Penguin Solutions, Inc.

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

Thank you, operator. Good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss Penguin Solutions' fourth quarter and full year fiscal 2025 results. On the call today are Mark Adams, Chief Executive Officer, and Nate Olmstead, Chief Financial Officer. You can find the accompanying slide presentation and press release for this call on the investor relations section of our website. We encourage you to go to the site throughout the quarter for the most current information on the company. I would also like to remind everyone to read the note on the use of forward-looking statements that is included in the press release and the earnings call presentation. Please note that during this conference call, the company will make projections and forward-looking statements, including but not limited to statements about the company's growth trajectory and financial outlook, business plans and strategy, and existing and potential collaborations. Forward-looking statements are based on current beliefs and assumptions and are not guarantees of future performance and are subject to risks and uncertainties, including, without limitation, the risks and uncertainties reflected in the press release and the earnings call presentation filed today, as well as in the company's most recent annual and quarterly reports. The forward-looking statements are representative only as of the date they are made and, except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements. We will also discuss both GAAP and non-GAAP financial measures. Non-GAAP measures should not be considered in isolation from, as a substitute for, or superior to our GAAP results. We encourage you to consider all measures on analyzing our performance. A reconciliation of the GAAP to non-GAAP measures is included in today's press release and accompanying slide presentation. And with that, let me turn the call over to Mark Adams, CEO. Mark?

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