Penguin Solutions, Inc. Q1 FY2026 earnings call

• CEO Mark Adams mentioned Q1 revenue was $343 million, up 2% sequentially and 1% year-over-year. Non-GAAP gross margins were 30%, non-GAAP operating income was $42 million, and non-GAAP diluted earnings per share was $0.49.
• Advanced Computing had revenue up 9% sequentially, with new customer bookings in Q1, pipeline expanding into new sectors, and ongoing discussions with sovereign cloud customers.
• Integrated Memory had revenue up 41% year-over-year, strong demand for memory portfolio, early development of CXL solutions, and investment in OMA.
• Optimized LED had revenue down 18% sequentially, but operating income increased 24% sequentially. The company is streamlining structure, sold stake in Zilia Technologies, and focuses on partnerships and customizing ICE platform.

In the first quarter, Advanced Computing achieved revenue of $151 million, which was 44% of total company net sales and down 15% year-over-year. Excluding Penguin Edge and hyperscale hardware net sales, Q1 2026 advanced computing net sales grew 52% year-over-year. Integrated Memory recorded $137 million of revenue in Q1, which was 40% of total company net sales and up 41% year-over-year. The Optimized LED business generated revenue of $55 million in the first quarter, which was 16% of total company net sales and down 18% year-over-year.

• Confirm full company net sales and non-GAAP diluted EPS outlook, midpoint calls for 6% net sales growth and $2 of non-GAAP diluted EPS.
• Advanced Computing: full year net sales expected to change between -15% and +15% year-over-year.
• Memory: net sales expected to grow between 20% and 35% year-over-year.
• LED: net sales expected to decline between -15% and -5% year-over-year.
• Non-GAAP gross margin outlook for full year is 29% ±1 percentage point. Non-GAAP operating expenses expected $250 million ±$10 million. Non-GAAP diluted earnings per share still expected approximately $2 ±$0.25.

• Global macroeconomic environment and ongoing supply chain constraints, especially affecting Advanced Computing and Integrated Memory businesses with extended lead times for certain components impacting project ramping and order fulfillment.

Q: A few questions. Maybe just first with the maintaining the outlook, although changing the components a little bit. Firstly, first half -- fiscal first half versus fiscal second half guidance, I guess does that suggest that the February quarter revenue is down maybe low to mid-single digits? And kind of which of the segments is driving that sequential decline? And then also for the full year, raising the memory revenue growth to 20% to 35% year-over-year. But certainly, pricing should be a favorable tailwind. Curious if there are any kind of challenges or constraints shipping product given sort of how constrained some of the memory wafer supply is at the moment?

A: Brian, thanks for the question. I'll take the first end of it, and then I'll hand it over to Nate. There's two implications to the kind of forward-looking assumptions. To speak to the memory one, we continue to do a fairly good job navigating the supply constraints you're alluding to, and that allowed us to think through kind of how that business should perform going forward. And so we haven't seen anything material impacting that business and which allowed us to kind of get more granularity on the forward-looking projection, so to speak. On the Advanced Computing piece, and we'll talk about some of this through the call. But when we're winning these new customers, there's a process of kind of getting the award. And then since they're new customers, in many cases, we have to negotiate a master agreement, and then from there that gets converted into a purchase order. There's just more timing involved in new customers. Now the exciting news is we are winning more new customers, but the predictability gets a little bit tougher for us in a given quarter, so to speak. And that's where, I guess, we're a little bit more cautious. I would say just -- we talked about an award with a major financial institution last quarter. I'm happy to announce that we've signed that agreement, and we expect the PO here shortly this week or worst case next. I can also tell you that we have the same -- we have a major new oil and gas customer that we've also signed a master agreement with and expecting a PO in here shortly as in the next week or so. And so as we go through that, the timing of then getting the POs in the system and then going out and sourcing components and staging the equipment, all of that becomes just tougher for a first-time customer in the model. And that's where you may sense a little bit of caution as we think about our Q2 and even back half guidance to when things will hit. Nate?

Q: This is MP on behalf of Samik Chatterjee. So, firstly, I wanted to ask about the enterprise engagements, like you have been talking about the shift from hyperscalers towards then enterprises deploying for pilot programs and then towards broader enterprise-wide applications. Can you please help us understand like what exactly are you seeing, which is helping you see clearly mark that trend out? And then other than that, I wanted you to double-click a bit on your diversification efforts.

A: Sure. Let me start with your first question. If I look back over the last three or four years, most of the capital expenditure dollars of massive -- of large-scale deployments was in the area of large language model training at large hyperscalers for the most part, okay? I don't want to be universal in saying 100%, but a majority of the spend that we saw was in a very consolidated set of customers. And if you want to triangulate that data with what's going on in the market, look at where NVIDIA was selling their GPUs as an example, you'll see that their major customers were consolidated to a few large hyperscale type environments. We saw the same thing. I'd say over the last 6 to 12 months, we've seen the beginning of an evolution where enterprise opportunities are accelerating in terms of just raw volume of enterprise opportunities. And I would say the capital behind that and the planning for future growth and expansion in our customer relationships in the enterprise back that up. And so it's really been an evolution, a shift from early-stage large language model training to corporate enterprise rollout. And just based on our own pipeline activity, but also just raw market data in terms of where the products are going, we're fairly bullish on the enterprise environment as well we are on these larger sovereign AI deals. The combination of that makes us feel pretty strong on our pipeline development and diversification efforts.

Q: This is Matt Calitri over at Needham. Last quarter, you noted an inventory increase to support shipments at the start of 1Q FY '26. And while inventory declined sequentially, it still remains elevated. How should we think about inventory levels as a leading indicator for future shipments? And how is your visibility into the remainder of the year?

A: Yes, you're right. Last quarter, we exited the quarter with some inventory. That was both in memory, where the price increases, when the prices go up, you're going to see that reflected in inventory. The cost of the goods goes up. And we also had some shipments in advanced computing, which shipped early this past quarter in Q1. So I think inventory being higher than where it was a year ago is not surprising given that the overall business is larger, especially in memory. It was up 41% year-over-year. But if you look at the inventory days or the inventory turns, they're in a very healthy position. So certainly no concerns there. returning inventory quickly. Our business model is not one where we're buying really ahead of orders. We're buying to orders rather than to forecast generally. Now in today's constrained memory environment, we'll look for opportunities where we can secure some supply to take some risk off the table, and we have a strong balance sheet that we intend to put to use if the opportunity is out there for us to do that.

Q: This is Maddie calling on behalf of Kevin Cassidy. I was just wondering, given the recent Marvell acquisition of Celestial AI and just a broader shift towards optical fabrics, are you seeing any change in optical memory and related technologies?

A: I wouldn't say we're seeing any changes. I think it's a strong validation of the market opportunity, broad macro opportunity. People are definitely looking at this dynamic of enhancing the bandwidth performance between memory and GPU/CPUs. So when I think about an established company like Marvell making such an investment that's publicly been announced, I -- it makes me feel good about the direction and the strategy that we're deploying here in developing that type of system-level product in memory.