SMART Global Holdings, Inc. (NASDAQ:SGH) Q1 2025 Earnings Call Transcript

SMART Global Holdings, Inc. (NASDAQ:SGH) Q1 2025 Earnings Call Transcript January 8, 2025

Operator: Good afternoon. Thank you for attending today’s Penguin Solutions First Quarter Fiscal 2025 Earnings Call. My name is Tamia, and I will be your moderator for today’s call. [Operator Instructions]. I would now like to pass the conference over to your host, Suzanne Schmidt, Investor Relations. You may proceed.

Suzanne Schmidt: Thank you, operator. Good afternoon, and thank you for joining us on today’s earnings conference call and webcast to discuss Penguin Solutions’ First Quarter fiscal 2025 Results. On the call today are Mark Adams, Chief Executive Officer; and Nate Olmstead, Chief Financial Officer. You can find the accompanying slide presentation and press release for this call on the Investor Relations section of our website. We encourage you to go to the site throughout the quarter for the most current information on the company. 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. 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 and strategy and potential collaborations.

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 recent annual and quarterly reports. The forward-looking statements are representative only as of the date they are made and except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements. We will also discuss both GAAP and non-GAAP financial measures. Non-GAAP measures should not be considered in isolation from, as a substitute for or superior to our GAAP results.

We encourage you to consider all measures when analyzing our performance. A reconciliation of the GAAP to non-GAAP measures is included in today’s press release and accompanying slide presentation. And with that, let me turn the call over to Mark Adams, CEO. Mark?

Mark Adams: Thank you, Suzanne. Welcome everyone to our Q1 fiscal 2025 earnings call. We hope you had a nice holiday season. For the first quarter of fiscal 2025, we delivered strong financial results across a number of key metrics. Our revenue was $341 million, an increase of 24% compared to the same period last year. Non-GAAP earnings per share was $0.49, a 108% increase year over year. We achieved non-GAAP operating income of $41 million, up 53% from the prior year, and we improved non-GAAP operating income margin to 12%, up 2.3 percentage points year over year. These results are a testament to our strategic focus and operating discipline. We believe that Penguin Solutions, Inc. is well positioned to capitalize on growing demand for high-performance, high-availability solutions that companies need to deploy AI infrastructure on-premise, at the edge, and in the cloud.

Q&A Session

Penguin Solutions leverages its deep experience and its differentiated portfolio of hardware, software, and managed services to help its customers solve the complexity of deploying AI. We work with our customers to design, build, deploy, and manage these environments with a focus on time to revenue, reliability, and the highest level of performance and availability. Our products and services are primarily sold to hyperscalers, cloud service providers, and large Fortune 500 corporations in the financial, energy, education, federal, consumer, and manufacturing sectors. At the core of Penguin’s success is over 25 years of experience in deploying large-scale complex data center clusters, originating from our earlier days in high-performance computing (HPC), which is the foundation of our migration and becoming a leader in AI infrastructure solutions.

Whether a customer is looking for a ready-to-use solution like our Origin AI offering, or a custom leading-edge offering, we are able to deliver the right solution to meet their needs. Before discussing our individual segments, I want to remind you that we’ve transitioned from providing a quarterly financial outlook to providing a full-year outlook. As mentioned in previous calls, we believe that a full-year outlook affords a broader perspective of our business, especially in relation to AI infrastructure where the timing of deployments can be unpredictable, and that it aligns well with our emphasis on achieving long-term objectives. We also understand that our investors, customers, and partners appreciate commentary on our progress each quarter, which is what we hope to offer you today.

With all that in mind, we are affirming our outlook for fiscal 2025, which Nate will discuss in more detail later. Let me now provide more detail on our business segments. Advanced Computing, formerly called Intelligent Platform Solutions or IPS, consists of our Penguin Computing, Stratos, and Penguin Embedded brands. Advanced Computing revenue for the first quarter of fiscal 2025 was up 49% year over year, representing 52% of Penguin Solutions, Inc.’s revenue. We continue to make progress in expanding our customer engagements in end markets such as hyperscalers, cloud service providers, financial energy, federal integrators, media and entertainment, and education. We feel that the AI markets in 2025 will begin shifting from early AI pilot systems to full-scale AI production environments and expect Penguin’s ability to successfully manage large-scale deployments to be in demand.

We entered Q2 with a strong backlog, highlighted by large bookings at both an established hyperscaler and a federal systems integrator. Taking these and other developments into account, we expect Advanced Computing to grow sequentially in our second quarter. Integrated Memory, formerly called Memory Solution, consists of our Smart Modular brand. In the first quarter of fiscal 2025, Integrated Memory revenue was up 13% compared to the same period last year, representing 28% of total Penguin Solutions, Inc.’s revenue. Memory is a critical contributor to the AI ecosystem. Large enterprises have an insatiable need for high-performance and higher reliability memory to support complex workloads. In addition to our customers in networking, telecom, compute servers, and defense, we are seeing growth in new segments such as hyperscalers, cloud service providers, and even large enterprises interested in CXL and higher speed memory solutions.

Our memory backlog heading into Q2 reflects improving demand as our core customers have continued to work through their higher levels of inventory, accumulating in the first half of 2024. Optimized LED, formerly called LED Solutions, is marketed under the Cree LED brand. In the first quarter of fiscal 2025, Optimized LED revenue declined by 4% as compared with the year-ago quarter, while gross and operating margins improved. We have mentioned on prior calls that the LED industry remains in an oversupply capacity condition. As such, Cree LED’s capital-light, outsourced model continues to be a competitive advantage and was a contributing factor to improving profitability in Q1. In December, we announced that we entered into a patent license agreement with Daktronics, a US-based leader in large-scale LED displays.

Our strong intellectual property, coupled with a cost-effective operating model, has contributed to some exciting new customer design win activity with larger LED lighting customers. Our strategic priorities this year include innovating relentlessly on differentiated technology, increasing our software and services offerings, and expanding our go-to-market partnerships. Let me briefly discuss our progress in each of these areas. We continue to invest in research and development to further differentiate our products and services in compute, memory, and software. For customers who are looking to accelerate AI deployment, we are expanding our Origin AI offerings to include Dell servers along with Penguin software and services, which can help expand our customer TAM for future engagements.

In addition, we continue to work with leading chip providers such as NVIDIA, AMD, Intel, and an early-stage chip technology company to ensure qualification of the latest technologies as part of our data center solution portfolio. For customers interested in cutting-edge memory, our CXL add-in card products offer greater density with higher bandwidth and performance. Recent customer qualifications and sample orders of CXL from OEMs and AI computing companies make us optimistic about its appeal to new types of customers. We have also been making progress towards the release of an Optical Memory Appliance, or OMA. We expect final specifications of the OMA in Q1 of calendar 2025, which will enable sampling by large hyperscalers, OEMs, and cloud service providers.

These solutions will allow us to expand beyond our core specialty memory offerings and address the AI market’s desire for faster and more reliable memory products. We have also intensified our focus on software. Penguin’s software platform was developed for advanced cluster management environments for the more traditional IT systems administrator type user. Our next planned release is expected to introduce an improved user interface that is designed to simplify deployment and management for end users, an advancement that we expect to accelerate adoption, particularly as an enhancement to our ready-to-use Origin AI solution. We have also initiated work on multi-tenant capabilities, a critical feature designed to allow a single AI platform or service to be shared by multiple users or organizations while maintaining data isolation and security.

Our software strategy promotes an open ecosystem through its compatibility with multiple chip vendors like AMD, NVIDIA, Intel, as well as with players up the software stack like Kubernetes and VM players. Multiple schedulers like Run AI and ClearML. Our technology-agnostic approach, whether in hardware or software, allows us to serve a broader set of use cases and offer our customers the most flexibility in defining their overall architecture. In addition to our investment into differentiated hardware, software, and services, we are expanding our strategic partnerships to enhance our offerings and increase our go-to-market capabilities. In mid-December, we announced the close of our investment from SK Telecom into Penguin Solutions, Inc. Beyond the financial benefit to our balance sheet, we are excited about the opportunities that we expect to come from collaborating with SK.

Whether it is in advanced computing, with next-generation GPU offerings, for high-performance memory solutions, or tapping into other technology areas in energy, cooling, or networking, all technologies that are part of the SK portfolio, we think there’s an exciting potential to work together to differentiate our offerings in deploying premier AI infrastructure solutions. In November, we announced an agreement with Dell to deliver complete AI solutions combining Dell servers, storage, and networking with Penguin’s management software platform and managed services. We expect Dell’s distinguished go-to-market platform, coupled with Penguin’s ability to manage the most complex AI deployments, to help us scale our customer reach across new industries and geographies.

We will continue to evaluate new partnerships where we can accelerate new product time to market or potentially grow more quickly in helping large enterprises implement large AI infrastructure at scale. Given our experience with large-scale AI implementations at hyperscalers, energy companies, federal systems integrators, educational institutions, and cloud service providers, we feel now is the time to broaden our go-to-market efforts as AI moves from an early prototyping stage market to full-scale deployments of live production systems. As we have discussed in the past, our revenues and gross margins can fluctuate due to the nature of our business, where customer deployments and acceptances vary from period to period, as can the mix of hardware and software and services.

Having said that, given demand signals from our customers and current booking numbers, we are optimistic about the growth profile of our business heading into Q2. We believe we offer a compelling value proposition as a trusted adviser providing technology-agnostic hardware, software, and managed service solutions that focus on solving the complexity of AI infrastructure. Let me now hand the call over to Nate for a more detailed look at our Q1 financial performance and commentary regarding our business for the remainder of fiscal 2025. Nate?

Nate Olmstead: 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 Relations materials on our website. Now let me turn to our first-quarter results. Total Penguin Solutions, Inc. revenues were $341 million, up 24% year over year and up sequentially for the fourth consecutive quarter. Non-GAAP gross margin came in at 30.8%, which was down year over year due to a higher hardware revenue mix. Non-GAAP operating margin was 12%, up 2.3 percentage points versus last year, and non-GAAP diluted earnings per share were $0.49 for the first quarter, more than double Q1 last year. In the first quarter of 2025, our overall services revenue totaled $71 million or 21% of total company revenue, up 5% versus Q1 last year.

Product revenues were $270 million in the first quarter, up 31% year over year. First-quarter revenue by business segment was as follows: Advanced Computing, $177 million or 52% of our total revenue, and up 49% year over year. Integrated Memory, $97 million, which was 28% of our total revenue, and up 13% year over year. And Optimized LED, $67 million or 20% of our total revenue, and down 4% year over year. Non-GAAP gross margin for Penguin Solutions, Inc. in the first quarter was 30.8%, down 2.5 percentage points year over year, driven primarily by a higher mix of Advanced Computing hardware revenue compared to last year, partially offset by improved margins in LED. Gross margin was roughly flat sequentially, with lower Advanced Computing hardware margins offset by higher margins in both Memory and LED.

Non-GAAP operating expenses for the first quarter were $64 million, down 1% year over year and up 3% sequentially. Operating expenses as a percentage of sales were down both year over year and sequentially, driven by higher revenue volumes and disciplined expense management. Non-GAAP operating income was $41 million, up 53% year over year and up 21% versus last quarter. The combination of top-line growth and operating expense efficiencies translated into a 2.3 percentage point increase in operating margin versus Q1 last year. Non-GAAP diluted earnings per share for the first quarter of 2025 were $0.49, up 108% versus the prior year and up 33% versus the prior quarter. Adjusted EBITDA for the first quarter of 2025 was $45 million, up 30% year over year.

Turning to balance sheet highlights, working capital, net accounts receivables totaled $276 million compared to $171 million a year ago, with the increase driven by higher sales volumes. Days sales outstanding came in at 45 days, up from 41 days in the prior year quarter due to variations in sales linearity within the quarters. Inventory totaled $247 million at the end of the first quarter, up from $208 million at the end of Q1 a year ago due to higher sales volumes. Days of inventory were 49 days, down from 63 days a year ago, primarily due to the timing of receipts and shipments. Accounts payable were $244 million at the end of the quarter, up from $182 million a year ago, due primarily to higher sales volume. Days payable outstanding was 49 days compared to 55 days last year due to the timing of purchases and payments.

Our cash conversion cycle was 46 days, an improvement of three days compared to last year due to faster inventory turns. 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. Gross and net revenue were $554 million and $456 million respectively in the first quarter. As a reminder, the difference between gross and net revenue is related to our memory businesses’ logistics services, which is accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as revenue. Cash and cash equivalents and short-term investments totaled $394 million at the end of the first quarter, down $159 million from Q1 last year and up slightly sequentially.

The year-over-year fluctuation was due primarily to debt repayments for our term loan in fiscal year 2024. First-quarter cash flows generated from operating activities totaled $14 million compared to $60 million generated by operating activities in the prior year quarter. The decrease was due primarily to increased investment in working capital to support business growth. We spent approximately $8 million to repurchase 467,000 shares in the first quarter under our share buyback program. Since our initial share repurchase authorization in April of 2022, we have used a total of $80 million to repurchase 4.6 million shares through Q1 of fiscal year 2025. We did not make any debt prepayments in this past quarter, and the principal on our term loan remains at $300 million as of the end of the quarter.

Our net debt at the end of Q1 was $276 million. For those of you tracking capital expenditures and depreciation, capital expenditures were $2 million in the first quarter, and depreciation was $5 million. And now turning to our outlook. Given our strong Q1 performance, we are pleased to confirm our outlook for the year, which calls for revenue growth of 15% year over year, plus or minus 5 percentage points. By segment, our full-year revenue outlook reflects the following: For Advanced Computing, we expect full-year revenues to grow between 10% and 25% year over year. Based on a large customer order that partially shipped in Q1 and will finish shipping in Q2, we expect Advanced Computing growth to be higher in H1 than in H2. For Memory, we expect revenues to grow between 10% and 20% year over year.

And for LED, we expect revenues to be flat to up 10% year over year. Our non-GAAP gross margin for the full year is still expected to be 32%, plus or minus 1 percentage point. We continue to expect our non-GAAP operating expenses for the full year will be $275 million, plus or minus $15 million. And our non-GAAP full-year diluted earnings per share, which includes the impact of the SK Telecom transaction, is expected to be approximately $1.50, plus or minus $0.20, which is unchanged from the revised outlook we provided on December 16th after incorporating the impact from the SK Telecom transaction. And finally, our non-GAAP diluted share count is still expected to be approximately 56.3 million shares for the year. As a reminder, we are utilizing a long-term projected non-GAAP tax rate of 28%, which reflects currently available information.

While we expect to use this normalized non-GAAP tax rate through 2025, the long-term non-GAAP tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global tax environment, significant changes in our geographic earnings mix, or changes to our strategy or business operations. While we are providing a full-year outlook, I also want to provide some directional color on near-term expectations. We are pleased with our results in Q1, which were driven by strong hardware revenue growth in Advanced Computing and a return to growth in Memory. We expect compute hardware and memory revenue to grow again in Q2. Remember that compute hardware revenue is recognized at the time of sale and comes at a lower margin than our compute services revenue, which is recognized over time.

Our outlook for fiscal year 2025 is based on the current environment, which contemplates, among other things, the global macroeconomic headwinds and ongoing supply chain constraints, especially as it relates to our Advanced Computing business. 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. 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. 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.

With that, operator, we are ready for Q&A.

Operator: Absolutely. We will now begin the question and answer session. The first comes from Michael Ng with Goldman Sachs. You may proceed.

Michael Ng: Hey. Good afternoon. Thank you very much for the questions. I just have two. First, on the Dell partnership, I was just wondering if you could expand a little bit around your comments about how that partnership could help you scale across new industries and geographies. You know, what about the Dell partnership kind of opens up opportunities for you? And then I just have a quick follow-up. Thank you.

Mark Adams: Sure. Well, Michael, you think about the value add that we are able to add on top of our clustered hardware, NVIDIA, or other technology server. It’s really in the design and the deployment of these systems utilizing our software and our managed services. And as we think about some of the trends that we’ve seen in our customer conversations over the last six to twelve months, at times, they want to utilize existing hardware they procured or they’ve got access to more of a standard configuration, and then we get called in to bring this value add. This is a differentiator for us, and companies like Dell have approached us in our conversations to see if there might be collaboration going to market together. Where we bring 25 years of history in advanced computing solutions and data center environments and our know-how to deploy utilizing software and services.

With their, you know, really incredible go-to-market engine on a global basis. And so, you know, when it is an environment like that, we’re anxious to leverage the potential benefits of both Dell and Penguin Solutions, Inc. working together to drive more scale in our business and to help differentiate their overall go-to-market offering.

Michael Ng: Great. Thank you, Mark. And just for the second one, I was just wondering if you could comment a little bit more around the timing of Advanced Computing revenue for the year. You know, was that large customer shipment this quarter and next more on the hyperscale or the CSP or enterprise side? And you commented about the strong backlog going into the second quarter. You know, has the backlog been growing? Maybe you could just talk about some of the AI, Advanced Computing demand trends you’re seeing. Thank you.

Mark Adams: Sure. In the first quarter, we benefited from a deployment at a major hyperscale customer that we have. That was one of a number of key deployments, but a significant opportunity for us, and we’re very excited to execute on that. In the second quarter, it’s a combination beyond the hyperscaler, in addition to there’s also a large federal integrator and the deployment there. And so that’s really kind of physical revenue recognition opportunities. When I say physical, I mean the ability to install, deploy, get customer acceptance in the quarter, and Q2 are the opportunities that we have. Taking a step back when you think about backlog and pipeline, this is really, you know, the strongest pipeline we’ve had at Penguin Solutions, Inc.

as we’ve kind of built up our AI practice. And when I think about that, I just say, I have to caution that obviously bookings and pipeline can vary quarter to quarter. As both Nate and I talked about in our prepared comments. But in financial institutions and energy, as well as in the federal space, those are three examples. Market segments where our customer engagements have expanded. And proposals and overall pipeline continue to expand, and we’re gaining more and more confidence in our ability to compete for larger business over time. And I think when Nate earlier reaffirmed our forecast for the year, it’s a good signal that we not only see a strong Q2, but we believe in the initial forecast that we provided in our last call.

Michael Ng: Great. Thank you for all the thoughts, Mark. Very helpful.

Mark Adams: Thanks, mate.

Operator: Thank you. The next question comes from Brian Chin with Stifel. You may proceed.

Brian Chin: Hi. Good afternoon. Thanks for letting us ask a few questions. Maybe just building off that last part of the discussion. Unofficially, it sounds like you expect fiscal second-quarter revenue to be up a little bit. Even flatlining the fiscal Q1 revenue across the year, you’d be tracking above that 15% revenue growth midpoint in fiscal 2025. I guess given this and including your backlog commentary, is there some conservatism now for the fiscal 2025 revenue outlook?

Nate Olmstead: Hey, Brian. It’s Nate. You know, I think I would refer you back to just comments we’ve made historically about the lumpiness in our business. And as Mark was referring, we had, you know, a large customer order from a hyperscaler in Q1 and in Q2, which indicates that those are not repeating in the second half. So good news is second half, you know, we do see some good new opportunities. But we do not have the benefit of that large customer order that ships in Q1 and Q2.

Mark Adams: Really, what the emphasis there is, it just goes back to the feeling of a really good pipeline process evolving for us. But the inability right now here in January to call the back half. And so as Nate said, you know, we were trying to give a little more color even though we’re doing annual, I’m trying to give a little more color about the short term. And as some of these transactions come to fruition, we’ll be able to provide updates as we go throughout the, you know, next quarter call and beyond.

Nate Olmstead: And, Brian, you know, there’s a range on that revenue number obviously too. So if there’s a many different outcomes that are possible. We’ve got tracking really well for Q2 and as Mark said, we’re building a good solid pipeline for the second half and hopefully in fiscal year 2026.

Brian Chin: That’s helpful. And in terms of the Dell relationship, how many quarters or when do you think that could really start to hit its stride in terms of that channel? And the ability to, you know, piggyback off of, you know, that kind of standardized Dell infrastructure, but really participate in what could be a higher margin business for you and kind of flow through the P&L better.

Mark Adams: I don’t think the sales motions differ from what we’ve already articulated in the past, which is kind of twelve to eighteen months. And, you know, clearly, we’re not just starting here in January. We’ve had some initial efforts in the back half of 2024 calendar. And so would think towards the, you know, the earliest you might see something is towards the end of our fiscal year, early fiscal year 2026, but you can imagine that we’ve had some really good momentum going into the announcement of the agreement.

Brian Chin: Okay. Maybe last one for me, and this might also kind of orient towards maybe tail end this current fiscal year, maybe more fiscal 2026. But in terms of the closing of the SK Telecom investment, you know, if CES booth is any indication, SK Telecom certainly seems to have a clear, maybe ambitious vision of the role they can play in developing the AI ecosystem. It sounds like they plan to build several large data centers in Korea from 2025 onward. Can you describe the role Penguin might play in these projects and what other revenue opportunities and synergies you expect from this relationship? Again, perhaps starting, yeah, maybe later this fiscal year.

Mark Adams: Yeah. And we’ve got to caution it that that transaction just literally closed in mid-December. But, you know, we’ve had very good preliminary discussions with SK. What I said at the time of the announcement of the transaction, I’ll reinforce now is that they have a very large portfolio in terms of the elements of an AI infrastructure solution. And whether that be high bandwidth memory, their own version of a GPU architecture, all the way down to networking and power and cooling. They’ve invested heavily, and I think where we could be very helpful for them is a company that can bring it all together in terms of an integrated solution for some of these customers and for their internal interest in building out cloud infrastructure.

So those are the conversations that you’ll see us having with them, and, you know, as I said, out of the gates for limit, you know, since the close of the transaction, and even, you know, carefully beforehand, they’ve been very progressive, and, you know, we’re very pleased with the nature of the agreement.

Brian Chin: Okay. Yeah. I want more to come on that. I appreciate the color. Thanks.

Mark Adams: Thank you.

Operator: Thank you. The following question comes from Nick Doyle with Needham. You may proceed.

Nick Doyle: Hey, guys. Thanks for letting me ask a couple questions. Could you give more details on the inventory increase? It jumped about $100 million quarter over quarter. So is that directly related to the strong bookings and backlog commentary in the Advanced Compute business? And is that another data point we can lean on for confidence in the fiscal 2025 outlook? Thanks.

Nate Olmstead: Yeah. It is related to especially to that large customer order that I mentioned. Also, keep in mind, you know, the timing of purchases can differ from quarter to quarter, and the timing of shipments can differ from quarter to quarter. So it’s not unusual to see fluctuations like that. But this customer order we’ve been talking about is also a major factor that you see there. But we expect that to ship through in Q2. So is there, you know, a level of inventory dollars or days that we should be looking for maybe next quarter or towards the end of the year? Yeah. It’s kind of hard to predict because the timing of when these orders come in, when the inventory build happens, those sorts of things can be difficult to predict.

You know, we run a pretty tight ship, I would say, on inventory. Cash conversion cycle improved year over year. So it’s important, I think, to look at all the metrics. Also, where possible, we work with customers to get prepayment on inventory as well to manage cash in back.

Nick Doyle: Okay. Thanks. For the LED, the operating margin increased again quarter over quarter. You talked about how your capital-light strategy helps your margins. So can you talk about how the Daktronics deal impacts gross margins going forward?

Mark Adams: Sure. First of all, we’ve talked a little bit about just the broader LED market environment has not been super healthy. There’s a massive oversupply, and you’ve got some large companies really not able to compete effectively. You know, throughout this, I think I’ve also mentioned that there has been foreign investment in capacity subsidized by local government, and that’s put the industry at further risk for the rest of the world. Part of that has also led to indirect and direct violation or what we believe is a violation of our intellectual property. And so as part of trying to protect the long-term investment we’ve made in Cree LED and in the innovation around LED technology, we’re going to protect that. And so the Daktronics announcement is really a validation of our ability to work with a leading LED systems provider, and in this case, a large display provider, and it really validates our differentiation and our technology.

And, you know, the ability to license our technology to someone like Daktronics not only validates our position but also lets the market be on notice that we’re not going to allow people to infringe. And so it won’t be the last you likely hear on this topic. We’ll continue to be protective of our investments both in the past and current on innovation as Cree has been a leader in LED. And so I think there’s more to come over time, but we’re going to defend our IP, and that’s important to us.

Nick Doyle: Thanks, Nick.

Operator: Thank you. Next question comes from Alex Valera with Loop Capital. You may proceed.

Alex Valera: Hey, guys. Thank you for taking my question. This is Alec calling from Fernanda. My first question is can you provide any color as to what kind of future partnerships you guys can potentially do with hyperscalers or telcos?

Mark Adams: Yeah. I think, you know, it’s kind of a broad question. You know, we’ve talked about hyperscalers in general as being less strategic for us because we perceive that we can add more value with cloud service providers and large enterprises, and the enterprise could be anywhere from financial services to energy, to education, to the federal sector. I guess what I would say is that the value proposition we bring to market is pretty unique, and as we invest in differentiated solutions across hardware, software, and services, I think we position ourselves pretty well, and that’s the brand that Penguin has developed really more as a trusted adviser, technology agnostic, not trying to push a hardware solution on somebody, but really working to design the right solution for a particular workload environment.

I think hyperscalers tend to be a little bit more commodity-based and don’t require the value that we bring as much, whereas enterprises looking to deploy in the on-prem or private cloud environment don’t necessarily think in the same terms and value the differentiation that we bring to the table.

Alex Valera: Got it. Thank you for that. Just a quick follow-up on the SK Telecom transaction. Can you provide any color as to what you suppose proceeds you find most attractive?

Mark Adams: Well, I think it’s, you know, it’s an exciting time in the industry. And you’ve got a lot of investment in the market in AI solutions broadly. And so, you know, nothing to signal or announce, but we will continue to look at M&A as a tool to scale our offering and thus the business. Of course, continue to invest organically and go to market new product development. Obviously, we’ve got a very, very strong balance sheet when you factor in the money that was received in December by the close of SK. And so we will continue to take a look at our balance sheet from a capital allocation perspective. But I would say we’re a growth mindset. We feel we really have a very unique position in the market when compared to some of the larger corporate brands in AI.

You look at the gross margin compare, and, you know, we’re somewhere between two to three times gross margin versus these companies. And so we feel it’s important now for us to be able to accelerate our business and continue to develop technology and solutions that allow us to further differentiate ourselves over the long term.

Alex Valera: Great. Thanks, Alex. Thank you, guys.

Operator: Thank you. The next question comes from Rustam Conga with Citizens JMP. You may proceed.

Rustam Conga: Good afternoon, Mark and Nate. This is Russ. Congrats on the strong start to fiscal 2025, especially the notable growth in Advanced Computing. In the absence of a quarterly guide, I’m curious on whether you can comment on if the quarter outperformed or was more in line with your own expectations relative to ninety days ago?

Mark Adams: I just say we’re pretty pleased with the quarter. I think on the last call, you know, we get challenged sometimes when a shipment goes to a customer, and, you know, the timing of the actual customer acceptance is unknown or uncertain relative to the end of a quarter day. And so I’d say that the quarter was relatively good, relatively solid. And I would say that, you know, our commentary today on Q2 reflects continued optimism in the business for the quarter, for Q2. As you can see in the guide and in the comments from Nate and myself. And again, a lot of this is the work we’ve done, you know, and over the, you know, last, you know, one to two years on building up relationships in the field. This is a longer-term selling cycle.

And as we talk about from time to time, it’s like, you know, whether it’s twelve to eighteen months or so, plus or minus, we’re starting to see that payoff and with some real exciting opportunities. And we’ll see bookings, and we believe backlog will allow us to deliver a pretty good quarter in Q2.

Rustam Conga: Yeah, Russ. I mean, I would also say too, you know, give you a guide for the year. Everything that we recognized in Q1 was something that was part of that guide. So as Mark said, sometimes the timing can be a challenge to predict. These are really large orders, and they’re complex, and the timing of shipments and revenue recognition can be hard to nail down. But good solid execution in Q1. Consistent with the way we were thinking about it for the full year. And moving on to Q2.

Rustam Conga: That’s great. Appreciate the comments from you both. Just one last one from me. Coming away from the SC24 event, which I know Penguin had a notable presence at, to what extent are you delivering or realizing ROI in the quarter and fiscal 2025 from that event in terms of evangelizing Penguin Solutions, Inc. and services in the form of either pipeline build, lead generation, or new customer pilots?

Mark Adams: Thanks. I think the last piece is really helpful once you clarify the question. I mean, in terms of actual financial return on the event in the quarter, it’s probably not the way we look at it. But to your point, we had a great presence, and the traffic was fantastic at the event. And, you know, I think people are starting to understand the investment we made in a differentiated solution model, which is really a combination of managed services and software on top of hardware. And in some cases, as we did in the back half of 2024, we’re winning opportunities that are just really software and managed services as part of a solution. So those conversations and the excitement as the market moves away from what has been really kind of an early-stage infrastructure, you know, deployment of getting, you know, the hardware set up and what have you in terms of pilots and early-stage modeling.

I think that you’re starting to see more larger-scale deployments in production-ready environments. And that’s kind of where we think our value proposition is most valuable. And so I would say that the customer lead generation, the ability to really just tell the story and with more proof points as we were winning more customers in the back half of the year, I think you’re starting to see larger enterprises take notice because, you know, again, this complexity we talk about, you know, a lot of times companies think they can do it on their own. And they run into a hurdle, and they come, you know, come back and say, hey, we have hardware. We’ve got things doing, and we want to learn more about what you bring to the table. And when they get the pain points that we know exist in this complexity of deploying AI, they know they have a trusted partner ready to help them.

And so these conversations all in one, you know, location like a super compute is really a great opportunity for us. And we’ve got some industry awards coming out of that. And just a very powerful thing for us, and we think it’s a great investment for us. But from a, like, a quarterly return in the short term, it’s hard to kind of make that claim.

Rustam Conga: Makes total sense. Thank you both.

Mark Adams: Thank you.

Operator: Thank you. This is your final reminder that if you’d like to ask a question, please press star one. Our next question comes from Madison DePaola with Rosenblatt Securities. You may proceed.

Madison DePaola: Hi. I just have one question. About Daktronics, is your licensing agreement exclusive, or can you license the technology to other companies?

Mark Adams: Oh, well, sorry. That should’ve we should’ve made that more clear in my earlier comments. That is just a transaction between Cree LED and Daktronics that’s not exclusive. And so that agreement is just between the two parties. We have the ability because we own our own IP, obviously, that we can enforce that IP or license it, whichever, to other parties.

Madison DePaola: Okay. Great. Thank you, guys, for your question.

Mark Adams: Yeah. Okay.

Rustam Conga: Yes. Yeah.

Mark Adams: Thank you very much.

Operator: Thank you. There are currently no other questions queued at this time. I will now pass it back over to CEO Mark Adams for closing remarks.

Mark Adams: Well, thank you all again for joining us on today’s call. This quarter has marked a strong beginning to a year where we can focus on capturing opportunities in AI infrastructure, advanced memory solutions, and high-performance computing. Our investments in hardware, software, and managed services have positioned us to address the rapidly growing demand for AI across on-prem, cloud, and edge environments. With a strong portfolio of innovative products, a strengthened financial foundation, and growing partnerships, we remain confident in our ability to lead in this evolving market.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect your line.