Q3 2022 Credo Technology Group Holding Ltd Earnings Call
Ladies and gentlemen, thank you for finding by at this time all participants are in a listen only mode. Later, we will conduct a question and answer session at that time. If you have a question you will need to press Star then one on your push button phones.
I would now like to turn the conference over to Dan O'neill. Please go ahead Sir.
Good afternoon, and thank you all for joining us today on our first earnings conference call as a public company.
Joining me today from Credo, our Bill Brennan, our Chief Executive Officer, and Dan Fleming, Our Chief Financial Officer.
I'd like to remind everyone that certain comments made in this call. Today may include forward looking statements regarding expected future financial results strategies and plans future operations the markets in which we operate in other areas of discussion.
These forward looking statements are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC.
It is not possible for the company's management to predict all risks nor can the company assess the impact of all factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward looking statement.
In light of these risks uncertainties and assumptions the forward looking events discussed during this call may not occur and actual results could differ materially and adversely from those anticipated or implied.
The company undertakes no obligation to publicly update forward looking statements for any reason after the date of this call to conform to these statements to actual results or to changes in the companys expectations, except as required by law.
Also during this call we will refer to certain non-GAAP financial measures, which we consider to be an important measure of the companys performance.
These non-GAAP financial measures are provided in addition to and not as a substitute for or superior to financial performance prepared in accordance with U S. GAAP.
A discussion of why we use non-GAAP financial measures and reconciliations between our GAAP and non-GAAP financial measures is available in the earnings release, we issued today as well as in our S. One, which both can be accessed using the investor relations portion of our website.
With that I'll now turn the call over to our CEO Bill.
Thanks, Dan.
I want to thank you all for joining our call. Since this is our first earnings call as a public company I'd like to start with a brief description of what we do.
Accredo as a pure play high speed connectivity company. Our goal is to deliver high speed solutions to break bandwidth barriers on every wired connection in the data infrastructure market.
We've initially targeted the leading edge Ethernet market, that's driven by the Hyperscale data centers.
We're pursuing an exponential growth curve in speed and that's driving a large fast growing market that because of its degree of difficulty is a natural filter on competition.
We're building our connectivity solutions to enable these explosive bandwidth increases for every optical and copper connection in the data center.
Market forecasters expect the high end of the Ethernet market to grow at almost 50% per year and we expect this will create a $5 billion plus Ethernet Tam for us by 2025.
Beyond data centers, we have seen other markets begin to experience exponentially increasing speed demands and we see that as a great opportunity for us to expand beyond Ethernet I'll talk a little bit more about that opportunity later.
Core to our platform is our <unk> technology high speed <unk> is a very high hurdle technology that requires leading edge high performance analog design and signal processing and it requires doing it with very low power. We are fortunate to have a team with decades of experience designing to just this type of challenge.
With extraordinary focus on optimizing the mix of analog design, a DSP, we can deliver differentiated connectivity solutions with optimized power efficiency and cost effectiveness at the highest speeds. This is why we've been successful engaging with a broad customer base that includes several major hyperscale.
Networking Oems and Odm's as well as optical module manufacturers.
I would like to give a brief overview of our Ethernet connectivity solutions.
The first set of Credo solutions I'd like to talk about our active electrical cables or he sees.
We began development more than four years ago, and we've been a pioneer in establishing this new category of connectivity solutions.
We targeted our first efforts to enable disaggregated racks in the switching and routing layers in the data center.
The traditional way of making these connections has been with passive copper cables known as Dax now.
Now the problem with Dax when you move to 56 gig single lane speeds to support either 400 gig or 200 gig ports is that the signal integrity becomes a huge challenge also the thickness weight and bend radius of the docs make it very difficult to install and service, especially when you've got installers.
More than 200 large cables within very tight space in the front and the side of the rack.
The loss of signal integrity, though is the real issue with Dax.
Now, we see the 200 gig and 400 gig market as a crossover generation, where some companies will commit to the struggle with dax, but many others will move to <unk> due to the signal integrity and form factor advantages.
However, at 112 gig single eight speeds to support 800 gig ports, we firmly believe that docs are dead.
We also have a growing family of ADC solutions that target server racks with connections from the server Nick to the tour switch.
We're delivering highly innovative solutions driven by our Hyperscale partners for example in a collaborative effort with Microsoft We recently introduced the switch AUC, which enables a hitless dual tour architecture.
Our switch AUC is able to detect when a tour port is failing and then instantly switched the data flow to the redundant towards switch. This kind of innovation is simply not possible with dax or active optical cables known as a ocs and over time, we're going to continue to add other equally innovative new.
Detour AUC solutions to our portfolio.
Next I'd like to talk about our solutions for optical modules. The first products, we developed our optical DSP that cover all the optical module deployments today in the Hyperscale data centers, including 100 gig 200 gig and 400 gig and in the future 800.
Gig in addition to a full family of optical DSP that we're promoting to the data centers. We're also promoting single lien 50 gig optical DSP for the <unk> infrastructure market.
As well as 64 gig single lane optical DSP for the fibre channel market.
Overtime Youll also see credo, expanding our optical solutions in the future starting with laser drivers. This week at OFC in San Diego, We announced and are demonstrating our first laser driver solutions.
Okay.
Next I would like to talk about our line card fives.
These are solutions optimized for the copper connections needed by switch line card makers for back pain in front panel connections. We also see emerging high speed server applications as an opportunity.
We're selling a re timers gearboxes as well as Mac set devices devices that provide encryption for applications, where security is critical.
We've got a complete family of solutions covering the 100 gig 200 gig and 400 gig port markets and this week, we announced our products for the 800 gig and 1.6 T Port markets.
Finally, Credo has series IP license and chip solutions, which we've delivered to highly regarded customers across various end markets.
While we are primarily a product company, we believe our IP and chip lit solutions are very strategic enabling us to engage in highly collaborative relationships with industry, leading customers, we count more than 30 customers that have chosen our a series IP and chip lit solutions.
When we talk about our competitive advantage, we start with a term called the N minus one in.
In reference to the process technology that we're using to deploy our solutions for any given speed. We can engineer a solution in a more mature process and N minus one process technology and that gives us an advantage on development cost as well as our wafer cost. This is we're optimizing analog and DSP architectures and doing it all.
With low power and very small die sizes results in a remarkable value proposition for our customers. This is a true differentiator for credo.
Next we bring a purpose built mentality to our solutions. We don't view every link is one size fits all technology challenge, we engineered solutions that are optimized for the many different links we serve we've got optimized solutions for optical as well as the many different types of copper links in the data.
Center.
Got a wide range of Certes architectures to address the many different links.
We have both mixed signal and DSP architectures that are optimized for speed power as well as die size.
We believe we're the world's leader in mixed signal architectures, and we believe we are the most highly differentiated company for DSP architectures, especially at 112 gig speeds and beyond.
The final source of our competitive advantage is system expertise, we focus on delivering system level into and signal integrity.
We've also developed a tightly coupled for more base that adds system design flexibility and we're driving leading edge system level test solutions I point to our ADC family is evidence of the fact that we've gone very far with our system level mentality, we're delivering a complete system solution versus just an IC solution.
All of this boils down to Accredo, delivering optimized signal integrity power efficiency and cost effectiveness. This is really the key to our success.
We feel that our customer engagement is the best validation of our differentiation because when our customers choose to engage with credo.
They're choosing to bet their next generation platform on our execution ultimately takes a huge amount of trust to make that kind of decision. We're engaged with five of the top seven hyperscale and we count more than 20 additional blue chip clients that include networking Oems odm's as well as optical transceiver manufacturers and many others. So I'm very happy.
With where we are with customers.
Now lets.
Talk about new opportunities that we see within our sites that are beyond the Ethernet market.
Other connectivity standards in the data infrastructure market are also experiencing an exponentially increasing demand for higher speed and higher bandwidth. We're committed to serving the most demanding high speed markets, where we can deliver the same advantages in power efficiency and cost effectiveness. So in addition to the Ethernet market accretive will deliver high speed connectivity.
Solutions for the USB and Pcie markets. Our solutions are targeting next generation speeds. So it will be some time before we ramp our products. Our go to market strategy will be similar to our strategy for Ethernet, leading with IP licensing and following with products.
I'm happy to say that we've signed our first major USB IP license and that's with an industry leader in the consumer market.
We expect these two markets will.
It will bring us more opportunity and diversity in our customer base and we believe this will add roughly $3 billion in Tam in the 2025 timeframe.
Of course, none of our goals would be attainable without our tremendous team of employees, we've scaled our organization very quickly over the past several years and we now employ well over 350 people globally. This.
This team enabled us to achieve strong results in fiscal third quarter ended January 31 2022.
During this most recent quarter, we achieved approximately $31.8 million in revenue and delivered gross margins at approximately 61%.
With that introduction I'd now like to turn the call over to Dan Fleming, our CFO to provide more details on our January quarter results.
Thank you Bill and good afternoon, I will first review our Q3 fiscal 'twenty two results and then discuss our outlook for Q4 fiscal 'twenty two.
As a reminder, the following financials will be discussed on a non-GAAP basis, unless otherwise noted.
I am pleased to share with you that we achieved record revenue of $31 $8 million.
Up 20% sequentially and up 136% year over year.
This record result was largely driven by strong revenue growth of our products, which also reached a record of $26 $7 million for the quarter up 35% sequentially and up 190% year over year.
Our product revenue ramp is at an inflection point as our revenue mix shifts from being IP focused to product focused.
This revenue mix shift is first being driven by our E C products, which continue to ramp at our first Hyperscale data center customer.
Our largest customer in the quarter was 40% of total revenue, which was associated with this E C ramp.
We expect this customer to remain a large portion of our revenue in the coming quarters as their AUC ramp continues.
Our IP business generated $5 $1 million of revenue in Q3 up 20% year over year.
IP will remain a strategic part of our business, but our IP results will vary from quarter to quarter, driven largely by specific deliverables to preexisting contracts.
While the mix of IP and product revenue will fluctuate in any given quarter over time, our revenue mix in Q3 was 16% IP.
Slightly above our long term expectation for IP, which is 10% to 15% of revenue.
Against the backdrop of a challenging supply chain environment, our team delivered gross margin of 67%.
20 basis points sequentially, and up 43 basis points year over year.
Our IP gross margin generally hovers just below 100%.
And our product gross margin was 53, 5% in Q3.
564 basis points sequentially, and up 867 basis points year over year based largely on leverage from our strong product growth.
Total operating expenses in the third quarter were $18 $2 million up 51% year over year as we scaled the organization for growth, but slightly down sequentially as certain R&D project related spending slipped into Q4.
We delivered net income of $2 $4 million in Q3 <unk>.
Net income expanded by 20 percentage points sequentially, and 41 percentage points year over year.
Testament to the operating leverage we are driving in the business.
Our earnings per share was three cents in Q3 up 10 cents year over year.
Cash flow from operations in the third quarter was $1.7 million, an increase of $7 $1 million year over year.
Capex was $2 $9 million in the quarter and free cash flow was negative $1 $2 million, an improvement of $7 million year over year.
We ended the quarter with cash and equivalents of $245 million, an increase of $169 $5 million over the second quarter.
This increase in cash came from the net proceeds of our successful IPO completed in January .
Our accounts receivable balance declined 25% sequentially to $21 $7 million, while days sales outstanding declined to 71 days down from 101 days in Q2.
Our Q3, ending inventory was $26 $1 million up $4 $8 million sequentially as we continue our sequential product ramp.
Now turning to our guidance for the fourth quarter. We currently expect revenue in Q4 fiscal 'twenty two to be between $37 million and $41 million up 97% year over year at the midpoint.
We expect Q4 gross margin to be within a range of 59% to 61%.
We expect Q4 operating expenses to be between $21 million and $23 million, including the R&D project related spend that slipped from Q3.
And finally, we expect Q4 weighted average diluted share count to be approximately 158 million shares.
And with that I'll open it up to questions.
Thank you.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Well pause for just a moment to compile the Q&A roster.
Our first question comes from the line of Vivek Arya with Bank of America. Your line is open.
Thanks for taking my questions and congratulations on achieving the IPO milestone duty.
A tough time for the market. Thank you. Thank.
Thank you so maybe.
A few for you first on the ADC market you know from what we heard at the recent OFC Tradeshow seems the size and growth of the market could be larger than previously thought but we also heard of some incremental competition from marvell and maybe others. So maybe give us a perspective of how large a U T is for you today.
Where can it go over time and how do you see this emerging competition.
Yes, that's a great question very much appreciate it let me talk about.
The you know what you saw down at OFC in San Diego, So Marvell made an announcement that theyre entering the AUC market in a big way and we think this is great.
Matt and his team have a strong track record for making good decisions and we think that he's made another good one.
I'll say that.
This is an important.
Thing for the ADC market in general for the past several years many of our potential competitors have been dismissive of the AC market opportunity, even going as far as to evangelize a world that will become exclusively optical and so we see their announcement is a great validation that marvell and others agree with our long held belief that.
That AAC has really delivered great advantages and will become de facto solution for short in rack connections in the future, especially as speeds go beyond 400 gig.
And so at OFC. This week, we're demonstrating our AUC solutions, including the 800 gig and.
Be honest with you Marvel's announcement couldnt come at a better time, because it grow it drove a huge excitement and interest in our booth.
And so kind of reflect a bit on.
Our belief with our approach and.
We've talked about pioneering this product category. We've we we were the first to really invest in a big way.
And as a result, we took a really a system level approach. We built the team internally at Credo that focuses focuses exclusively on the ADC system solution.
So we take responsibility for all aspects, including definition execution qualification quality and reliability of our solutions and we are fully standing behind our <unk>, we're taking the full responsibility with our customers.
And so we think this approach has been critical to our success, thus far and we're intending on increasing our investment over time now as far as the size of the market we've talked about this being.
The market in the 2025 timeframe that.
Is in the $3 billion range Andy.
Annually now I think that.
As different datacenters move towards faster speeds in the switching and routing layer as well as in the in their server racks, you may see that market increase in size, it's kind of hard to peg. It right now I think that we're comfortably sitting with 100% market share is we're the first to really come out of the gate in high volume.
But I think generally we're really focused on.
The large opportunity that's in front of us starting the next couple of years.
Got it and for my follow up maybe.
Dan one for you on gross margin how do you see the evolution of gross margins for the next couple of quarters that as your mix changes, perhaps more to the <unk>.
Site and.
As part of that if you could just help me clarify the gross margin that you reported because when I take the 19.565 and non-GAAP Cogs and divided by the states I actually get 61, 5% gross margin not 67, maybe I'm just missing something simple that but if you could clarify back and just give us your perspective on how gross.
Arjun evolves this year. Thank you.
Yep.
That's a great I'm glad you pointed that out to say that because.
I like your number more than ours.
Adam.
Because of the way our non-GAAP reporting is done.
You might have noticed in the reconciliation there is a warrant contra revenue item. So for non-GAAP purposes, we add back that contra revenue.
So when you are calculating gross margin you need to make sure you add that back to the denominator in your calculation.
So that's.
That's the difference between the 67 and a 61.5 so while we have this warrant outstanding and they're as counter revenue will continue to recognize revenue on our sorry recognize gross margin on this more.
Conservative approach.
Yes.
Getting to your your broader question.
Look has not really changed significantly.
Since we last spoke from let.
Let me highlight a few things from Q1 to Q3 of this year.
Fiscal 'twenty two our product gross margin if you calculate that it's actually expanded more than 900 basis points.
Nice expansion sequentially each quarter.
And that's largely been driven by our increasing scale as we ramp these new products, especially the <unk> product.
But now we expect these gross margins to expand.
From this point forward on a.
In the upcoming years, but we don't expect it to be a purely linear expansion. So there will be some margin variation from quarter to quarter as we're ramping different products and different customers over the course of time, but if we look kind of a longer view over the next few years our product gross margin.
We will continue to expand as we gain scale and really what that's driven by is.
You have a relatively fixed portion of Cogs becomes a smaller percentage of total cogs.
In addition, these product mix changes over the upcoming years will continue to drive margin expansion as well for instance, optical will be will become a larger revenue contributor in FY 'twenty three and 'twenty four.
Or that's just starting to ramp currently in FY 'twenty two and then the last thing I'll mention on margin expansion and our view is.
The market dynamics of the of the ADC market when we get to 400 gig E. C cables, we believe that there's a it's a very favorable.
Margin expansion story at that point because of different market dynamics.
Thank you.
Our next question comes from the line of Toshi Hari with Goldman Sachs. Your line is open.
Hi, gentlemen, good afternoon, and thank you for taking the question and congrats on the whole process and the strong execution in the quarter.
Bill I wanted to ask you about the supply side of the equation, obviously very tricky times for everyone out there.
And during the IPO process I think you expressed your confidence in your ability to secure supply whether it be wafers or substrates or what have you I was hoping to get an update on the outlook. There for the next couple of quarters. If it feels like things have gotten a little bit more difficult little more challenging over the past couple of months, but.
How are you feeling about supply and your ability to.
Address demand for the next call. It six to 12 months and then I got a quick follow up.
Sure.
Sure. Thank you and thanks for the question.
Yeah.
I love the question because it kind of points out another strength that I believe that we've built as we've built the company over the last several years, we've got a deeply experienced operations team that really has deep relationships within the supply chain.
You know a lot of people.
We're starting to treat the supply chain strategically when we first started seeing tightness, we really go back to.
2016 timeframe when this team.
Was really forming.
And so we've taken a strategic approach we've always stayed very close in.
In terms of our business plan and our forecast with our supply chain and so.
So really about 12 to 18 months ago, we really.
<unk> formed a much more structured long term planning approach and so I feel very good about where we are.
I think that even beyond the next couple of quarters I see.
No issues with supporting our very quick ramp.
Another thing I'd like to point out is that we've got a deeply experienced customer facing team and so the supply chain challenges.
Have been something that we've.
<unk> gone to our customer base with in a sense of.
Bringing a more structured planning.
Approach on that end of it and so believe it or not I think that the.
Tightness here has has drawn us closer to our supply chain as well as draws us closer to our customer base.
I I I feel confident at this point that we're not going to see disruptions.
That's great. Thank you and then as my follow up I had a question on the AUC business as well.
In your prepared remarks, you mentioned that.
You had a 40% customer in the quarter and obviously that customers doing a lot with you guys and AAC.
Should we think about the broadening of your customer base within a C. Over the next couple of years.
I suspect this specific customer to be the vast majority of our business in the near term but.
If you can talk a little bit about sort of the design in activity.
And in the back and forth Youre, having with customers specifically in AC that'd be super helpful. Thank you.
Right. Another another good question.
And so generally let me we seem that we're really happy about the AC ramp with that customer and it really speaks to the overall growth potential.
The overall ADC market opportunity.
And so.
I think you can you can kind of look at this that this is really the nature of being a small <unk>.
Julie disruptive company in a fast growing market.
Theres always going to be a first mover.
As you know the new innovative product category has brought to market proven and ultimately adopted by the first one and so from our perspective.
This is really a validation and Israeli unavoidable.
That a small company entering a fast growing market with a limited number of players.
It's if we expected to see a high customer concentration as the revenue scales.
And so we believe really long term that all hyperscale or will use agencies in some form or fashion, whether in the switching and routing layers or in the server racks, especially of singling speeds increase and so the question that you ask is when are we going to ramp our second big customer and we think that's coming in.
The upcoming quarters.
I will say that we're deeply engaged with a second hyperscale are and things have progressed very quickly and so this is.
Again, it's more validation, we're also engaged with several other customers in.
In.
The the whole conversation about AE sees this.
This product category is really quite unique in a sense that we're entering into architectural level discussions with the hyperscale is for their next generation deployments. So the answer to your question is I see really within the upcoming quarters will will ramp our second large customer and then over time I see the opportunity expanding.
Really more broadly.
That's great. Thank you.
Thank you.
Our next question comes from the line of Quinn Bolton with Needham Your line is open.
Hey, guys.
Mike Congratulations on the IPO and the first successful quarter post.
Bill wanted to again follow up on the ADC market work.
Walk the floor at OFC are you seeing any of the AUC competitors looking to develop.
Switching.
That could serve as a second source to your product line and then a follow up question. You mentioned I think today you are ramping 100 gig <unk> at your first customer.
Ed mentioned as you get to 400 gig agencies the margin profile increases dramatically can you just give us a sense from a timing perspective. When do you think you start to shift some of the higher speed Adcs, especially the 400 gig.
And 800 gig.
T versions.
Yeah, So I'll make one one correction I think Dan meant to say the 800 gig is really where we see an opportunity in and its really a shift from single lead speeds being 56 gig.
Shifting to 100 gig.
Singling speeds.
So please make note of that.
I think that the way that we view the opportunity is really there's two distinct markets.
One market is in the the Nic to Tor server racks.
And then the other one is with disaggregated chassis or disaggregated switch racks and routers as well.
And so that's really it.
We're shipping to customers. These customers are smaller they're not you know the top seven but we've had customers make a very very quick decision too.
To adopt our technology and so we're we're shipping in production for 400 gig, but it's not as it's not material in a sense of comparing it to our our first Nick detour customer.
So it's really a function of of each datacenter when they.
Really make the conversion.
And ultimately it comes down to an architectural decision.
And so I think that's what we'll see is during the next say 12 to 18 months will start shipping in a much bigger way for the 400 gig.
And anything on this.
Competition wise to the switch AUC that you provide.
Well you know of course.
Our datacenter customers of course, they want multiple sources. This is.
Part of the rules of the road for them.
And so we've had a couple of competitors try to come up with the.
The switch AUC that we're shipping in production, but I think one of the competitors.
We hit the end of the road and they're no longer trying to build the solution, but I think theres another company that is.
Possibly delivered samples and you know is in the process of trying to get qualified.
Got it. Thank you and then just moving to the line card Ics you guys introduced the Spiro and herein re timers and gearboxes. This week can you just give us a sense.
I think at least one of them is currently sampling or maybe already shipping in production, but can you give us a sense of the timing for the revenue ramp on those new solutions.
Well, it's really it's going to be based on on the you know when the 100 gig the hundred gig singling switches start shipping.
And so I think generally were encouraged.
Lung card business is a very nice business for us It was the first business that we ramped.
And it's very stable and steady it's not maybe the largest market opportunity, but we think that the trend towards faster singling speed on switches will drive growth in the market. So I think we're really very well positioned when that market takes off it's hard for me to guess, but I would say that it's going to be.
Maybe more than.
Six to 12 months from now.
Great. Thank you Bill.
Thank you.
Our next question comes from the line of Torrey band, Derek <unk> with Stifel.
Your line is open.
Yes. Thank you this is actually Jeremy calling in for Tori.
A question I guess on the following up on the sparrow inherent and particularly for the re timer the Huron.
Is there are there any advantages and pairing it with your high wire agencies, whether on the EC side or on the line card side.
Yes. So that's it's interesting I'll also note that some of the 100 gig per lane switches will go with the two are you form factor on the front panel.
They'll use 400 gig.
Ports and so that that's in an effort to try to get to market quickly.
Without having to wait for 800 gig solutions to be available.
And so the heron part Theres, a gearbox mode, where it can receive 100 gig links from the switch and then it can speed shift to 50 gig lanes for the 400 gig modules and.
So naturally if you're using a combination of products.
There's going to be extremely straightforward interop.
But again, we're building the whole industry is building towards this towards the night Tripoli standard and so.
I wouldn't expect that there's a huge advantage we're not building in secret features.
You know that we're following the standards. So I would expect that it would be very straightforward, maybe more straightforward than connecting with another solution.
But no huge advantage.
Got it and then as we look to.
Opportunities beyond Ethernet, you mentioned with E N G E.
And with our first customer on the consumer side can you tell US you know for you or speaking tell us what kind of applications specifically.
You see ramping first and then you know.
Over time, what's the balance between USD and Pcie in terms of the time. Thank you.
Yeah. Good question and so I think that.
The folks that follow the standards in the in the U S B space.
I know that there's typically a doubling of speed every generation and.
We expect that.
Laptops tablets will be the first application that adopt the fastest speeds we expect that.
You know the peripherals that you plug in to laptops or tablets will need to go to that same speed to really take advantage for the applications that.
They want to take advantage of the bandwidth.
And then I think there's a large market in the in cabling as well because of that speed. There is a necessity to have some sort of active solution.
For cables that are over.
Over.
Even two feet or less so we expect those will be the first markets to ramp and I think there are other applications that will drive high bandwidth.
That will that will follow.
Great and.
Tam expectations in terms of USB versus pcie.
We see that USB has the larger potential I would probably break it down to maybe 60% to 65% of that number that I said would be a tam driven by USB and then the balance would be for pcie.
Great. Thank you very much and congrats on a great quarter. Thank you. Thank you.
Thank you. Our next question comes from the line of a J Rockies with Mizuho. Your line is open.
Yeah, Bill and then I'll add my congratulations on a solid IPO.
Good first quarter here.
Thank you.
On the on your visibility I was wondering you talked about very strong was built into the first half.
So just wondering how you Javier Isabelle deals in it.
You know.
How the backlog looks like as well.
I have a follow.
Yes, so just to make sure that we understood. Your question, you're asking about our visibility in the first half.
Yes.
As we look out.
Yes, so as I mentioned before you know part of the process that we've gone through with our customers.
Due to the supply chain challenges is to is to really get as far a look possible at what their demand profile will be.
So I would say that we've got good visibility right now.
And we're on a very regular basis trying to refresh that visibility with our customer base.
It is critical to make sure that we've got products that are that we can supply. So I think that you know.
Our visibility is probably better now than it was prior to the kind of supply chain tightness.
Right.
On the win back on the model question I know this probably with amphenol, but I think when you differentiate as you have a much more integrated cable that goes in sync with the authorities.
Steps and obviously, a much broader portfolio with speed in case shifting deal this year.
Before but.
But it also took us two plus years too.
Get this out in the field and qualified so.
Is that.
So that would be a pretty significant proprietary mark for you.
That's it.
Yes, that's it's a very good question and you know I can speak to our approach.
I don't feel great about speaking towards our competitors' approach and playing that game.
We found as we were in development on these ADC solutions is that.
It was not a straightforward to handoff or device to a partner and expect a partner to take it forward.
Even if I provide the firmware as a starting point and so that's why we quickly decided to assemble our own team internally that took ownership of every aspect of the design all the way through.
Qualification we defined.
The test.
The equipment, that's used to test our cables and we wrote all the firmware for the tests, we wrote all the firmware on the cable side.
We optimize every single pair of wires for signal integrity as part of our manufacturing process, but we are defining every step.
And so we felt like taking the full responsibility and really standing behind it with our customer base was the right approach very similar to our IC solutions.
The single throat to choke mentality, if something happens to go wrong, you cant be pointing at each other saying, it's not my problem.
And so this is our approach and.
And we feel like it was critical for our success, it's not to say that others couldn't overcome the hurdles of.
Trying to divide the work and divide the responsibility.
Got it thanks.
Thank you.
As a reminder, ladies and gentlemen that star one to ask the question.
Our next question comes from the line of soldiers as silver with Roth Capital. Your line is open.
Check to see if your line is on mute.
Hey, guys, sorry about that I built Dan so the initial customer that's ramping up here can.
Can you talk about whether there is an initial ramp volume or whether it should be steady going forward Dan in terms of the lead customer that's kicked in initially.
Okay.
Yeah. Unfortunately, we can't really.
Talk about specifics about customer engagements like that at that level of detail.
Yes, I would probably add that were.
We're in the early stages of the ramp we expect it to.
Continue to ramp throughout the calendar year end.
And it's really a function of their own plan and.
And that's.
Ultimately, we're trying to stay as close as possible and we're getting a forecast that.
Go out in time, even even to the order of 12 months and so I think it's.
It's something you'll see continuing to ramp.
Okay, because I call. It helps and then just for the other customers that are coming are following on.
Can you remind us the length of the qualification cycle on average and is that what is going on right now or is it more driven by that the customers transitioning.
The various platforms that would bring with it any distinction there would be helpful.
Sure. So it's very interesting if we look at some of the.
The cables that were targeting for the switching and routing layers. These are 400 gig.
Our 200 gig solutions and.
It's really great because when a customer decides to qualify the cables.
It is a very straightforward thing we ship them.
Enough cables to build Iraq.
As some of the Iraq. They qualify the the solution and they can begin production really quickly so from start to production could be as short as six months. Because this is a fully baked solutions.
When we're looking at a line card design you get involved in the first stages of a big switch maker laying out their PCB.
And.
Sometimes it takes on the order of 18 plus months to go from.
First effort to production and so it's really nice.
On the AUC because it is a system solution is done before and it can be very quickly qualified.
You know the first ramp that we've had this was really a collaborative effort. This was one where you know kind of core to our values are.
The concept of listening to customers, helping them solve problems and making them successful and so this was an opportunity where we earned enough credibility for our customer to approach us and say do you think this is possible.
And you know from start to production was on the order of 18 months in that case, but.
But again. This is this is evidence of the fact that.
There is real innovation opportunities that have never been seen before because nobody has really taken approach to make an active solution like we have.
And so I will say that the second effort that we've got underway the second engagement isn't.
It's a similar type of engagement, where theyre not picking up a standard cable that we've.
We've developed it's something that's.
Again.
An idea that it comes from listening to our customers and helping them solve their problems and so.
That one's not going to ramp so quickly, but you know what I'd say in the upcoming quarters, we'll see we'll.
We will see the initial ramp.
Okay. Thanks, guys.
Thank you.
Our next question comes from the line of Richard Shannon with Craig Hallum. Your line is open.
Oh, Hey, guys. Thanks for taking my questions and congratulations on the first quarter out of the gate here, maybe I'll just ask a quick tack a question for Dan on the guidance here I think you're suggesting off from your prepared remarks that the cables. We then kind of a big sequential driver here.
So just wanted to check to see if that that conclusion is right and if youre expecting IC growth product IC growth to also grow and then just kind of as a corollary to that you talked about a 40% customer in the last quarter is it safe to think of this concentration being at least is that high in the April quarter as well.
Yes, those are all.
Two questions.
The last question, Yes, we would expect in Q4.
Similar.
What type of concentration Congress since theyre going through that ramp right now.
And as far as what what's driving growth in Q4, and our guidance and it really is you are correct in your assessment of it really is a E C.
We expect our IP revenue to be relatively healthy as well.
And.
Matt.
Generally speaking, yes, you are accurate and you are correct.
Okay. Thanks for that Dan Bill.
Bill a question for you since I haven't heard a question here on your on your optical ramps here I just wanted to get your latest update, especially as your team goes to OFC and your thought process on timing.
When youre expecting to see a real ramp up in production volumes.
Pam four DSP sake.
Sure Yeah, it's been a big week for us at OFC.
Large team down in San Diego.
We feel like we're in great position on our optical products and this is.
Our product development that is a little bit longer in nature to get to production because we've got to get through qualification with our customers and they've got to get through qualifications with the hyperscale.
I'm happy to say that we've started production shipments to several customers.
Not a material amount of revenue yet it's small, but we do expect that the large number of design engagements that are ramping in the upcoming quarters will generate material revenue in our fiscal year 'twenty three.
And so it's also interesting we've got solutions that cover the 50 gig per lambda market as well as the 100 gig per Lambda market.
And.
Going back five or six years.
Or so I was new to the market and the market was basically.
Forecasters are saying that.
100 gig per Lambda is coming and that's the only market that you should target.
Ultimately.
We made the decision to.
To invest in 50 gig per Lambda and although many industry watchers believe that the 50 gig per Lambda market was cast in stone. We're now playing the role of Disruptor, we've got multiple engagements, including 200 gig 400 gig.
<unk> 50 for five G and also 64 gig for fibre channel.
And so it shows that although it's important to be on the leading edge, there's still great opportunity in the in existing markets and I think everybody is aware that three major data centers are going with the 200 gig module approach for there.
There.
Ramping next generation architecture.
We also have several tonight design engagements for 100 gig per Lambda, including both 104 hundred gig download.
Down at OFC This week.
We're demonstrating a broad set of our solutions, including 200 gig 400 gig 800 gig as well as the single lien products I described.
Note that our.
Our module partners played a big role in helping us with demonstrations to six Asa link Ci G high sense look share and own at all provided credo based modules that are being demonstrated this week.
So I think a little bit.
A little bit more on I think key to this market is driving best performance with the best power efficiency and doing it with the best possible cost it can make or break.
Customers in this market.
Depending on how cost effective your solution is and so on.
We are demonstrating 800 gig at OFC.
And I'll say that.
We're probably never going to win the competition on press releases.
We're just a little bit more conservative in our approach, but I'm really confident that we will have equal or better performance and power, but for sure we're going to deliver the most cost effective solution and that's really based on our end minus one process approach.
Okay perfect that is all from me guys. Thank you.
Sure.
Thank you.
I'm showing no further questions in the queue I would now like to turn the call back over to Bill for closing remark.
Yeah. So thank you everybody for.
Participating actively participating in our first earnings call.
We very much appreciate your ongoing interest in credo.
So with that I'll say take care until the next time, we talk.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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