Penguin Solutions Q2 2025 Earnings Call Transcript

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Provided by Quartr
April 2, 2025
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Operator

Good afternoon. Thank you for attending today's Penguin Solutions Q2 Fiscal twenty twenty five Earnings Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I'll now hand the call over to Suzanne Schmidt with Investor Relations to begin. Suzanne, you may proceed.

Suzanne Schmidt
Suzanne Schmidt
Head of Investor Relation 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' second quarter fiscal twenty twenty five 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.

Suzanne Schmidt
Suzanne Schmidt
Head of Investor Relation at Penguin Solutions

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 re domiciliation 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 Relation 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. And with that, let me turn the call over to Mark Adams, CEO. Mark?

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

Thank you, Suzanne. I'd like to welcome all of you to our Q2 fiscal twenty twenty five Penguin Solutions earnings call. We are very pleased with our second quarter financial results. Our revenue was $366,000,000 an increase of 28% compared to the same period last year. Non GAAP gross margins came in at 30.8%.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

Non GAAP earnings per share was $0.52 a 97% increase year over year. We achieved non GAAP operating income of 49,000,000 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.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

As we've mentioned in the past, our belief is that the GPU sales the energy saw in 2023 and 2024 would lead to growth in enterprise deployment in 2025 and 2026. As customers move from proof of concept to full scale AI implementations, we are seeing signs that we have entered the early stages of growth in corporate build outs 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 in the financial, energy, education, federal, consumer and manufacturing sectors.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

Historically, we have sold directly to our end customers. However, we are also expanding our go to market breadth by focusing on developing channel partnerships, which we believe will provide new opportunities for growth longer term. The foundation of Penguin Solutions' success is our twenty five plus year history of deploying large scale complex data center clusters, originating from our early days in high performance computing or HPC. This expertise is integral to our AI infrastructure offering. Our experience, understanding the complexity of how best to integrate advanced technologies such as power, cooling, AI compute, memory, storage and networking enables us to deliver high performance, high reliability enterprise infrastructure solutions.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

As we mentioned at the beginning of our fiscal year '20 '20 '5, we have transitioned from providing a quarterly financial outlook to providing a full year financial outlook. We believe that a full year outlook affords a broader perspective of our business, especially in relation to AI infrastructure, where the timing of actual deployments and associated revenue recognition can be unpredictable. And that aligns well with our emphasis on achieving long term strategic objectives. We also understand that our investors, customers and partners appreciate commentary on our progress each quarter and we intend to offer that as well today. On our Q4 fiscal twenty twenty four call, we forecasted fiscal year twenty twenty five revenue to grow 15% at the midpoint.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

When discussing our full year outlook last quarter, we highlighted that a large advanced computing order would finish shipping in Q2. Due in large part to that shipment, we expect revenue and profits to be more first half weighted when compared to our second half. In light of our strong first half performance, we are raising the midpoint of our revenue outlook for full year fiscal twenty twenty five from 15% year over year growth to 17% year over year growth, which Nate will discuss in more detail later. Let me now provide more detail on our business segments. Our advanced computing revenue for the second quarter of fiscal twenty twenty five was $200,000,000 up 42% year over year when compared to Q2 fiscal twenty twenty four, representing 55% of Penguin Solutions revenue.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

We had some exciting wins at our existing customers and added three new logos in the technology, telecom and media and federal spaces. Our core competency in successfully managing large scale infrastructure deployments helps customers accelerate their time to successful implementation. We believe our customers value our technology agnostic approach to creating a unique overall solution to meet their AI infrastructure needs. As a trusted advisor, we evaluate which technologies would best fit an individual customer requirement. Beyond the technology building blocks, we leverage Penguin's ICE Clusterware and working with our clients to design the optimal software stack to enable a robust platform to manage their infrastructure.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

For many of our key customers, our Penguin services organization will help manage post deployment operations to support continued high performance and availability. We have seen growth in our pipeline during the first half of fiscal year twenty twenty five and remain focused on working to convert these opportunities into bookings over the remainder of the fiscal year and into fiscal year twenty twenty six. Integrated memory is represented by our Smart Modular brand. In our second quarter of fiscal twenty twenty five, integrated memory was $105,000,000 up 26% compared to the same period last year, representing 29% of total Penguin Solutions revenue. Memory is a critical component of our computing, networking and telecommunications customers' platform.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

Large enterprise require higher performance and higher reliability memory to support complex workloads. In line with this increasing demand for improved memory bandwidth and availability, we are executing on new product development plans for our Compute ExpressLink or CXL family of products. We are seeing positive momentum in our customer qualification efforts, resulting in sample orders of CXL from OEMs and AI computing companies, which reinforced our optimism about its appeal to a new type of customer. In addition, in March, Dell added Smart CXL add in card as part of their server configuration option program. We enter Q3 with a strong backlog buoyed by AI related demand, improving market conditions in enterprise memory and more stable inventory levels at key customers in data center, networking and telecommunications.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

Optimized LED operates under the Cree LED brand. In the second quarter of fiscal twenty twenty five, Optimized LED revenue was flat as compared with the year ago quarter, while non GAAP operating margins were up nearly five points comparatively. Q2 has traditionally been a seasonally lower quarter due to The U. S. Holidays coupled with the Chinese New Year holiday and this year was no exception.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

We believe CRE LED's capital light outsource model was a contributing factor to our improved profitability in the first half of fiscal twenty twenty five and will continue to be a competitive advantage longer term. In early Q2, we announced that we entered into a patent license agreement with Daxtronics, a U. S.-based leader in large scale LED displays. Our strong intellectual property coupled with a cost effective operating model has led to some exciting new customer design win activity with larger LED lighting customers in The U. S.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

And Western Europe. As we continue the transformation of Penguin Solutions, our strategic focus on research and development and partnerships will remain critical to our future success. Let me highlight three of our key initiatives and the progress we are making on each of them. First, in early March, Penguin Solutions announced that it has expanded its ICE Clusterware software platform with multi tenancy support, streamlined workflows and enhanced controls. We also announced the launch of ICE Clusterware AIM service, an advanced optimization service that leverages prediction automation to enhance performance, availability, operational efficiency of our customers' AI infrastructure.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

These new software capabilities are compatible with multiple chip vendors such as NVIDIA, AMD and Intel, enhancing our ability to successfully support customers' AI deployments across a broad set of technologies and use cases. Second, in memory, which continues to play an increasingly vital role in AI systems performance, the Smart Modular R and D team is focused on the development of a Smart Modular Optical Memory Appliance or OMA, addressing the need for greater bandwidth performance and availability to support future AI compute requirements. While in our early stage of development, we believe this to be an exciting new market opportunity with first revenues anticipated to be late calendar twenty twenty six to early calendar twenty twenty seven. Finally, in the area of strategic partnerships, our relationships with SK and Dell are also expected to provide new opportunities for longer term growth. We are in discussions with SK Telecom regarding potential collaborations related to their AI strategy, including AI data center infrastructure initiatives.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

In addition, an already strong relationship between SK Hynix and Smart Modular is evolving as we look at ways to address markets not historically served by SK Hynix in custom low volume, high mix segments. Regarding the Dell partnership, Penguin's AI software and managed services are now being able to be sold by Dell's worldwide sales force, expanding our market reach. We're in the process of training Dell sales teams and are seeing favorable early response to co marketing opportunities with large enterprise customers. As part of this relationship, we have also expanded our Origin AI offerings to include Dell servers along with Penguin software and services, which can help expand our customer TAM for future engagements. Combining our unique value proposition with larger go to market companies will remain a priority for us.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

We are evaluating both domestic and international partners who could benefit from working with Penguin Solutions to deliver world class AI infrastructure solutions. More to come on future calls. We've also recently announced that we intend, subject to court and shareholder approval, to redomicile our parent company from The Cayman Islands to The United States. We believe this aligns with our strategic objectives and reflect our increased business and operational focus in The United States. Additionally, before we conclude today's call, I'd like to share some important organizational news.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

After close to twenty five years with us, Jack Pacheco, our Executive Vice President, Chief Operating Officer and President of Integrated Memory has decided to retire at the end of our calendar year. Jack has been instrumental in our company's growth and success, particularly in strengthening our memory solutions business and building an outstanding operations team. We are grateful for Jack's contributions and appreciate his willingness to help with the transition. In closing, I want to thank our global team for the strong results in Q2. We are laser focused on short term execution in Q3, while also expanding our pipeline for longer term growth.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

Our first half results give us the confidence to raise the midpoint of our revenue outlook for the full year fiscal year 2025. Penguin's value proposition of solving the complexity of AI infrastructure for our customers positions us well to address the increasing market opportunity of enterprise AI adoption at scale. Let me stop here and hand the call over to Nate to provide more color on our performance and outlook for the remainder of fiscal twenty twenty five. Nate?

Nate Olmstead
Nate Olmstead
Senior VP & 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 on our website. Now let me turn to our second quarter results. Total Penguin Solutions revenues were $366,000,000 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.

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

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 twenty twenty five, our overall services revenue totaled $64,000,000 up 30% versus Q2 last year. Product revenues were three zero two million dollars in the second quarter, up 28% versus the prior year. Second quarter revenue by business segment was as follows: Advanced Computing $200,000,000 or 55% of our total revenue and up 42% year over year integrated memory, dollars 105,000,000, which was 29% of our total revenue and up 26% year over year and optimized LED, 60,000,000 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.

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

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 $63,000,000 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 $49,000,000 up 85% year over year and up 20% versus last quarter. The combination of top line growth and operating expense efficiencies translated into a 4.1 percentage point increase in operating margin versus Q2 last year.

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

Non GAAP diluted earnings per share for the second quarter of fiscal year twenty twenty five were $0.52 up 97% versus the prior year and up 7% versus the prior quarter. Adjusted EBITDA for the second quarter was $54,000,000 up 61% year over year. Turning to balance sheet highlights. For working capital, our net accounts receivables totaled $330,000,000 compared to $170,000,000 a year ago, with the increase driven by higher sales volumes. Days sales outstanding came in at fifty days, up from forty two days in the prior year quarter due to variations in sales linearity across the quarters.

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

Inventory totaled $200,000,000 at the end of the second quarter, up from $173,000,000 at the end of Q2 a year ago due to higher sales volumes. Days of inventory was thirty seven days, down from fifty four days a year ago, primarily due to the timing of receipts and shipments. Accounts payable were $238,000,000 at the end of the quarter, up from $148,000,000 a year ago due primarily to higher sales volumes. Days payable outstanding was forty four days compared to forty six days last year due to the timing of purchases and payments. Our cash conversion cycle was forty three days, an improvement of six days compared to last year due to faster inventory turns.

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

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 $596,000,000 and $492,000,000 respectively in the second quarter. As a reminder, the difference between gross and net revenue is related to our memory businesses logistics services, which are accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as revenue. Cash and cash equivalents and short term investments totaled $647,000,000 at the end of the second quarter, up $181,000,000 from Q2 last year and up $253,000,000 sequentially. The year over year fluctuation was due primarily to proceeds from the issuance of preferred shares offset by debt repayments for our term loan in fiscal year twenty twenty four. Second quarter cash flows generated from operating activities totaled $73,000,000 compared to $22,000,000 used by operating activities in the prior year quarter.

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

The increase year over year was due primarily to higher net income, faster inventory turns and increased deferred revenues from our services business. Additionally, the prior year included a $29,000,000 payment of contingent consideration as part of the Stratus acquisition earn out. We spent approximately $3,000,000 to repurchase 167,000 shares in the second quarter under our share buyback program. Since our initial share repurchase authorization in April 2022, we have used a total of $83,000,000 to repurchase 4,700,000.0 shares through Q2 of fiscal year twenty twenty five, and we have $67,000,000 remaining in our authorization. We did not make any debt prepayments in this past quarter, and the principal on our term loan remains at $300,000,000 as of the end of the quarter.

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

Our net debt at the end of Q2 was $23,000,000 For those of you tracking capital expenditures and depreciation, capital expenditures were $2,000,000 in the second quarter and depreciation was $5,000,000 And now turning to our outlook. Given our strong first half performance, we are pleased to raise the midpoint of our revenue outlook for the year, which now calls for growth of 17% year over year plus or minus three percentage points. Based on a previously mentioned large advanced computing order that shipped in the first half of fiscal year twenty twenty five, we expect that second half revenues and profits will be lower than the first half. And this expectation is included in our higher overall outlook for the year. By segment, our full year revenue outlook reflects the following.

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

For Advanced Computing, we expect full year revenue to grow between fifteen percent and twenty five percent year over year. For Memory, we expect revenue to grow between 2030% year over year. And for LED, we expect revenue to be approximately flat year over year. Based on strong hardware sales and faster growth in our lower margin memory business, our non GAAP gross margin for the full year is now expected to be 31% plus or minus one percentage point. We expect our non GAAP operating expenses for the full year will be $265,000,000 plus or minus $5,000,000 We are also raising our outlook for non GAAP full year diluted earnings per share, which is now expected to be approximately $1.6 plus or minus $0.10 This is up from our prior outlook of $1.5 plus or minus $0.20 And finally, our non GAAP diluted share count is now expected to be approximately 55,000,000 shares for the year.

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

As a reminder, we are utilizing a long term projected non GAAP tax rate of 28%, which reflects currently available information. While we expect to use this normalized non GAAP tax rate through 2025, the long term non GAAP tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global tax environment, significant changes in our geographic earnings mix or changes to our strategy or business operations. Our outlook for fiscal year twenty twenty five 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 business. 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 and higher tariffs in our LED business. We believe we are continuing to manage our operations in a prudent manner as we navigate a challenging environment while also investing in our long term growth.

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

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 and A.

Operator

Thank you. We'll now begin the Q and A session. The first question is from the line of Dennis Pichonin with Stifel. Your line is now open.

Denis Pyatchanin
Denis Pyatchanin
Equity Research Associate at Stifel Financial

Hi, good afternoon. Thanks for letting us ask questions. This is Dennis on for Brian Chin. Maybe we can start with Advanced Computing. Given the hyperscalers 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?

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

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 our commentary that there'll be other places where we're deploying AI solutions that are complementary to the markets that drove our first half success.

Denis Pyatchanin
Denis Pyatchanin
Equity Research Associate at Stifel Financial

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 deep sick news in 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?

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

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.

Denis Pyatchanin
Denis Pyatchanin
Equity Research Associate at Stifel Financial

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

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

Thank you.

Operator

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

Samik Chatterjee
Samik Chatterjee
Executive Director at JP Morgan

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.

Samik Chatterjee
Samik Chatterjee
Executive Director at JP Morgan

And I have a follow-up.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

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 for the past couple of quarters so to speak.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

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. It's something we'll continue to deal with and we'll monitor relative to any changes. But again, it's like my earlier comments. At this point, we're digesting news like everybody else and we'll adjust accordingly as we need to.

Samik Chatterjee
Samik Chatterjee
Executive Director at JP Morgan

And for advanced computing, sorry?

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

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, lot of our design and manufacturing is in our Newark operation site.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

We do have a 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's kind of the footprint we have for advanced computing and memory.

Samik Chatterjee
Samik Chatterjee
Executive Director at JP Morgan

All right. Good. 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 you're 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?

Samik Chatterjee
Samik Chatterjee
Executive Director at JP Morgan

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.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

Yes. 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 with a lot without a lot of risk because we sense and 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.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

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.

Samik Chatterjee
Samik Chatterjee
Executive Director at JP Morgan

Thank you. Thanks for taking my question.

Operator

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

Alek Valero
Equity Research Associate at Loop Capital Markets LLC

Hey guys, thank you for taking my question. This is Alex 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?

Alek Valero
Equity Research Associate at Loop Capital Markets LLC

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?

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

What was the last piece? I'm sorry, Alex.

Alek Valero
Equity Research Associate at Loop Capital Markets LLC

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?

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

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.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

But yes, 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.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

And I think we'll be able to keep updating people investors on a quarterly basis. But directionally, seem to be very pleased.

Alek Valero
Equity Research Associate at Loop Capital Markets LLC

Thank you for that. And I just have a quick follow-up. So my quick follow-up is on your thoughts around the growing Neoploud opportunity and just Penguin's ability to participate there.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

Yes. I think it's really an interesting segment. You're calling it Neo Cloud. We've called it and by the way, it's probably better said Neo Cloud. We used to call it on our calls Tier two cloud service providers.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

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 getting to data centers. And so with this shortage, a number of companies that 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.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

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've 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 Neo Cloud.

Alek Valero
Equity Research Associate at Loop Capital Markets LLC

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

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

Thanks Alex.

Operator

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

Kevin Garrigan
Research Analyst at Rosenblatt Securities

Yes. 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?

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

Yes. 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 U.

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

S. 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 was really about aligning our operations with the entity structure.

Kevin Garrigan
Research Analyst at Rosenblatt Securities

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?

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

Well, we've said all along that we were on a path for developing these type of products. First of all, 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 twelve months of getting some type of prototypes.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

And in my commentary, I said earlier, revenue probably earliest at the end of calendar '26 and then maybe that leaks into '27 just depending on availability of key parts and products and testing and what have you. So but nonetheless, we think it's 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. 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.

Kevin Garrigan
Research Analyst at Rosenblatt Securities

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

Operator

Thank

Operator

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

Nick Doyle
Vice President at Needham & Company

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 tenancy support. My understanding was that your core business is really focused on single tenants, you know, where their cluster needs to be optimized for their own workloads.

Nick Doyle
Vice President at Needham & Company

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.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

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 Neo Cloud and what we referred to as Tier two cloud service providers.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

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 as skins in the game. So it's not an eitheror 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 segment is there's 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.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

But more often than not it's back to this hyperscale or neo cloud capability requirement from the customer and it's something we really have heard and taken to heart and developed.

Nick Doyle
Vice President at Needham & Company

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? You know, it's not typically a focus on these calls, I think.

Nick Doyle
Vice President at Needham & Company

But how 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?

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

Yeah. Well, 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.

Nick Doyle
Vice President at Needham & Company

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

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

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

Nick Doyle
Vice President at Needham & Company

Okay. Thank you.

Nate Olmstead
Nate Olmstead
Senior VP & CFO at Penguin Solutions

Yes. Thanks Nick.

Operator

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.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

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 twenty twenty five.

Mark Adams
Mark Adams
President & Chief Executive Officer at Penguin Solutions

Thank you and have a great day.

Operator

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

Executives
    • Suzanne Schmidt
      Suzanne Schmidt
      Head of Investor Relation
    • Mark Adams
      Mark Adams
      President & Chief Executive Officer
    • Nate Olmstead
      Nate Olmstead
      Senior VP & CFO
Analysts
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Earnings Conference Call
Penguin Solutions Q2 2025
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