Q4 2022 Credo Technology Group Holding Ltd Earnings Call
Ladies and gentlemen, thank you for standing by at this time, all participants are in a listen only mode.
We will conduct a question and answer session at this time.
If you have a question you will need to press star one on your.
Phone.
I would like to turn the conference over to Dan O'neill. Please go ahead Sir.
Good afternoon, and thank you all for joining us today for our fiscal 2022 fourth quarter and year end earnings call.
Joining me today from <unk> are 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 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's not possible for the company's management to predict all risks.
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 statements.
In light of these risks uncertainties and assumptions the forward looking events discussed during this call may not occur.
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 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 company's 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 SEC filings, which can all 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 and thank you all for joining our call during.
During this call I'll provide an overview of our Q4 and fiscal 'twenty two accomplishments and then share why we're optimistic about continued strong growth in fiscal 'twenty three.
After my remarks, our Chief Financial Officer, Dan Fleming will provide a more in depth review of our fourth quarter and full year results.
We will then be happy to take questions.
While we faced some challenges in April .
22 was in total another great year for credo, notably due to the tremendous work of our team and partners. We became a public company on January 27.
Our IPO has provided us with more than ample capital to support the investments required to deliver the leading products are fast growing market demand.
Our IPO not only bolstered our liquidity, but solidified our paths as an independent company.
Both of which enhanced our relationships with our customers and supply chain partners.
During fiscal 'twenty, two we achieved record revenue of $106 $5 million up more than 80% from the prior year.
That total included product growth of 120%.
We achieved revenue growth in all our Ethernet product lines, including agencies optical Dsp's line card fives and certain triplets and we also achieved growth in our IP licensing business.
This success is a testament to the hard work of our team and the trust they have earned with our customers.
Customers choose kudos solutions for several reasons, but at its heart, we differentiate ourselves with our architectural approach.
Our advantaged truly lies in our engineering.
We optimize analog and DSP architectures to deliver low power and very small die sizes also are N minus one process node approach provides an advantage on development cost as well as our wafer cost.
These factors combined with our purpose built mentality.
Where we optimized solutions for the many different links we serve enable us to provide tremendous value to our customers across the entire range of their connectivity applications.
Applications.
Our dedication to engineering optimal system solutions translates to innovations across our product lines and nowhere is this more evident than our active electrical cable or ADC solutions.
We've worked closely with hyperscale customers to understand their core needs and through engineering ingenuity and a customer first mindset.
We've been successful in delivering leading edge ADC system solutions and effectively we pioneered a new high speed connectivity category.
Okay.
Let me share some of our accomplishments and highlights from the past year across our Ethernet connectivity solutions.
Within our ADC solutions, we began ramping our first Hyperscale data center customer, we also deepened our engagements with additional customers, including Hyperscale and several tier two data center operators.
Our customer progress has validated the ADC market.
And we continue to expect it to grow rapidly.
Fiscal 'twenty. Two also included notable achievements for the solutions, we provide the optical module manufacturers and their end customers we.
We developed and deepened engagements with several optical module manufacturers and are working closely with them to proliferate our solutions into their datacenter five G carrier and OEM customers during fiscal 'twenty, two we ramped initial production with several optical module customers and.
And in March our team attended OFC to meet with customers and partners. It was a great opportunity to meet in person and it was also a great opportunity to see the strong interest in our optical offerings.
Next let me discuss our line card fires data security continues to become more and more important and we've continued to see a strong adoption of our <unk> solutions that provide data encryption.
We also gained traction with our re timer and gearbox solutions and this was based on our leading power efficiency and cost effectiveness.
During fiscal 'twenty, two we ramped our line card Phy solutions at several new customers, including Hyperscale or <unk>.
And leading networking Oems.
Lastly, customers continued to seek out our.
Our IP licensing and our Thirtyish triplets for ASIC solutions with multi chip module packaging.
While we are clearly transition to a product company. These solutions remain a strategic part of our overall business.
In the past year, we had wins with several new and existing customers and we continued to recognize revenue from our IP contract backlog.
We also achieve volume production with the first two of our <unk> chip led customers.
From a supply chain perspective, we've been navigating the challenges facing the entire electronics industry as we announced in our 8-K on April 13th one of our key supply chain partners in China was shut down due to Covid lockdown mandates.
While we did not face any other supply chain issues. This locked down limited our ability to deliver to the customer demand we had in Q4 and it impacted our revenue in the quarter.
Going forward, we will add geographic diversity to our supply chain strategy and given the fact that we have good forecast visibility we will also judiciously build inventory.
In fact with many of our large customers we have firm backlog that extends to 52 weeks.
Despite the supply complexity experienced in April we delivered record quarterly revenue of $37 $5 million, an increase of 18% from last quarter and 90% year over year.
We had strong relative performance on the IP side of our business. We also achieved very good gross margins.
There were several key drivers to our record setting quarter, which included the continued ramp of a Nick detour AUC solution at a leading hyperscale or.
As well as multiple new IP license wins, and IP revenue recognition from backlog with an industry leader in the consumer market.
We're encouraged as we move into fiscal 'twenty, three as we see increasing strength in demand for our solutions as we deepen our customer engagements with industry leaders, including Hyperscale.
Optical module manufacturers and networking Oems and Oems.
As we previously mentioned, we are addressing a large and fast growing town within the high end of the Ethernet connectivity market.
Based on industry reports, we believe our overall Tam will exceed $5 billion in the upcoming years.
We also believe our emerging solutions for new target markets, such as USB, and Pcie will add an incremental $3 billion to our town.
Our team has been working very hard to meet and drive customer demand through continued customer engagement and innovation.
Our hard work has been paying off and we have many reasons to be excited about our prospects in fiscal 'twenty three and beyond.
Within ADC, we expect to launch a third major program at our first hyperscale or customer during fiscal 'twenty three.
Which is indicative of our strong execution in the first engagements and it's also indicative of the credibility credo has earned to be trusted with a third key program.
Also we continue to make progress in our AUC engagement with a second hyperscale customer and we expect to begin ramping that program.
In fiscal 'twenty three.
We're also bullish on the opportunity for 800 gig ports in the future having already sampled 800 gig ADC solutions to several leading partners.
We continue to strongly believe at 800 gig DAC is dead.
Based on customer traction. We also expect the continued ramp of our optical DSP solutions. We continued to work jointly with customers across a variety of applications targeting various hyperscale.
While hyperscale orders will remain the most significant customers for optical DSP.
We're encouraged by our products for applications for the <unk> infrastructure, PON and fiber channel markets.
We're one of the few established leaders in the line card five market and we've been very pleased with the growth of this product line.
Which was driven by the expansion of our customer base of Hyperscale and networking Oems and Oems.
Going forward, we believe that we will continue our market leadership for <unk> solutions that provide encryption for the growing number of applications requiring high security.
And we expect a re timers and gearbox solutions to continue to gain momentum based on our ability to deliver more power efficient and cost effective solutions.
Lastly, some thoughts on our Certes, IP and chip lids, which remain a highly strategic part of our overall business.
While our IP business is variable on a quarter to quarter basis, we continue to build backlog and maintain a robust pipeline of new opportunities for fiscal 'twenty three and beyond.
We're certainly excited to further deepening our relationships with Ethernet customers as well as further engaging leading U S b customers.
Kudos diverse portfolio of low power series IP offers our customers optimal solutions for their needs.
Looking forward our engineering teams are working aggressively on next generation 800 gig and 1.6 T Ethernet solutions across all of our product and IP offerings.
And our expectation is that we will be very well positioned to continue to deliver the same compelling advantages to our customers as these cutting edge markets ramp in the upcoming years.
Fortunately customer demand for our solutions continues to look very robust.
We had growth in every part of our business in fiscal 'twenty, two and we expect the same in fiscal 'twenty three give.
Given the breadth of our solutions, our technical innovation, our operational capabilities, the favorable market trends and ultimately the strong demand from customers. We look forward to another record setting year in fiscal 'twenty, three where we expect to achieve at least $200 million in revenue.
Which would represent growth of more than 88%.
With that I'd now like to turn the call over to Dan Fleming, our CFO to provide more details on our fourth quarter and full fiscal year results.
As well as to get guidance moving forward.
Thank you Bill and good afternoon, I will first provide a financial summary of our fiscal year 'twenty. Two then review our Q4 fiscal 'twenty two results and finally discuss our outlook for Q1 of fiscal 'twenty three.
As a reminder, the following financials will be discussed on a non-GAAP basis, unless otherwise noted.
Okay.
As Bill mentioned this past year has been truly transformative for credo, we have scaled our business considerably and expanded our Tam. Thanks to the strong progress made with our <unk> product.
In addition, we are well capitalized to continue investing in our strong growth trajectory, while maintaining a substantial cash buffer in this volatile environment.
I am pleased to share with you that revenue for fiscal year 'twenty two was a record at $106.5 million up 81% year over year, driven by product revenue that grew by 120%.
Gross margin for the year was 66% as we continued to gain scale.
Our operating margin improved by 11%, even as we dramatically grew our product revenue mix from 63% in fiscal year, 'twenty, 1% to 77% in fiscal year 'twenty two.
This illustrates the leverage we can deliver with our strong top line growth.
While product will continue to drive substantial topline growth IP remains strategically important to us and this source of high margin revenue grew 16% for the year, which translated into a $4 1 million improvement in gross profit.
In Q4, we achieved another quarter of record revenue at $37.5 million up 18% sequentially and up 90% year over year.
Our sequential growth was largely driven by strong revenue growth of our IP.
Our product revenue was $26 $4 million for the quarter.
While it was flat sequentially product revenue grew 104% year over year.
While our Q4 revenue represented strong year over year topline growth. This result was at the low end of our guidance range as we previously disclosed.
The product revenue was limited by government Covid Lockdown mandates in China, which caused certain disruptions in the manufacturing of some of our products in the fourth quarter.
With the lockdown impacting our supplier, we were simply not able to fulfill all demand.
As Bill mentioned, we're taking mitigating actions to ensure we're better positioned to deliver to demand should we encounter similar issues in the future.
Most importantly, we continue to see extraordinary demand across all of our product lines. In fact, we saw each product category line card Fi optical and AUC growth for the quarter and full year.
Additionally, we're pleased to share that we expect this to occur again in fiscal 'twenty three.
With our product growth being led by a wave of AAC adoption.
The fundamental driver a strong H S. D C expansion outlook at the highest speeds remains in place in the face of an uncertain economic and geopolitical landscape. So we're thrilled to be well positioned with a leading set of products.
Our first large AAC customer was again much greater than 10% of our revenue.
And was 30% of revenue for the full year, we expect this customer to remain a large portion of our revenue in the coming quarters as their E. E. C ramp continues.
Our IP business generated $11 $1 million of revenue in Q4 up 64% year over year.
IP will remain a strategic part of our business, but as a reminder, our IP results may 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 Q4 was 30% IP due to strong IP execution. This is above our long term expectation for IP, which is 10% to 15% of revenue.
With a strong IP result, this quarter, we delivered gross margin of $63, 7% above the high end of our guidance. This was up 292 basis points sequentially.
Our gross margin generally hovers near 100% and our product gross margin was 48, 5% in Q4 down 495 basis points sequentially due to a sequential decline in our product engineering services are high margin contributor to our product gross margin.
Total operating expenses in the fourth quarter were $21 $6 million at the low end of our guidance and up 50% year over year as we scaled the organization for growth now.
Now I think it's important to note that this is considerably below our 90% year over year revenue growth.
We expect to continue to deliver considerable leverage in the business.
Our Opex increase was driven by a 59% increase in R&D as we continue to invest in the resources to deliver leading solutions.
Our SG&A Conversely, it was up 40% as we built out public company infrastructure.
We delivered net income of $2 $8 million in Q4, an increase of $4 million sequentially and $5 $1 million year over year.
Cash flow from operations in the fourth quarter was $2 $4 million, an increase of <unk> 6 million sequentially and $13 $9 million year over year.
Capex was $9 $6 million in the quarter driven by production mask sets and free cash flow was negative $7 3 million, an improvement of $3 $7 million year over year.
We ended the quarter with cash and equivalents of $259 $3 million, an increase of $18 $8 million over the third quarter.
This increase in cash came from the net proceeds of a green shoe offering in connection with our successful IPO completed in January .
Our accounts receivable balance increased 36% sequentially to $29 $5 million.
While days sales outstanding increased slightly to 72 days up from 71 days in Q3.
Our Q4, ending inventory was $27 $3 million up $1.2 million sequentially as we continue our product ramp.
Now turning to guidance for the first quarter. We currently expect revenue in Q1 fiscal 'twenty three to be between $43 $5 million and $47 5 million up 21% sequentially at the midpoint and 324% year over year.
We expect Q1 gross margin to be within a range of 59% to 61%.
We expect Q1 operating expenses to be between $21.5 million and $23 $5 million and finally, we expect Q1 weighted average diluted share count to be approximately 161 million shares.
As Bill mentioned, we expect to achieve at least $200 million of revenue in fiscal 'twenty three.
Coupling, our strong growth and our fiscal discipline, we will continue to generate leverage in the business and expect to deliver a double digit operating margin for the full year.
And with that I will open it up for questions. Thank you.
At this time I would like to remind everyone in order to ask a question press.
<unk> Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Once again that star one for questions.
Our first question will come from the line of Toshi Hari from Goldman Sachs. Your line is open.
Hi, good afternoon. Thank you so much for taking the question.
I had two if I may 1st one bill just on kind of the supply dynamic curious how significant or how meaningful the hit was to revenue in the April quarter, and if you can kind of share with us how your partners doing today.
Again from a supplier operations perspective that would be helpful and will you be caught up from a supply perspective exiting this quarter and then I've got a quick follow up thank you.
Sure I appreciate the question so.
So let me give some color.
If we look at the.
The disruption we had it was it really began in the first half of April .
And we were okay backup in production by the end of April or the last week in April .
The reason we did the 8-K was because we were trying to be as transparent as possible with investors being a newly public company with significant interest from many investors we were actually having many investor meetings. The same week, we received the news on the mandate from a supply chain partner.
So we were trying to lean towards being as transparent as possible and.
So we managed to make the low end of our guidance for the quarter and we're happy about that.
We've been in a growth mode across all of our products and IP and so we were still able to perform.
Well in the quarter, even given the impact that we had from the.
Production shortfall in April .
To answer your question about going forward, we expect to make it up in Q1.
I'm sorry, yeah in Q1.
Got it and then as my follow up.
You talked about fiscal year 'twenty three revenue outlook of at least $200 million are I think bill you set up 88% I was hoping you could give a little bit more color on.
Our differentiate between your product business and your IP business and more importantly, within your product business I'm guessing the vast majority of that growth is going to be coming from AUC.
But how are you thinking about line card five optical DSP and then within AUC. If you can kind of differentiate between your largest customer in your second largest customer that would be super helpful. Thank you.
Sure. So again appreciate the question.
The way that the growth is going to breakdown I think it is going to be consistent in a sense that we see growth across all of our businesses.
If I were to kind of summarize by product line I think.
<unk> will be very steady growth as we've seen over the last several years.
AUC will will I think make up the majority of the absolute growth.
But if we look at from a percentage growth standpoint, I think optical will be growing the fastest from a percentage standpoint, although its from a smaller base.
From an IP perspective, Dan's given guidance that we expect long term to be on the order of 10% to 15%. We think for the year that we will probably exceed that expectation.
And so hopefully that gives you an idea about.
The growth that we see in the upcoming year.
And bill sorry within AC your largest customer and the second customer, which you expect to ramp in fiscal 'twenty three should we expect.
The majority of the growth to still come from your largest customer could your number two customer be as impactful in fiscal 'twenty three.
Well.
As far as the second hyperscale or that we're working with.
We expect the ramp to begin in fiscal 'twenty, three and so with that said.
Hi.
It's sometimes hard to pinpoint exactly when the ramp is going to happen because there is.
There's complexities around the exact deployment schedule with our end customers will.
We'll be ready to ramp.
In the first half.
Our fiscal year.
But we're kind of giving guidance.
That says that the ramp will probably happen the initial ramp will happen towards the towards the end of the year.
And so to answer your question more directly we don't think it's going to be a.
A huge amount of revenue coming within FY 'twenty three from that second hyperscale or.
We we would expect to have very high growth in the following year.
Thank you. Our next question comes from the line of Vivek Arya from Bank of America. Your line is open.
Thanks for taking my question I actually had a question on the Q1 outlook and then for fiscal 'twenty three.
When I look at your Q1 outlook I'm right and assume let's say, 80% is going to come from product and 20% from IP or so that's just a very strong sequential growth in your product.
Segment.
So I just wanted to make sure you have the inventory to support that kind of product I imagine part of it is just the swing from the prior quarter that you were not able to deliver so just kind of the confidence and support to deliver on this kind of.
Sequential product.
Going into Q1.
Yes. Thanks.
Great question, let me address that.
So youre exactly correct in terms of there was some catch up from the delays that we experienced in Q4.
And we our factory and Quinn, Sean is back up and running so we expect to fulfill the demand.
The gap that we had the previous quarter.
And from an inventory standpoint, and also bear in mind that as Bill mentioned, we are experiencing strength across our entire product line and we have been building inventory across our entire entire product line and you can see that in our balance sheet in Q4 as well. So we are we are highly confident that we can we can.
Chief what we've set out to achieve in Q1.
Got it and then on fiscal 'twenty T. Bill you gave this very strong outlook of 200 million plus.
Could you give us a sense of backlog to support that view just given a lot of the macro concerns about spending slowdowns and whatnot I understand that you know a lot of your growth is very company specific product cycles, but it's still a very strong outlook for next year, So maybe a sense of backlog and.
Part B of that is how are you thinking about the gross margins that can go with the mix that you have in mind for next year.
Yes, thanks for the question.
So I think thats.
No let me let me.
First comment on the fact that the unprecedented tightness in the supply chain has really caused that change in behavior and demand planning with our customers and it has caused.
Demand planning change for us as well.
So it is how we work with our supply chain partners and that's how our customers work with us and so many of the customers are going to break measures to ensure the flow of product over the next year.
All 52 weeks.
And so.
It's hard to put a label on exactly how that.
That firm demand comps so there is backlog.
There is.
Binding forecasts and other forms of commitment generally speaking I think as we as we look out.
Through the through the next year I think we feel comfortable that we are.
We're close with our key customers and I feel like.
There is confidence as we come into the year that.
That demand look that we're getting is a consistent 52 week look and its rolling every single month.
So I feel like as we head into the year now I do feel confident with the end demand from our customers.
And let me let me address your gross margin question.
The first thing to bear in mind is as we've discussed previously our our IP revenue can vary quarter to quarter. So that does have an impact on our quarter to quarter gross margin percentage, obviously, but.
But.
In terms of our margin expansion opportunities over the course of time, especially in the long term everything is exactly as we had expected it to be over over the last few quarters as we've been discussing with you. So what that really means is.
In FY 'twenty three.
As a relatively large mix of products that we have.
But margins will continue to expand for our products as we continue to achieve scale and then beyond that actually kind of going beyond fiscal 'twenty three and we believe these market fundamentals are out there that will enable margin expansion specifically with our <unk> product line as Bill mentioned, we believe back is that at 800 gig.
But the other thing in FY 'twenty, three and 24 is our product mix will be shifting a bit where optical will become a significant contributor in 'twenty three and then even more so in 'twenty for that obviously has an impact on margin expansion opportunities as well, but let me just reiterate from a long term perspective, our total.
Corporate gross margin expectation.
Still remains 63% to 65%.
And as Bill just mentioned a moment ago, our IP will make up 10% to 15% of that revenue mix. So if you were to isolate on product margins.
You can back solve that it's around 60% of the product margin itself. Excluding IP. So hopefully that gives you some color on our margin expectations.
Thank you.
Our next question will come from the lab tore Svanberg from Stifel. Your line is open.
Yes, congratulations on the continued strong execution.
Bill you talked about.
A third program ramping with your largest customer for AUC here in fiscal 'twenty three.
Could you just elaborate a little bit more on the magnitude of that program.
I mean, obviously you can't disclose too much but any metrics that you can perhaps share with us just so we understand the magnitude of that of the third program versus the.
The previous two.
Sure sure. So let me first give some color on the first two programs. The first two programs where both Nick to tour.
He sees the first was a 50 gig AC solution that was two lanes of 25. The second one was a next generation 100 gig or four lanes of 25 Nic to tour solution.
Can't provide too many details about this third program, but it's in the.
The same Nick to tour space.
And it does have the potential to be significant although we don't have details on.
The specifics related to the volume expectations, but from our perspective, we think that this can be the third significant program that we.
But we are engaged on.
No that's fair and as my follow up could you also elaborate a little bit on the diversification strategy of your supply chain.
Obviously, you were impacted by the China locked down this quarter.
But help us understand a little bit you know how difficult is it to diversify.
How long will it take.
Just just so we can get a sense for how quickly you can have multiple suppliers.
To alleviate the current issues.
Sure sure.
Great question and it's since.
Since April it has become kind of top of mind for US. There is really two different approaches here. One is a mid to long term approach, which is to gain geographic diversity.
We've got <unk>.
Very large volume established a very large volume capability established into China with the supply partners that we've got there both of these supply partners, our global corporate large global corporations.
But generally speaking as we think about.
Becoming more geographically diverse.
We're now kind of actively looking at different locations globally, and the kind of timeframe that it would.
Really be for us.
Bring up production in a significant way.
One of the challenges that we're faced with is that we're still in the very early stages of ramp and so we've had.
Relatively large investment with our.
Partners with the current locations. So this would be in addition to that in.
In any case, we don't expect that that in the near term, we're going to we're going to be able to establish this geographic diversity and that's why we've talked about judiciously building inventory, we expect in this quarter that will establish a significant buffer.
Of inventory so that we have.
Future impacts that are forced mature type of impacts.
Impacts that we'll be able to navigate it much more smoothly than we did in April .
And so that's that is.
You know really something that we've decided to do because of the strength of the forecast and the backlog in the.
In the.
The binding forecast commitments that we've got we feel comfortable with making that investment. So really a short term is let's address it by.
Building some inventory in a smart way and then long term of course, you'll see us.
Bring up production.
Outside of outside of China.
That's a great perspective, congrats again.
Thank you.
Thank you. Our next question will come from Quinn Bolton from Needham Your line is open.
Thanks, guys and congratulations on the results and outlook I wanted to follow up on <unk> question, just sort of around the current supply chain and Kuhn, Sean you mentioned the suppliers I think are now back up and running but we've heard stories that many factories may only be at 50% of labor.
Labor staff given.
The effect of the Lockdowns ease your supplier back up sort of running full steam and.
Our boats suppliers, providing you with the ECS in the first quarter.
I can say that the feedback that you're getting from your.
From your context is accurate.
Coming back there is theres really phases towards coming back.
And the.
The first phase is basically reestablishing.
Production with.
Smaller group of employees that were maintained at the facility.
And so our partners are now hiring again and increasing.
Increasing capacity, we're not quite back to the full capacity, where we were we had been running.
I think in the next couple of weeks or next few weeks, we're on a good path to achieve what we consider full capacity at this point.
And so.
Yes, both of our partners will be backup.
And shipping.
Okay. Great. The second question is you had mentioned sampling the 800 gig AUC to multiple vendors just wondering it sounds like 800 gig modules may be starting to be deployed.
For sort of AI cluster applications wondering if you could give us some sense when do you think you might see.
The 800 gig AUC going into volume productions, whether it's AI clusters or whether it's the distributed disaggregated chassis application.
Yes, great question.
I'll start by saying that we do see a lot of 100 gigabit per second per lane silicon.
800 gig switches 400 gig for.
Four lanes of 100 for high end servers, we see a lot of silicon that is sampling and in development with leading hyperscale and switch Oems.
And so we're seeing a lot of activity right now on 100 gig per lane Adcs.
Really as a result of our solution being.
Being readily available.
And customers need to source some form of the 800 gig connectivity connectivity solution for their development.
And so from a timing standpoint on deployment.
This is a really hard one for us to have a.
Opinion on we'd like to see it sooner than later.
Everybody in the industry would but in reality, we think that it's going to be.
In the probably in the.
12 to 18 month timeframe from now before we see it in volume.
Great. Thank you.
I will say that.
Again, we will be ready for production I think far in advance of when the actual production.
Deployments begin so I think we're in great great.
Great position and we think just to reiterate.
At 800 gig or 100 gigabit per second per lane.
We see okay.
The board that we.
We don't see any customers that are really trying to make the <unk> work and so now it's really a function of.
Deploying with Adcs for short connection deploying with optical solutions for longer solutions. So we think that.
More and more firming up as we kind of move through the last several months.
Thank you.
Remind you it's a star one for questions. Our next question comes from the line of Vijay Rakesh from Mizuho. Your line is open.
Yes, Hi, Bill and then great quarter and guide and just a quick question on the on the mix of revenues from the product side. When you look at the.
For Q1, Q, if you can give us a split up as he was this optical and nightclub.
Yes. Thanks.
P J.
So we don't.
Unfortunately, we don't disclose specifics when it comes to our product line mix, but from a from a long term perspective, the expectations that we set out where.
We're trending toward those amounts which.
Longer term, we would expect AUC to be nearly half of our revenue.
Again IP.
Right now we're not quite at the long term model of course, so we're slightly above the 10% to 15%.
And then the.
The line card business has been very very strong business for us and it continues its strength and is growing.
Longer term it will probably be in the.
The 15% range and on the balance.
Optical will be.
Significant contributor this year.
Especially towards the end of the year and then even more so next year. So hopefully that gives you just kind of broad strokes.
Direction that we're headed.
Got it and on the AC side I know you guys have a pretty broad portfolio of Mexican fish shift in speed shift in nichter thought et cetera.
Just wondering when you look at the competitive landscape given your broad portfolio and you get qualified at many of the enterprise Hyperscale guys.
What's the what does the competitive moat I mean, you guys think you have a 12 to 24 month or even longer lead time.
When you.
You look at the competition, who I would say most of them are still trying to get that product in place but.
If you can give some color around how you look at that space.
Yes, great question I think that.
First of all I'll say that.
We're very happy that.
We see competitors validating the seat.
Product category.
We feel like we do have a significant.
Lead in a sense that we've been working on this product category for going on for years.
Approach that we've taken I think is unique in a sense that we have built an organization internally at credo, that's responsible for the.
The design the development and ultimately the delivery of the AC system solution.
That means that.
At the end of the day, we are responsible for the entire.
<unk> ADC system solution, where the single throat to choke in a sense.
When we're dealing with customers.
Our manufacturing partners do a great job in what they do well.
We had started by thinking that we could.
Sell chips to copper cable companies and it just simply was very clear very quickly.
Our approach is going to be more effective.
We own the entire system design from the from.
From the firmware.
So the hole from the framework on the copper to the test program development. So the actual tester design and development, we felt that that was a.
<unk>.
A much stronger approach than trying to rely on others to put all of this together.
So I do think that as we look at our business now it's.
It's really taken.
Taking shape in a sense that it's different than.
Our original thinking which was hey, we'll just put together a 400 gig on each ended but the cable 400 gig connect or any general cable the solutions, we're delivering in volume right now are unique.
These are truly system level.
While our solutions that are.
I think would be could be classified as the most advanced connectivity solution cable connectivity solutions ever delivered.
So the data center do you think about what we're shipping currently door first hyper scaler.
They were successful in deploying a dual core architecture in a single rack because the intelligence in our cable we've got the ability to sense. When the tour port is failing our cable makes the decision.
To switch the data flow to the second part. So this is a level of intelligence in the cable that.
It has never been delivered as a DAC never been delivered an S and Aoc.
Or other optical connection and so this is the direction that.
Our business is taken as a result of us owning and really building.
The capability internally I can tell you that the second solution that we're developing is also very unique it's Bob just it's not just a straight cable.
And so we expect that more and more innovation will be requested by our customer base as they see.
This is now a category where they can think about system solutions that they haven't even thought of before.
There will be business, especially in the switching and routing layer that is leading edge 800 gig ports.
Where you have 800 gig connection connectors on each end of the cable that is going to be a robust business as well.
But generally we think that.
The approach we took is paying off right now as you see is as you see us taking off as a clear leader in the in the space.
But I will say that having having competition is always it's always a great thing so.
We appreciate that multiple people are now investing in that it seems that the market is accepting AUC is really a de facto solution for short connections, meaning three meters and less.
Yes.
I know you guys have talked about Mexico and others.
The other question I had is given that you guys saw that N minus one node on the 30th Chip site does that.
Allow you.
More.
Capacity at the foundry side, given that you are not competing for the leading edge I know you guys. All the cable side of the supply chain, but on the chip side is it fair to assume that the capacities.
If you're able to negotiate better capacity there.
Yeah, absolutely so youre right on with that and so the.
The strategy that we've taken with our process choices is really based on the fact that.
Connectivity solutions, our primary decision for us, we're not being driven to advanced processes do too.
Memory or large amounts of logic.
So we can choose a process thats the most suitable for our design and so we've always had this mentality. If we can use our more mature process and achieve.
Best in class power Best in class performance and best in class Die size of course, that's the approach we're going to take because we can.
In turn.
Have become the disruptor in the market.
That strategy has turned into a supply chain advantage for us because we are in an N minus 112 nanometer is really our workhorse.
We've had had a lot of success.
<unk> really never been limited.
From a capacity standpoint, and I will stay on top of that if you look at our die sizes.
We are demand for wafers is less because our die sizes are smaller and so it's turned into a big advantage from a supply perspective, as well and that really wasn't intended when the when we made the decision but it sure is.
Sure as a strength that we've got going into this year.
Thank you.
Our next.
Next question comes from the line of Sujit de Silva from Roth Capital. Your line is open.
Hi, Dan congratulations on the execution here.
A question on AC and then a bigger picture question on AUC.
The customers like from one to three wins.
How big that denominator is how many opportunities there are to given customer like this and then are those sole sourced or are they still sort of just remind us.
Yes, I think that.
We view every hyperscale or is kind of an independent market.
We also view that the work that they're doing at a Nick the tour level as well as the work that they're doing in the switching and routing layers. We view all of these things is.
Separate markets as it relates to it given hyperscale.
Hyper scaler.
We view that the opportunities that.
That we'll see for <unk> for the for the Nic to tour space within each one of these hyperscale <unk>.
We will long term be there will be an AUC opportunity for every server deployed.
As we look at the switching and routing layer.
Different strategies different deployment strategies different.
Port speed strategies that we see.
No hyperscale or is the.
The same is another and so we think that.
AUC has a unique solution because it puts us in the architectural discussion.
With the Hyperscale is we're engaged with and long term I expect all of the Hyperscale.
And so I cant I don't think theres any nice both that I could put other than to say that we believe that the opportunity is going to be.
It's going to track the server shipments and it's going to be based on the switching and routing layer based on architectural decisions on disaggregation versus chassis.
Okay and bill are those sole sourced just to follow up.
I think that.
Where we may be sole source today, we expect long term that will be in a dual source environment.
And that's really driven by the desires that.
You know that the Hyperscale is half.
They live in a world where dual sourcing is.
Absolute requirement. So we expect that we're going to be living in.
In that world for sure.
We may be sole source for some period of time and we're in a mode of if we can be the the partner that moves quickly and delivers successfully we will maintain a large market share.
Okay.
The Big picture, given you're able to guide the head for fiscal 'twenty, three and the visibility you have I'm curious you know various cloud vendors have seen kind of buy and caused cycles, maybe the processor guys.
Can you tell me it feels like youre more immune to that sort of cycle or whether that could be a factor in your forward visibility any any color there would be helpful.
Yes, I don't think that we would ever say that we're immune to the cycles that we've seen in the past.
I will say that we've got.
Okay.
We've got discussions ongoing with our with our customers that.
Our really discussions where were trying to outline.
Going out 52 weeks very specific demand.
And very specific commitments so that we can go in sourcing.
And build to those schedules so.
So I feel comfortable even with that we do apply some conservatism and so.
I do feel.
As we go into the year with the demand outlook that we've got but I will never say that.
We're going to be immune to big changes.
Unforeseen things are possibly coming.
I will say also that the.
The deployments that we're on right now are adding significant efficiency improvements and so if we look at that.
Playing a dual tour.
Server rack, that's opposed to deploying two rack side by side. So there is an enormous savings in in cost an enormous savings in power.
And there is the opportunity to have better equipment utilization and so I will say that even with unforeseen things. This is the type of investment that we think that customers will continue to make because the benefit is just so compelling and that's why it.
Has been a strategic imperative for our first customers they've ramped.
Okay. Thanks, Bill I appreciate all the color thanks, guys.
Thank you.
No further questions at this time I'll turn the call over to you.
Great well, let me. Thank you all for attending the call I really appreciate the great questions and I also appreciate the strong interest that you've got in Korea. So we will.
Look forward to talking with you in the future. Thank you very much.
This concludes today's conference call you may now disconnect everyone have a great day.
Okay.
Okay.
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Okay.
Yes.