Penguin Solutions (NASDAQ:PENG) reported fourth-quarter financial results on Tuesday. The transcript from the company's fourth-quarter earnings call has been provided below.

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OPERATOR

After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Lana Adair, Investor Relations. Please go ahead.

Lana Adair, Investor Relations

Thanks, everyone, for joining us. With me today are Cash Sheikh, Stephen Cumming, and Erin Johnson. Our earnings materials are available on the Investor Relations section of our website, and I encourage you to review these materials. Also, please take some time to review the presentation, which includes additional content to complement our discussion today. During this call, unless otherwise indicated, all references to financial measures refer to non-GAAP financial measures.

Non-GAAP measures should not be considered in isolation from, as a substitute for, or superior to our GAAP results. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our press release and accompanying slide presentation. Statements made during this call that relate to future results and events are forward-looking statements based on current beliefs and assumptions and are not guarantees of future performance.

Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our press release, our earnings call presentation, and our SEC filings. Except as required by applicable law, we assume no obligation to update our forward-looking statements. Now I'll turn it over to Cash.

Aaron Johnson, Interim Chief Financial Officer

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

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. Starting with the fourth quarter, net sales were $567 million, up 68% year over year and up 18% sequentially. Gross margin was 28.8%, operating margin was 15.8% and diluted earnings per share was $1, up 133% year over year. For the full year, net sales were $1.73 billion, 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. Fourth quarter product net sales were $510 million, or 90% of total company net sales, up 86% year over year. 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. Net sales by business segment were as follows. For Advanced Computing, fourth quarter net sales were $154 million, up 11% year over year and 12% sequentially.

For the full year, Advanced Computing net sales were $559 million, down 14%, reflecting the wind down of Penguin Edge and lower hyperscale hardware sales. 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. 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.

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. The growth reflects strong demand for memory supporting AI-driven data center applications, consistent with our strategic focus on this market. For Optimized LED, fourth quarter net sales were $72 million, representing 13% of total company net sales, up 7% year over year. 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. 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. Together with strong net sales growth, this drove record gross profit of $163 million, up 21% sequentially and 57% year over year. For the full year, gross profit reached a record $508 million.

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. The growth in gross profit dollars demonstrates the leverage generated by our increased scale. Fourth quarter operating expenses were $73 million, up 4% sequentially and 13% year over year. The sequential increase primarily reflects higher incentive compensation associated with our strong financial results.

For the full year, operating expenses increased 4% to $267 million, well below our 26% growth in net sales. 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. 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, 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. Fourth quarter diluted earnings per share was $1, up 19% sequentially and 133% year over year.

The sequential EPS growth rate trails our 39% operating income growth, reflecting a higher share count following our convertible notes offering. For the full fiscal year, diluted earnings per share were $2.87, up 51% and $0.22 above the high end of our July outlook. Adjusted EBITDA was a record $93 million in the fourth quarter, up 115% year over year and 38% sequentially. Full year adjusted EBITDA was $256 million, 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.

Gross sales were $1.57 billion and gross cost of goods sold was $1.42 billion in the fourth quarter. The difference between gross and net sales relates primarily to our memory businesses’ logistics services, which are accounted for on an agent basis. Turning to working capital, net accounts receivable increased to $796 million from $308 million a year ago, reflecting the growth in our memory business and the associated gross billings. Despite the higher balance, days sales outstanding improved to 46 days from 53 days last quarter and 51 days a year ago.

We are managing these investments against customer deployment schedules and supply availability as we support growth. 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. Inventory days were 48, up from 42 last quarter as we positioned inventory against a record backlog, and down from 51 a year ago.

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. Days payable outstanding was 52, down from 62 last quarter and 54 a year ago, primarily reflecting the timing of purchases within the quarter. Our cash conversion cycle was 42 days compared with 33 days last quarter and 49 days a year ago. Funding growth efficiently and maintaining disciplined working capital management remain important priorities.

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. The notes have an initial conversion price of approximately $116.70 per share, representing an approximately 50% premium to our share price at pricing. We also entered into capped call transactions designed to reduce potential dilution up to an initial cap price of approximately $175.05 per share.

Concurrently, we exchanged approximately $296 million 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 outstanding under our credit agreement. 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.

Following these actions, we ended the fourth quarter with cash and cash equivalents of $647 million, which is up $207 million from the third quarter and $193 million from a year ago. We remain focused on managing liquidity and the working capital required to support our growth. 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.

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, 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.

Our asset-light model allows us to scale without significant capital spending, and we expect that to continue in fiscal 2027. Now turning to our outlook, 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. We expect strong net sales growth to increase gross profit dollars while operating expenses grow at a considerably slower rate.

That combination is expected to expand operating margin and drive diluted EPS growth that outpaces net sales growth 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 to approximately $2.43 billion at the midpoint. Last quarter we shared a preliminary view of approximately 30% growth from the midpoint of our then-current fiscal 2026 outlook.

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

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

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. 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. We expect full year gross margin of approximately 28%, plus or minus 2 percentage points.

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. While these factors influence the gross margin rate, we expect net sales growth and scale to drive higher gross profit dollars. We expect full year operating expenses of approximately $275 million, plus or minus $10 million. 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.

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 $0.70, representing growth of approximately 55% at the midpoint and exceeding our expected rate of net sales growth. The EPS outlook reflects higher gross profit dollars, disciplined operating expense growth, and further operating margin expansion.

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

These factors may affect quarterly cadence and mix, but are reflected in our full year planning assumptions. Overall, our outlook reflects the momentum in our AI-driven businesses and the benefits of a more scalable operating model. We plan to invest selectively behind our highest-return opportunities while maintaining expense discipline. Our objective is to convert strong net sales growth into higher gross profit dollars, operating margin expansion, and earnings growth that outpaces net sales growth.

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

OPERATOR

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, 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 and A roster.

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

Catherine Murphy, Analyst at Goldman Sachs

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. 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 Solutions expands more into the NEO cloud 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? 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.

Aaron Johnson, Interim Chief Financial Officer

Thanks, Kat, for the questions. To your first question about our initial preliminary guidance last quarter in the mid-teens over to 40% for advanced computing, mainly driven by AI infrastructure. So this is primarily the growth that we have seen since the last earnings announcement: the booking strength. We have booked more than we expected, and we have a 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 in the increased guidance for AI infrastructure driving advanced computing guidance, and also increasing the guidance at the company level, primarily driven by AI infrastructure. On your question about NEO clouds 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 NEO cloud customers: we have a pretty unique product–market fit for these NEO cloud 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 NEO cloud customers to be able to provide SLAs to their off-takers. But all in all, similar unit economics, further expansion, and pretty unique product–market fit with NEO cloud customers.

OPERATOR

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

Sajal Dogra, Analyst at Rosenblatt Securities

Hey, thank you for taking my question, and fantastic results. You're essentially front-running my forecast 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.

Aaron Johnson, Interim Chief Financial Officer

Sure. So, Sajal, first of all, the outlook we provided last quarter was more of a color and preliminary outlook than the actual outlook, because it was sooner than we provide, right? As in typically we provide in Q4 earnings the timeframe where we are 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%.

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. As we are closer, we have more visibility, and we have more confidence in continuing the model as we scale the business. 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 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.

OPERATOR

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

Ananda Barua, Analyst at Loop Capital

Yeah, thanks, guys, for taking the question. Really appreciate it. What are some of—just sort of in keeping with Cash, Aaron, and Steven—you know, what are the dynamics that are sort of underpinning not just the increase in the fiscal year 27 guide, but the acceleration of the growth rate actually across the key businesses? What are some of the mechanics that you're seeing out there in the marketplace that are leading to, you know, sort of increased NEO cloud 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. Thanks a lot. Appreciate it.

Aaron Johnson, Interim Chief Financial Officer

Sure, Ananda. So starting with the acceleration of the business, as I mentioned earlier, part of it is the increased visibility that we are seeing as well as the growth acceleration. We believe one of the competitive advantages we have is we are not a product company that is just providing the hardware and leaving it at the doorstep of the customers. We actually work with them much earlier in the cycle, get involved in their design based on the requirements they have—whether they are a large enterprise customer deploying an on-premise factory or a NEO cloud provider—and then work with them consultatively, understanding their requirement to, if it is a NEO cloud provider, what is their SLAs, who are their customers, and how can we align the design to meet their requirements. That consultative aspect, and especially the fact that we've been doing it for more than two decades, that's an advantage. Our team was working with Nvidia designing these clusters 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 elements and makes it much 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 centers is 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. That's one of the advantages we are realizing is helping us.

Nvidia partnership is certainly helping us because we were recently nominated by Nvidia as the AI Factory Specialized Partner. We are 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 since we launched our AI factory platform strategy midway through 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 dynamic 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 workflows and creating really the productivity for the enterprises. That is going to sustain much longer. If anything, let's say agent AI is adopted in the enterprises 10% because they are still getting 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. Combine that with these two tailwinds we have—memory business position in the data center, solving memory issues, providing the solutions for OEMs and now increasingly providing forward-looking data center solutions such as CXL memory expansion cards. Those memory expansion cards are primarily for inference workloads, and we see this CXL business taking off pretty strongly.

So the pipeline is increasing, bookings are increasing, so those newer solutions, data center focus, inference focus is another advantage for us as a differentiation and solving the inference challenges in the data center. 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 NEO cloud 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, 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.

OPERATOR

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

UNKNOWN Analyst

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 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.

Cash Sheikh

First of all, I want to give you the credit for remembering my comment, and you are right. That was what we observed last quarter where the revenue was pretty strong, record revenue from memory, even though the backlog was as much as our revenue. 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 recognized in this quarter, and the backlog now extends to at least four quarters and it continues to strengthen, which is why we have the confidence to increase the outlook for the business.

And it is really, as I mentioned in the previous question, that function of data center–focused demand 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.

OPERATOR

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

Matthew Calitri, Analyst at Needham & Company

Hey guys, Matt Kalitri at Needham here. Thanks for taking the questions and great to see the strength to close the year here, including with some of those Neo Cloud wins you talked about. I'm wondering if you could give any more detail there on when will these projects start and begin to be recognized in the model and what the impact could be. And also is there anything specific to point to as to why you had so much success closing deals in the quarter, or just more broadly, like why now is the moment for this Neo Cloud opportunity?

UNKNOWN Executive

Yeah, so we're 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. 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 has accelerated into the bookings recently.

We were working on these Neo Cloud projects opportunities along with other enterprise opportunities, which is why I was referring to Neo Cloud 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 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 Neo Cloud deployments.

But as I mentioned, one of the reasons 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.

OPERATOR

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

Brian Chin, Analyst at Stifel

Hi, good afternoon. Congratulations on the results and thanks for letting us ask a question. 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 obviously really strong flow-through in terms of the model and the non-GAAP EPS guide for next year.

But on that really kind of low opex increase year to year, are you investing enough in terms of headcount, retention 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, right?

Aaron Johnson, Interim Chief Financial Officer

So let me address your first question. We are not sharing the details of how much of our backlog 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 refer to as a record backlog. 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, a 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 locations. Even as the business scales, 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 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, are using 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 function, including finance, legal, and that is helping us scale much more effectively. Between building this model in locations that are in cost-effective locations and scaling in those areas as well as using AI, it is a pretty efficient model.

But to answer your question, for sure we are investing in innovation, which is why we are winning more. The products I mentioned, cluster area 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 allows us to continue to deliver more profitability.

And if you look at our operating profit, it's a record of 90 million—was a record last quarter, almost 64 million. And we continue to expect that while we will drive profitable growth, based on a scalable, efficient model we have created, we can increasingly invest in innovation. And we will, even though the productivity will continue to increase for the company.

OPERATOR

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

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.