Q3 2025 Penguin Solutions Inc Earnings Call
Good afternoon. Thank you for attending to be paid with solutions third quarter fiscal year 2025, earning results conference call. My name is Cambrian and I'll be your moderator.
All lines.
Call with.
Quick question.
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Star.
Ed and I would now like to pass the Gulf Coast.
Speaker Change: Investor Relations.
Speaker Change: Thank you operator, good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss Penguin solutions third quarter fiscal 2025 results.
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.
Speaker Change: We encourage you to go to the site throughout the quarter for the most current information on the company.
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 business plans and strategy and existing and potential collaborations.
Speaker Change: Forward looking statements are based on current beliefs and assumptions 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 read.
Speaker Change: <unk> annual and quarterly reports.
Speaker Change: The forward looking statements are representative only as of the date, they're made and except as required by applicable law, we assume no responsibility to publicly update or revise any forward looking statements.
Speaker Change: We 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. We.
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 the accompanying slide presentation.
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 third quarter of fiscal 2025 Penguin solutions earnings call.
We are pleased with our Q3 financial results.
Mark Adams: Our revenue was $324 million, an increase of seven 9% compared to Q3 of fiscal year 2024.
Mark Adams: non-GAAP gross margins came in at 31, 7%.
Mark Adams: non-GAAP diluted earnings per share was 47 cents.
Mark Adams: 5% increase year over year.
Mark Adams: We achieved non-GAAP operating income of $38 million up 15% in the prior year.
Mark Adams: And we delivered non-GAAP operating income margin of 11, 9%.
Mark Adams: All in all our Q3 results attest to our progress in transforming <unk> solutions into a leader in high performance high availability enterprise infrastructure solutions.
Mark Adams: We continue to see signs that early stage enterprise AI adoption across vertical markets, such as financial services Energy Defense education, and Neo cloud segments.
Mark Adams: As we have mentioned in the past our belief is that the investment of AI powered systems deployed throughout the industry in 'twenty three 'twenty four.
Mark Adams: The growth in full production installs in 2025 and 2026.
Mark Adams: We are now seeing signs that we have entered the initial stages of that growth and corporate build out at scale.
Speaker Change: Uh-huh solutions helps customers manage the complexity of AI adoption by leveraging both our proven knowhow and advanced clustered build outs.
Speaker Change: And our 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 also targeting the highest level of performance and availability.
Speaker Change: Our products and services are primarily marketed to hyperscale.
Speaker Change: Neo cloud service providers and Fortune 500 companies.
Speaker Change: Historically, we have sold directly to our end customers. However, we are also investing in channel partnerships that we believe will provide new opportunities for growth over the long term.
Speaker Change: The foundation of Taiwan solutions success is.
Speaker Change: As our expertise and large scale deployments.
Speaker Change: Which has been developed over a 25 plus year history implementing complex data center clusters, beginning with our early days and high performance computing or HTC.
Speaker Change: Our expertise integrating advanced technologies, such as power cooling.
Speaker Change: Compute memory storage and networking enabled us to deliver high performance high reliability enterprise infrastructure solutions for our customers.
Speaker Change: As we mentioned at the beginning of our fiscal 2025.
Speaker Change: We have transitioned from a providing a quarterly financial outlook.
Speaker Change: To providing our full year financial outlook.
Speaker Change: We believe that our full year outlook provides a broader perspective of our business, especially with regards to AI infrastructure engagements where.
Speaker Change: Or the timing of actual deployments.
Speaker Change: And associated revenue recognition can be unpredictable and concentrated.
Speaker Change: This approach aligns well with our focus on long term strategic objectives.
Speaker Change: At the same time.
Speaker Change: We know that our stakeholders appreciate your commentary on our progress each quarter.
Speaker Change: And we will offer that today as well.
Speaker Change: On our Q2 fiscal year 2025 call in April we raised our full year revenue growth outlook from 15% to 17% at the midpoint.
Speaker Change: Today, we are reaffirming that outlook.
Speaker Change: In addition.
Speaker Change: We are raising our full year non-GAAP diluted earnings per share outlook from $1 60 to $1 80 per share at the midpoint.
Speaker Change: As a reminder, we have shared previously that revenue and profits are likely to be weighted more towards the first half rather than the second half of fiscal 2025.
Speaker Change: I'd like to now provide additional detail on our business segments.
Speaker Change: Our advanced computing revenue for the third quarter of fiscal 2025 was $132 million down compared to the prior quarter as expected.
Speaker Change: As we often highlight on our earnings calls.
Speaker Change: Revenue recognition advanced computing tends to be lumpy.
Speaker Change: This is due to factors like customer concentration the timing of large project implementation for our major customers.
Speaker Change: And the timing of discretionary nature of our customer renewals.
Speaker Change: The decline in Q3, when compared to the prior quarter was largely due to the timing of our major deployment at a large hyperscale customer.
Speaker Change: We recognize the revenue in our second quarter.
Speaker Change: That said this quarter, we had some exciting wins at our existing customers and closed five new customer bookings highlighted by wins in the federal energy and biotech segments.
Speaker Change: We continue to see increased interest and enterprise customers as well as in neo cloud customer opportunities exemplifying the increased investments being made in large scale AI infrastructure.
Speaker Change: Our core competency in successfully managing large scale AI infrastructure build outs helps customers accelerate their time to a live production environment.
Speaker Change: We believe our customers value our technology agnostic approach.
Speaker Change: Which allows us to create a unique overall solution that meets their specific AI infrastructure needs.
Speaker Change: Beyond our hardware building blocks, we are investing in the development of Penguin ice cluster where a.
Speaker Change: Our software platform that helps customers manage their infrastructure assets.
Speaker Change: Our Penguin solution service organization can assist companies in managing their post deployment operations supporting the high performance and high availability of their systems. Overall, we are seeing growth in new customer bookings and have continued to expand our pipeline. During the first three quarters of FY 2025.
Speaker Change: Integrated memory under the smart modular brand achieved $130 million in revenue in Q3 up 24%.
Speaker Change: Impaired to the prior quarter.
Speaker Change: We saw strong demand from our computing networking and telecommunications customers.
Speaker Change: Pricing in both DRAM and NAND appears relatively stable and inventory levels appeared balanced at our major customers.
Speaker Change: We are optimistic about memory demand in the near term as large enterprises seek out higher performance and higher reliability memory.
Speaker Change: To support both established workflows in new complex AI workloads.
Speaker Change: In line with this increasing demand for improved memory bandwidth and availability.
Speaker Change: We are seeing early adoption of our compute express link or CSL family of products.
Speaker Change: Thanks in part to positive momentum in our customer qualification efforts. We have received early production orders of CSL from Oems, and then AI computing customer, which reinforces our optimism about CSL to appeal to new types of customers.
Speaker Change: From an R&D perspective, we are focused on products that enable higher bandwidth and larger memory access.
Speaker Change: And from a GPU.
Speaker Change: Memory pooling.
Speaker Change: We continue to invest in the design of smarts optical memory appliance.
Speaker Change: Hey.
Speaker Change: With first product shipments targeted for late 2026 early 2027.
Speaker Change: Given the importance of memory to the AI ecosystem, we feel confident that smart modular continued to play a key role.
Speaker Change: Telling our customers integrated memory requirements in the future.
Speaker Change: Optimize led.
Speaker Change: Operates under the Cree led brand.
Speaker Change: Revenue came in at $62 million up slightly compared to the prior quarter.
Speaker Change: Our topline was constrained during the second half of Q3, largely due to increased cost and uncertainty related to tariffs on products shipped out of our ways, Joe China facility.
Speaker Change: Despite macro uncertainty in the led market.
Speaker Change: We remain confident in our high performance product portfolio, our strong intellectual property and our cost effective capital light operating model.
Speaker Change: In December of 2024, we closed a $200 million investment from SK Telecom.
Speaker Change: At the time, we explained that in addition to the investment.
Speaker Change: The opportunities to partner with SK group, and more specifically SK telecom and SK hynix could offer strategic commercial benefits as well.
Speaker Change: We are making progress with SK telecom on opportunities related to their AI strategy, including their AI data center infrastructure initiatives.
Speaker Change: The already strong relationship between SK Hynix and smart modular is evolving as we look at new ways to address markets with system level products and custom high value add memory related segments.
Speaker Change: Since our last call that.
Speaker Change: There have been two other company developments that I would like to mention.
Speaker Change: First on June 26.
Speaker Change: We announced a refinancing that further strengthens our balance sheet.
Speaker Change: By reducing our gross leverage and.
Speaker Change: Extending our overall debt maturity.
Speaker Change: Establishing a $400 million credit facility.
Speaker Change: Nate will provide more details in his comments.
Nate: Second on June 30th.
Speaker Change: We completed the re Domiciliation of Penguin Solutions, Inc. From.
Nate: From the Cayman Islands to United States as a Delaware Corporation.
Nate: While our price structure has served us well.
Nate: Look forward to being a U S based company as we continue our transformation.
Nate: In closing I want to thank our team for delivering strong results.
Nate: At time of macro uncertainty.
Nate: For Q4, we remain focused on short term execution.
Nate: While also continuing to invest for longer term growth.
Nate: Penguins value proposition of solving the complexity of AI infrastructure for our customers positions us well to address the increasing market opportunity being created by enterprise adoption at scale.
Nate: Let me stop here and hand, the call over to Nate.
Speaker Change: Who will provide more color on our performance and outlook for the remainder of fiscal 2025 Nate.
Nate: <unk>.
Nate: Thanks, Mark I will focus my remarks on our non-GAAP results, which are reconciled to GAAP in our earnings release tables and in the investor materials on our website.
Nate: Now, let me turn to our third quarter results.
Nate: Total Penguin solutions net sales were $324 million up seven 9% year over year.
Nate: non-GAAP gross margin came in at 31, 7%, which was down year over year and up sequentially.
Nate: non-GAAP operating margin was 11, 9% up <unk> eight percentage points versus last year and non-GAAP diluted earnings per share were <unk> 47 for the quarter up 25% from Q3 last year.
Nate: In the third quarter of fiscal 2025, our overall services net sales totaled $66 million down 3% versus Q3 last year.
Nate: Product net sales were $259 million in the third quarter up 11% versus the prior year.
Nate: Third quarter net sales by business segment were as follows.
Nate: First computing $132 million or <unk>, 41% of our total net sales and down 9% year over year.
Nate: Integrated memory $130 million, which was 40% of our total net sales and up 42% year over year.
Nate: And optimized led $62 million or 19% of our total net sales and down 4% year over year.
Nate: non-GAAP gross margin for Penguin solutions in the third quarter was 31, 7% down <unk> six percentage points year over year, driven primarily by a higher mix of integrated memory net sales compared to last year, partially offset by improved margin rate and integrated memory and optimized LCD.
Nate: Gross margin was up <unk> nine percentage points sequentially with higher margin rates and advanced computing, partially offset by a higher mix of integrated memory net sales.
Nate: non-GAAP operating expenses for the third quarter were $64 million up 1% year over year and up 2% sequentially.
Nate: Operating expenses as a percentage of net sales were down year over year, driven by higher net sales volumes and stable spending levels.
Nate: non-GAAP operating income was $38 million up 15% year over year and down 22% versus last quarter.
Nate: The combination of topline growth and operating expense discipline translated into a <unk> eight percentage point increase in operating margin versus Q3 last year. This is our fourth consecutive quarter of non-GAAP operating margin expansion year over year.
Nate: non-GAAP diluted earnings per share for the third quarter of fiscal 2025, or <unk> 47 up 25% versus the prior year and down 10% versus the prior quarter.
Nate: Adjusted EBITDA for the third quarter was $45 million up 15% year over year.
Nate: Turning to balance sheet highlights for working capital, our net accounts receivables totaled $293 million compared to $212 million a year ago with the increase driven by higher sales volume.
Nate: Days sales outstanding came in at 47 days up from 42 days in the prior year quarter due to variations in sales linearity across the quarters.
Nate: Inventory totaled $184 million at the end of the third quarter up from $177 million at the end of Q3, a year ago due to higher sales volumes.
Nate: Days of inventory were 36 days down from 44 days, a year ago, primarily due to the timing of receipt and shipment.
Nate: <unk> payable were $272 million at the end of the quarter up from $192 million a year ago, due primarily to higher sales volumes.
Nate: Days payable outstanding was 53 days compared to 47 days last year due to the timing of purchases and payments.
Nate: Our cash conversion cycle was 30 days, an improvement of eight days compared to last year due to faster inventory turns.
Nate: 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 $563 million and $468 million respectively in the third quarter.
Nate: As a reminder, the difference between gross and net sales is primarily related to our memory businesses logistics services.
Nate: Each are accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as net sales.
Nate: Cash and cash equivalents and short term investments totaled $736 million at the end of the third quarter up $268 million from Q3 last year and up $89 million sequentially.
Nate: The year over year fluctuation was due primarily to proceeds from the issuance of preferred shares and cash generated by the business.
Nate: Third quarter cash flows generated from operating activities totaled $97 million compared to $80 million generated from operating activities in the prior year quarter.
Nate: The increase year over year was due primarily to improved working capital efficiency.
Nate: We spent approximately $30 million to repurchase one 8 million shares in the third quarter under our share buyback program.
Nate: Since our initial share repurchase authorization in April 2022, we have used a total of $113 million to repurchase six 6 million shares through Q3 of fiscal year 2025.
Nate: And we have $37 million remaining in our authorization.
Nate: We did not make any debt prepayments in this past quarter and the principal on our term loan was at $300 million as of the end of the quarter.
Nate: Our net debt at the end of Q3 was negative $66 million.
Nate: Subsequent to the end of the quarter, we completed a refinancing of our existing credit facility.
Nate: We paid off the $300 million remaining on our term loan using $200 million of cash from our balance sheet and $100 million of borrowings from our new revolving credit facility.
Nate: This refinancing transaction significantly reduced our leverage extended our debt maturities and is expected to reduce our debt service costs as we reduced our total gross debt by $200 million.
Nate: For those of you tracking capital expenditures and depreciation capital expenditures were $2 million in the third quarter and depreciation was $5 million.
Nate: Now turning to our outlook.
Nate: Given our strong year to date performance, we are maintaining the midpoint of our net sales outlook for the year at 17% year over year and tightening the range to plus or minus two percentage points.
Nate: By segment, our full year net sales outlook reflects the following.
Nate: <unk> computing, we continue to expect full year net sales to grow between 15 and 25% year over year.
Nate: For memory, we now expect net sales to grow between 25% and 30% year over year.
Nate: And for led we continue to expect net sales to be approximately flat year over year.
Nate: Our non-GAAP gross margin outlook for the full year remains 31% with a tighter range of plus or minus 0.5 percentage points.
Nate: We now expect our non-GAAP operating expenses for the full year will be $260 million, plus or minus $5 million.
Nate: We are also raising our outlook for our non-GAAP full year diluted earnings per share, which is now expected to be approximately $1 80.
Nate: Lesser minus five.
Nate: This is up from our prior outlook of $1 60, plus or minus 10.
Nate: And finally, our non-GAAP diluted share count is now expected to be approximately 54 million shares for the year.
Nate: Due primarily to changes in our geographic mix of our earnings we are lowering our FY 'twenty five non-GAAP tax rate to 25% which reflects.
Nate: <unk> currently available information.
Nate: While we expect to use this normalized non-GAAP tax rate through 2025.
Nate: Long term non-GAAP tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global and U S tax environment.
Nate: Inefficient changes in our geographic earnings mix or changes to our strategy or business operations.
Nate: 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 businesses.
Nate: This includes extended lead times for certain components that are incorporated into our overall solutions impacting how quickly we can ramp existing and new customer projects and higher tariffs and are optimized led business.
Nate: 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: 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.
Nate: With that operator, we are ready for Q&A.
Nate: Okay.
Nate: Thanks.
Nate: Now begin the question and answer session.
Nate: If you would like to ask a question. Please press star followed by one on your telephone keypad.
Nate: Any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one and as a reminder, if you are using a speaker phone. Please remember it's a pick up your handset before asking a question we will pause here briefly as questions are registered.
Nate: The first question is from the line of Kevin Cassidy with Rosa Securities You May proceed.
Kevin Cassidy: Yes, Thanks for taking my question congratulations on the good results.
Nate: And in particular, the five new customer bookings.
Kevin Cassidy: I'm wondering if you could give us a little more details on that.
Nate: The customers that you've got through partnerships.
Nate: And maybe how long had been working on booking these new customers and is it software and services hardware on boats.
Nate: Maybe just a few questions about that.
Mark Adams: Hey, Kevin Thanks, It's mark.
Nate: We see if I can break this down for you.
Nate: The length of the sales motions typically are in the 12 to 18 month range from the time, we engage with customers at the time, we ship in the bookings kind of come somewhere around the 12 month Mark.
Nate: And I would say.
Nate: Some of the some of the new bookings were kind of along that framework.
Nate: And you asked.
Nate: Specifically about.
Nate: Software and services relative to hardware.
Nate: We've mentioned on previous calls that.
Nate: The hardware is typically something that we recognize revenue upfront and the way software and services.
Nate: That category is recognized as more ratified over time and so when we get these.
Nate: Bundled solutions so to speak these integrated solutions of hardware software and services.
Nate: Typically our hardware.
Nate: Upfront and have characteristics of being lower margin and then.
Speaker Change: Sure and then the software and services come to us over time and.
Nate: And thats consistent with.
Speaker Change: Some of our more recent bookings.
Speaker Change: Okay, Great and maybe you.
Speaker Change: Said, a little bit about the SK telecom.
Speaker Change: Collaboration.
Speaker Change: I mean, maybe Jen.
Speaker Change: Generating new customers.
Speaker Change: Talk more about.
Speaker Change: Where are you seeing that.
Speaker Change: Our geographies are.
Speaker Change: Yes, absolutely.
Speaker Change: At the time of the investment when we closed it back in December of 'twenty four.
Speaker Change: We highlighted that this was really a relationship that was transcending the financial investment.
Speaker Change: The element of it and we.
Speaker Change: We were excited about working with SK and more specifically SK telecom and SK hynix.
Speaker Change: We've had some early wins on the memory side.
Speaker Change: And we look.
Speaker Change: Look forward to broadening that relationship.
Speaker Change: With Hynix overtime.
Speaker Change: Our assistant related products and helping enable some of their memory technologies to.
Speaker Change: New application environments, we've talked about higher bandwidth.
Speaker Change: Opportunities like the LMA, we mentioned.
Speaker Change: But we've actually had some early success.
Speaker Change: On business opportunities with Hynix.
Speaker Change: Right.
Speaker Change: We are making really good progress with SK telecom as well we are certainly very optimistic about the opportunities ahead with them in terms of it.
Speaker Change: Data center infrastructure solutions by the way.
Speaker Change: The efforts that we have there are really global in nature not just.
Speaker Change: Domestic but also.
Speaker Change: In other parts of the world.
Speaker Change: And.
Speaker Change: We're again, we're pleased about the progress we're seeing on their on their AI data center initiatives.
Speaker Change: And we're exploring multiple joint opportunities with them so.
Speaker Change: Overall, the relationship with SK is positive.
Speaker Change: And we're pleased with the progress.
Speaker Change: Okay great.
Speaker Change: Spreads in the question.
Speaker Change: The next question is from the line of Tom O'malley with Barclays. You May proceed.
Tom O'malley: Hey, guys. Thanks for taking my questions.
Tom O'malley: My first is on the memory side I think that's the one segment that you are actually taking a bit higher for the full year.
Tom O'malley: You saw some strong growth in the May quarter August for your full year guidance implied kind of down in the mid single digits range can you kind of talk about the dynamic of potential pull forwards. If we look at some other companies in the ecosystem you have seen some really strong consumer demand.
Tom O'malley: In the most recent quarter you didn't call that out you kind of called out a broad breadth of strength, but.
Tom O'malley: Do you know if youre seeing any pull forwards are you protecting against that with the guide in August any color there would be helpful.
Tom O'malley: Sure and Tom I think just one correction I think did you said that memory was the only one that was growing in the year.
Tom O'malley: Did I misunderstand.
Tom O'malley: No.
Tom O'malley: <unk> memory from I think prior.
Tom O'malley: Your range for the full year, I think moved a little higher from 25% to 30, correct to you took that correctly.
Tom O'malley: Right, Okay, Yes, and advanced computing is up in the range I guess, it's 15% to 25% I believe so in the memory side.
Tom O'malley: We are not seeing any necessarily pull forward so to speak.
Tom O'malley: As we commented on in the.
Tom O'malley: Back in the fall.
Tom O'malley: There was some inventory that we were working through.
Tom O'malley: And.
Tom O'malley: This quarter I think.
Tom O'malley: <unk>.
Tom O'malley: So really pleased with the growth opportunities as people started to.
Tom O'malley: To get back and ordering.
Tom O'malley: But we don't we don't see any.
Tom O'malley: Significant inventory builds or what have you and yes, we watch that from.
Tom O'malley: Yes.
Tom O'malley: Customer discussions standpoint on on their ordering patterns and what their requirements are and their forecasts and.
Tom O'malley: Our pipeline.
Tom O'malley: Q4 remains pretty healthy so we're generally very pleased.
Tom O'malley: With the direction of the business.
Tom O'malley: Overall.
Tom O'malley: Helpful and then and then on the advanced computing side.
Tom O'malley: Historically these are big projects big customers they tend to slide around one to two quarters, which is.
Tom O'malley: While I think before year guidance is useful but when you look at the fourth quarter.
Tom O'malley: Is the big acceleration again timing of an order.
Speaker Change: Or are you seeing kind of broad based strength across different customers kind of implied in your full year guide is a nice mid teens growth sequentially into the August quarter. So just trying to understand what's contributing to that strength in Q4.
Tom O'malley: We're doing as we mentioned we're seeing some.
Tom O'malley: Some uptick in terms of bookings some of which will be looking to recognize.
Tom O'malley: Revenue through deployment by the end of the quarter.
Tom O'malley: But.
Tom O'malley: This quarter.
Tom O'malley: Isn't necessarily one.
Tom O'malley: A major deployment thats not what we are.
Tom O'malley: Suggesting.
Nate: Got a little more diversity in the quarter, although I'll, let Nate talk to a specific.
Tom O'malley: Outlook.
Tom O'malley: But this quarter is not like we commented on in Q2 earlier in my script.
Tom O'malley: This is more a number of customers and again, we've run into the situation where the bookings comment.
Tom O'malley: Come at a certain time, our supply chain goes out and acquires accordingly, and we look to install and it's really done at the customer and our pace relative to the business.
Tom O'malley: We do with them and not necessarily to the end of our fiscal quarter. So.
Tom O'malley: This is where we run into that same lump.
Tom O'malley: Lumpiness in terms of revenue, having said that as I want to reinforce it's not about one customer per se, it's a little more diversified.
Speaker Change: The next question is from the line of <unk> with Jpmorgan you May proceed.
Speaker Change: Hey, guys. Thanks for taking my question, maybe if I can start on advanced computing and you talked about sort of the deployments.
Speaker Change: Our fiscal <unk>, not being given by like one lumpy deployment, but more broad based but can you talk about the mix abate in terms of what you're seeing in those incremental deployments and I know you've talked about the new cloud opportunity, but any sense.
Speaker Change: That you can give us in terms of what you're currently seeing in the mixed set of rotating more towards the new workloads or any more visibility as you look forward into that and I have a follow up thank you.
Speaker Change: Sure I think.
Speaker Change: As I commented on earlier in my prepared comments.
Speaker Change: We've seen in addition to neo cloud, we've seen some strength in federal.
In energy how.
Speaker Change: How to win in biotech.
Speaker Change: And we're seeing a lot more.
Speaker Change: Yeah.
Speaker Change: Inbound signals relative to interest in the financial sector.
Speaker Change: As well those are kind of the top segments that were.
Speaker Change: Playing in today.
Speaker Change: Okay got it and then.
Speaker Change: Maybe on the sort of <unk>.
Speaker Change: Though it's too early to talk about the next fiscal year, but when you think about sort of the new customers that you've signed up that you talked about the five new customers as well as the opportunity that you are now seeing in the pipeline.
Speaker Change: Just help us think about maybe from a fiscal 'twenty six perspective for advanced computing, what should we keep in mind for fiscal 'twenty five the growth rate that you have index sort of.
Speaker Change: 15% to 25% range, how should we think about what are the puts and takes for fiscal 'twenty six.
Speaker Change: Yes. Unfortunately.
Speaker Change: We're not providing any of that guidance today, it's just it's too dynamic environment with all the puts and takes as a number of factors that.
Speaker Change: That we we and other companies are dealing with right now one. Good example is the tariff situation and how dynamic that changes over time.
Speaker Change: Certainly very happy and proud of where the team navigated that in Q3 and delivered strong results but.
Speaker Change: We're going to we're going to start from.
Speaker Change: Commenting on FY 'twenty six in any way shape or form today.
Speaker Change: Okay. Appreciate it. Thank you thanks for taking the questions.
Thank you.
Speaker Change: The next question is from the line of Nick Doyle with meet him you May proceed.
Nick Doyle: Hey, guys. Thanks for taking my questions first could you give any details on the CDW agreement or partnership just maybe talking about how that approach is different than with Dell and if you expect any kind of.
Nick Doyle: Similar contributions or customer type wins in fiscal 'twenty six.
Nick Doyle: Sure.
Speaker Change: Again, we're going to sorry, Nick we're going to hold off on any 26 commentary, but the framework that we're working on right now is we're starting to invest.
Nick Doyle: In.
Nick Doyle: Partnerships outside of our direct customer engagement and you've mentioned two of them today.
Nick Doyle: The idea being that.
Nick Doyle: We can scale.
Nick Doyle: A larger set of customers through some of these partnerships and really focused on our value add.
Nick Doyle: And we've seen.
Nick Doyle: Some early proof of concept success stories and in both.
Nick Doyle: Both partners that you mentioned.
Nick Doyle: But again its early stage and it's the right thing for us to be thinking about as we expand.
Nick Doyle: Not just in terms of customers here in the U S, but as we think about our broader go to market.
Nick Doyle: Internationally.
Nick Doyle: Got it and for my second question Services' revenue grew quarter over quarter.
Nick Doyle: While overall advanced compute declined sharply so was that driven more by these point in time services or did those larger hardware hardware deals in the first half translate to this.
Nick Doyle: Kind of slower steady revenue growth that we saw this quarter.
Nick Doyle: I think that it's a mixture of everything what you just said it is a mixture of.
Nick Doyle: Service revenue ratified overtime and recognized.
Nick Doyle: Over multiple periods so to speak.
Nick Doyle: <unk>.
Nick Doyle: The mix of hardware in Q3 was lower than.
Nick Doyle: Say Q2.
Nick Doyle: And so the combination of that contributes to the service mix services mix.
Nick Doyle: As you know we we.
Nick Doyle: We recognized services the way, we do but they are renewed annually and then in the middle of the fiscal year, if we get a new order we begin that recognition at the time.
Nick Doyle: Shipment slash signed order for those services and so.
Nick Doyle: That's a positive.
Nick Doyle: And we.
Nick Doyle: Continuing to try to add to that.
Nick Doyle: Quarter to quarter.
Nick Doyle: Thank you.
Nick Doyle: Brief reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one and as a reminder.
Nick Doyle: If you were using a speaker phone. Please remember to pick up your handset before asking a question.
Brian Chin: The next question is from the line of Brian Chin with Stifel. You May proceed.
Nick Doyle: Yes.
Dennis: Hi, This is Dennis on for Brian Thanks for taking our questions.
Nick Doyle: My first one is on advanced compute.
Nick Doyle: The new customers that you won are you expecting any change in the hardware and software mix proportions over the life of these customers.
Nick Doyle: Well typically what happens or what we've seen happen with our customer engagements with new.
Nick Doyle: <unk>.
Nick Doyle: As again the revenue recognition for the new customers upfront is hardware related.
Nick Doyle: Just because thats, what we install and Thats, what we design a solution for and then our services and software mix.
Nick Doyle: Happens over time now.
Nick Doyle: We've had a number of instances where customers.
Nick Doyle: Increased the <unk>.
Nick Doyle: Foot print of their rollout of their implementation and that can be.
Nick Doyle: A time when they actually order more hardware along the way, but typically the flow of revenue recognition and type of product is hardware early on in the cycle of a new customer acquisition and services software and services over time.
Nick Doyle: And.
Nick Doyle: We continue to try to be very disciplined.
Nick Doyle: And making sure that we're not doing any hardware only deal as you.
Nick Doyle: All can see from our competitor announcements without being specific the hardware market itself is super competitive from a margin standpoint.
Nick Doyle: And quite frankly, I think our value add is is in the services area and the software and services that.
Nick Doyle: We offer our customers and.
Nick Doyle: Of course, our hardware is best in class from a design and performance standpoint.
Nick Doyle: But the hardware market tends to be lower in gross margin.
Nick Doyle: Thus, we tend to propose and look at our business from our solutions.
Nick Doyle: Mindset not.
Nick Doyle: And where any one component of hardware only sales.
Nick Doyle: When you see that the majority of this $66 million of.
Nick Doyle: Software services sales comes from advanced computing or is there a good bit from the other segments too.
Nick Doyle: Charity of the services.
Nick Doyle: Like a healthy majority I'll, let Nate if he can.
Nick Doyle: The actual number here, but the majority of services at all advanced computing.
Nick Doyle: The great majority.
Nick Doyle: Got a little bit in memory.
Nick Doyle: It's really mostly advanced compute.
Nick Doyle: Great and then for my second question after for memory could you discuss the strengthen.
Nick Doyle: This quarter from a product and a vertical perspective like how does the strength in DRAM pricing impacts year memory gross margins and then maybe you could also talk about the like the attach rate of your memory products to your desk, including products.
Nick Doyle: Okay. So the first.
Nick Doyle: The pricing in DRAM.
Nick Doyle: <unk>.
Nick Doyle: It's been relatively stable in the quarter.
Nick Doyle: What I would say is.
Nick Doyle: The memory gross margin question.
Nick Doyle: Ironically, when memory pricing goes up.
Nick Doyle: Margins.
Nick Doyle: Our impacted slightly in a negative way because DRAM, then becomes a higher percentage of the whole value add that we give.
Nick Doyle: But it's just a directional.
Nick Doyle: Trend, but the.
Nick Doyle: The mix of products.
Nick Doyle: And the unit growth was substantial as well in the quarter, which led to a combined.
Nick Doyle: High growth quarter in memory.
Nick Doyle: On the attach rate we continue to work.
Nick Doyle: And used smart modular and the Penguin platform.
Nick Doyle: We do sell and we.
Nick Doyle: We are continuing to develop our new products that we think will be.
Nick Doyle: I'm very valuable in terms of the AI ecosystem as we've talked about.
Nick Doyle: CSL.
Nick Doyle: In our optical memory appliance development, which is a long term initiative for us.
Nick Doyle: To help provide better memory advanced memory solutions for advanced workloads.
Nick Doyle: So it is it is a priority of ours and we do a good job on the Penguin systems itself and we're looking to develop.
Nick Doyle: More sophisticated higher bandwidth memory and products going forward.
Nick Doyle: That's it for me thank you.
Nick Doyle: Thank you.
Nick Doyle: Okay.
Speaker Change: For our last question, we have a follow up from Nick Doyle with meet him.
Nick Doyle: Proceed.
Speaker Change: Alright, Thank you and just kind of a bigger picture question.
Speaker Change: We're hearing about this idea of production in France, and and I think that really requires a truly tier one grade high availability sorry.
Speaker Change: Server solutions. So if you take out the Hyperscale is just because thats not where you generally play how much market capacity today is operating at that level and kind of ready to service production in France, and how much is left where you guys can go in and really increase that utilization get.
Speaker Change: The high availability ready to go.
Speaker Change: I'm not sure I and Nick I'm not sure I totally understood your question.
We have a.
Speaker Change: High availability.
Speaker Change: Uh huh.
Speaker Change: Hedge server platform that we use.
Speaker Change: We've talked about developing products for inferencing overtime.
Speaker Change: And the data center.
Speaker Change: We're starting to see more of the trend line to be a hybrid training and embracing.
Speaker Change: Demand thesis, but I am not sure again, if I am.
Speaker Change: So I'm quite getting your question can you restate it.
Speaker Change: Yes.
Speaker Change: Joining outfit.
Speaker Change: When guys want to do this kind of production level and trends there is thinking that it really requires high availability versus more traditional cloud.
Speaker Change: And to do that you need a higher level of server and that's what you guys can provide so maybe the market just isn't there and you can kind of help the market move towards a solution that works for everybody and wonder sorry, yes, great got it so I understand I apologize I misunderstood because.
When you said in Brazil, I initially went to our edge platform and what we're trying to build for our future edge implementations, but in the environment Youre talking about Youre exactly right. There is and by the way. That's a lot of it has to do with our software and services that we provide to be able to make sure that not only is the design performance we.
Speaker Change: Get upfront in our system is critical but it's also the availability and uptime through.
Speaker Change: Diagnostics and.
Speaker Change: Our fault.
Speaker Change: Fault repair capabilities in the data center that allow us to have the maximum uptime and that's a really critical metric. When you think about the capital investments into AI infrastructure, making sure people have high reliability high availability, along with the high performance and quite frankly, when you come from a high.
Speaker Change: Performance compute background like us we've seen.
Speaker Change: The levers that allow for the most optimal performance in a data center and I think that has played well and we will continue to play well for us as true enterprise rollout production environments for inferencing.
Speaker Change: Yeah.
Mark Adams: Thanks Mark.
Speaker Change: Thank you.
unknown: That concludes the Q&A session I would now like to pass the conference back over to Mark Adams, the CEO for any closing remarks.
Mark Adams: Thank you operator and.
Mark Adams: Just in closing we are pleased with our results through the third quarter on today's call.
Mark Adams: We reconfirm the midpoint of our revenue guidance, which we raised to 17% on our last call.
Mark Adams: And we've raised today our earnings per share guidance range for fiscal 2025.
Mark Adams: We have strengthened our balance sheet and remain committed to our long term investments in hardware software and services.
Mark Adams: Positioning us to address the rapidly growing market demand for AI infrastructure solutions on premise in the cloud and at the edge.
Mark Adams: Thank you all for joining today's call.
Mark Adams: That concludes today's call. Thank you for your participation and enjoy the rest of your day.