PENG - NASDAQ

Good afternoon, thank you for attending today's Penguin Solutions Fourth Quarter and Full Year 2025 Financial Results. My name is Victoria, and I'll be your moderator today. I would now like to pass the conference over to our host, Suzanne Schmidt, thank you. You may proceed, Suzanne.

Thank you, operator. Good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss Penguin Solutions' Fourth Quarter and Full Year 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 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. Welcome to Penguin Solutions Fourth Quarter and Fiscal Year 2025 Earnings Call. Today, I'll walk through both our Q4 and full year results, providing updates on each of our business segments and sharing how we are positioning the company for long-term growth. Fiscal 2025, the transformational year for Penguin Solutions as we continue to evolve from a holding company structure into a leading provider of AI infrastructure solutions. In addition to delivering 17% top line growth, 190 basis points of non-GAAP operating margin expansion and a 53% increase in non-GAAP diluted EPS, we made meaningful progress positioning the company for long-term success. Key accomplishments included expanding our advanced computing pipeline and adding several new customers to the Penguin Solutions franchise, supporting our ongoing customer diversification strategy, deploying our first international AI infrastructure implementation, developing and expanding key partnerships with NVIDIA, CDW, Insight, and Dell; rebranding the company as Penguin Solutions. Moving our corporate domicile to the United States; closing a $200 million investment from SK Telecom; refinancing our debt to strengthen the balance sheet; and strengthening our leadership team with the appointments of Tony Fry formerly of NetApp as our SVP and Chief Revenue Officer; and Ted Gillick, formerly of Dell, as our SVP of Strategy and Corporate Development. I'll now turn to our financial results for the fourth quarter and full year. We delivered solid fourth quarter financial results. Revenue for Q4 was $338 million, an increase of 9% year-over-year. Non-GAAP gross margin was 30.9%. Non-GAAP operating income reached $39 million, a 16% increase year-over-year with non-GAAP operating margin at 11.6% up 80 basis points. Non-GAAP diluted earnings per share was $0.43, up 18% from the prior year. Our fourth quarter performance rounded out a strong fiscal year. For the full year, revenue grew 17% year-over-year. Non-GAAP gross margin remained steady at 31% and non-GAAP operating margin improved by 190 basis points to 12.2%. Non-GAAP diluted EPS was $1.90, an increase of 53% compared to fiscal 2024. We continue to see signs of broad AI adoption particularly within verticals such as financial services, energy, federal and education. As we've noted previously, our expectation has been that the AI pilot systems deployed across industries in 2023 and 2024, could lay the groundwork for broader production scale rollouts in the years ahead. We're now beginning to see indications of this transition with early-stage corporate build-outs taking shape. Notably, Penguin Solutions was recently selected by a Tier 1 U.S. financial institution to manage an AI infrastructure deployment, the institution's first on-premise GenAI data center implementation. We believe this win reflects the growing confidence enterprises have in our ability to deliver scalable high-performance infrastructure, and we look forward to formalizing this engagement in due course. At Penguin Solutions, we support customers in navigating the complexity of AI adoption by combining deep technical expertise in advanced cluster implementations with a comprehensive portfolio of hardware, software and managed services. We collaborate with customers to design, deploy and operate these environments with a focus on time to revenue performance, availability and long-term reliability. Our solutions are primarily targeted at deployment serving Fortune 500 enterprises, educational institutions, government entities and systems integrators and neocloud service providers. While our go-to-market strategy has traditionally focused on direct customer relationships, we are actively investing in forming strategic partnerships that we believe can expand our reach and open new long-term growth opportunities. Our foundation is built on over 25 years of experience in large-scale deployments beginning with our roots in high-performance computing or HPC. We believe this expertise gives us an advantage in integrating complex AI building blocks such as power and cooling systems, compute, memory, storage and networking. This foundation enables us to deliver the kind of infrastructure that today's enterprise customers need to drive innovation, scale efficiently and stay ahead of the curve in enterprise AI. I'd like to provide additional detail on our business segments. Advanced computing revenue for the fourth quarter of fiscal 2025 was $138 million, up 4% sequentially from Q3. For the full fiscal year, advanced computing revenue reached $648 million, reflecting 17% year-over-year growth. Within advanced computing, our HPC AI revenue from non-hyperscalers increased 75% year-over-year, highlighting progress on our customer diversification strategy. Since our last call, we completed the design, build and deployment of Haien, one of South Korea’'s largest and most powerful GPU as a service systems developed by SK Telecom for the Korea Ministry of Science and Technology as a key element in the country's sovereign AI initiative. We now manage the system on an ongoing basis. We also launched several new AI projects, including with a Fortune Global 500 multinational consumer products company, Fortune 100 federal systems integrator and a Fortune 50 financial institution. This last project is in addition to the win from a different Tier 1 financial institution that I mentioned earlier. We're also pleased with the growth in our new customer opportunities. In fiscal 2025, pipeline, bookings and revenue from new customers grew nicely, reflecting the ongoing demand for our expertise and solutions. As we've noted on prior calls, revenue in this segment can be lumpy with large deployments in one period, not necessarily reoccurring in the next. That said, we remain encouraged by the level of customer interest in our solutions and the long-term growth potential of these relationships. Our core competency in successfully managing large-scale AI infrastructure build-outs helps customers accelerate their time to a live production environment. We believe our customers value our technology-agnostic approach, which allows us to create a unique overall solution that meets their specific AI infrastructure needs. Beyond our hardware building blocks, we continue to invest in our Penguin ICE ClusterWare software, a platform that helps customers manage infrastructure assets. Post deployment, our Penguin Solution services organization can provide ongoing operational support to sustain the high performance and high availability of their systems. Our Integrated Memory segment with sales products under the SMART Modular brand, delivered $132 million in revenue for the fourth quarter and $464 million in revenue for the full fiscal year representing a 30% increase compared to fiscal 2024. This growth was driven by strong demand from customers in computing, networking and telecommunications. We are optimistic about our memory demand in the near term as large enterprises seek out higher performance and reliability memory solutions to support both traditional use cases and increasingly complex AI application. In line with this demand, we are seeing promising early interest in our Compute Express Link or CXL family of products. As customer qualification efforts continue to expand, we believe we are well positioned for growth as adoption of CXL scales. In memory, our R&D investments are focused on next-generation technologies. One key area is memory pooling, which has the potential to significantly expand bandwidth and improve memory capacities in GPU environments. We continue to invest in the design of SMART'S optical memory appliance or OMA, with initial product shipments targeted for late calendar 2026 to early 2027. This new offering will be designed to enable memory scaling of the industry's fastest high-bandwidth memory or HBM, which is today a limiting factor in AI cluster performance and efficiency. With a strong backlog, ongoing technology transitions such as DDR4 to DDR5 and a road map that includes innovations like CXL and OMA, we believe memory will be an important growth engine for Penguin Solutions. Optimize LED under the Cree LED brand. Cree's fourth quarter revenue came in at $67 million, an increase of 9% compared to the prior quarter. Full year revenue was $256 million, roughly flat year-over-year reflecting a combination of secular and macroeconomic headwinds in the LED market. Despite these challenges, we achieved a 250 basis point improvement in non-GAAP operating margin in fiscal year 2025. As we move into fiscal 2026, Cree is focused on capturing market share, operating efficiently, protecting our intellectual property and driving operating profit growth. Fiscal 2025 was a defining year for Penguin Solutions. We took meaningful steps to transform the company and sharpen our focus on becoming a leading provider of AI infrastructure solutions. We believe that these efforts have strengthened our foundation and positioned us well for long-term success. Looking ahead to fiscal 2026, we believe we can sustain our growth momentum with the following strategic priorities; growing our enterprise customer base in AI infrastructure deployments; driving innovation across our hardware, software and services portfolio, to create sustainable differentiation; expanding our strategic partnerships to enhance Penguin's go-to-market efforts; operating with discipline and efficiency to position the company for long-term success; and further strengthening our balance sheet to support investments in scale and new capabilities. In setting these priorities, our intention was to align with the long-term interest of our shareholders, customers and employees. In closing, I want to thank our global team for the dedication and performance in FY 2025. We delivered top line growth, improved profitability, strengthened our balance sheet and expanded the Penguin Solutions customer base. We believe we are well positioned for future success in FY '26 and beyond. Let me stop and hand it over to Nate for a detailed review of 2025 financials and our outlook for FY 2026.

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 available on our website. Now let me turn to our fourth quarter and full year results. In the quarter, total Penguin Solutions net sales were $338 million, up 9% year-over-year. Non-GAAP gross margin came in at 30.9%, which was flat year-over-year. Non-GAAP operating margin was 11.6%, up 0.8 percentage points versus last year, and non-GAAP diluted earnings per share were $0.43, up 18% from last year. For the full fiscal year 2025, total company net sales were $1.37 billion, up 17% year-over-year and aligned with the outlook we initially provided in April and better than the outlook we provided at the start of the fiscal year. Full year non-GAAP EPS was $1.90, up 53% versus the prior year and better than the increased outlook we provided last quarter. In the fourth quarter, our overall services net sales totaled $63 million, up 5% versus the prior year. Product net sales were $275 million in the quarter, up 9% versus the prior year. Net sales by business segment were as follows; in advanced computing, Q4 net sales were $138 million, which was 41% of our total net sales and down 7% year-over-year. For the full year, advanced computing delivered $648 million of net sales or 47% of total company net sales and up 17% year-over-year. Our strong full year advanced computing growth was driven by our HPC and AI business, which grew 34%. Notably, within our HPC AI business, product and services sales to our non-hyperscale customers were up 75% for the full fiscal year. For Integrated Memory, in Q4, net sales were $132 million, which was 39% of total company net sales and up 38% year-over-year. For the full year, memory net sales totaled $464 million or 34% of total net sales and up 30% year-over-year. And in Optimized LED, net sales were $67 million or 20% of total company net sales and up 2% year-over-year. For the full year, LED delivered $256 million of net sales or 19% of total company and down 1% versus the prior year. Non-GAAP gross margin for Penguin Solutions in the fourth quarter was 30.9%, flat year-over-year with margin pressure from a higher mix of integrated memory net sales offset by improved margin rate across all 3 business segments. Non-GAAP gross margin was down 0.8 percentage points sequentially with lower margin rates in advanced computing, partially offset by higher margin rates in both Integrated Memory and Optimized LED. For the full fiscal year, gross margins were 31%, in line with our prior outlook and down 0.9 percentage points year-over-year due to growth in our memory and AI hardware businesses which have lower than company average margins, but are addressing fast-growing market opportunities. Non-GAAP operating expenses for the fourth quarter were $65 million, up 5% year-over-year and up 1% sequentially. Operating expenses as a percentage of net sales were down both year-over-year and quarter-over-quarter, driven by higher net sales volumes and modest spending increases. For the full fiscal year, non-GAAP operating expenses were $257 million, up 1% year-over-year and down 2.9 percentage points as a percent of net sales due primarily to strong top line growth and disciplined expense management. Q4 non-GAAP operating income was $39 million, up 16% year-over-year and up 2% versus last quarter. The combination of net sales growth and operating expense management translated into a 0.8 percentage point increase in operating margin versus Q4 last year. This is our fifth consecutive quarter of non-GAAP operating margin expansion year-over-year. For the full fiscal year, non-GAAP operating income was $168 million, up 39% year-over-year and non-GAAP operating margin improved 1.9 percentage points to 12.2% of net sales. Non-GAAP diluted earnings per share for the fourth quarter were $0.43, up 18% versus the prior year. For the full year, non-GAAP diluted EPS was $1.90 up 53% versus the prior year and $0.05 better than the high end of our outlook provided in July. Adjusted EBITDA for the fourth quarter was $43 million, up 11% year-over-year, and for the full year was $187 million, up 28% versus the prior year. Turning to balance sheet highlights. For working capital, our net accounts receivable totaled $308 million compared to $252 million a year ago, with the increase driven by higher sales volumes and variations in sales linearity across the quarters. Days sales outstanding came in at 51 days, up from 49 days in the prior year quarter. Inventory totaled $255 million at the end of the fourth quarter, up from $151 million at the end of last year due to higher sales volumes and order linearity. Days of inventory was 51 days up from 36 days a year ago, primarily due to the positioning of inventory for shipment early in Q1 FY '26. Accounts payable were $267 million at the end of the quarter, up from $182 million a year ago due primarily to higher sales volumes and the timing of purchases and payments. Days payable outstanding was 54 days compared to 43 days last year due to the timing of purchases and payments. Our cash conversion cycle was 49 days, an increase of 7 days compared to last year due to slower inventory turns resulting from materials positioned for shipment early next quarter. 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 $550 million and $453 million, respectively, in the fourth quarter. As a reminder, the difference between gross and net sales is primarily 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 net sales. Cash, cash equivalents and short-term investments totaled $454 million at the end of the fourth quarter, up $64 million from the prior year and down $282 million sequentially. The year-over-year fluctuation was due primarily to proceeds from the issuance of preferred shares, cash generated by the business and the repayment of our term loan in Q4. The sequential decline was primarily driven by the repayment of our term loan. Fourth quarter cash flows used by operating activities from continuing operations totaled $70 million compared to $12 million used by operating activities from continuing operations in the prior year quarter. The increased use of cash in the quarter versus last year was due primarily to investments in inventory to support shipments at the start of Q1 FY '26. For the full fiscal year 2025, operating cash flow from continuing operations was $113 million, an increase of 8% versus the prior fiscal year. We spent approximately $296,000 to repurchase 16,000 shares in the fourth quarter under our stock repurchase program. Since our initial stock repurchase authorization in April 2022, we have used a total of $113 million to repurchase 6.6 million shares through 2025. Earlier today, we announced that our Board has authorized a $75 million increase in our stock repurchase authorization, bringing our total remaining authorization to $112 million. As mentioned in our Q3 earnings call, in Q4, we completed a refinancing of our existing credit facility. We paid off the $300 million remaining on our term loan using $200 million of cash from our balance sheet and $100 million of borrowings from a new revolving credit facility. This refinancing transaction significantly reduced our leverage, extended our debt maturities and is expected to lower our debt service costs as we reduced our total gross debt by $200 million. Our net debt at the end of the fiscal year was $16 million. For those of you tracking capital expenditures and depreciation, capital expenditures were $3 million in the fourth quarter and $9 million for the full year, and depreciation was $5 million for the quarter and $21 million for the full year. And now turning to our outlook. Coming off a strong fiscal year '25, we believe that our strategy and execution capabilities position us well for long-term profitable growth. For fiscal '26, we are initiating an outlook for net sales to grow 6%, plus or minus 10% versus the prior year. There are a few important assumptions to keep in mind with regard to this outlook. First, as previously disclosed in our annual and quarterly filings, we are in the process of winding down our Penguin Edge business, which is part of our Advanced Computing segment. We expect sales from these Penguin Edge products to essentially cease at the end of this calendar year and have included this assumption in our outlook. While this will result in the phaseout of some profitable business, Penguin Edge has become a smaller portion of our overall portfolio and in the long-term, we do not expect a material impact to our growth trajectory. Second, we believe that we will continue to diversify our customer sales mix and we have assumed zero hardware sales in FY '26 to hyperscale customers as we don't currently have line of sight to such business in this fiscal year. To be clear and importantly, we do expect our hyperscale services business to continue in FY '26, and those sales are included in our outlook. The combined effect of these 2 assumptions in our FY '26 outlook is a 14 percentage point unfavorable year-over-year impact to our total company net sales growth. Last, you may notice that the net sales growth range in our outlook is wider than last year. While we entered this year with a stronger pipeline of AI compute opportunities than last year, we expect our sales volumes to be higher in the second half of the year than in the first half. You will recall that in FY '25, the opposite was true as we had a strong first half of hardware shipments to our large hyperscale customer. That shipment timing led to approximately 52% of our total company sales coming in the first half of fiscal 2025. By comparison for fiscal '26, the midpoint of our outlook assumes approximately 46% of our sales come in the first half of the year. So with our growing base of AI compute opportunities and our expectation of a more back-end loaded year, we felt a wider net sales outlook range was prudent to reflect a broader set of potential outcomes. With that said, our full year net sales outlook reflects the following by segment; for advanced computing, we expect full year net sales to change between minus 15% and plus 15% year-over-year. This outlook includes the Penguin Edge and hyperscale hardware sales impact mentioned earlier. For Memory, we expect net sales to grow between 10% and 20% year-over-year. And for LED, we expect net sales change between minus 5% and plus 5% year-over-year. Our non-GAAP gross margin outlook for the full year is 29.5%, plus or minus 1 percentage point. The decline in gross margin outlook versus FY '25 is primarily due to the wind down of the high-margin Penguin Edge business as well as growth in lower-margin businesses, such as Memory and AI hardware. New AI customer wins typically begin with upfront hardware net sales at lower margin during the implementation phase, and we aim to follow those engagements with higher-margin recurring software and services sales. As a result, we anticipate some near-term gross margin pressure as we engage in initial infrastructure deployments, but we view these upfront investments as an important foundation for durable high-margin growth over time. For non-GAAP operating expenses, we expect a full year total of $255 million, plus or minus $10 million. For non-GAAP full year diluted earnings per share, we expect approximately $2 plus or minus $0.25. Our FY '26 non-GAAP diluted share count is expected to be approximately 55 million shares. Due primarily to changes in the geographic mix of our earnings and benefits from our recently completed U.S. redomiciliation, we are lowering our FY '26 and long-term non-GAAP tax rate to 22% which reflects currently available information. While we expect to use this normalized non-GAAP tax rate throughout FY '26 and beyond, the long-term non-GAAP tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global and U.S. tax environment, significant changes in our geographic earnings mix or changes to our strategy or business operations. Our outlook for fiscal year 2026 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 businesses. 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. Overall, we believe our focused execution, disciplined expense management and balance sheet strength provide a strong foundation for sustained profitable growth. We expect these qualities to support our continued progress as we pursue opportunities to enhance long-term shareholder value. 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&A.

[Operator Instructions] Our first question comes from the line of Kevin Cassidy with Rosenblatt Securities.

Thanks for letting me ask a question and congratulations on the strong fiscal year '25. Thank you for the information about your hyperscale customer. But can you say, is there a project over? And would you say that going forward, we should just take them out of the forecast or should -- are you still active in potential -- more hardware deployments?

Kevin, thanks for the question. We don't look at it like the project's over. We have ongoing services with the customer and still are in discussions for future development opportunities, it's just that in our outlook for the year, fiscal 2026, we don't anticipate any non-service revenue or systems hardware revenue in the year. I'll let Nate comment.

Yes, that's right. I think last year, we entered the year with some visibility to some hardware shipments from the hyperscalers and just wasn't the case this year. So coming into this year, we thought it made sense to just make the assumption that we wouldn't have any hardware revenue from hyperscalers this year. But as Mark said, we continue to have a very good relationship with them and the services revenues continue.

Okay. Great. And also exciting news with the SK Telecom and landing one client with that. And there was a lot of news last week about SK Telecom even being awarded with some business with OpenAI in Korea. Is there any participation availability for Penguin in that relationship?

That's something we can't address or talk to today, Kevin. What I would say is the referenced implementation in our prerecorded material was a great opportunity for the company. It's our first international deployment of significant scale and we went from order to go live in just about 2 months, and it was a significant validation of our capabilities, our rapid deployment framework. And we really value the relationship with SK Telecom, but we're not able to comment on any future opportunities at this time.

Kevin, I'll just add to that. Last quarter, you saw in our filings when we initially booked the deal, it was for hardware. Since then, we've also added services as well. So it's great to see that as part of that transaction and the relationship with SK being strong.

Okay. And maybe just to add on to that a little bit. In the filing, I think it was $34.6 million. Is that -- will that be recognized over the next couple of quarters? Or when does that get recognized?

So we recognize that portion in Q4, but we'll have more in FY '26.

Our next question comes from the line of Michael Ng with Goldman Sachs.

I wanted to just ask about the Penguin Edge and combined impact with hardware and revenue for next year. I think you mentioned a 14 percentage point headwind to revenue growth to the total company. When I do the math, I think that implies a 28 percentage point impact to Advanced Computing, is that the right way to think about it? How would you think about Advanced Computing growth next year, kind of ex these items? And could you just remind us why it kind of strategically makes sense to exit the Penguin Edge business, which I think was about 10% of the segment, but would love to hear your general thoughts there.

Thanks for the question, Michael. I'm going to answer the last part of your question first and then hand it over to Nate to talk about the financial impact and your question on impact of the other elements. It really wasn't a decision that we could stay or not stay. We had 2 clients in our Penguin Edge business that made up a significant part of that business. And as we announced in our filings, we were going through some last time buys and we're winding down the business. And over time, we were just getting better visibility towards the end of our fiscal '25 to what the impact would be in '26. So it wasn't really a choice of should we stay in it strategically or not, it was 2 large customers that we're winding down on a prior generation of a product and that they were not renewing.

Mike. And so I think on your math, you're roughly right. Advanced Computing is about 47% or 50% of total company sales. So that 14 points all sits within Advanced Computing, which means it's about 28% to 30% of Advanced Computing revenue from FY '25.

Great. And if I could just follow up, please. So if the underlying is growing closer to the 30% to 45%, could you just maybe talk about the key areas of momentum for advanced computing that you're seeing for next year, is it just more of those customer wins that you talked about converting into revenue? And maybe just kind of expand a little bit more in terms of the wideness of the range. I know you had made some comments earlier during the call.

Sure. Let me take a shot at that one. When you think about our model, and we've talked about customer diversification for some time, we've done a pretty good job at the launching of going to market resources into a broader set of customers. And those target enterprise customers plus federal opportunities and those in the education sector. When you combine that into a target set of customers for us, we engage with these customers. We bring them the value proposition we have, we try to identify funded projects that would allow us to utilize our capabilities and helping accelerate our customers' AI implementation. Once we get that opportunity to bid on a proposal, or a request for proposal. We delivered that, and that starts the beginning of a pipeline opportunity, and our pipeline is growing. Now pipeline is not a booking, as we all know. But the pipeline opportunities are growing as our, just the number of customers that we're engaged with. And so as you talk about the offset to some of these headwinds, we're continuing to add customers to the franchise and some really notable global brands in their respective industries. And we're excited about the direction we're heading, and we're looking to convert those pipeline opportunities into bookings and eventually revenue.

Yes. I mean I think just building on what Mark said, I think it's part of our diversification of our customer base is what you're seeing reflected in the outlook. And as I mentioned in my prepared remarks, too, 75% growth in the HPC, AI business from non-hyperscalers, I think it's just a really positive that at point for us from FY '25, and we think that we can continue to grow a very fast clip in those customers in FY '26.

Our next question comes from the line of Samik Chatterjee with JPMorgan.

I have a couple, and maybe I'll sort of give you both at the same time. You did mention a better second half compared to the first half. And maybe just if you can dive in towards giving you that visibility with some of your customers? And is it really more coming from Advanced Computing visibility? Or is it more memory-driven? And then just specific to Memory, when you are guiding to 10% to 20% growth. Just curious how much of that is maybe somewhat pricing driven, given sort of what's happened with the underlying commodities here? Or -- and what are the margin implications of what you're seeing on the commodity front -- you feed into your sort of overall systems on the Memory side?

Sure. Let me take the Memory one first. So you're right, obviously, prices are starting to increase. And that affects a portion of our portfolio. It's not all of it. Important to keep in mind that we generally operate in Memory on a value-add basis, right? And so as Memory prices increase, we can generally pass along those price increases, but we don't get additional margin from that. So you would see an increase in revenue, but you would see a decrease in margin rate or really no increase in profit dollars because we operate on this value-add basis. I would say in terms of the outlook, listen, I think I put a little bit of price increase probably into the high end of the range for Memory, but not a lot. We'll see how things play out there. I think currently, we feel good about the backlog that we've been able to build from Memory going into Q1. And we have pretty good visibility, I'd say, into the first half on Memory. You mentioned the second half being stronger than the first half in our outlook. And mostly, that reflects the AI business. Mark mentioned about the strength of the pipeline. And we haven't converted those into bookings yet. And so the outlook really reflects that, where we have a strong pipeline and some good opportunities, some of which we expect to convert into bookings, but they will be booked later in the first half into the second half and expect revenue in the second half of the year.

Our next question comes from the line of Ananda Baruah with Loop Capital Markets.

Yes. I have a couple, if I could. So just going back on the apples-to-apples revenue growth sort of when you back out -- back out the meta hardware and the Penguin Solutions -- or sorry, the Edge business. So is that to say, if it's a 14% impact year-over-year growth, is that to say that apples-to-apples, like on a pro forma basis, you'd really be guiding 20% growth? Should I think about it that way or am I totally off?

Well, let me explain to you this way and see if it makes sense. The 14% of our revenue in FY '25 came from the Penguin Edge business and the hardware from hyperscalers, right? So I haven't included that revenue in the FY '26 outlook. So yes, if you wanted to remove that from FY '25 and have apples-to-apples with FY '26, you would have a calculated growth rate around 20%.

It would be. I got it. And that's helpful, Nate. And then this -- Nate, the 75% growth from non-hyperscale HPC, AI. Can you give us a sense -- I mean, I guess, can we -- I guess you're giving us the bits we can back into that, I guess, is right, with the overall guide? Is that something we can back into or do we need sort of more parts?

You're talking about how much revenue would that generate?

I guess. I think the comment was -- yes, I think the comment was in 2025...

Yes. So looking at Advanced Computing and non -- there's the AI business, HPC/AI business, there's Stratus and there's Penguin Edge. Focusing on the HPC/AI business, which is obviously our strategic focus. Within that, you have sort of hyperscale business and non-hyperscale business and the non-hyperscale portion of that grew 75% in fiscal year '25. I'm just trying to [zero] really on that strategic focus area for us.

Totally. And I guess what I'm wondering is given the guide [indiscernible] you've given us some different businesses for fiscal '26. Are we able to back into what's implied for that growth in fiscal '26? Or is that something that we need more information to figure out with 75%?

Yes, I think we're basically discussing a trend that happened in '25. And what we're suggesting is that with that focus, we're trying to leverage that and build off that to deliver on the plan for '26. I don't think there's an implied association with what happened in the report for the '25 outcome and -- into the '26 number.

Yes. Ananda, I think you can kind of get to a range with data that we've given you. But the other thing I would just add to that is most of the -- the guidance range mostly reflects opportunity in that HPC/AI space for non-hyperscale customers. So that's where we're seeing that pipeline build, right? And so it's a wide range on Advanced Computing because of that. We have visibility to opportunities, but not visibility yet to the bookings. And so I left the range wider for Advanced Computing than I did on LED or Memory, which you see have tighter ranges on the revenue outlook.

And Mark -- actually Nate and Mark, like Nate sort of to the variance that's left in the bookings that drove -- describing the wider range. What would be, I guess, like what aspects of HPC/AI business, I guess, maybe what end markets or aspects would be the biggest add parts of the market that would sort of maybe drive some of the upside? I guess, is it -- yes.

What I would say -- let me just -- I'll try to answer that. The market opportunities that we're seeing the most near-term customer engagements are in the financial sector. The federal sector, which includes both government and federal integrators, there are some education opportunities that are interesting, but also sovereign cloud opportunities. Those are the 4 that I think can drive us to a successful FY '26. By the way, this is -- to fully answer, in addition to that, those markets, I think we mentioned in our script, we've had a new CRO start, Tony Fry, who came over from NetApp, and Tony has already brought on team members to target health care and other verticals organizationally to further enhance that. But in terms of '26 outlook, our pipeline reflects the sectors I talked about being, again financial education, federal integrators and government direct as well as sovereign cloud.

Our next question comes from the line of Rustam Kanga with Citizens.

Congrats on the strong close to the year and great to hear about Penguin's pivotal role in South Korea’s Sovereign AI plans. I just had one follow-up. Nate, it was great to hear you kind of call out that you were able to add the services revenue in such a short period of time after the initial hardware deal. And I think you guys have historically talked about hardware as you lead with the hardware and then services follow on. I'm just wondering, is it too large of a leap to make to say that in this instance, you were able to sort of accelerate the time to services from an initial hardware implementation. Is that something that you're seeing? Or is that just a one-off?

Well, I think it's -- we got to be careful and be clear here. The overall solution, and as it was commented in our recorded scripts, the overall solution contemplates hardware systems, software and services. And the timing of when the revenue gets recognized is different. And so the more hardware oriented deals we take revenue credit on, that's normally upfront in any deployment. The software and services, bookings and revenue is typically ratified. So if we get a booking, that doesn't mean that we get the revenue upfront as you know. The revenue happens over the lifetime of an agreement. And so in this case, like any case, once we install or deploy systems into a data center environment, for example, the hardware gets booked right away, relatively speaking. And we start the clock on software and services that are contracted to and that happens over time. So this wasn't that different than other deployments. It's just that we got both agreements within a certain time frame right after the other.

I think also it's -- listen, each deal can be different than the next. But when we have a large hardware deployments, the value proposition for our services tends to be higher. And so we do tend to see good services attached to those large deployments, and that was the case with SK Telecom.

Our next question comes from the line of Matt Calitri with Needham & Company.

There's obviously no shortage of conversation around AI. And lately, we've heard quite a bit of discourse around how CapEx and revenue seems to be rotating between just a few companies. And then this week, we've had reports out about AMD getting involved in chip shipments with OpenAI and another report today, questioning the profitability of Oracle's GPU strategy. Just curious what your thoughts are on how build-outs are and will progress in this space and what you're seeing in the broader market?

Well, implied in our earlier comments, Matt, is that we still think we're in the relatively early innings of broad enterprise rollouts. If I separate your questions to AMD and OpenAI in that announcement, I think that just goes to show that the capital dollars out building on future large language model training environments as well as inferencing implementations. Again, it's still on the front end, the early end of the market opportunity there. buoyed by enterprise adoption of AI, which is different than the earlier stages that were primarily large hyperscalers making significant investments in their training. We're seeing and we're starting to see a big pickup in terms of enterprise engagements and the pipeline growing there. Now relative to your reference to the GPU gross margin announcement, what -- I guess I would say when you have a lot of people selling the same thing, it tends to get commoditized pretty quickly. And I'm not commenting on today's announcement only. But if you look at the gross margin of the hardware-only companies that are the large OEMs in the business. Their gross margins have been significantly impacted over time. And so that model is not, in my opinion, is not for everybody, for sure. I think it's -- it will get commoditized if you're selling the same basic underlying solution or chip in this case. So I think there are 2 different issues you raised. I definitely think the market is on the early stage of deployments, especially around the enterprise opportunity. And I think the announcement with AMD and OpenAI that was in the press this week, certainly, another good example of the CapEx spending. Today's announcement that you're referring to on the gross margin piece is something that we see when there's large hardware-only type environments and competitors.

That makes sense. Very helpful there. And then as the memory market seems to be heating up here and good commentary from you guys there and guidance there. How are you differentiating your offering there? Or to a certain extent, is it just a matter of who has availability to ship this stuff?

Well -- and Matt, I know you're relatively new to our story from Needham and thanks again for jumping on the call today. Our business is largely is differentiation because we buy our supply of Memory silicon from the likes of SK Hynix and others. And we deliver a value add in terms of a system or subsystem level solution and we get margin above the industry gross margin for the commodity itself being the memory chip. And so we differentiate ourselves both through design and firmware and software and performance reliability. And so those categories are elements of our differentiation allow us to charge more than the industry charges for the Memory itself. And so it's largely a differentiation model if we're not differentiating on the design wins, we're not going to get a lot of them.

There are no additional questions waiting at this time. I would now like to pass the conference back to Mark Adams, CEO, for closing remarks.

Thank you, operator. Our Q4 and full year results validate that we are on the right path, helping our value customers solve the complexity of AI infrastructure. Thank you all for joining today's call.