Good afternoon. Thank you for attending the Penguin Solutions Third Quarter Fiscal Year 2025 Earnings Results Conference Call. My name is Cameron, and I'll be your moderator today. All lines will call with request like to ask question. Press 1. Telephone And I would now like to pass the your host, Suzanne Schmidt. Investor relations Thank you, operator.

: Good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss Penguin Solutions' Third 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, and existing 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 report. 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 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 the 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 third quarter of fiscal 2025 Penguin Solutions earnings call. We are pleased our Q3 financial results. Our revenue was $324 million, an increase of 7.9% compared to Q3 of fiscal year 2024. Non GAAP gross margins came in at 31.7%, Non GAAP diluted earnings per share was 47¢, a 25% increase year over year. We achieved non GAAP operating income of $38 million, up 15% from the prior year and we delivered non GAAP operating income margin of 11.9%. All in all, our Q3 results attest to our progress in transforming Penguin Solutions into a leader in high performance, high availability, enterprise infrastructure solutions. We continue to see signs that early stage enterprise AI adoption across vertical markets such as financial services, energy, defense, education, and neo cloud segments. As we have mentioned in the past, our belief is that the investment of AI powered systems deployed throughout the industry in '23 and '24 would lead to growth in full production installs in 2025 and 2026. We are now seeing signs that we have entered the initial stages of that growth in corporate build outs at scale. Payment Solutions helps customers manage the complexity of AI adoption by leveraging both our proven know how and advanced cluster build outs and our 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 also targeting the highest level of performance availability. Our products and services are primarily marketed to hyperscalers, Neo Cloud service providers, and Fortune 500 companies. Historically, we have sold directly to our end customers. However, we are also investing in channel partnerships that we believe will provide…

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. Let me turn to our third quarter results. Total Penguin Solutions net sales were $324 million up 7.9% year over year. Non GAAP gross margin came in at 31.7%, which was down year over year and up sequentially. Non GAAP operating margin was 11.9%, up 0.8 percentage points versus last year, non GAAP diluted earnings per share were $0.47 for the quarter, up 25% from Q3 last year. In the third quarter of fiscal 2025, our overall services net sales totaled $66 million down 3% versus Q3 last year. Product net sales were $259 million in the third quarter, up 11% versus the prior year. Third quarter net sales by business segment were as follows: Advanced computing, 132 million or 41% of our total net sales and down 9% year over year. Integrated memory, $130 million, which was 40% of our total net sales and up 42% year over year. And optimized LED $62 million or 19% of our total net sales and down 4% year over year. Non GAAP gross margin for Penguin Solutions in the third quarter was 31.7%, down 0.6 percentage points year over year driven primarily by a higher mix of integrated memory net sales compared to last year, partially offset by improved margin rate in integrated memory and optimized LED. Gross margin was up 0.9 percentage points sequentially with higher margin rates in advanced computing, partially offset by a higher mix of integrated memory net sales. Non GAAP operating expenses for the third quarter were $64 million up 1% year over year and up 2% sequentially. Operating expenses as a percentage of net sales were…

We'll now begin the question and answer session. If you would like to ask a question, please press star followed by 1 on your telephone Again, to ask a question, press star 1. And as a reminder, if you are using a speakerphone, please remember to pick up your hand before asking a question, and we will pause here briefly as questions are registered. The first question is from the line of Kevin Cassidy with Rosen Securities. You may proceed. Yes. Thanks for taking my question. Congratulations on the good results. And in particular, the five new customer booking I wonder if you could give us a little more details on that. Are these you know, customers that you got through partnerships maybe how long have been working on booking these new customers? And is it software and services? Or hardware or both? Maybe just a few questions about that. Hey, Kevin. Thanks. It's Mark. Let me see if I can break this down for you. The length of these sales motions typically are in the twelve to eighteen months range from the time we engage a customer to the time we ship, and the and the bookings kinda come somewhere around the twelve month mark. And I would say, some of the some of the new bookings were kinda along that framework. And you asked specifically about software and services relative to hardware. And we've mentioned on previous calls that the hardware is typically something that we recognize revenue upfront And the way software and services that category is recognized as more ratified over time And so when we get these bundled solutions, so to speak, these integrated solutions of hardware, software, and services, they typically are hardware upfront and have characteristics of being lower margin in nature. And then software and services come to us over time. And that's consistent with some of our more recent bookings.

Okay. Great. And maybe you said a little bit about the SK Telecom collaboration. It's coming maybe generating new customers. Can you talk more about where where you're seeing that? Which geographies or what Yeah. Absolutely. You know, at the time, of the investment when we closed it back in December, of '24, we highlighted that this was really a relationship that was transcending the financial investment element of it. And we were excited about working with SK and more specifically SK Telecom and SK Hynix. We've had some early wins on the memory side. And we look look forward to broadening that relationship with Hynix over time. More system related products, and helping enable some of their memory technologies to new application environments We've talked about higher bandwidth opportunities like the OMA we mentioned. But we've actually had some early success on business opportunities Hynix to date. We are making really good progress with SK Telecom as well. We are certainly very optimistic about the opportunities ahead with them in terms of AI data data center infrastructure solutions. By the way, the efforts that we have there are really global in nature, not just domestic, but also in other parts of the world. And you know, we're, again, we're pleased about the progress we're seeing on their on their AI data center initiatives. We're exploiting multiple joint opportunities with with them. So overall, the relationship with SK is positive. And we're pleased with the progress.

Okay. Great. Thanks for answering the question. The next question is from the line of Tom O'Malley with Barclays. You may proceed.

Hey, guys. Thanks for taking my questions. My first is on the memory side. I think that's the one segment that you're actually taking a bit higher for the full year. You saw some strong growth in the May. August for your full year guidance in implied kind of down in the mid single digits range. Can you kind of talk about the dynamic of potential pull forwards if we look at some other companies in the in the ecosystem you've seen some really strong consumer demand. Most recent quarter, you didn't call that out. You kinda called out a broad breadth of strength, but do you know if you're seeing any pull forwards? Are you protecting against that with the guide in August? Any color there would be helpful.

Sure. And Tom, I think just one correction. I think if you said that memory was the only one that was growing in the year, Did I misunderstand?

No. The you raised memory from, I think, prior your your range for the full year, I think, moved a little higher from 25 to 33. You took that up a little bit.

Right. Okay. Yeah. And advanced computing is up the range, I guess, it's 15 to 25%, I believe. So on the memory side, we are not seeing any necessary pull forward, so to speak. As we commented on the back in the fall, there was some inventory that we were working through. And this quarter, I think we were, you know, really pleased with the growth opportunities as people started to to get back in ordering. But we don't don't see any significant inventory builds or what have you. And yeah, we watch that from a customer discussion standpoint on on their ordering patterns and what their requirements are and their forecasts. And our pipeline in Q4 remains pretty healthy. So we're generally very pleased with the direction of the business. Overall.

Helpful. And then and then on the advanced computing side, you know, historically, are big projects, big customers. They tend to slide around one to two quarters, which is, you know, why I think the full year guidance is is useful. But when you look at the fourth quarter, is the big acceleration again a timing of an order or are you seeing kind of broad based strength across different customers kind of implied in your full year guide as a nice mid teens gross Into the August. Just trying to understand what's contributing to that strength in Q4.

You know, we're doing as we mentioned, we're, you know, we're seeing some some uptick in terms of bookings some of which will be looking to recognize revenue through deployments by the end of the quarter But this quarter, isn't necessarily one major deployment. That's not what we're suggesting. We've got a little more diversity in the quarter, although, I'll let Nate talk to a specific outlook. But this quarter is not Like we commented on in in in Q2. Earlier in my script. This is more a number of customers. And, again, run into a situation where the bookings come at a certain time, our supply chain goes out and and acquires accordingly. And we look to install, and and it's really done at the customer and our pace relative to the business. We do with them and not necessarily to the end of a fiscal quarter. So, you know, this is this is where we run into that same you know, lumpiness in terms of revenue. Having said that, as I wanna reinforce, it's not about one customer per se. A little more diversified

The next question is from the line of Samik Chatterjee with JPMorgan. You may proceed. Hey, guys. Thanks for taking my question. Maybe if I can start on advanced computing and talked about sort of the deployments for fiscal four q not being driven by like, one lumpy deployment, but more broad based. But can you talk about the mix a a bit in terms of what what you seeing in those incremental deployments? And I know you've talked about the new cloud opportunity, but, any sense in that you can give us in terms of what you're incrementally seeing in the mix sort of rotating more towards the new clouds? Or any more visibility as you look forward into that? And I have a follow-up. Thank you.

Sure. I think as I commented on earlier in my prepared comments, we've seen, in addition to NeoCloud, we've seen some strength in federal and energy had a win in biotech, and we're seeing a lot more inbound signals relative to interest in the financial sector as well. Those are kind of the top segments that we're playing in today.

Got it. Got it. And then maybe on the sort of I know it's too early to talk about the next fiscal year, but when you think about sort of the new customers that you've signed up, that you talked about, the five new customers as well as opportunity that you're now seeing in the pipeline. Just help us think about maybe from a fiscal twenty six perspective for advanced computing, what should we keep in mind relative to fiscal twenty five, the growth rate that you have in that sort of 15 to 25% range? How should we think about what are the puts and takes for fiscal twenty six?

Yeah. Unfortunately, we're not providing any of that guidance today. It's just it's too dynamic an environment. All the puts and takes. There's a number of factors that you know, that we we and other companies are dealing with right now, you know, one good example is the tariff situation. And how how dynamic that changes over time. Certainly, you know, very happy and proud of the way the team navigated that in Q3. And delivered strong results. But we're gonna we're gonna stop from commenting on FY '26 in any way, shape, or form today.

Okay. No. Appreciate it. Thank you. Thanks for taking the questions.

The next question is from the line of Nick Doyle with Needham. You may proceed.

Hey, Thanks for taking my questions. First, could you give any details on the CDW agreement or partnership just maybe talking about how that approach is different than with Dell and if you expect any kind of, you know, similar contributions or or type wins in in fiscal twenty six? Thanks.

Sure. Again, we're gonna sorry, Nick. We're gonna hold up on any '26 commentary. But the framework that we're working on right now is we're starting to invest in partnerships outside of our direct customer engagement. And you've mentioned two of them today. The idea being that we can scale to a larger set of customers through some of these partnerships and really focus on our value add we've seen some early proof of concept success stories in in both both partners that you mentioned. But, again, it's early stage, and it's it's the right thing for us to be thinking about as we expand not just in terms of customers here in The US, as we think about a broader go to market internationally.

Got it. And for my second question, services revenue grew quarter over quarter while overall advanced compute declined sharply. So was that driven more by these point in time services, or did those larger hard wheel hardware deals in the first half translate to this, you know, kind of slower, steady revenue growth that we saw this quarter?

I think that it's a mixture of everything, what you just said. It is a mixture of mixture of you know, service revenue ratified over time and recognized over multiple periods, so to speak. And you know, the mix of hardware in Q3 was lower than Say, Q2. And so the combination of that contributes to the service mix services mix You know, as you know, we we we recognize services the way we do, but they are renewed annually And then in the middle of the fiscal year, if we get a new order, we begin that recognition at the time of a of a shipment slash signed order for those services. And so that's a positive. And we continue to try to add to that quarter to quarter. Thank you.

Brief reminder, 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 1. And as a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. The next question is from the line of Brian Chin with Stifel. You may proceed.

Hi. This is Dennis on for Brian. Thanks for taking our questions. My first one is on advanced compute. So for the five new customers that you won, are you expecting any change in the hardware and software mix proportions over the life of these customers?

Well, typically, what happens or you know, what we've seen happen with our customer engagements with, with new customers is, again, the revenue recognition for the new customers up front is hardware related. Just because that's what we install and that's what we design a solution for. And then our services and software mix happens over time. Now we've had a number of instances where customers increased the footprint of their rollout or of their implementation. And that can be a time when they actually order more hardware along the way. But, typically, the the the flow of revenue recognition and type of product is hardware early on in the cycle of a new customer acquisition, and soft software and services over time. And we continue to try to be very disciplined and making sure that we're not doing any hardware only deals. As you all can see from our competitor announcements, without being specific. The hardware market itself is super competitive from a margin standpoint. And quite frankly, I think our value add is is in the services area, in the software and services that we offer our customers. And you know, of course, our hardware is best in class from a design and performance standpoint. But the hardware market tends to be lower in gross margin And thus, we we tend to propose and and look at our business from a solutions mindset, not into any one component of hardware only sales.

Would you say that the majority of this 66 million of software services sales comes from advanced computing, or is there a good bit from the other segments too?

Oh, a majority of the services like, a a healthy majority. I'll let Nate see if he can give me the actual number here, but the majority of services is all advanced computing. Yeah. The great majority. Got a little bit in memory. It's certainly mostly advanced compute.

Great. And then for my second question now, so for memory, could you discuss the strength in this quarter from a product in the vertical perspective? And, like, how does the strength in DRAM pricing impact your memory gross margins? And maybe you could also talk about the like, the attach rate of your memory products to your advanced computing products.

Okay. So the first the pricing in DRAM has been relatively stable in the quarter. What I would say is the memory gross margin question ironically, when memory pricing goes up, the gross margins are impacted slightly. In a negative way because DRAM then becomes a higher percentage of the whole value add that we give but it's just a directional trend, but the the mix of products and the unit growth was substantial as well in the quarter, which led to a combined high growth quarter in memory. On the attach rate, we continue to work and use smart modular and the Penguin platform that we do sell. And we're continuing to develop on new products that we think will be very valuable in terms of the AI ecosystem as we've talked about CXL, and our optical memory appliance development. Which is a long term initiative for us. To help provide better memory, advanced memory solutions for advanced workloads. So it is a it is a priority of ours, and we do a good job on the Penguin systems itself. And we're looking to develop more sophisticated, higher bandwidth memory and products going forward. That's it for me. Thank you. Thank you.

For our for our last question, we have a follow-up from Nick Doyle with Needham. May proceed.

Hi. Thank you. Just kind of a bigger picture question. We're hearing about this idea of production inference. And and I think that really requires us truly tier one grade high availability you know, server solution. So if you take out the hyperscalers, just because that's not where you generally play, how much market capacity today is operating at that level and and kinda ready to service production inference and, you know, how much is left where where you guys can go in and really increase that utilization, get the the high availability ready to go. Thanks.

Nick, I'm not sure I totally understood your question. We have a high availability edge server platform that we use. We've talked about developing products for inferencing over time. In the data center, you know, we're starting to see more of the trend line to be a hybrid training and enforcing demand thesis, but I'm not sure again if I'm quite getting your question. Can you restate it?

Yeah. Just pointing out that when guys wanna do this kind of production level inference, there's this thinking that it really requires high availability versus more traditional cloud. And and to do that, you know, you need a a higher level server, and and that's what you guys can provide. So maybe the market just isn't there, and then you can kinda help the market move towards a solution that you know, works for everybody and wondering how much Great.

Got it. So I understand. I apologize. I misunderstood because we when you said inferencing, I initially went to our Edge platform and what we're trying to build for future Edge implementations. But in the environment you're talking about, you're exactly right. There's and by the way, that's a lot that has to do with our software and services. That we provide to be able to make sure that not only is the design performance we get upfront in our systems critical, it's also the availability and uptime through diagnostics and fault repair capabilities in the data center allow us to have the maximum uptime, and that's a really critical metric when you think about the capital investments into AI infrastructure making sure people have high reliability, high availability, along with the high performance and quite frankly, when you come from a high performance compute background like us, we've seen the levers that allow for the the most optimal performance in a data center. And I think that has played well and will continue to play well for us as true enterprise rollout production environments for inferencing. Thanks, Mark. Thank you.

That concludes the Q&A session. I would now like pass the conference back over to Mark Adams, the CEO, for any closing remarks.

Thank you, operator, and just in closing, we are pleased with our results through the third quarter. On today's call, we reconfirmed the midpoint of our revenue guidance, which we raised to 17% on our last call. And we raised today our earnings per share guidance range for fiscal 2025. We have strengthened our balance sheet and remain committed to our long term investments, in hardware, software and services positioning us to address the rapidly growing market demand for AI infrastructure solutions on premise, in the cloud, and at the edge. Thank you all for joining today's call.

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