Penguin Solutions (PENG) Q4 2025: Non-Hyperscale AI Revenue Jumps 75% as Customer Mix Shifts
Penguin Solutions delivered a pivotal year, marked by a 75% surge in non-hyperscale AI revenue and a deliberate pivot toward enterprise and government customers. The company’s transformation from holding company to AI infrastructure specialist is driving customer diversification, but the loss of hyperscale hardware and Penguin Edge business creates a near-term growth headwind. Investors should watch how well Penguin converts its expanding AI pipeline into bookings as industry adoption broadens and margin mix shifts.
Summary
- Enterprise AI Pipeline Expands: Customer wins and pipeline growth in financial, federal, and education sectors drive non-hyperscale momentum.
- Margin Mix Under Pressure: Wind-down of Penguin Edge and hardware-heavy deployments weigh on near-term gross margin outlook.
- Growth Recast for FY26: Core business set for double-digit underlying growth, but headline guidance reflects hyperscale and Edge headwinds.
Performance Analysis
Penguin Solutions capped FY25 with 17% revenue growth and robust margin expansion, propelled by advanced computing and integrated memory segments. Non-GAAP operating margin rose 190 basis points to 12.2%, and diluted EPS climbed 53% year-over-year, reflecting disciplined cost control and operational leverage. The company’s advanced computing segment, now 47% of total sales, grew 17% for the year, with non-hyperscale HPC AI revenue jumping 75%—a direct result of customer diversification efforts.
The integrated memory business, branded as Smart Modular, delivered 30% annual growth, benefiting from strong demand in computing, networking, and telecom, and early traction for compute express link (CXL) products. Optimized LED operations remained flat on the year, but margin improvement of 250 basis points signaled operational discipline amid secular headwinds. Cash flow from operations rose 8% to $113 million, while inventory and receivables increased to support a heavier Q1 FY26 shipment profile. Penguin’s balance sheet strengthened with a $200 million SK Telecom investment and debt refinancing, reducing net debt to $16 million.
- Customer Mix Shift: Non-hyperscale AI revenue growth offset declining hyperscale hardware, with services now a larger share of advanced computing.
- Margin Dynamics: Lower-margin hardware and memory growth, plus Penguin Edge wind-down, create near-term gross margin compression despite operating leverage.
- Cash Conversion Cycle Elongates: Inventory build for early FY26 shipments extended cash conversion cycle to 49 days, up from 42 days last year.
While headline growth faces a 14-point headwind from Edge and hyperscale hardware exits, underlying core business momentum remains strong, especially in non-hyperscale AI deployments and memory solutions for next-gen workloads.
Executive Commentary
"Fiscal 2025, the transformational year for Penguin Solutions as we continue to evolve from a holding company structure into a leading provider of AI infrastructure solutions... We continue to see signs of broad AI adoption, particularly within verticals such as financial services, energy, federal, and education."
Mark Adams, Chief Executive Officer
"Non-GAAP diluted earnings per share for the fourth quarter were 43 cents, up 18% versus the prior year... For the full year, non-GAAP diluted EPS was $1.90, up 53% versus the prior year, and 5 cents better than the high end of our outlook provided in July."
Nate Olmstead, Chief Financial Officer
Strategic Positioning
1. AI Infrastructure Focus and Customer Diversification
Penguin’s deliberate shift from hyperscale hardware dependency to enterprise and government AI deployments is reshaping its growth engine. The company’s advanced computing business now derives a growing share from non-hyperscale customers, as evidenced by a 75% YoY surge in non-hyperscale HPC AI revenue. Recent wins include a Tier 1 US financial institution’s first on-premise GenAI data center, a Fortune 100 federal systems integrator, and a sovereign AI project in South Korea with SK Telecom. This strategy reduces concentration risk and positions Penguin to capture the next wave of AI adoption among enterprises and public sector organizations.
2. Memory Innovation and Value-Add Model
The integrated memory segment, under the Smart Modular brand, is evolving beyond commodity DRAM by investing in value-added solutions such as CXL and memory pooling technologies. Penguin’s differentiation lies in firmware, system-level design, and reliability, enabling premium pricing and stickier customer relationships. The upcoming smart optical memory appliance (OMA) targets the high bandwidth memory (HBM) bottleneck in AI clusters, with initial shipments planned for late 2026 to early 2027.
3. Margin Management Amid Business Transition
Gross margin guidance for FY26 is set at 29.5% (plus or minus one point), reflecting the wind-down of higher-margin Penguin Edge business and an initial mix shift toward lower-margin hardware deployments in new AI projects. Management expects to follow hardware wins with higher-margin recurring software and services, but investors should anticipate near-term gross margin pressure as the revenue mix evolves.
4. Strategic Partnerships and Go-to-Market Expansion
Penguin is leveraging partnerships with Nvidia, CDW, Insight, and Dell to broaden its reach and accelerate customer acquisition. The company’s rebranding and US redomicile signal a commitment to global scale and regulatory alignment, while leadership hires from NetApp and Dell bring fresh go-to-market and strategic development expertise.
Key Considerations
Penguin’s FY25 validated its AI infrastructure pivot, but FY26 will test the company’s ability to offset lost hyperscale and Edge revenue with diversified growth and margin discipline.
Key Considerations:
- Pipeline Conversion Pace: Success hinges on converting a robust, diversified AI pipeline into bookings and revenue, especially in financial, federal, and sovereign cloud verticals.
- Margin Recovery Trajectory: The timing and scale of recurring software and services following hardware deployments will determine how quickly gross margin rebounds.
- Inventory Risk: Elevated inventory and elongated cash conversion cycle increase working capital risk if shipment timing slips or customer demand softens.
- Memory Pricing Volatility: Memory segment growth includes some price uplift, but value-add model limits profit upside from commodity swings; margin rate could decline if price-driven growth accelerates.
Risks
Penguin faces near-term revenue and margin headwinds from the wind-down of Penguin Edge and the absence of hyperscale hardware sales, which together create a 14-point drag on FY26 growth. Execution risk around pipeline conversion, supply chain constraints in advanced computing and LED, and potential delays in memory innovation adoption could further pressure results. Competitive intensity in AI hardware and memory markets remains high, threatening both pricing and customer retention.
Forward Outlook
For FY26, Penguin Solutions guided to:
- Net sales growth of 6% plus or minus 10%, reflecting significant headwinds from Penguin Edge and hyperscale hardware exits.
- Non-GAAP gross margin of 29.5%, plus or minus one percentage point.
- Non-GAAP operating expenses of $255 million, plus or minus $10 million.
- Non-GAAP diluted EPS of approximately $2, plus or minus 25 cents.
Segment outlooks:
- Advanced Computing: Net sales change between -15% and +15% YoY (wide range due to pipeline uncertainty).
- Memory: Net sales growth of 10% to 20% YoY, with backlog visibility and some price increase baked into the high end.
- LED: Net sales change between -5% and +5% YoY.
Management highlighted:
- Stronger AI compute pipeline than last year, but with more backend-loaded revenue in FY26.
- Gross margin pressure from mix shift, but expectation of higher-margin software and services following hardware deployments.
Takeaways
Penguin Solutions’ transformation is real, but the FY26 story is about execution against a wider, less predictable growth range and margin reset.
- Growth Engine Realignment: The pivot to enterprise, federal, and sovereign AI customers is gaining traction, but must scale rapidly to offset lost hyperscale and Edge revenue.
- Margin Management Key: Investors should track the cadence of software and services attach to hardware wins, as this will drive the timing of gross margin recovery.
- Pipeline Conversion Critical: Watch for updates on pipeline conversion rates and new customer wins, especially in financial and public sector verticals, as leading indicators of sustained growth.
Conclusion
Penguin Solutions enters FY26 with a fundamentally reshaped business, leaning into enterprise AI infrastructure and memory innovation. The company’s ability to convert pipeline into bookings and manage margin mix will determine whether its transformation delivers durable value creation for shareholders.
Industry Read-Through
Penguin’s results reinforce a broader industry shift: AI infrastructure demand is moving beyond hyperscalers to mainstream enterprises, financials, and government, creating new opportunity for integrators with deep technical expertise. The company’s margin commentary highlights the commoditization risk in hardware-only models, a warning for OEMs and cloud providers chasing large-scale deployments. Memory and interconnect innovation is becoming a key differentiator, as AI workloads expose bottlenecks in bandwidth and capacity. Supply chain and working capital management remain critical as lead times and customer deployment cycles elongate across the sector.