Good afternoon. Thank you for attending today's Penguin Solutions Q2 Fiscal 2025 Earnings Call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. [Operator Instructions] I'll now hand the call over to Suzanne Schmidt with Investor Relations to begin. Suzanne, 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' second quarter fiscal 2025 results. On the call today are Mark Adams, Chief Executive Officer, and Nate Olmstead, Chief Financial Officer. You can find the accompanying slide presentation and press release for this call on the Investor Relations section of our website. We encourage you to go to the site throughout the quarter for the most current information on the company. I would also like to remind everyone to read the note on the use of forward-looking statements that is included in the press release and the earnings call presentation. Please note that during this conference call, the company will make projections and forward-looking statements, including, but not limited to, statements about the company's growth trajectory and financial outlook, business plans and strategy, proposed redomiciliation, and existing and potential collaborations. Forward-looking statements are based on current beliefs and assumptions and are not guarantees of future performance and are subject to risks and uncertainties, including, without limitation, the risks and uncertainties reflected in the press release and the earnings call presentation filed today, as well as in the company's most recent annual and quarterly reports. The forward-looking statements are representative only as of the date they are made and, 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. I'd like to welcome all of you to our Q2 fiscal 2025 Penguin Solutions earnings call. We are very pleased with our second quarter financial results. Our revenue was $366 million, an increase of 28% compared to the same period last year. Non-GAAP gross margins came in at 30.8%. Non-GAAP earnings per share was $0.52, a 97% increase year-over-year. We achieved non-GAAP operating income of $49 million, up 85% from the prior year, and we improved non-GAAP operating income margin to 13.4%, up 4.1 percentage points year-over-year. All in all, our Q2 results demonstrate the progress we are making and the transformation of Penguin Solutions into a leader in high-performance, high-availability enterprise infrastructure solutions. The market for artificial intelligence is growing in the enterprise segment across a number of different industries. Market research continues to reinforce the strategic value of AI to enhance corporate productivity, decision making and customer satisfaction. As we've mentioned in the past, our belief is that the GPU sales the energy saw in 2023 and '24 would lead to growth in enterprise deployment in '25 and '26. As customers move from proof of concept to full-scale AI implementations, we're seeing signs that we have entered the early stages of growth and corporate buildups at scale and are excited for what lies ahead. Penguin Solutions helps customers manage the complexity of AI adoption by leveraging our proven know-how and advanced cluster implementations in the data center, coupled with our differentiated portfolio of hardware, software and managed services. We work with our customers to design, build, deploy and manage these environments with a focus on time to revenue and reliability while targeting the highest level of performance and availability. Our products and services are primarily sold to hyperscalers, cloud service providers and Fortune 500 companies…

Thanks, Mark. I will focus my remarks on our non-GAAP results, which are reconciled to GAAP in our earnings release tables and in the investor materials on our website. Now, let me turn to our second quarter results. Total Penguin Solutions revenues were $366 million, up 28% year-over-year and up sequentially for the fifth consecutive quarter. Non-GAAP gross margin came in at 30.8%, which was down year-over-year and flat sequentially. Non-GAAP operating margin was 13.4%, up 4.1 percentage points versus last year, and non-GAAP diluted earnings per share were $0.52 for the second quarter, nearly double from Q2 last year. In the second quarter of fiscal 2025, our overall services revenue totaled $64 million, up 30% versus Q2 last year. Product revenues were $302 million in the second quarter, up 28% versus the prior year. Second quarter revenue by business segment was as follows. Advanced Computing $200 million or 55% of our total revenue, and up 42% year-over-year. Integrated Memory $105 million, which was 29% of our total revenue and up 26% year-over-year. And Optimized LED $60 million, or 16% of our total revenue and flat year-over-year. Non-GAAP gross margin for Penguin Solutions in the second quarter was 30.8%, down 0.7 percentage points year-over-year, driven primarily by a higher mix of Advanced Computing hardware revenue compared to last year, partially offset by improved margins in Memory and LED. Gross margin was flat sequentially with a higher mix of Advanced Computing hardware sales offset by higher margin rate in both Memory and LED. Non-GAAP operating expenses for the second quarter were $63 million, down 0.2% year-over-year and down 1.4% sequentially. Operating expenses as a percentage of sales were down both year-over-year and sequentially, driven by higher revenue volumes and disciplined expense management. Non-GAAP operating income was $49 million, up 85% year-over-year…

Thank you. We'll now begin the Q&A session. [Operator Instructions] The first question is from the line of Denis Pyatchanin with Stifel. Your line is now open.

Hi, good afternoon. Thanks for letting us ask questions. This is Denis on for Brian Chin. Maybe we can start with Advanced Computing. Given the hyperscaler strength in the fiscal first half, maybe you can talk about which customers or verticals you see driving revenue in the fiscal second half for this segment?

We typically don't forecast that way, but we just kind of suggest that the second half is going to be not driven primarily by that vertical and look to verticals like federal, like financial, energy and the likes. So -- but we don't really forecast, obviously, inter-quarter or that way, especially at the vertical market level. But you can assume embedded in our commentary that there will be other places where we were deploying AI solutions that are complementary to the markets that drove our first half success.

Great. And then for my follow-up. So, it sounds like federal budget uncertainty isn't impacting the government-related projects. But maybe on the topic of economic uncertainty, have you seen any impacts in your engagements with enterprise and cloud customers? Or maybe around this like DeepSeek news and AI capital efficiency? Has that been a topic of discussion for you and customers? Have there been any impact on, like, infrastructure build-out plans related to all of that?

It's pretty dynamic, to be honest with you. So, we're doing our best to reflect what we see in our business today as best we can, but these are a little bit unprecedented times, and I can't -- we can't sit here and say there'll be no future impact. Having said that, current to date we have not had a lot of those conversations.

Great. That's all for me. Thank you.

Thank you.

Thank you. The next question is from Samik Chatterjee with JPMorgan. Your line is now open.

Thank you for taking my questions. Maybe if I can start on the topic of tariffs, and -- I think in your prepared remarks, you mentioned you're including the higher tariffs on the LED segment. But if you can just remind us in terms of the manufacturing footprint for LED relative to Advanced Computing and how should we think about given some of the news on the tape right now relative to tariffs on more wider breadth of geographies, how should we think about the manufacturing footprint there where your sensitivity to the tariffs would be? Thank you. And I have a follow-up.

So, the LED supply chain and manufacturing, the design of which happens primarily in North Carolina, our manufacturing is through partners in Taiwan. And then, we have, of course, our test assembly and phosphor application facility in Huizhou. By the way, we've been in this environment with this business for some time. So, the question around tariffs is something that we've been dealing with over the past couple of quarters, so to speak. And I think that the footprint we're looking at to continue to evaluate longer-term solutions, but it's embedded in our number. Ironically, the gross margin in LED was fantastic for the quarter. So, it's something we'll continue to deal with and we'll monitor relative to any changes, but again, it's like my earlier comment, at this point, we're digesting news like everybody else, and we'll adjust accordingly as we need to.

And for Advanced Computing, sorry?

Advanced Computing, of course, some of the components that we source may or may not be from other regions, but from an integration where we manufacture and build most of our products are built in the U.S. at our Fremont operations facility. And similarly, with SMART Modular, a lot of our design and manufacturing is in our Newark operation site. We do have Malaysia operations that complements the SMART Modular business and some segment of our compute -- Advanced Computing business, which is more of the embedded edge products. But it's primarily that -- that's kind of the footprint we have for Advanced Computing and memory.

Okay. And for my follow-up, I know you've mentioned that you're trying to sort of look at the within a dynamic environment and trying to take the best sort of estimate at this point for the remainder of the year. And you mentioned elevated backlogs as well. But when I think about the revenue forecast for the remainder of the year, particularly when it comes to Advanced Computing, can you give us a sense of how much of that revenue is already part of booked backlog or booked orders related to what is the incremental portion you would have to rely on new orders coming in for the remainder of the year? Just asking from the perspective that given all the changes in the macro, if customers do end up being more cautious about new orders going forward? Thank you.

Yeah. Like we -- again, we typically don't break up our forward-looking forecast into that type of segmentation, so to speak, bookings versus required to get. But I would also say, we've always taken a very conservative approach relative to that because you have to remember, in order for us to ship products in a given quarter, given the supply chain limitations around, specifically AI and broader compute, we have to be pretty close to knowing early in the quarter. So, I think that we do our best and we plan for what we kind of know to be true without a lot of risk because we sense we have risk in the actual lumpiness of the orders and the revenue recognition post-deployment with customers. It doesn't always happen perfectly, which we've talked about on a number of our past calls. So, I would think that the question around bookings as a percentage of -- what we think the number to be, I would just go back on our past performances. We're very mindful of that and are pretty conservative in nature.

Thank you. Thanks for taking the question.

Thank you. The next question is from Alek Valero with Loop Capital. Your line is now open.

Hey, guys. Thank you for taking my question. This is Alek on for Ananda. I actually have a question on SK Telecom. I just wanted to ask about any progress. What's -- how's the sentiment? Are you guys more enthusiastic about the partnership now? And also, if you could possibly provide some insights on SK Telecom's goals and any customers they aim to attract?

What was the last piece? I'm sorry, Alek?

Yeah. The last piece was on, if you could provide any insight on SK Telecom's goals with the partnership, and any customers they aim to attract.

I'm not sure I can answer that last piece. I can't speak for them. But relative to the relationship, we continue to have very good dialogue and we're evaluating ways that we can help in really two parts of their business. One is their AI strategy deployment of infrastructure, of which they have a number of good assets to complement our capabilities, both for their internal needs as well as potential joint customer collaboration. And we're optimistic in our ability to work together and to drive future results. Nothing to announce today, but yeah, good conversations and in my -- I actually had that in my prepared remarks that continues to move favorably. And on the Memory side, we're working closer with SK hynix. Now that has not been a relationship that just started. That relationship has been going on for years, and it's getting stronger and we're helping SK think about reaching markets that historically they have not had on their radar screen cooperatively working with SMART Modular on. So, we're very pleased with the relationship to date. And I think we'll be able to keep updating people -- investors on a quarterly basis, but the directionally, continue to be very pleased.

Thank you for that. And I just have a quick follow-up. So, my quick follow-up is on your thoughts around the growing [neocloud] (ph) opportunity and just Penguin's ability to participate there?

Yeah, I think it's really an interesting segment. You're calling it neocloud. We've called it -- and by the way, it's probably better said neocloud, we used to call it on our calls Tier 2 cloud service providers. It's a really interesting market because there's a shortage in overall AI-ready data center locations. And it's primarily driven around a shortage around the power of getting to data centers. And so, with this shortage, a number of companies, and I mean a large number of these smaller cloud service providers, who have access to megawatts and up through gigawatt type power into data centers. They're kind of repurposing themselves away from legacy businesses, for example, crypto, and they're driving themselves to offer or partner with people to deliver AI in some type of rental GPU market or private cloud, public cloud type business model. And these businesses have been able to get financing to build this out. What they don't have is they don't have the ability to really develop a plan for managing the complexity part of the deployment, which is the design, build, deploy, and manage framework that we deploy. And so, it's really proven to be a very interesting market for us because these older models that they had didn't require sophisticated IT teams. And so, we found it to be a very good market for opportunities for us, and continue to invest in growing our business there and what you're calling neocloud.

That's super helpful. I really appreciate the answer. Thank you, guys.

Thanks, Alek.

Thank you. [Operator Instructions] The next question is from Kevin Garrigan with Rosenblatt Securities. Your line is now open.

Yeah. Hey. Good afternoon, all. This is Kevin Garrigan on for Kevin Cassidy. Thanks for taking my questions. For the first one, we were wondering how moving your domicile from the Cayman Islands to Delaware changes your federal and state contract opportunities and what are some other benefits from this move?

Yeah. Hey, thanks for the question, Kevin. I think the important thing here to consider is really just our goal is to align our current operations with our future plans. If you look at the structure of the company today versus in 2011 when the Cayman entity was set up, things are really much different for us. Our headquarters, substantial number of our employees, the executive team and really the majority of our operational assets are in the US. So, this move simplifies things for us operationally and gets things aligned. In terms of impact for us with federal customers, I don't think that that's really something that we consider. This is really about aligning our operations with the entity structure.

Okay. Great. And then, as a follow-up, just kind of looking at some of the trends in the market, co-package optics is a big buzzword, if you will. So, how do you see this trend kind of changing the need for your memory solutions?

Well, we've said all along that we were on a path for developing these type of products. First of all, the requirements for AI and memory only keep getting more demanding, if you will. And the co-packaged optics, as you refer to it, is definitely on our roadmap. We've made an investment in a partner who we're collaborating on and designing this optical memory appliance that we've referenced. And while it's early, and it is, we are super excited about this opportunity and our conversations with customers on design and eventually out into the next 12 months of getting some type of prototypes. And in my commentary, I said earlier, revenue probably earliest at the end of calendar '26 and then maybe that leaks into 2027 just depending on availability of key parts and products and testing and what have you. So -- but nonetheless, we think it's a brand new category. We're in great shape with it. We're able to leverage a lot of our capabilities, both on the design side and the customer collaboration for testing and evaluation. So, super exciting and we think it is revolutionary in terms of enhancing the bandwidth and performance that future compute requirements are going to drive on memory for AI in the future.

Okay. Perfect. I appreciate that color. Thanks, guys.

Thank you. The next question is from Nick Doyle with Needham & Company. Your line is now open.

Hey, guys. Thanks for taking my questions and best wishes to Jack on his next steps. You talked about this software platform expansion, the new ICE ClusterWare and one of the new features discussed was multi-tenant support. My understanding was that your core business is really focused on single tenants, where their cluster needs to be optimized for their own workloads. So, my question is, does this new multi-tenant support signal, an openness to support a CSP type customer more than the enterprise customer that you talked about? Thanks.

Hey, Nick. Thanks for the question. It's a good question. I would think it's more additive. And one of the earlier questions, I think it was from Alex from Loop, talked about neocloud and what we referred to as Tier 2 cloud service providers, we keep running into companies who are deploying different models to help build out and have these revenue models that in some cases multi-tenancy is a given and you have to have it. It's skins in the game. So, it's not an either or proposition. It's just that with the evolution of some of our key customers, new additions to the portfolio of customers we have, multi-tenancy is a key feature. And even in the enterprise, you can make an argument for how that segmented. There is some applicability, but more than not, it's in the cloud service providers. And when I say the enterprise, it could be a private cloud where they're using it internally for some reason in a segmented way. But more often than not, it's back to this hyperscale or neocloud capability requirement from the customer, and it's something we really have heard and taken to heart and developed.

Makes sense. It sounds like you're just kind of listening to your customers and building what they need. So, the deferred income had a really big jump. Can you talk more about that line item? It's not typically a focus on these calls, I think, but how should we think about these getting recognized? I know you talk about services contracts are typically a year or so. Yeah, so how should we think about that?

Yeah, well, you got it right. So, the deferred revenue line really relates to our services business. And so, what you see there are some customer renewals, which often happen early in the calendar year or at the end of the prior calendar year. And so that's what you see driving the increase this quarter.

And it would make sense that it's more -- it's around a year. I mean, can these extend to two, three, five years?

It does vary. I think one year is typical, but we do see some that extend further than that more probably to the three year time period.

Okay. Thank you.

Yeah. Thanks, Nick.

Thank you. There are no further questions in queue. I'd like to turn the call back over to Mark Adams, CEO, for closing remarks.

Thank you, and thank you all for joining today's call. As we close, I want to reflect on the progress we have made in the fiscal year-to-date. The first half has demonstrated our ability to execute our strategic priorities while delivering strong financial results. Our investments in hardware, software and services have positioned us to address the rapidly growing demand for AI infrastructure on premise, in the cloud and at the edge. With a growing portfolio of innovative products, a focus on leveraging strategic partnerships and expanding go to market strategy, we remain optimistic about our ability to lead in this evolving market and meet our revised growth plan for fiscal 2025. Thank you and have a great day.

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