Penguin Solutions' Q4 2025 Earnings Call: Contradictions Emerge on Customer Strategy, AI/Memory Markets, SK Telecom Ties, and Penguin Edge Exit

The above is the analysis of the conflicting points in this earnings call

Date of Call: None provided

Financials Results

• Revenue: $338.0M, up 9% YOY
• EPS: $0.43 per diluted share (non-GAAP), up 18% YOY
• Gross Margin: 30.9% (non-GAAP), flat YOY; down 80 bps sequentially
• Operating Margin: 11.6% (non-GAAP), up 80 bps YOY

Guidance:

• FY26 net sales growth ~6% ±10% vs FY25; H1 ~46% of full-year sales.
• Assume wind-down of Penguin Edge by end of calendar year and zero hyperscale hardware revenue (services continue), creating a 14-pt drag to total growth.
• Segment outlook: Advanced Computing -15% to +15%; Memory +10% to +20%; LED -5% to +5%.
• Non-GAAP gross margin 29.5% ±1 pp; OpEx ~$255M ±$10M.
• Non-GAAP diluted EPS ≈ $2.00 ± $0.25; diluted share count ~55M; non-GAAP tax rate 22%.
• More back-end loaded year; supply-chain/lead-time constraints considered.

Business Commentary:

* Revenue Growth and AI Integration: - Penguin Solutions reported a 17% increase in top-line revenue for fiscal year 2025. - This growth was driven by expanding advanced computing pipelines, customer diversification, and strategic partnerships.

• Advanced Computing Performance:
• Advanced computing revenue was $138 million for Q4 2025 and $648 million for the full fiscal year, reflecting 17% year-over-year growth.

• The growth was attributed to a 75% increase in HPC AI revenue from non-hyperscalers, reflecting a successful customer diversification strategy.

• Memory Segment Expansion:

• Integrated memory segment revenue was $132 million in Q4 and $464 million for the full fiscal year, a 30% increase.

• This growth was driven by strong demand from customers in computing, networking, and telecommunications, and the promise of emerging technologies like Compute ExpressLink (CXL).

• Operational Efficiency and Margin Expansion:

• Non-GAAP operating income increased 16% year-over-year to $39 million in Q4 2025, with non-GAAP operating margin up 190 basis points to 12.2% for the full year.

• This was achieved through disciplined expense management and strategic focus on key growth areas.

• Geographic and Strategic Shifts:

• The company successfully completed its rebranding as Penguin Solutions and moved its corporate domicile to the United States, facilitating international deployments like the SK Telecom project in South Korea.
• These strategic moves aimed to strengthen its global presence and position the company for long-term success in AI infrastructure solutions.

Sentiment Analysis:

• Management highlighted strong FY25 execution (17% revenue growth, 190 bps operating-margin expansion, EPS up 53%) but guided FY26 to 6% ±10% growth with a lower gross margin (29.5% ±1 pp) and no hyperscale hardware revenue, plus the wind-down of Penguin Edge causing a 14-pt growth headwind and a back-end loaded revenue profile.

Q&A:

• Question from Kevin Cassidy (Rosenblatt Securities): Is the hyperscale hardware project over, and should we remove it from forecasts?
  Response: No hyperscale hardware revenue is assumed in FY26, but services continue and the relationship remains active.

• Question from Kevin Cassidy (Rosenblatt Securities): Any involvement with SK Telecom’s OpenAI news, and how is the $34.6M recognized?
  Response: They won’t comment on OpenAI; SKT deployment validated rapid capabilities; the cited hardware was recognized in Q4 with added services and more revenue in FY26.

• Question from Michael Ng (Goldman Sachs): Does the 14-pt company growth headwind equate to ~28–30% of Advanced Computing, and why exit Penguin Edge?
  Response: Yes, ~28–30% impact within Advanced Computing; Edge wind-down stems from two large customers ending prior-gen programs, not a strategic choice to exit.

• Question from Michael Ng (Goldman Sachs): What drives Advanced Computing momentum and the wide outlook range?
  Response: A growing enterprise/federal/education pipeline drives potential bookings; range is wide due to limited bookings visibility despite strong non-hyperscale traction (75% FY25 growth).

• Question from Samik Chatterjee (JPMorgan): Why back-half weighted, and how do memory pricing and margins factor into guidance?
  Response: Back-half strength reflects AI deals converting later; memory growth includes some price uplift but operates on value-add pricing—price pass-through raises revenue but not profit dollars, pressuring margin rate.

• Question from Ananda Barra (Loop Capital Markets): Excluding Edge and hyperscale hardware, is FY26 effectively ~20% growth?
  Response: Yes, removing those items from FY25 yields ~20% apples-to-apples growth; the FY26 range mainly reflects non-hyperscale HPC/AI opportunity.

• Question from Rustom Kanga (Citizens): Did services attach faster than usual on the SKT deal?
  Response: Pattern is typical: hardware recognized upfront; software/services recognized over time, with strong attach on large deployments.

• Question from Matt Colicci (Needham & Company): How do you view AI buildouts and hardware profitability dynamics?
  Response: Enterprise AI is still early with rising capex; pure hardware tends to commoditize and compress margins—Penguin emphasizes integrated solutions and higher-margin services.

• Question from Matt Colicci (Needham & Company): How is memory offering differentiated amid tight supply?
  Response: Differentiation comes from value-add design, firmware/software, performance, and reliability, enabling margins above commodity memory.