Penguin Solutions (PENG) Q4 FY26 Earnings Call Transcript

Kash Shaikh00:00

DRAM must also scale. we believe Penguin is well positioned to lead in this market opportunity at the intersection of data center AI infrastructure and memory solutions. We are seeing enterprise and AI native companies address these AI compute infrastructure needs in a variety of ways primarily consuming AI infrastructure from new cloud providers and in some cases building their own on-premises AI factories.

Kash Shaikh00:17

For persistent high utilization AI workloads such as inference, large enterprises are increasingly considering on-premises AI infrastructure. which can offer better token economics data control and performance.

Kash Shaikh00:32

Our full stack AI factory platform combines five core elements with our partner ecosystem. First, clusterware AI operating system software for AI factories. Second, memory AI and integrated memory solutions.

Kash Shaikh00:48

Third, GPU and CPU systems under our Compute AI brand. Fourth, Origin AI factory architectures and fifth, end-to-end design build deploy and manage services.

Kash Shaikh01:12

What sets our platform apart is its rare combination of OEM like differentiated product innovations and end to end AI infrastructure systems integration capabilities this allows us to serve as the single builder and operator of AI factories across the entire life cycle for our customers.

Kash Shaikh01:28

Customers need more than hardware and assembly. This is particularly important for new cloud providers where we have seen a recent surge in interest that we believe reflects strong product market fit for our full stack platform.

Kash Shaikh01:48

For Neoclouds we can serve as a single operating partner across the entire life cycle helping customers meet service level agreements and generate revenue faster while they focus on securing additional off-takers and scaling their businesses.

Kash Shaikh02:08

Let me now turn to our business results. starting with advanced computing. In Q4, advanced computing net sales totaled $154 million, representing 27% of company net sales and growing 11% year over year.

Kash Shaikh02:18

Data center AI infrastructure growth within advanced computing driven by our AI factory platform was significantly stronger.

Kash Shaikh02:30

Non-hyperscale AI infrastructure net sales grew 99% year over year and represented 66% of advanced computing net sales.

Kash Shaikh02:35

Up from 60% in the prior year quarter.

Kash Shaikh02:48

This growth more than offset continued runoff from other traditional businesses and reflects the ongoing shift in advanced computing toward data center AI infrastructure.

Kash Shaikh03:02

During the quarter, we added six new AI infrastructure customers, including four Neoclouds a large quantitative trading firm and an enterprise customer.

Kash Shaikh03:19

We exited fiscal 2026 with strong momentum and bookings have accelerated further entering fiscal 2027. our land and expand model remains central to our go to market strategy.

Kash Shaikh03:26

Successful initial deployments create opportunities to expand across our platform.

Kash Shaikh03:33

Including clusterware AI and multi-year managed services engagements that typically span three to five years.

Kash Shaikh03:45

Across fiscal 2026, we added 17 new AI infrastructure customers, while 12 customers expanded their business with Penguin.

Kash Shaikh04:12

We are seeing strong momentum with Neocloud customers including a Neocloud backed by a leading South Korean technology company selected us to design build deploy and manage an Nvidia GB 300 NVL 72 based platform with the initial deployment expected to support a broader GPU as a service expansion.

Kash Shaikh04:37

A publicly traded Neocloud provider that has more than $3 billion in signed multi-year AI infrastructure contracts selected Penguin for a multi-year engagement to provide AI infrastructure deployment and 24-7 operation services supported by Clusterware AI our AI factory operating system software.

Kash Shaikh04:51

Electra a Neocloud selected our full stack AI factory platform to deploy and optimize distributed AI micro data centers powered by existing carbon free energy.

Kash Shaikh05:00

We provide validated reference designs NVIDIA based AI GPUs and expert services with Clusterware AI and support.

Kash Shaikh05:16

And for another Neocloud provider with 10 billion dollars in contracted compute from a leading AI lab we were selected to deploy and operate a 36,000 GPU AI factory in Norway.

Kash Shaikh05:27

This multi-year engagement demonstrates the scale of our platform and our ability to bring large scale AI infrastructure into production.

Kash Shaikh05:44

These engagements demonstrate an important evolution in our business. Customers are increasingly selecting Penguin as an end-to-end partner to design, deploy, optimize and operate AI infrastructure.

Kash Shaikh05:56

We also continued to advance Clusterware AI with new agentic AI capabilities that automate AI factory operations, remediation, and infrastructure monitoring.

Kash Shaikh06:11

Our AI factory operations agent provides administrators with a natural language interface for operational insights, put simply, administrators can now talk to their AI factory.

Kash Shaikh06:32

We are also an Nvidia AI factory specialized partner an invitation only designation that reflects the depth of our partnership with Nvidia which continues to strengthen and more than a decade of experience building and managing Nvidia based AI factories.

Kash Shaikh06:43

Finally we established a relationship with another AI hardware supplier to help expand supply availability and support growing demand.

Kash Shaikh06:56

Now turning to integrated memory. Fourth quarter net sales reached a record 341 million dollars representing 60% of company net sales.

Kash Shaikh07:03

Up 158% year over year and 24% sequentially.

Kash Shaikh07:14

In Q4 fiscal 2026 we added two new memory customer logos. Our land and expand strategy also continues to produce results.

Kash Shaikh07:25

Across fiscal 2026, we added 15 new customers while 29 existing customers expanded their business with us.

Kash Shaikh07:40

We are seeing an increase in both volume and pricing. Our growth reflects strong data center demand driven by agentic AI including increasing memory requirements from AI and inference workloads.

Kash Shaikh07:56

While memory is a cyclical market we believe AI is adding a structural demand driver particularly for memory solutions in the data center. Penguin operates differently from a traditional commodity memory manufacturer.

Kash Shaikh08:14

Our focus is primarily on data center solutions. Our engineering design firmware development advanced validation negotiated pricing and asset light model are designed to deliver more resilient economics across memory cycles.

Kash Shaikh08:21

We continue to see strengthening bookings and pipeline for our CXL memory expansion products.

Prepared remarks

Kash Shaikh08:35

A couple of proof points. In Q4, we secured business with a leading global AI server manufacturer whose platform support large scale AI training and inference.

Kash Shaikh08:57

This win reinforces the strength of our memory portfolio for data center AI infrastructure. We also expanded our relationship with a leading next generation AI infrastructure inference provider rapidly scaling AI inference deployments with our CXL memory expansion cards.

Kash Shaikh09:08

Beyond our core memory business, we are developing new solutions designed to address the growing memory bottleneck in data center AI infrastructure.

Kash Shaikh09:23

Our CXL based large memory expansion cards and memory AI KV cache solution are designed to increase memory capacity and improve the economics of agentic AI and real time inference.

Kash Shaikh09:54

Our memory AI roadmap also extends to future memory appliances including Photonic high bandwidth memory solutions designed to expand GPU memory capacity and bandwidth we are also developing a CXL AIC product line designed to repurpose installed DDR4 memory for AI infrastructure helping customers extend asset life and lower the cost of scaling memory intensive workloads.

Kash Shaikh10:09

Finally, we established a new supply arrangement with a leading memory supplier to support the growth of our data center AI infrastructure portfolio and strengthen our supply position.

Kash Shaikh10:18

Together, these developments reinforce our long-term focus on data center memory and AI infrastructure.

Kash Shaikh10:31

Turning briefly to optimized LED. Our LED business also performed well in the quarter with Q4 net sales totaling $72 million.

Kash Shaikh10:39

Up 7% year over year. Our strategic investment priorities remain focused on data center AI infrastructure and memory.

Kash Shaikh11:28

While we continue to manage our LED business with discipline. as we enter fiscal 2027 our focus is not simply on capturing demand it is on building a more repeatable and scalable operating model around that demand while keeping customer success at the center of everything we do as part of that we are deploying agentic AI across our operations with a focus on measurable business outcomes our engineering teams are using agentic AI coding workflows to accelerate clusterware AI development while AI driven tools are helping compress product cycles and improve supply chain responsiveness.

Kash Shaikh11:53

With that, let me share our updated fiscal 2027 outlook. During our Q3 earnings call, we provided preliminary fiscal 2027 expectations for net sales and diluted EPS growth of approximately 30% year over year from the midpoint of our fiscal 2026 outlook.

Kash Shaikh11:56

Based on our fourth quarter results and

Kash Shaikh12:09

AI driven demand we are providing a fiscal 2027 outlook that exceeds that preliminary view for both net sales and diluted EPS.

Kash Shaikh12:17

We expect our diluted EPS to grow faster than net sales due to our strong operating leverage.

Kash Shaikh12:45

Erin will provide the details in a moment. Let me close with three observations. First, our strategy is working and growth is broadening. Our AI driven businesses represented 78% of Q4 net sales and grew 141% year over year with integrated memory remaining strong and AI infrastructure now accelerating significantly.

Kash Shaikh12:54

Second, strong operating leverage is driving profitable growth while enabling continued investment in innovation.

Kash Shaikh13:22

EPS is growing faster than net sales, while we continue investing in differentiated products and capabilities. Third, we believe the value creation opportunity is durable and still in the early innings with our position at the intersection of AI infrastructure and memory combined with clusterware AI and services creating a differentiated long-term advantage.

Kash Shaikh13:43

I want to thank our team for their focus and execution throughout fiscal 2026 and for the strong momentum we carry into fiscal 2027. With that I'll turn it over to Aaron to walk through the financials and our outlook

Aaron Johnson14:03

Thank you Kash I'll begin with our fourth quarter and full year fiscal 2026 results and then turn to our outlook for fiscal 2027. In the fourth quarter, net sales and earnings per share exceeded our outlook, reflecting growing adoption of our AI infrastructure solutions and continued AI driven demand for data center memory.

Aaron Johnson14:10

Strong net sales growth, disciplined expense management, and improved profitability drove meaningful operating leverage.

Aaron Johnson14:24

We set company records for net sales, gross profit dollars, operating income, operating margin, net income, and adjusted EBITDA. For the full year, we also set records for gross profit dollars and operating income.

Aaron Johnson14:33

Starting with the fourth quarter, net sales were $567 million, up 68% year over year and up 18% sequentially.

Aaron Johnson14:44

Gross margin was 28.8%, operating margin was 15.8% and diluted earnings per share was $1, up 133% year over year.

Aaron Johnson15:02

For the full year, net sales were 1.73 billion dollars up 26% versus fiscal 2025 while diluted earnings per share increased 51% to $2.87 roughly twice the rate of net sales growth demonstrating the operating leverage in our model.

Aaron Johnson15:11

Fourth quarter product net sales were $510 million or 90% of total company net sales up 86% year over year.

Aaron Johnson15:26

Services net sales were $57 million or 10% of total net sales down 11% year over year reflecting lower hyperscale services volumes partially offset by growth in multi-year AI factory managed services.

Aaron Johnson15:37

Net sales by business segment were as follows. For advanced computing fourth quarter net sales were 154 million dollars up 11% year over year and 12% sequentially.

Aaron Johnson15:49

For the full year advanced computing net sales were 559 million dollars down 14% reflecting the wind down of Penguin Edge and lower hyperscale hardware sales.

Aaron Johnson16:04

Non-hyperscale AI infrastructure business grew 99% in the fourth quarter and represented 66% of segment net sales while growing 72% for the year and reinforcing its position as the segment's primary growth driver.

Aaron Johnson16:19

For integrated memory, fourth quarter record net sales were $341 million, representing 60% of total company net sales, up 158% year over year and 24% sequentially.

Aaron Johnson16:31

For the full year, integrated memory net sales were $924 million, up 99% and represented 53% of total company net sales, up from 34% in fiscal 2025.

Aaron Johnson16:39

The growth reflects strong demand for memory supporting AI driven data center applications consistent with our strategic focus on this market.

Aaron Johnson16:50

For optimized LED, fourth quarter net sales were $72 million, representing 13% of total company net sales, up 7% year over year.

Aaron Johnson17:05

For the full year, net sales were $249 million, down 3%. The business delivered improved profitability as we continued to execute with discipline and focus on profitable opportunities.

Aaron Johnson17:14

Fourth quarter gross margin was 28.8% up 70 basis points sequentially supported by improved profitability in integrated memory partially offset by lower advanced computing margins.

Aaron Johnson17:25

Together with strong net sales growth this drove record gross profit of 163 million dollars up 21% sequentially and 57% year over year.

Aaron Johnson17:31

For the full year gross profit reached a record 508 million dollars.

Aaron Johnson17:42

Gross margin was 29.3% down 1.7 percentage points primarily due to a greater contribution from AI infrastructure hardware even with stronger margins in integrated memory.

Aaron Johnson17:49

The growth in gross profit dollars demonstrates the leverage generated by our increased scale.

Aaron Johnson17:55

Fourth quarter operating expenses were $73 million, up 4% sequentially and 13% year over year.

Aaron Johnson18:02

The sequential increase primarily reflects higher incentive compensation associated with our strong financial results.

Aaron Johnson18:11

For the full year operating expenses increased 4% to $267 million well below our 26% growth in net sales.

Aaron Johnson18:21

As a result operating expenses declined by 3.4 percentage points as a percentage of net sales reflecting a structural improvement in the scalability of our operating model.

Aaron Johnson19:07

That combination of higher gross profit dollars and expense discipline drove record fourth quarter operating income of $90 million up 39% sequentially and 129% year over year with net sales growth significantly outpacing operating expense growth operating margin expanded 2.4 percentage points sequentially and 4.2 percentage points year over year to 15.8% for the full year operating income reached a record 241 million dollars up 44% with operating margin expanding 1.7 percentage points to 13.9% these results demonstrate how scale and disciplined spending are translating growth into higher profitability.

Aaron Johnson19:16

Fourth quarter diluted earnings per share was $1 up 19% sequentially and 133% year over year.

Aaron Johnson19:23

The sequential EPS growth rate trails our 39% operating income growth reflecting a higher share count following our convertible notes offering.

Aaron Johnson19:32

For the full fiscal year diluted earnings per share were $2.87 up 51% and 22 cents above the high end of our July outlook.

Aaron Johnson19:41

Adjusted EBITDA was a record 93 million dollars in the fourth quarter up 115% year over year and 38% sequentially.

Aaron Johnson19:59

Full year adjusted EBITDA was 256 million dollars up 37%. Before I walk through working capital a reminder that we calculate days sales outstanding days payables outstanding and inventory days on a gross sales and gross cost of goods sold basis.

Aaron Johnson20:06

Gross sales were 1.57 billion dollars and gross cost of goods sold was 1.42 billion dollars in the fourth quarter.

Aaron Johnson20:14

The difference between gross and net sales relates primarily to our memory businesses logistics services which are accounted for on an agent basis.

Aaron Johnson20:27

Turning to working capital net accounts receivable increased to 796 million dollars from 308 million dollars a year ago reflecting the growth in our memory business and the associated gross billings.

Aaron Johnson20:36

Despite the higher balance days sales outstanding improved to 46 days from 53 days last quarter and 51 days a year ago.

Aaron Johnson20:44

We are managing these investments against customer deployment schedules and supply availability as we support growth.

Aaron Johnson20:58

Inventory increased to $749 million from $255 million a year ago reflecting purchases to support record backlog and expected customer deployments across our memory and AI infrastructure businesses as well as higher memory costs.

Aaron Johnson21:08

Inventory days were 48 up from 42 last quarter as we positioned inventory against a record backlog and down from 51 a year ago.

Aaron Johnson21:24

Accounts payable increased to $817 million from $267 million a year ago reflecting purchasing activity to support the growth of our memory and AI infrastructure businesses as well as higher memory costs.

Aaron Johnson21:32

Days payable outstanding was 52 down from 62 last quarter and 54 a year ago primarily reflecting the timing of purchases within the quarter.

Aaron Johnson21:39

Our cash conversion cycle was 42 days compared with 33 days last quarter and 49 days a year ago.

Aaron Johnson21:46

Funding growth efficiently and maintaining disciplined working capital management remain important priorities.

Aaron Johnson22:02

Moving to our broader capital structure, during the quarter, we completed a significantly oversubscribed $750 million 0% convertible note offering due in 2031, which we believe reflects strong investor confidence in our business and long-term strategy.

Aaron Johnson22:14

The notes have an initial conversion price of approximately $116.70 per share representing an approximately 50% premium to our share price at pricing.

Aaron Johnson22:24

We also entered into capped call transactions designed to reduce potential dilution up to an initial cap price of approximately 175.5 per share.

Aaron Johnson22:43

Concurrently we exchanged approximately 296 million dollars principal amount of our 2029 and 2030 convertible notes for a combination of cash and shares of common stock and used a portion of the proceeds to fully repay the 100 million dollars outstanding under our credit agreement.

Aaron Johnson22:56

This disciplined and proactive approach extended our maturity profile and strengthened our capital structure providing additional flexibility to invest behind our AI factory platform strategy and the growth opportunities ahead.

Aaron Johnson23:02

Following these actions we ended the fourth quarter with cash and cash equivalents of 647 million dollars.

Aaron Johnson23:09

That is up 207 million dollars from the third quarter and 193 million dollars from a year ago.

Aaron Johnson23:15

We remain focused on managing liquidity and the working capital required to support our growth.

Aaron Johnson23:31

Cash used in operating activities was $163 million in the fourth quarter and $152 million for the full year primarily reflecting working capital investments to support growth in our memory and AI infrastructure businesses.

Aaron Johnson23:51

This compares with cash used of $70 million in the prior year quarter and cash provided of $113 million in fiscal 2025. we believe our capital structure and liquidity provide flexibility to fund this growth while improving working capital efficiency remains an important priority for fiscal 2027.

Aaron Johnson24:03

Capital expenditures were $4 million in the quarter and $12 million for the year well under 1% of net sales with depreciation expense of $5 million and $20 million respectively.

Aaron Johnson24:16

Our asset light model allows us to scale without significant capital spending and we expect that to continue in fiscal 2027 spending and we expect that to continue in fiscal 2027. now turning to our outlook.

Aaron Johnson24:30

We enter fiscal 2027 with strong momentum supported by our second half performance record backlog bookings growth continued integrated memory strength and further acceleration in demand for our AI infrastructure business.

Aaron Johnson24:38

We expect strong net sales growth to increase gross profit dollars while operating expenses grow at a considerably slower rate.

Aaron Johnson24:45

That combination is expected to expand operating margin and drive diluted EPS growth that outpaces net sales growth.

Aaron Johnson25:00

For fiscal year 2027 we expect net sales to grow approximately 40% at the midpoint plus or minus 10 percentage points or an increase of approximately 700 million dollars to approximately 2.43 billion dollars at the midpoint.

Aaron Johnson25:08

Last quarter we shared a preliminary view of approximately 30% growth from the midpoint of our then current fiscal 2026 outlook.

Aaron Johnson25:30

Using that same fiscal 2026 outlook midpoint as the starting point, our current fiscal 2027 midpoint represents growth of approximately 45%. The range reflects different growth expectations across our businesses as well as variability in customer deployment schedules and the availability, lead times and cost of certain products and components.

Aaron Johnson25:40

Our record backlog together with the demand we are seeing across the business provides a strong foundation for our fiscal 2027 growth expectations.

Aaron Johnson25:49

At the same time customer deployment schedules product availability and evolving memory market conditions could affect the mix and cadence of net sales throughout the year.

Aaron Johnson25:55

We believe the range appropriately balances the opportunities ahead with these execution and market variables.

Aaron Johnson26:16

Looking at the net sales outlook by segment for advanced computing we expect full year net sales to grow approximately 40% at the midpoint plus or minus 10 percentage points driven by continued momentum in non-hyperscale AI infrastructure partially offset by the absence of edge sales and lower expected hyperscale sales.

Aaron Johnson26:29

For integrated memory, we expect full year net sales to grow approximately 50% at the midpoint plus or minus 10 percentage points driven by continued strong demand for memory supporting AI driven data center applications.

Aaron Johnson26:37

And for optimized LED we expect full year net sales to be relatively flat year over year as we continue to manage the business with discipline.

Aaron Johnson26:44

We expect full year gross margin of approximately 28% plus or minus two percentage points.

Aaron Johnson26:54

Our outlook reflects the expected mix across our businesses including the mix of hardware software and services as well as our current assumptions for memory pricing and costs.

Aaron Johnson27:01

While these factors influence the gross margin rate we expect net sales growth and scale to drive higher gross profit dollars.

Aaron Johnson27:09

We expect full year operating expenses of approximately $275 million plus or minus $10 million.

Aaron Johnson27:19

Within that range we are reallocating resources toward our highest return AI infrastructure and memory programs while holding total spending growth well below net sales growth.

Aaron Johnson27:42

This disciplined investment approach together with higher gross profit dollars is expected to drive further operating margin expansion. For the full year, we expect diluted earnings per share of approximately 4.45 plus or minus 70 cents representing growth of approximately 55% at the midpoint and exceeding our expected rate of net sales growth.

Aaron Johnson27:50

The EPS outlook reflects higher gross profit dollars disciplined operating expense growth and further operating margin expansion.

Aaron Johnson27:58

The range also allows for variability in the timing of large customer deployments as individual project schedules can shift between quarters.

Aaron Johnson28:17

Our EPS outlook assumes a diluted share count of approximately 63 million shares and an effective tax rate of approximately 20%. We anticipate using this normalized rate throughout fiscal 2027 though it may change with our geographic earnings mix and developments in the global and US tax environment.

Aaron Johnson28:55

Our fiscal 2027 outlook is based on the current demand environment backlog customer deployment schedules expected product mix and our present assumptions regarding supply availability and costs the timing of customer deployments and product availability may create variability between quarters and certain components continue to have extended lead times that can affect project and shipment timing our outlook also incorporates current assumptions for memory supply and costs which may evolve during the year including the expected impact of new memory and AI infrastructure suppliers that strengthen our overall supply position and support growth.

Aaron Johnson29:00

These factors may affect quarterly cadence and mix but are reflected in our full year planning assumptions.

Aaron Johnson29:08

Overall our outlook reflects the momentum in our AI driven businesses and the benefits of a more scalable operating model.

Aaron Johnson29:14

We plan to invest selectively behind our highest return opportunities while maintaining expense discipline.

Aaron Johnson29:24

Our objective is clear convert strong net sales growth into higher gross profit dollars operating margin expansion and earnings growth that outpaces net sales growth.

Aaron Johnson29:35

Please refer to the non-GAAP financial information section and the reconciliations of GAAP to non-GAAP measures in our earnings release and the investor materials available on our website for additional detail.

Aaron Johnson29:39

With that operator we are ready for Q&A.

Operator29:59

We will now begin the question and answer session. Please limit yourself to one question to ensure everyone in the queue has a chance to ask. If you would like to ask a question please press star one to raise your hand to withdraw your question press star one again.

Operator30:11

We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally please remember to unmute your device. Please stand by while we compile the Q&A roster.

Questions and answers

Operator30:22

Your first question comes from the line of Katherine Murphy with Goldman Sachs. Catherine, your line is now open.

Katherine Murphy30:39

Great. Thank you for the question. Very helpful to see the improved advanced computing segment guidance for 40% plus or minus 10% for fiscal 2027. I think last quarter you had talked about mid-teens growth as being the preliminary starting point for your outlook there.

Katherine Murphy31:03

My first question would be, can you help us think about what has improved in the last 90 days that allows you to take up your outlook for advanced computing? And as a follow-up, as Penguin expands more into the Neocloud customer type, how does that change the unit economics relative to some of the enterprise customers and quant wins that you had in the first part of 2026? Is there more hardware?

Katherine Murphy31:09

How do we think about the margin impacts? Anything that you can share to help us from a modeling perspective would be helpful. Thank you very much.

Kash Shaikh31:28

Thanks, Kat, for the questions. Um uh to your first question about our initial preliminary guidance last quarter in the mid-teens uh over to 40% for advanced computing mainly driven by AI infrastructure.

Kash Shaikh32:15

So this is primarily the growth that we have seen since the last earnings announcement uh the booking strength uh we have booked uh more than we expected and we have very strong pipeline and as you heard some of these bookings that I shared as examples give us the confidence that our memory business strength continues and our AI infrastructure is further accelerating which is really resulting into the increased guidance for AI infrastructure driving advanced computing guidance and also increasing the guidance at the company level primarily driven by AI infrastructure.

Kash Shaikh33:23

And on your question about Neoclouds, and unit economics, unit economics are quite similar to our enterprise on-premise AI factory deployments however one of the things we have observed with the Neocloud customers we have a pretty unique product market fit for these Neocloud customers as in we can provide them end to end build and operate their factories on their behalf including procurement of the hardware end to end designing the hardware building the data center and then taking on the management of the data centers day two and beyond for up to three to five years as I shared in some of the examples along with our clusterware which is really our differentiation in terms of how we deliver the services and more importantly meet the SLAs which are really important for these Neocloud customers to be able to provide the SLAs to their off-takers.

Kash Shaikh33:31

But all in all, similar unit economics, further expansion and pretty unique product market fit with Neocloud customers.

Operator33:44

Your next question comes from the line of Sajal Dogra with Rosenblatt Securities. Sajal, your line is now open.

Unidentified speaker34:20

Hey, thank you for taking my question and fantastic results. We're essentially front running my bull case by a full year. So congrats. I guess for my question you know on your previous outlook your revenue growth and earnings growth was roughly in line but now you're finally showing operating leverage for next year. So I just want to understand what's changed versus 90 days ago that's allowed you to drive that earnings expansion and I was wondering like is that all like is it how much of that is memory or are we finally seeing some margin expansion in advanced computing as well thank you

Kash Shaikh36:42

Sure. So, Sajal, first of all, the um outlook we provided last quarter was more of a color and preliminary outlook than the actual um outlook because uh it was sooner than we provide right as in typically we provide in Q4 earnings uh the time frame where we aren't providing the update so that was much more directional versus what we are providing is looking at all the aspects and we have more visibility and more clarity and also the confidence of operating in this new model where if you look at Q3 our EPS grew faster than net sales company level and then same in Q4 net sales grew 68% versus the EPS growth of 133% and the line of sight we have in terms of the bookings and then the conversion ratios and so on and so forth we have much more clarity and it is much more of a formal outlook than the high level color we provided directionally so as we are closer we have more visibility and we have more confidence in continuing the model as we scale the business and in terms of the margins at the segment level we don't disclose the margins at the segment level but I can tell you at the high level memory continues to be strong stronger than we expected uh given the value we provide and the focus on the data center advanced computing overall has the advantage of the services and the software however as we increasingly have the wins where we have both hardware and the software AI infrastructure may have some downward pressure but at the same time the advantage of clusterware software as well as the services has a very very high attach rate in general with these opportunities that I shared in the earnings call earlier and the rest of the pipeline we see. So that's at the high level to give you an idea how we are looking at the segment margins.

Operator36:55

Your next question comes from the line of Ananda Baruah with Loop Capital. Ananda, your line is now open.

Ananda Baruah37:23

Yeah, thanks, guys, for taking the question. Really appreciate it. Um what are some of just sort of in keeping with cash Aaron and Steven you know welcome the dynamics of the sort of underpinning you know sort of the not just the increase in the fiscal year 27 guide but the acceleration of the growth rate actually across the key businesses.

Ananda Baruah38:05

What are some of the mechanics that you're seeing out there in the marketplace that are leading to you know sort of increased Neocloud capture what are you seeing to the degree that you're able to discern from commercial enterprise and would love to just get a little context if it's worth providing on the degree to which the Nvidia and Dell relationships are actually contributing to some of these dynamics at an increased pace.

Ananda Baruah38:07

Thanks a lot appreciate it.

Kash Shaikh40:03

Sure Ananda so starting with the acceleration of the business as I mentioned earlier part of it is the increased visibility uh that we are seeing as well as the growth acceleration we believe one of the competitive advantage we have is we are not a product company that is just you know providing the hardware and leaving at the doorstep of the customers uh we actually work with them much earlier in the cycle get involved in the design based on the requirements they have whether they are a large enterprise customer deploying an on-premise factory or a Neocloud provider and then work with them consultatively understanding their requirement to if it is a Neocloud provider what is their SLAs who are their customers and how can we align the design to meet their requirements so that consultative aspect and especially the fact that we've been doing it for more than two decades that's an advantage so our team was working with Nvidia designing these clusters uh for more than a decade so we have this advantage of understanding the architecture the discussions are at the architecture level we have the software the clusterware that brings together all of these element and makes it much more easier to build and manage these factories and then end to end staying with them and helping them manage as a part of our managed services for them to get those outcomes when they are investing so much capital in these AI factories or data center it's really a unique advantage as compared to the alternatives they have whether they go to product only companies or services companies there isn't a unique combination that we provide with our platform between the products we have and the services that we provide.

Kash Shaikh42:37

So that's one of the advantage we are realizing is helping us Nvidia partnership is certainly helping us because we are we were recently nominated by Nvidia as the AI factory specialized partner we are the one of the few handful partners they have and this is really the experience working with them and all of the things our team is capable of between design build deploy and manage helps us have that credibility but again when we get involved in these designs and we are having the whiteboarding sessions with the customers to meet their requirement that's a very unique competitive advantage we have along with our products so that's mainly for obviously AI infrastructure which is accelerating in the memory business one of the things we have done uh since we launched our AI factory platform strategy uh midway through the fiscal 2026 we've been focusing more on the data centers for two reasons one is the fact that while memory demand is high everywhere in other segments including the consumer segments we believe that demand may still be just a demand and supply dynamics and maybe cyclical however the demand in the data center for memory is driven by AI especially with the agentic AI workloads which are automating the workloads and creating really the productivity for the enterprises that is going to sustain much longer and if anything let's say agentic AI's adopted in the enterprises 10% because they are still getting the you know the workflows defined and the tools defined for every 10% increase that demand can double and we continue to see that demand increasing for our memory products in the data center so that positioning in the data center is another advantage both in terms of increased demand as well as the durability of the demand for us so combine that with these two tailwinds we have memory business positioned in the data center solving uh memory issues providing the solutions for OEMs and now increasingly providing forward looking data center solutions such as CXL memory expansion cards.

Kash Shaikh43:06

Those memory expansion cards are primarily for inference workloads and we see the this CXL business taking off pretty strongly so the pipeline is increasing bookings are increasing so those newer solutions data center focused inference focus is another advantage for us as a differentiation and solving the inference challenges in the data center.

Kash Shaikh44:18

So those are some of the things in addition to that one more thing we are seeing is in general going back to AI infrastructure within the enterprises they are primarily using Neocloud as a service for their AI infrastructure however in some cases they are considering on-premise especially large enterprises because of the fact that at scale when they are using inference applications cost becomes a challenge with especially with inference workloads at that point while they are getting the productivity they are not seeing the ROI for the dollars they are investing and they consider on-prem factories and then we get involved and they are looking to address their cost challenge and they are also considering the open weight models because that's another way for them to make the economics better as they are moving from a cloud-based service to on-premise so these are some of the trends where we have a very unique fit between our memory business as well as AI infrastructure business that is driving the growth for these two businesses

Operator44:29

Your next question comes from the line of Rustam Kanga with Citizens Rustam your line is now open

Rustam Kanga45:14

Great, thank you for taking my questions and congrats on a memorable close to the year with continued momentum in the AI infrastructure driven business. Cash you stated that the memory growth was a function of both price and volume I believe last quarter you made the interesting point that if you were to count the backlog that you couldn't ship because of supply constraints that that split would be closer to even or even lean more towards volume so I'm just curious how much of that backlog has started to convert here and as you look ahead to next year how are you thinking about that price versus volume mix in the memory business especially as you focus on new customers primarily with data center solution use cases thanks

Kash Shaikh46:21

Uh first of all i want to give you the credit for remembering my comment and you're right that was what we observed last quarter where you know the revenue was pretty strong record revenue for memory and even though the backlog was as much as our revenue uh fortunately we are seeing the same trend continue so as much as we had another record quarter for memory our backlog if any is much higher than the revenue that we uh recognized in this quarter and the backlog now extend to at least four quarters and it's continues to strengthen which is why we have the confidence to increase the outlook for the business and it is really as I mentioned uh in the previous question that function of data center focused demand uh for our core memory business as well as the new CXL based products that we are developing had a very strong pipeline and demand because of inference taking off in the data centers.

Operator46:36

Your next question comes from the line of Matthew Calitri with Needham Company. Matthew, your line is now open.

Matthew Calitri46:49

Hey guys, Matt Calitri at Needham here. Thanks for taking the questions and great to see the strength to close the year here including with some of those Neocloud wins you talked about.

Matthew Calitri47:18

I'm wondering if you could give any more detail there on like when will these projects start and begin to like be recognized in the model and what the impact could be and also like is there anything specific to point to as to why you had so much success closing deals in the quarter or just like more broadly like why now is is the moment for this Neocloud opportunity?

Kash Shaikh47:44

Yeah, so we are not sharing that level of details in terms of which project when, but I can tell you at the high level, most of these projects that I shared have already started as in we are managing their data centers or building their data centers and some of them we are in the process of procurement.

Kash Shaikh49:00

So they are not future, they are already happening in fact we were working on these projects for several months even though some of it is has accelerated into the bookings recently we were working on the Neo these Neocloud opportunities along with other enterprise opportunities which is why I was referring to Neocloud as a growth opportunity for us in the previous earnings announcement even if we were not in a position to share the details now that we have started working with them and we are you know managing these factories in some cases and we are seeing increased bookings that's why we are sharing more details and we will continue to share more details around these Neocloud deployments but as I mentioned one of the reason being the unique product market fit we have between the products we provide as well as our expertise in designing these AI factories or data centers decade long expertise to be able to help them achieve their goals is you know it's a pretty unique competitive advantage we have in the market with these opportunities

Operator49:12

Our next question comes from the line of Brian Chin with Stifel. Brian, your line is now open.

Brian Chin50:09

Hi good afternoon congratulations on the results and thanks for laying us ask a question um maybe kind of a two-parter here given that record backlog commentary coming into the fiscal year and the growth guide for computing roughly how much of your fiscal 27 advanced computing revenue outlook is already in backlog and then the other part of this question is um obviously really strong flow through in terms of the model and the EPS non-GAAP EPS guide for next year um but on that really kind of low opex increase year to year um are you investing enough in terms of headcount retention um areas to maybe kind of improve bandwidth and utilization and go after more projects with the revenue growth it seems like you have a lot of coverage maybe to invest even more

Kash Shaikh53:34

Right. So let me address your first question we are not sharing the details of how much of our backlog is is covering the revenue however I can tell you at the high level it's pretty strong backlog across both memory as well as AI infrastructure that's why we referred to as a record backlog and in terms of your question about operating expenses so when we say the strong operating leverage it is really a function of the efficient operating model we have and when I say efficient operating model to be specific for example for R&D research and development and our engineering predominantly 95 plus percent of our engineering is in India low cost location which gives us an advantage to scale much more cost effectively we also have our memory engineering in Taiwan another cost effective location so even as we scale our cost is very efficient as compared to other companies who may not have as much of a cost efficient model and then our manufacturing is in Malaysia all low cost location even as the business scale that's a fixed cost for us as we add the capacity and we have the capacity so even if we add the capacity the cost or the expenses don't increase linearly with the revenue we are also using AI pretty extensively in across the company so for almost eight or nine months we've had a lot of productivity gains as an example 100% of our software engineers wherever they are using code generation for so AI for code generation which is helping us scale beyond what we can do in a traditional model we are using AI in pretty much every functions including finance legal and that is helping us scale much more effectively so between building this model and locations that are in cost effective location and scaling in those areas as well as using AI it is a pretty efficient model but to answer your questions for sure we are investing in innovation which is why we are winning more the products I mentioned clusterware AI is a differentiation helping us win more CXL for the memory products is another advantage and we will continue to invest more so while the dollars may not seem to increase the productivity as well as the scale is increasing based on our efficient model driving the operating leverage which you know allows us to continue to deliver more profitability and if you look at our operating profit is record of 90 million was a record last quarter almost 64 million and we continue to expect that while we will drive profitable growth but based on a scalable model efficient model we have created we can increase increasingly invest in innovation and we will even though the productivity will continue to increase for the company

Closing

Operator53:50

There will be no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.