Good afternoon. Thank you for attending today's Penguin Solutions First Quarter Fiscal 2025 Earnings Call. My name is Tamia, and I will be your moderator for today's call. [Operator Instructions]. I would now like to pass the conference over to your host, Suzanne Schmidt, Investor Relations. You may proceed.

Thank you, operator. Good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss Penguin Solutions' First Quarter fiscal 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 and strategy and potential collaborations. Forward-looking statements are based on current beliefs and assumptions, are not guarantees of future performance, and are subject to risks and uncertainties, including, without limitation, the risks and uncertainties reflected in the press release and the earnings call presentation filed today as well as in the company's most recent annual and quarterly reports. The forward-looking statements are representative only as of the date they are made and except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements. We will also discuss both GAAP and non-GAAP financial measures. Non-GAAP measures should not be considered in isolation from, as a substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing our performance. A reconciliation of the GAAP to non-GAAP measures is included in today's press release and accompanying slide presentation. And with that, let me turn the call over to Mark Adams, CEO. Mark?

Thank you, Suzanne. Welcome everyone to our Q1 fiscal 2025 earnings call. We hope you had a nice holiday season. For the first quarter of fiscal 2025, we delivered strong financial results across a number of key metrics. Our revenue was $341 million, an increase of 24% compared to the same period last year. Non-GAAP earnings per share was $0.49, a 108% increase year over year. We achieved non-GAAP operating income of $41 million, up 53% from the prior year, and we improved non-GAAP operating income margin to 12%, up 2.3 percentage points year over year. These results are a testament to our strategic focus and operating discipline. We believe that Penguin Solutions, Inc. is well positioned to capitalize on growing demand for high-performance, high-availability solutions that companies need to deploy AI infrastructure on-premise, at the edge, and in the cloud. Penguin Solutions leverages its deep experience and its differentiated portfolio of hardware, software, and managed services to help its customers solve the complexity of deploying AI. We work with our customers to design, build, deploy, and manage these environments with a focus on time to revenue, reliability, and the highest level of performance and availability. Our products and services are primarily sold to hyperscalers, cloud service providers, and large Fortune 500 corporations in the financial, energy, education, federal, consumer, and manufacturing sectors. At the core of Penguin's success is over 25 years of experience in deploying large-scale complex data center clusters, originating from our earlier days in high-performance computing (HPC), which is the foundation of our migration and becoming a leader in AI infrastructure solutions. Whether a customer is looking for a ready-to-use solution like our Origin AI offering, or a custom leading-edge offering, we are able to deliver the right solution to meet their needs. Before discussing our…

Thanks, Mark. I will focus my remarks on our non-GAAP results, which are reconciled to GAAP in our earnings release tables and in the Investor Relations materials on our website. Now let me turn to our first-quarter results. Total Penguin Solutions, Inc. revenues were $341 million, up 24% year over year and up sequentially for the fourth consecutive quarter. Non-GAAP gross margin came in at 30.8%, which was down year over year due to a higher hardware revenue mix. Non-GAAP operating margin was 12%, up 2.3 percentage points versus last year, and non-GAAP diluted earnings per share were $0.49 for the first quarter, more than double Q1 last year. In the first quarter of 2025, our overall services revenue totaled $71 million or 21% of total company revenue, up 5% versus Q1 last year. Product revenues were $270 million in the first quarter, up 31% year over year. First-quarter revenue by business segment was as follows: Advanced Computing, $177 million or 52% of our total revenue, and up 49% year over year. Integrated Memory, $97 million, which was 28% of our total revenue, and up 13% year over year. And Optimized LED, $67 million or 20% of our total revenue, and down 4% year over year. Non-GAAP gross margin for Penguin Solutions, Inc. in the first quarter was 30.8%, down 2.5 percentage points year over year, driven primarily by a higher mix of Advanced Computing hardware revenue compared to last year, partially offset by improved margins in LED. Gross margin was roughly flat sequentially, with lower Advanced Computing hardware margins offset by higher margins in both Memory and LED. Non-GAAP operating expenses for the first quarter were $64 million, down 1% year over year and up 3% sequentially. Operating expenses as a percentage of sales were down both year over…

Absolutely. We will now begin the question and answer session. The first comes from Michael Ng with Goldman Sachs. You may proceed.

Hey. Good afternoon. Thank you very much for the questions. I just have two. First, on the Dell partnership, I was just wondering if you could expand a little bit around your comments about how that partnership could help you scale across new industries and geographies. You know, what about the Dell partnership kind of opens up opportunities for you? And then I just have a quick follow-up. Thank you.

Sure. Well, Michael, you think about the value add that we are able to add on top of our clustered hardware, NVIDIA, or other technology server. It's really in the design and the deployment of these systems utilizing our software and our managed services. And as we think about some of the trends that we've seen in our customer conversations over the last six to twelve months, at times, they want to utilize existing hardware they procured or they've got access to more of a standard configuration, and then we get called in to bring this value add. This is a differentiator for us, and companies like Dell have approached us in our conversations to see if there might be collaboration going to market together. Where we bring 25 years of history in advanced computing solutions and data center environments and our know-how to deploy utilizing software and services. With their, you know, really incredible go-to-market engine on a global basis. And so, you know, when it is an environment like that, we're anxious to leverage the potential benefits of both Dell and Penguin Solutions, Inc. working together to drive more scale in our business and to help differentiate their overall go-to-market offering.

Great. Thank you, Mark. And just for the second one, I was just wondering if you could comment a little bit more around the timing of Advanced Computing revenue for the year. You know, was that large customer shipment this quarter and next more on the hyperscale or the CSP or enterprise side? And you commented about the strong backlog going into the second quarter. You know, has the backlog been growing? Maybe you could just talk about some of the AI, Advanced Computing demand trends you're seeing. Thank you.

Sure. In the first quarter, we benefited from a deployment at a major hyperscale customer that we have. That was one of a number of key deployments, but a significant opportunity for us, and we're very excited to execute on that. In the second quarter, it's a combination beyond the hyperscaler, in addition to there's also a large federal integrator and the deployment there. And so that's really kind of physical revenue recognition opportunities. When I say physical, I mean the ability to install, deploy, get customer acceptance in the quarter, and Q2 are the opportunities that we have. Taking a step back when you think about backlog and pipeline, this is really, you know, the strongest pipeline we've had at Penguin Solutions, Inc. as we've kind of built up our AI practice. And when I think about that, I just say, I have to caution that obviously bookings and pipeline can vary quarter to quarter. As both Nate and I talked about in our prepared comments. But in financial institutions and energy, as well as in the federal space, those are three examples. Market segments where our customer engagements have expanded. And proposals and overall pipeline continue to expand, and we're gaining more and more confidence in our ability to compete for larger business over time. And I think when Nate earlier reaffirmed our forecast for the year, it's a good signal that we not only see a strong Q2, but we believe in the initial forecast that we provided in our last call.

Great. Thank you for all the thoughts, Mark. Very helpful.

Thanks, mate.

Thank you. The next question comes from Brian Chin with Stifel. You may proceed.

Hi. Good afternoon. Thanks for letting us ask a few questions. Maybe just building off that last part of the discussion. Unofficially, it sounds like you expect fiscal second-quarter revenue to be up a little bit. Even flatlining the fiscal Q1 revenue across the year, you'd be tracking above that 15% revenue growth midpoint in fiscal 2025. I guess given this and including your backlog commentary, is there some conservatism now for the fiscal 2025 revenue outlook?

Hey, Brian. It's Nate. You know, I think I would refer you back to just comments we've made historically about the lumpiness in our business. And as Mark was referring, we had, you know, a large customer order from a hyperscaler in Q1 and in Q2, which indicates that those are not repeating in the second half. So good news is second half, you know, we do see some good new opportunities. But we do not have the benefit of that large customer order that ships in Q1 and Q2.

Really, what the emphasis there is, it just goes back to the feeling of a really good pipeline process evolving for us. But the inability right now here in January to call the back half. And so as Nate said, you know, we were trying to give a little more color even though we're doing annual, I'm trying to give a little more color about the short term. And as some of these transactions come to fruition, we'll be able to provide updates as we go throughout the, you know, next quarter call and beyond.

And, Brian, you know, there's a range on that revenue number obviously too. So if there's a many different outcomes that are possible. We've got tracking really well for Q2 and as Mark said, we're building a good solid pipeline for the second half and hopefully in fiscal year 2026.

That's helpful. And in terms of the Dell relationship, how many quarters or when do you think that could really start to hit its stride in terms of that channel? And the ability to, you know, piggyback off of, you know, that kind of standardized Dell infrastructure, but really participate in what could be a higher margin business for you and kind of flow through the P&L better.

I don't think the sales motions differ from what we've already articulated in the past, which is kind of twelve to eighteen months. And, you know, clearly, we're not just starting here in January. We've had some initial efforts in the back half of 2024 calendar. And so would think towards the, you know, the earliest you might see something is towards the end of our fiscal year, early fiscal year 2026, but you can imagine that we've had some really good momentum going into the announcement of the agreement.

Okay. Maybe last one for me, and this might also kind of orient towards maybe tail end this current fiscal year, maybe more fiscal 2026. But in terms of the closing of the SK Telecom investment, you know, if CES booth is any indication, SK Telecom certainly seems to have a clear, maybe ambitious vision of the role they can play in developing the AI ecosystem. It sounds like they plan to build several large data centers in Korea from 2025 onward. Can you describe the role Penguin might play in these projects and what other revenue opportunities and synergies you expect from this relationship? Again, perhaps starting, yeah, maybe later this fiscal year.

Yeah. And we've got to caution it that that transaction just literally closed in mid-December. But, you know, we've had very good preliminary discussions with SK. What I said at the time of the announcement of the transaction, I'll reinforce now is that they have a very large portfolio in terms of the elements of an AI infrastructure solution. And whether that be high bandwidth memory, their own version of a GPU architecture, all the way down to networking and power and cooling. They've invested heavily, and I think where we could be very helpful for them is a company that can bring it all together in terms of an integrated solution for some of these customers and for their internal interest in building out cloud infrastructure. So those are the conversations that you'll see us having with them, and, you know, as I said, out of the gates for limit, you know, since the close of the transaction, and even, you know, carefully beforehand, they've been very progressive, and, you know, we're very pleased with the nature of the agreement.

Okay. Yeah. I want more to come on that. I appreciate the color. Thanks.

Thank you.

Thank you. The following question comes from Nick Doyle with Needham. You may proceed.

Hey, guys. Thanks for letting me ask a couple questions. Could you give more details on the inventory increase? It jumped about $100 million quarter over quarter. So is that directly related to the strong bookings and backlog commentary in the Advanced Compute business? And is that another data point we can lean on for confidence in the fiscal 2025 outlook? Thanks.

Yeah. It is related to especially to that large customer order that I mentioned. Also, keep in mind, you know, the timing of purchases can differ from quarter to quarter, and the timing of shipments can differ from quarter to quarter. So it's not unusual to see fluctuations like that. But this customer order we've been talking about is also a major factor that you see there. But we expect that to ship through in Q2. So is there, you know, a level of inventory dollars or days that we should be looking for maybe next quarter or towards the end of the year? Yeah. It's kind of hard to predict because the timing of when these orders come in, when the inventory build happens, those sorts of things can be difficult to predict. You know, we run a pretty tight ship, I would say, on inventory. Cash conversion cycle improved year over year. So it's important, I think, to look at all the metrics. Also, where possible, we work with customers to get prepayment on inventory as well to manage cash in back.

Okay. Thanks. For the LED, the operating margin increased again quarter over quarter. You talked about how your capital-light strategy helps your margins. So can you talk about how the Daktronics deal impacts gross margins going forward?

Sure. First of all, we've talked a little bit about just the broader LED market environment has not been super healthy. There's a massive oversupply, and you've got some large companies really not able to compete effectively. You know, throughout this, I think I've also mentioned that there has been foreign investment in capacity subsidized by local government, and that's put the industry at further risk for the rest of the world. Part of that has also led to indirect and direct violation or what we believe is a violation of our intellectual property. And so as part of trying to protect the long-term investment we've made in Cree LED and in the innovation around LED technology, we're going to protect that. And so the Daktronics announcement is really a validation of our ability to work with a leading LED systems provider, and in this case, a large display provider, and it really validates our differentiation and our technology. And, you know, the ability to license our technology to someone like Daktronics not only validates our position but also lets the market be on notice that we're not going to allow people to infringe. And so it won't be the last you likely hear on this topic. We'll continue to be protective of our investments both in the past and current on innovation as Cree has been a leader in LED. And so I think there's more to come over time, but we're going to defend our IP, and that's important to us.

Thanks, Nick.

Thank you. Next question comes from Alex Valera with Loop Capital. You may proceed.

Hey, guys. Thank you for taking my question. This is Alec calling from Fernanda. My first question is can you provide any color as to what kind of future partnerships you guys can potentially do with hyperscalers or telcos?

Yeah. I think, you know, it's kind of a broad question. You know, we've talked about hyperscalers in general as being less strategic for us because we perceive that we can add more value with cloud service providers and large enterprises, and the enterprise could be anywhere from financial services to energy, to education, to the federal sector. I guess what I would say is that the value proposition we bring to market is pretty unique, and as we invest in differentiated solutions across hardware, software, and services, I think we position ourselves pretty well, and that's the brand that Penguin has developed really more as a trusted adviser, technology agnostic, not trying to push a hardware solution on somebody, but really working to design the right solution for a particular workload environment. I think hyperscalers tend to be a little bit more commodity-based and don't require the value that we bring as much, whereas enterprises looking to deploy in the on-prem or private cloud environment don't necessarily think in the same terms and value the differentiation that we bring to the table.

Got it. Thank you for that. Just a quick follow-up on the SK Telecom transaction. Can you provide any color as to what you suppose proceeds you find most attractive?

Well, I think it's, you know, it's an exciting time in the industry. And you've got a lot of investment in the market in AI solutions broadly. And so, you know, nothing to signal or announce, but we will continue to look at M&A as a tool to scale our offering and thus the business. Of course, continue to invest organically and go to market new product development. Obviously, we've got a very, very strong balance sheet when you factor in the money that was received in December by the close of SK. And so we will continue to take a look at our balance sheet from a capital allocation perspective. But I would say we're a growth mindset. We feel we really have a very unique position in the market when compared to some of the larger corporate brands in AI. You look at the gross margin compare, and, you know, we're somewhere between two to three times gross margin versus these companies. And so we feel it's important now for us to be able to accelerate our business and continue to develop technology and solutions that allow us to further differentiate ourselves over the long term.

Great. Thanks, Alex. Thank you, guys.

Thank you. The next question comes from Rustam Conga with Citizens JMP. You may proceed.

Good afternoon, Mark and Nate. This is Russ. Congrats on the strong start to fiscal 2025, especially the notable growth in Advanced Computing. In the absence of a quarterly guide, I'm curious on whether you can comment on if the quarter outperformed or was more in line with your own expectations relative to ninety days ago?

I just say we're pretty pleased with the quarter. I think on the last call, you know, we get challenged sometimes when a shipment goes to a customer, and, you know, the timing of the actual customer acceptance is unknown or uncertain relative to the end of a quarter day. And so I'd say that the quarter was relatively good, relatively solid. And I would say that, you know, our commentary today on Q2 reflects continued optimism in the business for the quarter, for Q2. As you can see in the guide and in the comments from Nate and myself. And again, a lot of this is the work we've done, you know, and over the, you know, last, you know, one to two years on building up relationships in the field. This is a longer-term selling cycle. And as we talk about from time to time, it's like, you know, whether it's twelve to eighteen months or so, plus or minus, we're starting to see that payoff and with some real exciting opportunities. And we'll see bookings, and we believe backlog will allow us to deliver a pretty good quarter in Q2.

Yeah, Russ. I mean, I would also say too, you know, give you a guide for the year. Everything that we recognized in Q1 was something that was part of that guide. So as Mark said, sometimes the timing can be a challenge to predict. These are really large orders, and they're complex, and the timing of shipments and revenue recognition can be hard to nail down. But good solid execution in Q1. Consistent with the way we were thinking about it for the full year. And moving on to Q2.

That's great. Appreciate the comments from you both. Just one last one from me. Coming away from the SC24 event, which I know Penguin had a notable presence at, to what extent are you delivering or realizing ROI in the quarter and fiscal 2025 from that event in terms of evangelizing Penguin Solutions, Inc. and services in the form of either pipeline build, lead generation, or new customer pilots?

Thanks. I think the last piece is really helpful once you clarify the question. I mean, in terms of actual financial return on the event in the quarter, it's probably not the way we look at it. But to your point, we had a great presence, and the traffic was fantastic at the event. And, you know, I think people are starting to understand the investment we made in a differentiated solution model, which is really a combination of managed services and software on top of hardware. And in some cases, as we did in the back half of 2024, we're winning opportunities that are just really software and managed services as part of a solution. So those conversations and the excitement as the market moves away from what has been really kind of an early-stage infrastructure, you know, deployment of getting, you know, the hardware set up and what have you in terms of pilots and early-stage modeling. I think that you're starting to see more larger-scale deployments in production-ready environments. And that's kind of where we think our value proposition is most valuable. And so I would say that the customer lead generation, the ability to really just tell the story and with more proof points as we were winning more customers in the back half of the year, I think you're starting to see larger enterprises take notice because, you know, again, this complexity we talk about, you know, a lot of times companies think they can do it on their own. And they run into a hurdle, and they come, you know, come back and say, hey, we have hardware. We've got things doing, and we want to learn more about what you bring to the table. And when they get the pain points that we know exist in this complexity of deploying AI, they know they have a trusted partner ready to help them. And so these conversations all in one, you know, location like a super compute is really a great opportunity for us. And we've got some industry awards coming out of that. And just a very powerful thing for us, and we think it's a great investment for us. But from a, like, a quarterly return in the short term, it's hard to kind of make that claim.

Makes total sense. Thank you both.

Thank you.

Thank you. This is your final reminder that if you'd like to ask a question, please press star one. Our next question comes from Madison DePaola with Rosenblatt Securities. You may proceed.

Hi. I just have one question. About Daktronics, is your licensing agreement exclusive, or can you license the technology to other companies?

Oh, well, sorry. That should've we should've made that more clear in my earlier comments. That is just a transaction between Cree LED and Daktronics that's not exclusive. And so that agreement is just between the two parties. We have the ability because we own our own IP, obviously, that we can enforce that IP or license it, whichever, to other parties.

Okay. Great. Thank you, guys, for your question.

Yeah. Okay.

Yes. Yeah.

Thank you very much.

Thank you. There are currently no other questions queued at this time. I will now pass it back over to CEO Mark Adams for closing remarks.

Well, thank you all again for joining us on today's call. This quarter has marked a strong beginning to a year where we can focus on capturing opportunities in AI infrastructure, advanced memory solutions, and high-performance computing. Our investments in hardware, software, and managed services have positioned us to address the rapidly growing demand for AI across on-prem, cloud, and edge environments. With a strong portfolio of innovative products, a strengthened financial foundation, and growing partnerships, we remain confident in our ability to lead in this evolving market.

This concludes today's conference call. Thank you for your participation. You may now disconnect your line.