Penguin Solutions recovers from initial drop as Q3 top line miss seems more timing-related:
Penguin Solutions (PENG) is flat today despite a healthy Q3 (May) EPS beat. It also raised FY25 EPS guidance by a good amount. The main issue is that revenue rose just 7.8% yr/yr to $324 mln, which was light of analyst expectations. The good news is that PENG reaffirmed the mid-point of FY25 top line guidance at +15-19% vs +14-20% prior guidance, which implies the Q3 miss was more of a timing issue and Q4 (Aug) revenue should be better. - This company helps hyperscalers, neo-cloud service providers and enterprise customers manage the complexity (power, cooling, AI compute, memory, storage) of AI Adoption by helping them design and build AI infrastructure. Its expertise lies in large-scale deployments, which has been developed over a 25+ year history implementing complex data center clusters beginning with HPC in its early days.
- PENG continues to see signs of early-stage Enterprise AI adoption across vertical markets such as financial services, energy, defense, education and neo-cloud segments. PENG's belief is that investment in AI-powered systems deployed throughout the industry in 2023-24 would lead to growth in full production installs in 2025-26. PENG says it's now seeing signs that as the industry has entered the initial stages of that growth with build-outs at scale.
- In terms of the top line miss, PENG concedes that the timing of actual deployments and associated revenue recognition can be unpredictable and concentrated. This was the case in Q3 when its Advanced Computing revenue declined yr/yr to $132 mln. AC revenue, in particular, tends to be lumpy due to customer concentration and the timing of large project implementation.
- PENG continues to see increased interest at enterprise customers, as well as in neo-cloud customer opportunities due to increased investments in large-scale AI infrastructure. PENG noted some exciting wins at existing customers in Q3 and closed five new customer bookings, highlighted by wins in the federal, energy and biotech segments.
The stock had an initial sharp drop following its earnings last night, but it recovered during the call and now shares are trading around unchanged. We think the earnings call helped to calm investor nerves. The initial reaction was caused by the top line miss, but we think the FY25 guidance helped to assuage fears as the Q3 miss looks more like a timing issue rather than a demand pullback. On a final note, the stock came under pressure in early April following the announcement of the reciprocal tariffs. Investors were right to be concerned that this may cause PENG's clients to pause AI deployments. However, the stock has recovered nicely since then as investors seem less concerned that the tariffs will be implemented. |