Penguin Solutions' Q4 2025 Earnings Call: Contradictions Emerge on Revenue Recognition, Advanced Computing Growth, and Hyperscale Customer Relationships

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

Date of Call: October 7, 2025

Financials Results

• Revenue: $338M, up 9% YOY
• EPS: $0.43 non-GAAP diluted EPS, up 18% YOY
• Gross Margin: 30.9%, flat YOY; down 80 bps sequentially
• Operating Margin: 11.6%, up 80 bps YOY

Guidance:

• FY26 net sales expected to grow ~6% YOY, ±10%; H1 ~46% of FY sales (back-half weighted).
• Assumes zero hyperscale hardware revenue and wind-down of Penguin Edge by CY25-end (combined -14 ppt impact).
• Segment outlook: Advanced Computing -15% to +15%; Memory +10% to +20%; LED -5% to +5%.
• Non-GAAP gross margin 29.5% ±1 pp; non-GAAP opex $255M ±$10M.
• Non-GAAP diluted EPS ≈ $2.00 ±$0.25; tax rate 22%; diluted shares ~55M.
• Near-term GM pressure from upfront AI hardware; higher-margin software/services to follow.
• Supply chain constraints and extended lead times noted.

Business Commentary:

* Strong Financial Performance: - Penguin Solutions reported revenue of $338 million for Q4, an increase of 9% year-over-year, and full-year revenue grew 17%. - The growth was driven by a 190 basis point increase in non-GAAP operating margin and a 53% increase in non-GAAP diluted EPS. - The company's strategic focus on AI infrastructure solutions and expanding its customer base contributed to these favorable financial results.

• Diversification and Pipeline Growth:
• Advanced computing revenue for Q4 was $138 million, up 4% sequentially, and full-year revenue reached $648 million, reflecting 17% year-over-year growth.
• The company's HPC AI revenue from non-hyperscalers increased by 75% year-over-year, highlighting progress in customer diversification.

• This growth is attributed to expanding key partnerships, new customer acquisitions, and successful AI infrastructure implementations such as the one with SK Telecom in South Korea.

• Memory Segment Expansion:

• Integrated Memory segment revenue for the fourth quarter was $132 million, up 38% year-over-year, contributing to 30% full-year growth compared to fiscal 2024.
• Growth was driven by strong demand from customers in computing, networking, and telecommunications, as well as promising early interest in Compute Express Link (CXL) products.

• The company's strategic investments in R&D, including memory pooling and CXL, are expected to drive future growth in this segment.

• Strategic Outlook and Challenges:

• Penguin Solutions expects net sales to grow 6%, plus or minus 10%, for fiscal 2026, with a wider range reflecting customer diversification in AI infrastructure deployments.
• The company plans to focus on growing its enterprise customer base, driving innovation across its hardware, software, and services portfolio, and strengthening its balance sheet.
• Challenges include the wind-down of the Penguin Edge business and potential fluctuations in sales due to supply chain constraints and macroeconomic factors.

Sentiment Analysis:

• Management highlighted FY25 strength (revenue +17%, non-GAAP EPS +53%) and expanding AI pipeline, but guided FY26 net sales to +6% ±10% with lower gross margin (29.5% ±1 pp) and no hyperscale hardware. They expect back-half weighting and headwinds from the Penguin Edge wind-down (-14 ppt to growth). Tone balanced: confident on enterprise AI demand and diversification, cautious on near-term margin mix and booking timing.

Q&A:

• Question from Kevin Cassidy (Rosenblatt Securities): Is the hyperscale hardware project over, and should it be removed from forecasts?
  Response: Services continue and relationship remains active, but FY26 assumes zero hyperscale hardware revenue.

• Question from Kevin Cassidy (Rosenblatt Securities): Any participation with SK Telecom’s OpenAI-related activities in Korea?
  Response: No comment on future opportunities; SKT deployment validated rapid large-scale implementation capability and strengthened the partnership.

• Question from Kevin Cassidy (Rosenblatt Securities): The $34.6M SKT filing—when is revenue recognized?
  Response: $34.6M hardware was recognized in Q4; additional services and revenue will occur in FY26.

• Question from Michael Ng (Goldman Sachs): Clarify the 14 ppt headwind and the rationale for exiting Penguin Edge.
  Response: The 14 ppt impact is entirely within Advanced Computing (~28–30% of that segment); Edge is winding down due to two major customers ending prior-generation programs.

• Question from Michael Ng (Goldman Sachs): What drives Advanced Computing growth ex these headwinds and the wide outlook range?
  Response: Growing enterprise/federal/education pipeline and diversification beyond hyperscalers; range is wider due to booking timing and back-half weighting; non-hyperscale HPC/AI grew 75% in FY25.

• Question from Samik Chatterjee (JPMorgan): Why stronger 2H vs 1H, and how do memory pricing moves affect growth and margins?
  Response: 2H strength is mainly from AI compute deals expected to book later; memory price increases largely pass through—boosting revenue but not profit dollars due to value-add model.

• Question from Ananda Baruah (Loop Capital): On an apples-to-apples basis (ex Edge and hyperscale hardware), what does FY26 growth imply?
  Response: Approximately 20% pro forma growth; the 75% FY25 non-hyperscale HPC/AI growth is context, not a direct FY26 extrapolation.

• Question from Rustam Kanga (Citizens JMP Securities): Did SKT show accelerated services attachment versus typical cadence?
  Response: Pattern is consistent: hardware recognized upfront; services/software recognized over time; large deployments drive strong services attach, as with SKT.

• Question from Matthew Calitri (Needham & Company): How do you view AI build-outs and hardware profitability dynamics?
  Response: Enterprise AI is early; capex is expanding; pure hardware models tend to commoditize and compress margins—Penguin focuses on integrated solutions and services.

• Question from Matthew Calitri (Needham & Company): How is Memory differentiated amid tightening supply?
  Response: Differentiation via design, firmware/software, performance and reliability on top of commodity DRAM, yielding value-add margins beyond raw component pricing.