Penguin Solutions (NASDAQ:PENG) reported first-quarter fiscal 2026 results that management said held up better than expected despite headwinds in the first half of the year and the absence of hyperscale hardware revenue that had contributed in the prior-year period.
Quarterly results show stable revenue and margin performance
Total net sales were $343 million, up 2% sequentially and 1% year over year, according to Chief Executive Officer Mark Adams. The company posted non-GAAP gross margin of 30%, which Adams said compared favorably to the midpoint of the full-year outlook due to favorable mix and execution.
Olmstead also broke out revenue by type: services net sales were $65 million, down 9% year over year, while product net sales were $279 million, up 3% year over year.
Management describes shift toward enterprise AI deployments
Adams said the company continues to see indications of a broader market shift from hyperscaler deployments and early enterprise pilot programs toward wider enterprise adoption and more production-scale implementations. He added that there are early signs some workloads are evolving from training-centric environments toward inference-oriented use cases as organizations operationalize AI across the enterprise.
During the Q&A session, Adams said that over the last six to 12 months, the company has seen an “evolution” in the raw volume of enterprise opportunities. He tied that view to the company’s own pipeline activity and “raw market data” regarding where AI products are being deployed, and he also pointed to growing interest in “larger sovereign AI deals.”
Segment performance: Advanced Computing grows sequentially; Memory surges year over year; LED declines
Penguin’s Advanced Computing segment delivered $151 million in Q1 revenue, up 9% sequentially. Olmstead noted segment sales were down 15% year over year, reflecting both the wind down of Penguin Edge and hyperscale hardware sales that were present in the year-ago quarter but did not recur this year. Excluding Penguin Edge and hyperscale hardware, Olmstead said Advanced Computing net sales grew 52% year over year.
Adams said the company had several customer bookings in the quarter, including two new customers—one in the defense sector and another in education and research. He also highlighted pipeline expansion into financial services, oil and gas, telecommunications, manufacturing, and education, and said Penguin is engaged in discussions with sovereign cloud customers outside the U.S. about potential large-scale AI deployments. To support potential customers planning AI at scale, Adams said Penguin recently launched a Rapid Development Workshop Program bringing together architecture, software, managed services, and supply chain teams.
In Integrated Memory, Q1 revenue was $137 million, up 3% sequentially and up 41% year over year. Adams said demand signals were strong across networking, telecommunications, and computing customers heading into the second quarter. He emphasized the company’s work on Compute Express Link (CXL) solutions, noting it is shipping early production units through OEM partners while expanding end-user qualification efforts. He also said the company continues to invest in an optical memory appliance (OMA) in collaboration with technology partners, leveraging a photonic transport layer to increase interconnect performance.
During Q&A, management said supply availability remains an important variable for memory, but Adams and Olmstead indicated the company has been navigating constraints without seeing anything “material” impacting the business. Olmstead added that in a constrained memory environment, the company may secure supply to reduce risk, supported by what he described as a strong balance sheet.
The Optimized LED business, operating under the Cree LED brand, produced $55 million in Q1 revenue, down 18% sequentially and down 18% year over year. Adams cited weak demand in China and pockets of softness among certain large U.S. OEM customers. Despite lower revenue, Adams said operating income in LED was $3.5 million, up 24% sequentially, as the company focused on profitability using its specialty portfolio, intellectual property, and outsourced front-end operating model. Olmstead noted Q2 is typically softer in LED due to Chinese New Year and said he expects sequential pressure in the segment.
Portfolio changes, partnerships, and software positioning
As part of streamlining its corporate structure, Adams said Penguin signed an agreement in late December to sell its remaining 19% stake in Zillia Technologies (formerly Smart Modular Brazil) for $46 million. The company expects the transaction to close in the third quarter of fiscal 2026.
Adams also highlighted efforts to strengthen partnerships with ecosystem players including Nvidia, AMD, and CDW. In response to an analyst question, he said CDW opportunities include large-scale deployments where Penguin can contribute managed services and software capabilities. He added that engagements with Nvidia have been strengthening as enterprise deployments scale, and that the company continues to pursue opportunities with SKT both in and outside Korea, as well as sovereign cloud opportunities.
On software, Adams said the company is customizing its ICE clusterware platform to be compatible with other open-source industry software. He described building a “standalone stack” that combines ICE with “best-of-breed” open software components across areas such as cluster management, security, and orchestration, including collaboration with Nvidia software as part of customized platforms for future deployments.
Cash flow, buybacks, and full-year outlook maintained
On the balance sheet, cash, cash equivalents, and short-term investments totaled $461 million at quarter end, up $68 million year over year and up $8 million sequentially. Operating cash flow was $31 million, up from $14 million in the year-ago quarter, which Olmstead attributed primarily to lower working capital investment. The company spent $15 million to repurchase approximately 791,000 shares in Q1, with $96.5 million remaining under current authorizations as of Nov. 28, 2025.
Looking ahead, Olmstead said the company confirmed its full-year net sales and non-GAAP EPS outlook. At the midpoint, the outlook calls for 6% net sales growth and approximately $2 in non-GAAP diluted EPS. The company reiterated that the full-year outlook excludes any advanced computing hardware sales to hyperscale customers and reflects the wind down of Penguin Edge, with sales from that business expected to essentially cease by the end of fiscal 2026.
Olmstead said the company continues to expect the second half of fiscal 2026 to be stronger than the first half, with roughly 53% to 54% of sales expected in the second half at the midpoint, as pipeline AI opportunities are assumed to book and ship later in the year. He also updated segment assumptions and margin expectations:
- Advanced Computing: full-year net sales expected to range from -15% to +15% year over year (reflecting Penguin Edge and hyperscale-related impacts).
- Memory: net sales growth expected at 20% to 35% year over year, with pricing cited as a key driver.
- LED: net sales expected to decline -15% to -5% year over year.
- Non-GAAP gross margin: now expected at 29% ± 1 point, reduced by 50 basis points due to a higher mix of lower-margin memory sales.
- Non-GAAP operating expenses: expected at $250 million ± $10 million.
Management also pointed to ongoing supply chain constraints and extended lead times for certain components impacting the speed of ramping customer projects, particularly in advanced computing and memory.
About Penguin Solutions (NASDAQ:PENG)
Penguin Solutions, Inc engages in the designing and development of enterprise solutions worldwide. It operates through three segments: Advanced Computing, Integrated Memory, and Optimized LED. It offers dynamic random access memory modules, solid-state and flash storage, and other advanced integrated memory solutions for networking and telecom, data analytics, artificial intelligence and machine learning applications; and supply chain services, including procurement, logistics, inventory management, temporary warehousing, programming, kitting, and packaging services.
