PENG Q4 and FY25 Deep Dive: AI Infrastructure Transition and Headwinds Shape Outlook

Semiconductor maker Penguin Solutions (NASDAQ:PENG) fell short of the market’s revenue expectations in Q3 CY2025, but sales rose 8.6% year on year to $337.9 million. Its non-GAAP profit of $0.37 per share was in line with analysts’ consensus estimates.

Is now the time to buy PENG? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Penguin Solutions’ fourth quarter and full year results were met with a significant negative market reaction, reflecting concerns about topline performance and future visibility. While the company delivered year-over-year revenue growth and maintained operating margins, management attributed the underperformance to shifts in customer demand, particularly the winding down of its Penguin Edge business and reduced hardware sales to hyperscale customers. CEO Mark Adams acknowledged that these factors created a challenging environment, noting, “It wasn’t really a choice of should we stay in it strategically or not—it was two large customers that we’re winding down on a prior generation of a product and that they were not renewing.”

Looking forward, Penguin Solutions’ guidance reflects both optimism around expanding its AI infrastructure business and caution due to anticipated near-term headwinds. The company’s outlook for next year assumes zero hardware revenue from hyperscale customers and includes the complete wind-down of Penguin Edge, which together represent a substantial drag on growth. CFO Nate Olmstead emphasized that future sales will be more heavily weighted to the second half of the year as enterprise and government AI projects progress, stating, “We have a strong pipeline and some good opportunities…we expect revenue in the second half of the year.” Management also highlighted ongoing investments in memory technology and new verticals as strategic priorities for sustaining long-term growth.

Key Insights from Management’s Remarks

Penguin Solutions’ management cited customer diversification, the ramp-up of AI infrastructure deployments, and product innovation as key themes in the quarter, while also highlighting the impact of business exits and changing customer mix.

• AI infrastructure expansion: The company increased its pipeline of enterprise and government AI projects, with notable wins including a first on-premise GenAI data center for a major U.S. financial institution and a large-scale deployment in South Korea for SK Telecom.
• Customer diversification progress: Revenue from non-hyperscale customers in the HPC AI business grew 75% year-over-year, reflecting a deliberate effort to reduce reliance on large cloud providers and broaden the customer base across multiple sectors, including financial services and education.
• Penguin Edge wind-down: Management confirmed the wind-down of the Penguin Edge business, driven by the loss of two key customers and the phaseout of prior-generation products, resulting in both a direct revenue headwind and a shift in the company’s strategic focus.
• Memory segment momentum: The Integrated Memory business under the SMART Modular brand saw strong demand from large enterprises for high-performance memory, and management highlighted early interest in next-generation products like Compute Express Link (CXL) and Optical Memory Appliance (OMA).
• LED segment margin improvement: Despite flat revenues in Optimized LED, operational discipline led to a 250 basis point improvement in segment operating margin, with management focused on market share gains and cost efficiency in a challenging sector.

Drivers of Future Performance

Management expects future performance to be shaped by AI infrastructure adoption, a growing enterprise pipeline, and operational execution amid significant near-term headwinds.

• Shift away from hyperscale hardware: The outlook assumes no hardware sales to hyperscale cloud customers, which reduces near-term revenue but aligns resources toward enterprise, government, and education sectors, where management sees greater growth potential and less volatility.
• Memory technology investment: Continued research and development in memory technologies like CXL and OMA is expected to support differentiated offerings and position the company for growth as enterprise AI adoption increases, though margins may face short-term pressure due to the mix shift toward lower-margin products.
• Timing of revenue and bookings: Management anticipates a back-end loaded year, with stronger sales in the second half as AI infrastructure projects move from pipeline to bookings. This introduces some uncertainty, as conversion of opportunities to revenue is not guaranteed, and the company faces ongoing supply chain and market demand variability.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) the pace at which enterprise and government AI infrastructure projects progress from pipeline to bookings, (2) the success of the company’s customer diversification efforts—especially in non-hyperscale verticals, and (3) the rate at which next-generation memory products like CXL and OMA achieve commercial traction. Execution on operational discipline and margin management will also be critical markers.

Penguin Solutions currently trades at $22.50, down from $26.95 just before the earnings. At this price, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

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