Penguin Solutions Earnings Call Highlights Memory-Fueled Transition

Penguin Solutions, Inc. ((PENG)) has held its Q1 earnings call. Read on for the main highlights of the call.

Penguin Solutions Balances Strong Memory Growth With Business Headwinds in Q1 Call

The tone of Penguin Solutions’ latest earnings call was cautiously optimistic, with management emphasizing solid cash generation, steady margin expansion and strong momentum in the Integrated Memory segment, alongside a growing AI-focused pipeline. At the same time, executives acknowledged meaningful headwinds from the planned wind-down of the high-margin Penguin Edge business, the absence of hyperscale hardware revenue, weakness in the LED segment and some pressure on gross margins. The reaffirmation of full-year guidance, despite these challenges and acknowledged timing and supply-chain risks, underscored management’s confidence in underlying demand and the long-term strategy.

Steady Top-Line Performance Amid Portfolio Shifts

Penguin Solutions reported Q1 FY2026 total net sales of $343 million, up 1% year over year and 2% sequentially, showing modest but positive growth in a transition year. Product net sales reached $279 million, up 3% from the prior year, while services net sales came in at $65 million. The mix reflects the company’s ongoing pivot toward higher-growth, AI- and memory-centric offerings, even as legacy and wind-down activities weigh on reported growth. The modest headline expansion masks stronger gains in core areas that management highlighted as critical to long-term value creation.

Integrated Memory Emerges as a Growth Engine

Integrated Memory was the standout performer in Q1, delivering $137 million in revenue, or 40% of company net sales, up an impressive 41% year over year and 3% sequentially. This robust performance led management to raise its full-year outlook for memory net sales growth to a range of 20%–35%. The segment is benefiting from demand in AI, data-intensive workloads and high-performance computing use cases, positioning it as the central growth engine for the company. This accelerated trajectory, however, also tilts the overall mix toward lower-margin products, a trade-off management is openly acknowledging as it prioritizes share and scale in this strategic market.

Advanced Computing Underlying Momentum Masked by Portfolio Changes

Advanced Computing reported Q1 net sales of $151 million, representing 44% of total sales and a 15% decline year over year on a reported basis. However, when excluding the impact of the Penguin Edge wind-down and the absence of hyperscale hardware, management said Advanced Computing net sales actually grew 52% year over year. This adjusted view gives a clearer picture of underlying demand from enterprise and AI-oriented customers, where new customer bookings and project pipelines are expanding. The business remains lumpy, highly dependent on large projects and specific customer rollouts, but the company emphasized that the core, continuing Advanced Computing franchise is strengthening beneath the reported numbers.

Margin Expansion and Improving Profitability

Profitability continued to move in the right direction, with non-GAAP operating income rising 1% year over year to $42 million and non-GAAP operating margin improving slightly to 12.1%, up 0.1 percentage point. This marks the sixth consecutive quarter of year-over-year non-GAAP operating margin expansion, highlighting management’s disciplined execution despite mix shifts and revenue headwinds from business exits. The improvement underscores operational leverage and cost control, helping to offset the earnings drag from higher-growth but lower-margin areas and from segments in structural decline.

Gross Margin Holds Near Target Despite Mix Pressure

Non-GAAP gross margin came in at 30% in Q1. While this represented a modest decline of 0.8 percentage points year over year and 0.9 points sequentially, management noted that the figure compares favorably to the midpoint of the updated full-year outlook. The pressure is largely attributed to a greater contribution from Integrated Memory, which carries lower gross margins than some legacy and high-margin businesses being wound down. Even so, Penguin is keeping gross margins effectively in line with guidance, signaling that the company is managing the mix transition without a significant deterioration in overall profitability.

EPS Trends Show Sequential Improvement

Penguin posted non-GAAP diluted EPS of $0.49 for Q1, flat compared with the same period last year but up a healthy 14% sequentially. The flat year-over-year comparison reflects the combined impact of transitioning away from higher-margin legacy revenue streams and absorbing gross margin pressure from memory mix shifts. The quarter-over-quarter improvement, however, suggests better operational execution and leverage as the company moves deeper into its AI and memory growth cycle, providing investors with early signs that the current strategy can support earnings resilience.

Strong Cash Generation and Shareholder Returns

The balance sheet and cash flow trends were a bright spot. Penguin ended the quarter with $461 million in cash, cash equivalents and short-term investments, up $68 million from a year earlier. Cash flow from operations surged to $31 million, a 125% year-over-year increase, highlighting improved working capital management and profitability. The company also returned capital to shareholders, repurchasing approximately 791,000 shares for $15 million during the quarter, with $96.5 million remaining under the current authorization. This combination of liquidity, cash generation and buybacks supports the investment case even as headline revenue growth remains modest.

Cost Discipline Underpins Margin Gains

Non-GAAP operating expenses declined to $61 million, down 4% year over year and 6% sequentially, driven primarily by lower personnel-related and subcontract services costs. This disciplined approach to spending is a key factor behind the company’s consistent operating margin expansion and EPS stability. By tightly managing opex while investing selectively in high-priority initiatives such as AI, memory and software, Penguin is building financial flexibility to navigate macro uncertainty and fund growth without sacrificing profitability.

Strategic Wins and Expanding AI and Enterprise Pipeline

Management highlighted a number of strategic developments that underscore the company’s positioning in AI and high-performance computing. New customer bookings were secured in defense and education, with a growing pipeline across financial services, oil and gas, telecom, manufacturing and sovereign cloud opportunities. Penguin also rolled out a rapid development workshop program aimed at accelerating customer adoption of AI and advanced computing solutions. Partnerships with major technology players—including NVIDIA, AMD, CDW and SKT—remain central to the strategy, while ongoing development efforts on the ICE ClusterWare software platform and an optical memory appliance are designed to deepen differentiation in high-performance and AI-centric workloads.

LED Segment Weakness Weighs on Results

The Optimized LED (formerly Cree LED) business remains a drag on the portfolio. Q1 LED revenue was $55 million, down 18% sequentially as demand weakened notably in China and from certain large U.S. OEM customers. Reflecting this challenging backdrop, management now expects full-year LED net sales to decline between 15% and 5%. The segment’s headwinds underscore the shift in Penguin’s growth focus toward Integrated Memory and Advanced Computing, as LED becomes increasingly non-core and structurally pressured by end-market softness and competitive dynamics.

Impact of Penguin Edge Wind-Down and Hyperscale Pause

A major theme of the call was the adverse impact of strategic portfolio decisions on reported growth. Penguin recognized no hyperscale hardware revenue in Q1 and is actively winding down its high-margin Penguin Edge business, which it expects to be largely complete by the end of fiscal 2026. Management estimates that these two factors together are roughly 14 percentage points unfavorable to total company net sales growth and about 30 percentage points unfavorable to Advanced Computing growth this year. While painful in the short term, the company frames these actions as necessary to focus on more scalable, higher-growth markets aligned with AI and enterprise computing.

Advanced Computing Decline Reflects Lumpy Model

In reported terms, Advanced Computing net sales declined 15% year over year, even though the underlying continuing operations grew sharply when adjusted for Penguin Edge and hyperscale. Management emphasized that the business is inherently “lumpy,” with revenue concentrated in large, project-based deals that create variability from quarter to quarter. This customer concentration and project-driven pattern makes near-term forecasting difficult, but the company pointed to the strong pipeline and 52% adjusted growth as evidence that demand for its core Advanced Computing solutions remains robust beneath the reported volatility.

Gross Margin Outlook Trimmed on Mix Shift

Consistent with the Q1 margin performance, Penguin lowered its full-year non-GAAP gross margin outlook to 29%, plus or minus 1 percentage point, a 50-basis-point cut from prior expectations. The reduction is driven primarily by a higher mix of lower-margin memory sales as Integrated Memory grows faster than the rest of the portfolio. While this mix shift creates short-term pressure, management believes the trade-off is justified by the scale and strategic importance of the memory business, and it is relying on operating expense discipline and operational efficiencies to protect overall profitability.

Services Revenue Under Pressure

Services net sales were $65 million in Q1, down 9% from the prior year. The decline illustrates that services, while still an important component of the overall offering, is not currently a growth driver. The softness may reflect changing customer consumption patterns and the shift in focus toward hardware and integrated solutions tailored for AI and advanced computing workloads. For investors, this introduces some additional top-line drag, though the company’s primary narrative is centered on product-driven growth in memory and compute rather than services expansion.

Supply Chain Constraints and Timing Uncertainty

Penguin flagged ongoing supply-chain issues and extended lead times for certain components, particularly those critical for Advanced Computing and Integrated Memory offerings. Management also noted timing unpredictability in converting new master agreements into concrete purchase orders and shipments. These factors introduce volatility in quarterly results and make it harder to predict when sizeable opportunities in the pipeline will convert into revenue. While not unique to Penguin, these constraints are especially important in high-demand areas like AI hardware, where product availability and timing can significantly impact reported growth.

Working Capital and Receivables Build

Working capital usage moved higher as the company grew volumes and dealt with uneven sales linearity. Net accounts receivable increased to $342 million from $276 million a year ago, and days sales outstanding rose to 51 days from 45 days. Management tied this to higher sales volumes and quarter-to-quarter variability in the timing of shipments and billings. While still manageable and supported by a strong cash position, investors will likely monitor this trend closely as it may reflect longer payment cycles or concentration in large, project-based deals.

Wide Advanced Computing Outlook Highlights Back-Half Risk

The company’s full-year guidance for the Advanced Computing segment remains wide, with expected performance ranging from a 15% decline to a 15% increase year over year. This broad range underscores meaningful timing risk in how quickly pipeline opportunities convert and when they ship. Penguin expects roughly 53%–54% of total FY2026 sales to land in the second half, making the year back-half weighted. This structure heightens the impact of any delays in customer deployments or supply-chain constraints, increasing execution risk even as the overall demand backdrop appears supportive.

Guidance Reaffirmed Amid Mix Shift and Execution Risks

Despite the moving pieces, Penguin reaffirmed its FY2026 outlook, calling for net sales growth of about 6% at the midpoint and non-GAAP diluted EPS of roughly $2.00, plus or minus $0.25. The company now targets a non-GAAP gross margin of 29% (±1 percentage point), reflecting memory-driven mix headwinds, with non-GAAP operating expenses of $250 million (±$10 million), an expected non-GAAP diluted share count of around 55 million and a non-GAAP tax rate of 22%. By segment, Advanced Computing is guided to a wide range of −15% to +15% growth, Integrated Memory to a robust 20%–35% increase, and Optimized LED to a decline of 15% to 5%. The outlook assumes no contribution from hyperscale hardware and a continued wind-down of Penguin Edge, which together are expected to be a significant drag on reported growth. Management highlighted supply-chain, lead-time and memory-supply variability as key risks, but the reaffirmed guidance signals confidence that core demand and execution can offset these challenges.

In summary, Penguin Solutions’ earnings call painted the picture of a company in active transition: leaning into strong, AI-aligned growth in Integrated Memory and the core Advanced Computing franchise, while absorbing the drag from legacy wind-downs and a struggling LED business. Margins are holding up, cash generation is strong and cost discipline is evident, even as gross margin guidance nudges lower due to mix shifts. For investors, the key takeaways are that the underlying growth engines appear healthy, the balance sheet is solid and management is confident enough to reaffirm guidance—yet the story remains dependent on execution in the second half, navigating supply constraints and managing the inherent lumpiness of large enterprise and AI infrastructure deals.