markets or aspects, you know, would be the biggest aspects of the market that would sort of maybe drive some of the upside?

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

Sure.

Ananda Baruah
Ananda Baruah
Senior Equity Analyst at Loop Capital Markets

Like I said, is it?

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

Yeah.

Ananda Baruah
Ananda Baruah
Senior Equity Analyst at Loop Capital Markets

Yeah.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

What I would say, let me 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 2026.

Ananda Baruah
Ananda Baruah
Senior Equity Analyst at Loop Capital Markets

That's super helpful.

Mark Adams
Mark Adams
President and CEO at 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 start, Tony Frey, who came over from NetApp. Tony's already brought on team members to target healthcare and other verticals organizationally to further enhance that. In terms of 2026 outlook, our pipeline reflects the sectors I talked about being, again, financial, education, federal integrators, and government direct, as well as sovereign cloud.

Ananda Baruah
Ananda Baruah
Senior Equity Analyst at Loop Capital Markets

Thanks, Mark. Thanks, guys.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

Thanks, Ananda.

Moderator

Thank you for your questions. Our next question comes from a line of Rustam Kanga with Citizens JMP Securities LLC. Your line is now open.

Rustam Kanga
VP of Research at Citizens Capital Markets and Advisory

Hey, guys. Congrats on the strong close to the year, and great to hear about Penguin Solutions' 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. I think you guys have historically talked about hardware 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 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 thing?

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

I think we 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. The timing of when the revenue gets recognized is different. 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 typically ratified. 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. In this case, like any case, once we install or deploy a system 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. This wasn't that different than other deployments.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

It's just that we got both agreements, you know, within a certain timeframe right after the other. I think also it's, you know, listen, each deal can be different than the next. When we have large hardware deployments, the value proposition for our services tends to be higher. We do tend to see good services attached to those large deployments, and that was the case with SK Telecom.

Rustam Kanga
VP of Research at Citizens Capital Markets and Advisory

I appreciate you walking through these nuances. That's great. Thanks.

Moderator

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

Matthew Calitri
Matthew Calitri
Equity Research Associate at Needham & Company

Hey, guys. This is Matt Calitri over at Needham. Thanks for taking our question. There's obviously no shortage of conversation around AI, and lately, we've heard quite a bit of discourse around how CapEx and revenue seem to be rotating between just a few companies. 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 buildouts are and will progress in this space and what you're seeing in the broader market.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

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 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 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 a big pickup in terms of enterprise engagements and the pipeline growing there.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

Now, relative to your reference to the GPU gross margin announcement, what 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. 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.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

I think the announcement with AMD and OpenAI that was in the press this week certainly is 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.

Matthew Calitri
Matthew Calitri
Equity Research Associate at Needham & Company

That makes sense. Very, very helpful there. Thank you. 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? To a certain extent, is it just a matter of who has availability to ship this stuff?

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

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 differentiation because we buy our supply of memory silicon from the likes of SK Hynix and others. We deliver a value add in terms of a system or subsystem level solution, and we get margin above the industry gross margins of the commodity itself being the memory chip. We differentiate ourselves both through design and firmware and software and performance and reliability. Those categories are elements of our differentiation that allow us to charge more than the industry charges for the memory itself. 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.

Matthew Calitri
Matthew Calitri
Equity Research Associate at Needham & Company

Understood. Thanks so much.

Mark Adams
Mark Adams
President and CEO at Penguin Solutions

You got it.

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
Mark Adams
President and CEO at 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.

Moderator

That concludes today's call. Thank you for your participation and enjoy the rest of your day.

Executives
    • Nate Olmstead
      Nate Olmstead
      SVP and CFO
    • Suzanne Schmidt
      Suzanne Schmidt
      Head of Investor Relations
    • Mark Adams
      Mark Adams
      President and CEO
Analysts
    • Matthew Calitri
      Equity Research Associate at Needham & Company
    • Ananda Baruah
      Senior Equity Analyst at Loop Capital Markets
    • Samik Chatterjee
      Senior Equity Research Analyst at JPMorgan
    • Kevin Cassidy
      Senior Research Analyst at Rosenblatt Securities Inc.
    • Moderator
    • Rustam Kanga
      VP of Research at Citizens Capital Markets and Advisory
    • Michael Ng
      Equity Research Analyst at Goldman Sachs
Powered by Quartr