Q2 2025 Penguin Solutions Inc Earnings Call
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Operator: Good afternoon. Thank you for attending today's Penguin Solutions Q2 Fiscal 2025 Earnings Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
Speaker Change: Good afternoon. Thank you for attending today's Penguin solutions Q2 fiscal 2025 earnings call.
Speaker Change: All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end if you'd like to queue for a question on today's call. Please dial star one on your telephone keypad.
Operator: If you'd like to queue for a question on today's call, please dial star 1 on your telephone keypad.
Suzanne Schmidt: I'll now hand the call over to Suzanne Schmidt with Investor Relations to begin. Suzanne, you may proceed. Thank you, Operator.
Speaker Change: I'll now hand, the call over to Suzanne Schmidt with Investor relations to be good excuse ADT. You May proceed. 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 2025 results.
Suzanne Schmidt: Good afternoon, and thank you for joining us on today's Earnings Conference Call and webcast to discuss Penguin Solutions' second quarter 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.
Speaker Change: On the call today are Mark Adams, Chief Executive Officer, and Nate Olmstead, Chief Financial Officer.
Speaker Change: 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: 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 report.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Business plans and strategy proposed re domiciliation and existing and potential collaborations.
Speaker Change: 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 report.
Speaker Change: <unk>.
Suzanne Schmidt: The forward-looking statements are representative only as of the date they are made and accept as required by applicable law. We assume no responsibility to publicly update or revise any forward-looking statement.
Speaker Change: 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.
Suzanne Schmidt: We will also discuss both GAAP and non-GAAP financial measure. 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.
Speaker Change: We will also discuss both GAAP and non-GAAP financial measures.
Speaker Change: non-GAAP measures should not be considered in isolation from as a substitute for or superior to our GAAP results.
Speaker Change: We encourage you to consider all measures when analyzing our performance.
Speaker Change: A reconciliation of the GAAP to non-GAAP measures is included in today's press release and accompanying slide presentation.
Suzanne Schmidt: And with that, let me turn the call over to Mark Adams, CEO, Mark. Thank you, Suzanne.
Speaker Change: And with that let me turn the call over to Mark Adams CEO Mark.
Mark Adams: Thank you Suzanne I'd like to welcome all of you to our Q2 fiscal 2025 payment solutions earnings call.
Mark Adams: I'd like to welcome all of you to our Q2 Fiscal 2025 Penguin Solutions Earnings Call. We are very pleased with our second quarter financial results. Our revenue was $366 million, an increase of 28% compared to the same period last year. non-GAAP gross margins came in at 30.8%. Non-GAAP earnings per share was $0.52, a 97% increase year over year. We achieved non-GAAP operating income of $49 million, 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 in the transformation of Penguin Solutions into a leader in high-performance, high-availability enterprise infrastructure solutions.
Speaker Change: We are very pleased with our second quarter financial results.
Speaker Change: Our revenue was $366 million, an increase of 28% compared to the same period last year.
Speaker Change: non-GAAP gross margins came in at 38%.
Speaker Change: non-GAAP earnings per share was 52 says 97% increase year over year.
Speaker Change: We achieved non-GAAP operating income of 49 million up 85% from the prior year.
Speaker Change: And we improved non-GAAP operating income margin to 13, 4% up four one percentage points.
Speaker Change: Year over year.
Speaker Change: All in all.
Speaker Change: Our Q2 results demonstrate the progress we're making in the transformation of Penguin solutions into a leader in high performance high availability enterprise infrastructure solutions.
Speaker Change: Yeah.
Mark Adams: 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. 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 implementation. We're seeing signs that we have entered the early stages of growth in corporate buildups at scale and are excited for what lies ahead.
Speaker Change: The market for artificial intelligence is growing in the enterprise segment across a number of different industries.
Speaker Change: Market research continues to reinforce the strategic value of the AI to enhance corporate productivity decision, making in customer satisfaction.
Speaker Change: As we've mentioned in the past.
Speaker Change: Our belief is that the GPU sales the energy saw in 2023 and 'twenty four.
Speaker Change: Would lead to growth and enterprise deployment.
Speaker Change: 25 and 26.
Speaker Change: As customers move from proof of concept to full scale AI implementations.
Speaker Change: We are seeing signs that we've entered the early stages of growth and corporate build outs at scale and are excited for what lies ahead.
Mark Adams: 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. Historically, we have sold directly to our end customers.
Speaker Change: Penguin solutions helps customers manage the complexity of AI adoption by leveraging our proven knowhow.
And advanced cluster implementations in the data center, coupled with our differentiated portfolio of hardware software and managed services.
Speaker Change: 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.
Speaker Change: Our products and services are primarily sold to Hyperscale.
Speaker Change: Cloud service providers, and Fortune 500 companies and the financial energy education, federal consumer and manufacturing sectors.
Speaker Change: Historically, we have sold directly to our end customers.
Mark Adams: 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.
Speaker Change: However, we are also expanding our go to market breadth.
Speaker Change: By focusing on developing channel partnerships, which we believe will provide new opportunities for growth longer term.
Mark Adams: The foundation of Penguin Solutions' success is our 25-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. 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.
Speaker Change: The foundation of payment solutions success.
Speaker Change: Our 25 plus year history of.
Speaker Change: Deploying large scale complex data center clusters.
Speaker Change: Originate from our early days and high performance computing for H B C.
Speaker Change: This expertise is integral to our AI infrastructure offering.
Our experience understand 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: As we mentioned at the beginning of our fiscal year 2025, we have transitioned from providing a quarterly financial outlook to providing a full year at Financial Outlook. We believe that a full year outlook affords a broader perspective on 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.
Speaker Change: As we mentioned at the beginning of our fiscal year 2025, we.
Speaker Change: We have transitioned from providing a quarterly financial outlook to.
Speaker Change: Providing our full year financial outlook.
Speaker Change: We believe that our full year outlook affords a broader perspective, our business, especially in relation to our infrastructure, where the timing of the actual deployments and associated revenue recognition can be unpredictable.
Speaker Change: And that aligns well with our emphasis on achieving long term strategic objectives.
Mark Adams: We also understand that our investors, customers and partners We appreciate commentary on our progress each quarter, and we intend to offer that as well today. On our Q4 fiscal 2024 call, we forecasted fiscal year 25 revenue to grow 15% at the midpoint. 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 25 from 15% year-over-year growth to 17% year-over-year growth, which Nate will discuss in more detail later.
Speaker Change: We also understand that our investors customers and partners.
Speaker Change: Appreciate the commentary on our progress each quarter, and we intend to offer that as well today.
Speaker Change: On our Q4 fiscal 2024 call, we forecasted fiscal year 'twenty five revenue to grow 15% at the midpoint.
Speaker Change: When discussing our full year outlook last quarter, we highlighted that a large advanced computing order would finished shipping in Q2.
Speaker Change: Due in large part to that shipment, we expect revenue and profit to be more first half weighted when compared to our second half.
Speaker Change: In light of our strong first half performance.
Speaker Change: We're raising the midpoint of our revenue outlook for full year fiscal 'twenty five from 15% year over year growth to 17% year over year growth, which Nate will discuss in more detail later.
Mark Adams: Let me now provide more detail on our business segment. Our advanced computing revenue for the second quarter of fiscal 2025 was $200 million, up 42% year-over-year when compared to Q2 fiscal 2024, representing 55% of Penguin Solutions revenue. We had some exciting wins at our existing customers and added three new logos in the technology, telecom and media and federal spaces.
Speaker Change: Let me now provide more detail on our business segments.
Speaker Change: Our advanced computing revenue for the second quarter of fiscal 2025 was 200 million up 42% year over year, when compared to Q2 fiscal 'twenty four.
Representing 55% of Penguin solutions revenue.
Speaker Change: We had some exciting wins that our existing customers and added three new logos and the technology telecom and media and federal spaces.
Mark Adams: Our core competency is 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 in working with our clients to design the optimal software stack who enable a robust platform to manage their infrastructure. For many of our key customers, our Penguin Services organization will help manage post-deployment operations to support continued high performance and availability.
Speaker Change: Our core competency is successfully managing large scale infrastructure deployments.
Speaker Change: Helps customers accelerate their time to successful implementation.
Speaker Change: We believe our customers value our technology agnostic approach to creating a unique overall solution to meet their AI infrastructure needs.
Speaker Change: As a trusted advisor.
Speaker Change: We evaluate which technologies with best fit and individual customer requirement.
Speaker Change: Beyond the technology building blocks, we leveraged penguins ice cluster, where and working with our clients to design the optimal software stack.
Speaker Change: To enable a robust platform to manage their infrastructure.
Speaker Change: For many of our key customers, our Penguin services organization.
Speaker Change: Help manage post deployment operations to support continued high performance and availability.
Mark Adams: We have seen growth in our pipeline during the first half of fiscal year 2025 and remain focused on working to convert these opportunities into bookings over the remainder of the fiscal year and into fiscal year 2026.
Speaker Change: We are seeing growth in our pipeline during the first half of fiscal year 2025.
Speaker Change: And remain focused on working to convert these opportunities into bookings over the remainder of the fiscal year and into fiscal year 2026.
Mark Adams: Integrated memory is represented by our Smart Modular brand. In our second quarter of fiscal 2025, integrated memory was 105 million, 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. Large enterprises require higher performance and higher reliability memory to support complex workloads. in line with this increasing demand for improved memory bandwidth and availability.
Speaker Change: Integrated memory as represented by our smart modular brand.
Speaker Change: And our second quarter of fiscal 2025 I've.
Speaker Change: Integrated memory was 105 million up 26% compared to the same period last year.
Speaker Change: Representing 29% of total bandwidth solutions revenue.
Speaker Change: Memory is a critical component of our computing networking and telecommunications customers platform.
Speaker Change: Large enterprise require higher performance and higher reliability memory.
Speaker Change: To support complex workloads.
Speaker Change: In line with this increasing demand for improved memory bandwidth and availability.
Mark Adams: We are executing on new product development plans for our Compute Express Link, 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 reinforce our optimism about its appeal to a new type of customer. In addition, in March, Dell added Smart's CXL add-in card as part of their Server Configuration Options program. We enter Q3 with a strong backlog, buoyed by AI-related demand, improving market conditions and enterprise memory, and more stable inventory levels at key customers in data center, networking, and telecommunications.
Speaker Change: We are executing on new product development plans for our compute express link or CSL family of products.
Speaker Change: We are seeing positive momentum in our customer qualification efforts.
Speaker Change: Resulting in sample orders of six L from Oems and AI computing companies, which reinforced our optimism about its appeal to a new type of customer.
Speaker Change: In addition in March del added Smarts CX L add in card as part of their server configuration options program.
Speaker Change: We enter Q3 with a strong backlog.
Speaker Change: By AI related demand improving marketing conditions in enterprise memory and.
Speaker Change: And more stable inventory levels at key customers and datacenter networking and telecommunications.
Mark Adams: Optimized LED operates under the Cree LED brand. In the second quarter of fiscal 2025, optimized LED revenue was flat as compared with the year ago quarter, while non gap 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. We believe Cree LED's capital light outsource model was a contributing factor to our improved profitability in the first half of fiscal 2025 and will continue to be a competitive advantage longer term.
Speaker Change: Optimize led D operates under the Cree Leds brand.
Speaker Change: In the second quarter of fiscal 2025.
Speaker Change: Optimize led revenue was flat as compared with the year ago quarter, while non-GAAP operating margins were up nearly five points comparatively.
Speaker Change: Q2 is traditionally been a seasonally lower quarter.
Speaker Change: Due to the U S holidays, coupled with the Chinese new year holiday.
Speaker Change: And this year was no exception.
Speaker Change: We believe Cree Leds capital light outsourced model.
Speaker Change: <unk> factor to our improved profitability in the first half of fiscal 2025, and we will continue to be a competitive advantage longer term.
Mark Adams: In early Q2, we announced that we entered into a patent license agreement with Daktronics, 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 US and Western Europe.
Speaker Change: In early Q2, we announced that we entered into a patent license agreement with Tektronix U S based leader in large scale LCD displays.
Speaker Change: Our strong intellectual property, coupled with a cost effective operating model.
Speaker Change: That's led to some exciting new customer design win activity with larger led lighting customers in the U S and western Europe.
Mark Adams: As we continue the transformation of Penguin Solutions. Our strategic focus on research and development and partnerships. will remain critical to our future success.
Speaker Change: As we continue the transformation of Penguin solutions, our strategic focus on research and development and partnerships.
Speaker Change: Will remain critical to our future success.
Mark Adams: 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 workloads enhance 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. 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.
Speaker Change: Let me highlight three of our key initiatives.
Speaker Change: And the progress we are making on each of them.
Speaker Change: First in early March Penguin solutions announced that it has expanded its ice cluster where software platform.
Speaker Change: With multi tenancy support streamline workflows enhanced controls.
Speaker Change: We also announced the launch of ice cluster, where aim service.
Speaker Change: Advanced optimization service that Leverages prediction automation to.
Speaker Change: To enhance performance availability.
Speaker Change: Additional efficiency of our customers' AI infrastructure.
Speaker Change: These new software capabilities are compatible with multiple chip vendors, such as Nvidia AMD and Intel.
Speaker Change: Enhancing our ability to successfully support customers AI deployments across a broad set of technologies and use cases.
Mark Adams: Second, in memory, which continues to play an increasingly vital role in AI systems performance. The Smart Modular R&D team is focused on the development 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 2026. to early calendar 2027.
Speaker Change: Second in memory, which continues to play an increasingly vital role in AI systems performance.
Speaker Change: The smart modular R&D team is focused on the development of.
Speaker Change: Smart modular optical memory appliance or ooma addressing the need for greater bandwidth performance and availability.
Speaker Change: Support future AI compute requirements.
Speaker Change: Well in our early stage of development.
Speaker Change: We believe this to be an exciting new market opportunity with first revenues anticipated to be late calendar 2026 to.
Speaker Change: Too early calendar 'twenty 'twenty seven.
Mark Adams: 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.
Speaker Change: Finally in the area of strategic partnerships.
Speaker Change: Our relationships with SK and Dell.
Speaker Change: So expect it to provide new opportunities for longer term growth.
Speaker Change: We are in discussions with SK telecom.
Speaker Change: Guardian potential collaborations related to their AI strategy.
Speaker Change: Including AI data center infrastructure initiatives.
Mark Adams: 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 and custom low volume hynix segment.
Speaker Change: In addition, an already strong relationship between SK Hynix and smart modular.
Speaker Change: Is evolving as we look at ways to address markets not historically served by SK Hynix and custom low volume high mix segments.
Mark Adams: Regarding the Dell partnership. Penguin's AI software and managed services are now being able to be sold by Dell's worldwide sales force. Spanning our Margaret Reach. We are 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 engagement. Combining our unique value proposition with larger go to market companies will remain a priority for us. We are evaluating both domestic and international partners who could benefit from working with Penguin Solutions to deliver world-class AI infrastructure solutions.
Speaker Change: Regarding the Dell partnership.
Speaker Change: Penguins AI software and managed services are now being able to be sold by Delta worldwide sales force expanding our market reach.
Speaker Change: During the process of training Dell sales teams and are seeing favorable early response to co marketing opportunities with large enterprise customers.
Speaker Change: As part of this relationship.
Speaker Change: We have also expanded our origin AI offerings to include Dell servers, along with Penguin software and services.
Speaker Change: Which can help expand our customer Tam.
Speaker Change: Future engagements.
Combining our unique value proposition with larger go to market companies will remain a priority for us.
Speaker Change: We are evaluating both domestic and international partners, who could benefit from working with Penguin solutions to deliver world class AI infrastructure solutions.
Mark Adams: More to come on future calls.
Speaker Change: More to come on future calls.
Mark Adams: We've also recently announced that we intend, subject to court and shareholder approval.
Speaker Change: We've also recently announced that we intend subject to court and shareholder approval.
Mark Adams: to re-domicile 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.
Speaker Change: To re domicile of our parent company from the Cayman Islands to United States.
Speaker Change: We believe this aligns with our strategic objectives and reflect our increased business and operational focus in the United States.
Mark Adams: Additionally, before we conclude today's call, I'd like to share some important organization news. After close to 25 years with us.
Speaker Change: Additionally, before we conclude today's call I'd like to share some important organizational news.
After close to 25 years with us.
Mark Adams: 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.
Speaker Change: 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.
Speaker Change: Jack has been instrumental in our company's growth and success, particularly in strengthening our memory solutions business and.
Speaker Change: And building an outstanding operations team.
Speaker Change: We are grateful for Jack's contributions and appreciate his willingness to help with the transition.
Mark Adams: 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, also expanding our pipeline for longer term growth. Our first half results give us the confidence to raise the midpoint of our revenue outlook for the full year, fiscal year 2025. That was a value proposition of solving the complexity of AI infrastructure for our customers positions as well to address the increasing market opportunity of enterprise AI adoption at scale.
Speaker Change: In closing I wanted to thank our global team for the strong results in Q2.
Speaker Change: We are laser focused on short term execution in Q3.
Speaker Change: While also expanding our pipeline for longer term growth.
Speaker Change: Our first half results give us the confidence to raise the midpoint of our revenue outlook for the full year fiscal year 2025.
<unk> value proposition of Solvay, and the complexity of AI infrastructure for our customers positions us well to address the increasing market opportunity of enterprise AI adoption at scale.
Mark Adams: 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 2025. Thanks, Mark.
Speaker Change: Let me stop here and hand, the call over to Nate.
Nate Olmstead: To provide more color on our performance and outlook for the remainder of fiscal 2025.
Speaker Change: <unk>.
Nate Olmstead: 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 million, 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. 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.
Mark Adams: Thanks Mark.
Mark Adams: 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.
Mark Adams: Now, let me turn to our second quarter results.
Mark Adams: Total Penguin solutions revenues were $366 million up 28% year over year and up sequentially for the fifth consecutive quarter.
Mark Adams: non-GAAP gross margin came in at 38%, which was down year over year and flat sequentially.
Mark Adams: non-GAAP operating margin was 13, 4% up four one percentage points versus last year and non-GAAP diluted earnings per share were <unk> 52 for the second quarter nearly doubled from Q2 last year.
Nate Olmstead: In the second quarter of fiscal 2025, our overall services revenue totaled $64 million, about 30% versus Q2 last year. Product revenues were $302 million in the second quarter, up 28% versus the prior year. Second quarter revenue by business segment was as follows advanced computing $200 million or 55% of our total revenue and up 42% year over year integrated memory $105 million, which was 29% of our total revenue and up 26% year over year. and Optimize LED $60 million or 16% of our total revenue and flat year over year. Non-gap 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.
Mark Adams: In the second quarter of fiscal 2025, our overall services revenue totaled $64 million up 30% versus Q2 last year.
Mark Adams: Product revenues were $302 million in the second quarter up 28% versus the prior year.
Mark Adams: Second quarter revenue by business segment was as follows.
Mark Adams: Vance computing $200 million or 55% of our total revenue and up 42% year over year.
Mark Adams: Integrated memory $105 million, which was 29% of our total revenue and up 26% year over year.
Mark Adams: Optimize led $60 million or 16% of our total revenue and flat year over year.
Mark Adams: non-GAAP gross margin for Penguin solutions in the second quarter was 38% down <unk> seven 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: 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 million, 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 gap operating income was $49 million 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.
Mark Adams: Gross margin was flat sequentially with a higher mix of advanced computing hardware sales offset by higher margin rate in both memory and LCD.
Mark Adams: non-GAAP operating expenses for the second quarter were $63 million down <unk>, 2% year over year and down one 4% sequentially.
Mark Adams: Operating expenses as a percentage of sales were down both year over year and sequentially driven by higher revenue volumes and disciplined expense management.
Mark Adams: non-GAAP operating income was $49 million up 85% year over year and up 20% versus last quarter. The.
Mark Adams: The combination of topline growth and operating expense efficiencies translated into a four one percentage point increase in operating margin versus Q2 last year.
Nate Olmstead: Non-GAAP diluted earnings per share for the second quarter of fiscal year 2025 were 52 cents, up 97% versus the prior year and up 7% versus the prior quarter. just at EBITDA for the second quarter was $54 million up 61% year over year.
Mark Adams: non-GAAP diluted earnings per share for the second quarter of fiscal year 2025 were <unk> 52.
Mark Adams: 97% versus the prior year and up 7% versus the prior quarter.
Mark Adams: Adjusted EBITDA for the second quarter was $54 million up 61% year over year.
Nate Olmstead: Turning to balance sheet highlights for working capital, our net accounts receivable totaled $330 million, compared to $170 million a year ago, with the increase driven by higher sales volume. Ace sales outstanding came in at 50 days up from 42 days in the prior year quarter due to variations in sales linearity across the quarter. Inventory told $200 million at the end of the second quarter, up from $173 million at the end of Q2 a year ago due to higher sales volume. Days of inventory was 37 days down from 54 days a year ago, primarily due to the timing of receipts and shipments.
Mark Adams: Turning to balance sheet highlights for working capital, our net accounts receivable totaled $330 million compared to $170 million a year ago with the increase driven by higher sales volumes.
Mark Adams: Days sales outstanding came in at 50 days up from 42 days in the prior year quarter due to variations in sales linearity across the quarters.
Mark Adams: Inventory totaled $200 million at the end of the second quarter up from 173 million at the end of Q2, a year ago due to higher sales volumes.
Mark Adams: Days of inventory was 37 days down from 54 days, a year ago, primarily due to the timing of receipts and shipments.
Nate Olmstead: Accounts payable were $238 million at the end of the quarter, up from $148 million a year ago, primarily to higher sales volumes. Days payable outstanding was 44 days compared to 46 days last year due to the timing of purchases and payments. Our cash conversion cycle was 43 days, an improvement of six days compared to last year due to faster inventory turns. 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 $596,492,000 respectively in the second quarter. As a reminder, the difference between growth and net revenue is related to our memory business's logistic services, which are accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as revenue.
Mark Adams: Accounts payable were $238 million at the end of the quarter up from 148 million a year ago, due primarily to higher sales volumes.
Mark Adams: Days payable outstanding was 44 days compared to 46 days last year due to the timing of purchases and payments.
Mark Adams: Our cash conversion cycle was 43 days, an improvement of six days compared to last year due to faster inventory turns.
Mark Adams: Consistent with past practice day sales outstanding days payables outstanding and inventory days are calculated on a gross sales and gross cost of goods sold basis, which were $596 million and $492 million respectively in the second quarter.
Mark Adams: 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.
Nate Olmstead: Cash and cash equivalents and short term investments totaled $647 million at the end of the second quarter, up $181 million from Q2 last year, and up $253 million 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 2024. Second quarter cash flows generated from operating activities totaled $73 million compared to $22 million used by operating activities in the prior year quarter. The increase year over year was due primarily to higher net income, faster inventory turns, and increased deferred revenues from our services business.
Mark Adams: Cash and cash equivalents and short term investments totaled $647 million at the end of the second quarter.
Mark Adams: $181 million from Q2 last year and up $253 million sequentially. The.
Mark Adams: 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 2024.
Mark Adams: Second quarter cash flows generated from operating activities totaled $73 million compared to $22 million used by operating activities in the prior year quarter.
Mark Adams: The increase year over year was due primarily to higher net income faster inventory turns and increased deferred revenues from our services business.
Nate Olmstead: Additionally, the prior year included a $29 million payment of contingent consideration as part of the Stratus acquisition earn out We spent approximately $3 million 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 million to repurchase 4.7 million shares through Q2 of fiscal year 2025, and we have $67 million remaining in our authorization. We did not make any debt prepayment in this past quarter, and the principal on our term loan remains at $300 million as of the end of the quarter.
Mark Adams: Additionally, the prior year included a $29 million payment of contingent consideration as part of the Stratus acquisition earn out.
Mark Adams: We spent approximately $3 million to repurchase 167000 shares in the second quarter under our share buyback program.
Mark Adams: Since our initial share repurchase authorization in April 2022, we have used a total of $83 million to repurchase four 7 million shares through Q2 of fiscal year 2025, and we have $67 million 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 million as of the end of the quarter.
Nate Olmstead: Our net debt at the end of Q2 was $23 million. For those of you tracking capital expenditures and depreciation, capital expenditures were $2 million in the second quarter and depreciation was $5 million.
Mark Adams: Our net debt at the end of Q2 was $23 million.
Mark Adams: For those of you tracking capital expenditures and depreciation capital expenditures were $2 million in the second quarter and depreciation was $5 million.
Nate Olmstead: And now, turning to our outlet. 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 2025, 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.
Mark Adams: And now turning to our outlook.
Mark Adams: 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.
Mark Adams: Based on our previously mentioned large advanced computing order that shipped in the first half of fiscal year 2025, we.
Mark Adams: 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.
Nate Olmstead: By segment, our full year revenue outlook reflects the following. For advanced computing, we expect full year revenue to grow between 15 and 25% year over year. For memory, we expect revenue to grow between 20 and 30% 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-gap 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 million, plus or minus $5 million.
Mark Adams: By segment, our full year revenue outlook reflects the following.
Mark Adams: For advanced computing, we expect full year revenue to grow between 15% and 25% year over year.
Mark Adams: For memory, we expect revenue to grow between 20 and 30% year over year.
Mark Adams: And for <unk>, we expect revenue to be approximately flat year over year.
Mark Adams: 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 million, plus or minus $5 million.
Nate Olmstead: We are also raising our outlook for non GAP full year diluted earnings per share, which is now expected to be approximately $1.60 plus or minus 10 cents. This is up from our prior outlook of $1.50 plus or minus 20 cents. And finally, our non-GAAP diluted share count is now expected to be approximately 55 million shares for the year. As a reminder, we are utilizing a long term projected non gap tax rate of 28%, which reflects currently available information. While we expect to use this normalized non-gap tax rate through 2025, the long-term non-gap 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.
Mark Adams: We are also raising our outlook for non-GAAP full year diluted earnings per share, which is now expected to be approximately $1 60 plus.
Mark Adams: Plus or minus 10.
Mark Adams: This is up from our prior outlook of $1 50, plus or minus <unk> 20.
Mark Adams: And finally, our non-GAAP diluted share count is now expected to be approximately 55 million shares for the year.
Mark Adams: As a reminder, we are utilizing our long term projected non-GAAP tax rate of 28%, which reflects currently available information.
Mark Adams: While we expect to use this normalized non-GAAP tax rate through 2025 long term non-GAAP tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global tax environment significant.
Mark Adams: Significant changes in our geographic earnings mix or changes to our strategy or business operations.
Nate Olmstead: Our outlook for fiscal year 2025 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 solution, 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.
Mark Adams: Our outlook for fiscal year 2025 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.
Mark Adams: This includes extended lead times for certain components that are incorporated into our overall solution impacting how quickly we can ramp existing and new customer projects and higher tariffs in our led business.
Mark Adams: 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: 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.
Mark Adams: 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.
Operator: With that operator, we are ready for Q&A. Thank you.
Mark Adams: With that operator, we are ready for Q&A.
Mark Adams: Thank you.
Operator: We'll now begin the Q&A session. If you'd like to ask a question, please dial star one on your telephone keypad. If for any reason you would like to remove that question, please dial star two. Again, to ask a question, it is star one. As a reminder, if you're using a speakerphone on today's call, please remember to pick up your handset before asking your question. We'll pause here briefly to allow questions to generate in the queue.
Mark Adams: We will now begin the Q&A session, if you'd like to ask a question. Please dial star one on your telephone keypad. If for any reason you would like to remove that question. Please dial star two.
Mark Adams: Again to ask a question it is star one.
Mark Adams: As a reminder, if youre using a speakerphone on today's call. Please remember to pick up your handset before asking your question will pass here briefly to allow questions to generate in the queue.
Mark Adams: Yeah.
Dennis Piacennin: The first question is from the line of Dennis Piacennin with Stiefel. Your line is now open. Hi, good afternoon. Thanks for letting us ask a few questions. This is Dennis Ahn for Brian Chin. Maybe we can start with advanced computing. You know, given the hyperscale of strength in the fiscal first half, maybe you can talk about, you know, which customers or verticals you see driving revenue in the fiscal second half for this segment?
Speaker Change: The first question is from the line of Dennis pitch engine with Stifel. Your line is still open.
Speaker Change: Hi, good afternoon, thanks for letting US questions Hi, This is Dennis on for Brian Chin.
Speaker Change: Maybe if we can start with advanced computing.
Speaker Change: Given the Hyperscale has strengthened this fiscal first half.
Speaker Change: Maybe you can talk about which customers or verticals you see driving revenue in the fiscal second half for the segment.
Speaker Change:
Mark Adams: typically don't forecast that way. But we were just kind of The second half is going to be, you know, not driven primarily by... that vertical and look to verticals like federal, like financial, energy, and the likes.
Speaker Change: We typically don't forecast that way.
Speaker Change: But.
Speaker Change: Just kind of.
Speaker Change: Suggest that.
Speaker Change: The second half is going to be.
Speaker Change: Not driven primarily by that.
Speaker Change: And that vertical and look to verticals like federal.
Speaker Change: Like financial.
Speaker Change: Energy and the likes.
Mark Adams: So, but we don't really forecast. https://www.smartglobalholdings.com You know, our commentary, that there will be other places where we... we're deploying. A.I. Solutions that are complimentary. markets that drove our first It's pretty dynamic, to be honest with you. So we're doing our best to reflect what we see in our I can't, we can't sit here and say there will be no future impact having said that. current to date, we have not had a lot of those.
Speaker Change: So.
Speaker Change: But we don't really forecast, obviously inter quarter or that's.
Speaker Change: That way, especially in the vertical market level, but you can assume embedded in.
Speaker Change: Our commentary.
Speaker Change: That.
Speaker Change: There'll be other places where we are.
Speaker Change: Deploying.
Speaker Change: AI solutions that are complementary to the markets that drove our first half success.
Speaker Change: Okay, Great and then for my follow up so it sounds like federal budget uncertainty isn't.
Speaker Change: As an impact from the government related projects, but maybe on the topic of economic uncertainty.
Speaker Change: Have you seen any impacts on your engagements with enterprise and cloud customers or.
Speaker Change: Maybe around just like a deep sea Knudsen capital efficiency, how does that weigh on topic of discussion for your customers have there been any impact on like infrastructure Buildout plans related to all of that.
Speaker Change: It's pretty dynamic to be honest with you so.
Speaker Change: We're doing our best to reflect what we see in our business today.
Speaker Change: We can but these are a little bit unprecedented times and.
Speaker Change: Yeah.
Speaker Change: I can't we can't sit here and say there'll be no future impact having said that.
Speaker Change:
Speaker Change: Current to date, we have not had a lot of those conversations.
Dennis Piacennin: Great talk for me, thank you. Thank you.
Speaker Change: Great. That's all for me thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Samik Chatterjee: The next question is from Samik Chatterjee with JP Morgan. Your line is now open. Thank you for taking my questions.
Speaker Change: Next question is from semi strategy with J P. Morgan Your line is now open.
Speaker Change: Thank you for taking my questions.
Nate Olmstead: 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 related to tariffs on more wider breadth of geographies, how should we think about the manufacturing footprint and where your sensitivity to the tariffs would be? Thank you.
Speaker Change: Maybe if I can start on the topic of data I think in your prepared remarks, you mentioned, you're including the higher debt. If somebody led segment, but if you can just remind us in terms of the manufacturing footprint for <unk>.
Speaker Change: Creative to advanced computing, and how should we think about given some of the news on the deep right now really to put us on.
Speaker Change: Why do you do it by the breadth of geographies, how should we think about the manufacturing footprint, where you have a sense of we need to be taught us would be thank you and have a follow up.
Nate Olmstead: And as a follow-up. So The LED supply chain and manufacturing, the design of which happens... primarily in North Carolina, our manufacturing 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. a couple quarters, so to speak. And I think that that that the footprint we're looking at. fantastic for the quarter. So You know, it's something we'll continue to deal with and we'll monitor relative to any changes. But again, it's like my earlier comment, you know, at this point, we're digesting news like everybody else and and For Advanced Computing.
Speaker Change: So.
Speaker Change: Our supply chain and manufacturing.
Speaker Change: The design of which happens primarily in North Carolina.
Speaker Change: Manufacturing is through partners.
Speaker Change: In Taiwan.
Speaker Change: And then we have of course, our test Assembly.
Speaker Change: Phosphor application facility in ways Joe.
By the way we've been in this environment with this business.
Speaker Change:
Speaker Change: For some time so that the.
Speaker Change: The question around tariffs.
Speaker Change:
Speaker Change: It's something that we've been dealing with for the past.
Speaker Change: A couple of quarters so to speak.
Speaker Change: And I think that.
Speaker Change: The footprint, we're looking at to continue to evaluate longer term solutions, but it's embedded in our number ironically.
Speaker Change: The gross margin led.
Speaker Change: It was fantastic for the quarter so.
Speaker Change: It's something we want to continue to deal with it and we'll monitor relative to any changes, but again, it's like my earlier comment.
Speaker Change: At this point, we're digesting news like everybody else and.
Speaker Change: Yeah, well, we'll adjust accordingly.
Speaker Change: We need to.
Speaker Change: And for advanced computing sorry.
Nate Olmstead: Advanced Computing Of course, some of the components that we source. may or may not be from. other regions. But from a integration, where we manufacture and build, most of our products are built in the US. at our Fremont Operations Facility, and similarly, with Smart Modular, a lot of our design and manufacturing is in our Newark operations site. We do have a Malaysia operations that complements the Smart Modular business and some segment of our Advanced Computing Business, which is, you know, more of the embedded edge products. primarily that that's kind of the footprint we have for advanced computing and memory.
Speaker Change: That's computing.
Speaker Change: Of course, some of the components that we source.
Speaker Change:
Speaker Change: May or may not be from.
Speaker Change: Other.
Speaker Change: Other regions, but from a integration, where we manufacture and build.
Speaker Change: Most of our products are built in the U S.
Speaker Change: At our Fremont operations facility.
Speaker Change: And similarly with.
Speaker Change: Spartan smart modular.
Speaker Change: A lot of our design and manufacturing is in our Newark.
Speaker Change: Operations site we.
Speaker Change: We do have a Malaysia.
Speaker Change: Operations that complements the smart modular business and some.
Speaker Change: Segment of our compute.
Speaker Change: Advanced computing business, which is more of the embedded edge products.
Speaker Change: But.
Speaker Change: It's primarily that that's kind of the footprint we have four.
Speaker Change: Advanced computing and memory.
Nate Olmstead: And for my follow-up, I know you've mentioned that you're trying to sort of look at the within a dynamic environment, you know, 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 relative to what is the incremental portion you would have to rely on new orders coming in for the remainder of the year?
Speaker Change: Okay and for my follow up.
Speaker Change: You mentioned that you're trying to sort of look at the good any pandemic environment and trying to take the best sort of estimated disappoints alternative means to you and you mentioned elevated backlogs as well, but when I think about the <unk>.
Speaker Change: Revenue flu costs for the remainder up to you.
When it comes to advanced computing can you give us a sense of how much of that revenue is already bought often booked backlog of booked or those data to where does the incremental portion you would have to rely on new orders coming in for the remainder of deals just asking from the perspective that given all the changes in the macro if customers do it.
Nate Olmstead: 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. Yeah, like we again, we typically don't break up our, 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. 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.
Speaker Change: Being more cautious about new orders going forward. Thank you.
Speaker Change: Yeah like we again, we typically don't break up our AR our.
Speaker Change: Forward looking forecast and do that type of.
Speaker Change:
Speaker Change: Segmentation so to speak are booking.
Speaker Change: Bookings versus required to get them.
Speaker Change: But I would also say we've always taken a very conservative approach.
Speaker Change: <unk> to that because you have to remember.
Speaker Change:
Speaker Change: In order for us to ship products.
Speaker Change: Given quarter, given the supply chain limitations around specifically AI and broader compute.
Speaker Change: We have to be pretty close to knowing early in the quarter.
Nate Olmstead: So I think that do our best. https://www.smartglobalholdings.com 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. 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. Thank you. Thanks for taking the time. Thank you.
Speaker Change: I think that.
Speaker Change: We do our best and we planned for.
Speaker Change: What we kind of know to be true with a lot without a lot of risk because we sense and we have risk and.
Speaker Change: The actual the lumpiness of the orders and.
Speaker Change: 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.
Speaker Change: So I would think that the.
Speaker Change: Question around <unk>.
Speaker Change: Bookings as a percentage of what we think the number to be I would just go back on our past performance is a we're very mindful.
Speaker Change: Full of that and are pretty conservative in nature.
Speaker Change: Thank you thanks for taking my question.
Speaker Change: Okay.
Alex Valero: The next question is from Alex Valero with Loop Capital. Your line is now open. Hey guys, thank you for taking my question.
Speaker Change: Thank you.
Speaker Change: The next question is from Alex <unk> with loop capital. Your line is now open.
Alex: Hey, guys. Thank you for taking my question does this Alec on for a number I actually have a question on SK Telecom I just wanted to ask about any progress whats. How is the sentiment are you guys more enthusiastic about the partnership now and also if you could possibly provide some insights on SK telecom's coals and any customers.
Alex Valero: This is Alec on for Ananda.
Alex Valero: I actually have a question on SK Telecom. I just wanted to ask about any progress. What's, how's the sentiment? Are you guys more enthusiastic about the partnership now?
Mark Adams: And also if you could possibly provide some insights on SK Telecom's goals and any customers they aim to attract? What was the last piece? I'm sorry, Alex. 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.
Speaker Change: They aim to attract.
Speaker Change: What was the last piece I'm sorry, Alex.
Speaker Change: Yeah. The last piece was on if you could provide any insight on SK telecom schools.
Speaker Change: With the partnership and any customer stay aimed to attract.
Mark Adams: 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.
Speaker Change: I'm not sure I can answer that last piece.
Speaker Change: I can't speak for them.
Speaker Change: But relative to the relationship we continue to have very good dialogue.
Speaker Change: And we're evaluating ways that we can help in really two parts of their business. One is their AI strategy deployment.
Speaker Change: Of infrastructure of which they have a number of good assets to complement our capabilities both for their internal needs as well as a potential joint customer collaboration and we are optimistic.
Speaker Change: And our ability to work together and to drive future results nothing to announce today.
Mark Adams: But yeah, good conversations and I actually had that in my prepared remark. 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's 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. And I think we'll be able to keep updating people, investors, on a quarterly basis. But the directionally, we seem to be very pleased.
Speaker Change: But yes, good conversations and.
Speaker Change: I actually have that in my prepared remarks.
Speaker Change: <unk>.
Speaker Change: That continues to move favorably.
Speaker Change: And on the memory side.
Speaker Change: 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.
Speaker Change: S K think about reaching markets that.
Speaker Change: Historically, they have not had on our radar screen and cooperatively working with smart modular on so.
Speaker Change: We're very pleased with the relationship to date.
Speaker Change: I think we'll be able to keep updating people.
Speaker Change: Investors on a quarterly basis, but directionally.
Speaker Change: It seems to be very pleased.
Alex Valero: Thank you for that.
Speaker Change: Thank you for that and I just have a quick follow up. So my quick follow up is on your thoughts around the growing yield opportunity and just the penguins ability to participate there.
Alex Valero: And I just have a quick follow up. So my quick follow up is on your thoughts around the growing neoplout opportunity and just penguins ability to participate there. Yeah, I think it's really an interesting segment.
Speaker Change: Yes, I think.
Speaker Change: It's really interesting.
Mark Adams: You know, 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 2 cloud service providers. It's a really interesting market because There's a shortage. And 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, and 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.
Speaker Change: The segment you are calling it neo cloud we've called it.
Speaker Change: And by the way, it's probably better said Neocart, we used to call. It on our calls tier two cloud service providers.
Speaker Change: It's a really interesting market because.
Speaker Change: There is a shortage.
Speaker Change: Overall AI ready datacenter.
Speaker Change: Locations as primarily driven around a shortly around the power getting into data centers and so with this shortage a number of companies that I mean, a large number of these smaller cloud service providers.
Speaker Change: Who have.
Speaker Change: Access two megawatts and up through gigawatt type.
Speaker Change: The power and the 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.
Speaker Change: And some type of rental GPU market or private cloud public cloud type business model and.
Mark Adams: 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 and growing our business there in what you're calling NeoCloud.
Speaker Change: These businesses have been able to get financing to build this out.
Speaker Change: What they don't have is they don't have the ability to.
Speaker Change: Really develop.
Speaker Change: Plan for managing the complexity part of the deployment, which is the design build deploy and manage freight.
Speaker Change: <unk> framework that we deploy and so.
Speaker Change: It's really proven to be a very interesting market for us because all these older models that they had didn't require sophisticated it teams and so.
Speaker Change: We found it to be a very good market for opportunities for us.
Speaker Change: They continue to invest in growing our business there and what you are calling Neal cloud.
Alex Valero: That's super helpful. I really appreciate the answer. Thank you guys. Thank you.
That's super helpful. I really appreciate the answer thank you guys.
Speaker Change: Thanks, Alex.
Speaker Change: Thank you.
Operator: As a reminder, if you'd like to ask a question, please dial star one.
Speaker Change: As a reminder, if you'd like to ask a question. Please dial star one.
Kevin Garrigan: The next question is from Kevin Garrigan with Rosenblatt Securities. Your line is now open. Yeah, hey, good afternoon, all.
Speaker Change: The next question is from Kevin Garrigan with Rosenblatt Securities. Your line is now open.
Speaker Change: Okay.
Kevin Garrigan: This is Kevin Garrigan for Kevin Cassidy. Thanks for taking my questions.
Speaker Change: Yeah, Hey, good afternoon I'll. This is Kevin garrigan on for Kevin Cassidy, Thanks for taking my questions.
Kevin Garrigan: 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? Yeah, hey, thanks for the question, Kevin. You know, I think the important thing here to consider is really Look at the structure of the company today versus in 2011. different for us. Our headquarters... Really the majority of our operational assets are in the U.S. Simplified Things for S.O.P. In terms of impact for us with federal customers, I don't think that that's... about aligning our Okay, great.
Speaker Change: The first one we were wondering how moving your domicile from the Cayman Islands, the Delaware It changes your federal and state contract opportunities and where some other other.
Speaker Change: Other benefits from this move.
Speaker Change: Yeah.
Speaker Change: Yeah, Hey, Thanks for the question, Kevin I think the important thing here to consider it's really just our goal is to align our current operations with our future plans.
Speaker Change: 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.
Speaker Change: Number of our employees the executive team and really the majority of our operational assets are in the U S. So this moves simplify 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 considered this was really about aligning our operations with.
Speaker Change: The entity structure.
Mark Adams: And then, um, as a follow up, just kind of looking at some of the trends in the market, you know, 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? Well, we we've said all along that we were on a path for developing these type of products. First of all, the requirements for AI and memory. only keep getting more. There's a lot of interest in it and it's been a sort of a demanding, if you will. And the copackaged optics, as you refer to it, is definitely on our roadmap.
Speaker Change: Okay, Great and then as a.
Speaker Change: A follow up just kind of looking at some of the trends in the market co packaged optics is a big Buzz word if you will so how does how do you see this trend kind of changing the need for your memory solutions.
Speaker Change: Well, we've said all along that we were.
Speaker Change: On a path for developing these type of products.
Speaker Change: First of all the requirements for AI and memory.
Speaker Change: Only keep getting more.
Speaker Change: Demanding if you will and.
Speaker Change: The co packaged optics as you referred to it is definitely on our roadmap.
Mark Adams: 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 12 months of getting some type of prototypes. And my commentary, I said earlier, revenue probably earliest at the end of calendar 26, and then maybe at least in the 27, just depending on, you know. Availability of key parts and products and testing and what have you. But nonetheless, we think it's a 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, so 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.
Speaker Change: We've made an investment in a partner who were collaborating IDE collaborating on.
Speaker Change: In designing this optical memory appliance that we've referenced and while it's early and it is.
Speaker Change: We are super excited about this opportunity and in our conversations with customers on design and.
Speaker Change: Eventually out.
Speaker Change: And in the next 12 months of getting some type of prototypes.
Speaker Change: And in my commentary I said earlier.
Speaker Change: Revenue probably.
Speaker Change: Earlier at the end of calendar 'twenty six.
Speaker Change: And then maybe that leaks into 'twenty seven just depending on you know.
Speaker Change: Availability of key parts and products and testing and what have you. So but nonetheless, we think it's a brand new category, we're in great shape with it.
Speaker Change: We're able to leverage a lot of our capabilities both on the design side.
Speaker Change: The customer collaboration for testing and evaluation so.
Speaker Change: Super exciting.
Speaker Change: We think it is revolutionary in terms of <unk>.
Speaker Change: <unk>, the bandwidth and performance that future compute requirements are going to drive on memory for AI in the future.
Mark Adams: Okay, perfect. I appreciate that color. Thanks, guys.
Speaker Change: Okay perfect I appreciate that color thanks, guys.
Speaker Change: Yeah.
Nick Doyle: Thank you. The next question is from Nick Doyle with Needham & Company. Your line is now open.
Speaker Change: Thank you.
Speaker Change: The next question is from Nick Doyle with Needham and company. Your line is now open.
Nick Doyle: 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. 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 talk about? Thanks. Hey Nick, thanks for the question, and it's a good question.
Nick Doyle: Hey, guys. Thanks for taking my questions and best wishes to Jack on his next steps.
Speaker Change: You talked about this software platform expansion, the new ice cluster, where and one of the new features discussed was multi tenancy support.
Speaker Change: My understanding was that your core business is really focused on single tenants, where their cluster it needs to be optimized for their own workloads. So my question is does this new multi tenant support signal.
Speaker Change: And openness to support a CSP type customer more than the enterprise customer that you talked about thanks.
Nick Doyle: Hey, Nick Thanks for the question, it's a good question.
Mark Adams: 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 2 Cloud Service Providers. 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, it skins in the game. So it's not in either or 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's segmented that there's some applicability but more than not it's in the cloud service providers.
Speaker Change: I would think it's more a <unk>.
Nick Doyle: Additive and one of the earlier questions.
Speaker Change: I think it was from Alex from Luke talked about Neo cloud and what we referred to as tier two cloud service providers.
Nick Doyle: We keep running into companies who are deploying.
Nick Doyle: Different models to help build out and have these revenue models that in some cases multi tenancy as a given and you have to have it has skin in the game. So.
Nick Doyle: It's not an either or proposition.
Nick Doyle: Just that with the evolution of some of our key customers.
Nick Doyle: New additions to the portfolio of customers, we have multi tenancy is a key feature.
Nick Doyle: And even in the enterprise.
Speaker Change: You could make an argument for how that segment is that there is 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 are using it internally for some reason a segmented way, but more often than not.
Mark Adams: When I say the enterprise, it could be a private cloud where they're using it internally for some reason. Transcripts provided by Transcription Outsourcing, LLC. heard and taken to heart and developed.
Nick Doyle: Back to this hyper.
Speaker Change: Hyperscale or neo cloud capability requirement from the customer and it's something we really have.
Nick Doyle: Heard and taken to heart and developed.
Nick Doyle: That makes sense. It sounds like you're just kind of listening to your customers and building what they need.
Speaker Change: That makes sense. It sounds like you are just kind of listening to your customers and in building what they need.
Nate Olmstead: 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. But 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? Yeah, well, you got it right. So the deferred revenue line really relates to our And it would make sense that it's more it's a it's around a year. I mean, can these extend to two, three, five years? It does vary.
Speaker Change: 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 but.
Speaker Change: But how should we think about these getting recognized I know you talk about services contracts are typically a year or so.
Speaker Change: Okay.
Speaker Change: Yeah, So how should we think about that.
Speaker Change: Yes, you got it right. So the deferred revenue line really relates to our services business and so what you see there is some customer renewals, which.
Speaker Change: 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.
Speaker Change: And it would make sense that it's more it's around a year I mean can these extend to 235 years.
Speaker Change: It does vary I think one year is typical but we do see some that extend further than that more probably two to three.
Operator: I think one year is typical, but we... and further than that, more probably. Okay, thank you. Thank you. There are no further questions in queue.
Speaker Change: Three year time period.
Speaker Change: Okay. Thank you.
Speaker Change: Thanks, Nick.
Speaker Change: Thank you.
Speaker Change: 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: I'd like to turn the call back over to Mark Adams, CEO, for a closing remark. 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 today. 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.
Speaker Change: Thank you and thank you all for joining today's call.
Speaker Change: As I close I want to reflect on the progress we have made in the fiscal year to date.
Speaker Change: The first half has demonstrated our ability to execute our strategic strategic priorities, while delivering strong financial results.
Speaker Change: 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.
Mark Adams: with a growing portfolio of innovative products. 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 2025.
Speaker Change: With a growing portfolio of innovative products.
Speaker Change: Our focus on leveraging strategic partnerships and expanding go to market strategy.
Speaker Change: We remain optimistic about our ability to lead in this evolving market.
Speaker Change: And meet our revised growth plan for fiscal 2025.
Mark Adams: Thank you and have a great day. That concludes today's conference call. Thank you for your participation. You may now disconnect your line.
Speaker Change: Thank you and have a great day.
Speaker Change: That concludes today's conference call. Thank you for your participation you may now disconnect your lines.