Q2 2023 Credo Technology Group Holding Ltd Earnings Call
Ladies and gentlemen, thank you for standing by.
And welcome to the.
Semiconductor second quarter fiscal year 2023 earnings conference call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session.
At that time.
I have a question you will need to press star one one on your telephone.
I would now like to turn the call over to Dan O'neill.
Please go ahead Sir.
Good afternoon. Thank you for joining us today on our earnings call for our fiscal 2023 second quarter.
Joining me today from Credo, our Bill Brown, 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.
<unk> and plans future operations the markets in which we operate and 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 statement.
Given these risks uncertainties and assumptions.
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 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 important measures 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, which can be accessed using the investor relations portion of our website.
With that I'll now turn the call over to our CEO Bill.
Thank you Dan good afternoon, and thank you to everybody for joining the call.
During this call I'll review Kratos fiscal Q2 results and share why we remain excited about our future prospects.
After I conclude Dan Fleming, our Chief Financial Officer will provide a detailed review of our financial results and expectations moving forward.
<unk> is a pure play high speed connectivity company, we built our first solutions for the Ethernet market and are extending into other standards based markets as the need for higher speed connectivity increases exponentially.
Today, our product families include integrated circuits, or Ics active electrical cables or adcs and surface triplets.
Our intellectual property or IP solutions consist primarily of <unk> licensing.
Our connectivity solutions address both electrical and optical applications at port speeds currently ranging from 50 Gigabits per second up to one six terabits per second.
All of our product and IP solutions leverage our unique application specific <unk> portfolio.
Enabling us to deliver optimized secure and high speed solutions with better power efficiency and cost.
This has led to high growth rates with Hyperscale customers and the ecosystem of suppliers that provide the infrastructure for these data centers.
Credo continues to be one of the fastest growing companies in the semiconductor industry.
And I am pleased to report that we achieved record revenue of $51 4 million in the October quarter, an increase of 94% year over year and 11% sequentially.
I'll now give a brief update on our progress across our various solutions starting with Adcs.
<unk>, we continued to deliver strong execution as the pioneer of this product category.
Interac low speed cable connections have historically been made with passive copper dax.
<unk> increased 100 gigabit per second <unk> become obsolete due to signal integrity and physical size constraints the.
The industry assumption has been that when tax or dead optical cables, our Aoc would take their place.
<unk> saw an opportunity to develop a broad product family of AUC that deliver half the power half the cost and with 10 times better reliability than Aoc's. We also saw the opportunity to offer compelling functionality that enables our customers to innovate on server rack the switched <unk> architectures.
Industry analysts are now forecasting agencies to grow to a multibillion dollar market in the next four to five years.
We continue to ramp volumes with our first customer as they broadened deployments of our new dual tour architecture enabled by the Credo AUC.
We expect the ramp to continue into calendar 'twenty, three and we are developing multiple AUC solutions to solve for their future roadmap of higher speed deployments.
I'm happy to report the Credo has completed the stringent qualification with our second Hyperscale customer.
We expect to begin a revenue ramp near the end of this fiscal year and expect meaningful contribution in fiscal 'twenty four.
In addition, we are engaged in developing advanced AUC solutions with this customer for their next generation server rack and switch rack applications as they move to 100 gig single line speeds.
We are also further broadened our traction in the market.
We're currently in qualification with a third hyperscale customer for our 400 gig port switch rack application.
And yet with another hyperscale customer we're engaged in developing <unk> for two future architectural deployments.
Although a hyperscale are clearly our primary focus we have sold our adcs to dozens of customers, including data centers <unk> carriers networking Oems and Oems as well as others in the Ethernet ecosystem.
Finally, accredo is very proud to have introduced the industry's first one six terabits per second connectivity solution of LCP.
Which will be a critical enabler for the 51 terabyte per second switch generation.
This reinforces credo as the leader in the market.
Now moving to our optical solutions category.
As we do across all our product solutions accretive focuses on delivering disruptive solutions that are optimized for speed reach power and cost.
Our optical solutions include Dsp's laser drivers and TIAA is founded both optical modules and afcs and span the breadth of applications with $50 100 gigabit per second single eight speeds, including 50 gig 64 gig 100 gig 200 gig and 400 gig modules.
In the October quarter, we announced several new 100 gig per lane products, including our <unk> 800, 400 optical DSP with integrated drivers and they have been met with great customer enthusiasm.
In addition to engaging the optical module customer base directly our go to market strategy has grown to include the joint development model. Our JDM that is focusing on the end customers of our optical module manufacturing partners.
Data center, five G PON and fibre channel and customers as a means to.
To have the end customer pull creatives through to design wins by specifying our solution.
To date, we've been successful with JDM engagements with two hyperscale.
And the tier one OEM.
We are now actively engaging all datacenter customers directly and scheming with optical module partners to jointly pursue our end customers.
I am pleased with our progress as we now have line of sight on new engagements with several data center and <unk> customers across a wide range of applications, including 200 gig 400 gig 800 gig and 50 gig solutions.
I will note that we see the process from initial win qualification to volume ramp is taking longer in the current environment than we had anticipated a year ago.
With that Ah ramps material revenue has shifted somewhat but our opportunity remains the same.
We continue to play the role of a disruptor in the optical market and we will gain share over time, given the distinct efficiencies, we deliver and the combination of performance power and cost.
Based on our increasing customer traction, we look forward to announcing meaningful customer wins and growth in our optical business.
Regarding our line card five solutions Credo has established leadership for Ethernet like Kurt <unk> solutions at 50 gig and 100 gig per lane speeds. This includes <unk> for high security applications meeting encryption as well as re timer gearbox solutions.
Our customers again include leading hyperscale and networking Oems and Oems.
Singling speeds increased to 100 gig the demand for light <unk> increase is due to the signal integrity challenges that come with higher speed copper connections.
We also see a trend towards greater demand for encryption driving increased demand for Mac sacrifice a highlight from the Otp show in October was meta showing the use of our Osprey 800, <unk> five and one of their critical deployments.
Also in October we announced our screaming Eagle 100 gig per lane solution, a long reach DSP re timer device with one six terabits per second of bandwidth.
This product has received great market reception due to its combination of performance and power efficiency.
We have sampled it to many leading Oems and Oems and are already kicking off design engagements.
Based on our current market position product positioning and customer engagements, we expect solid growth and continued share gain in the market.
And finally I'd like to give an update on our <unk> IP licensing uncertainties triplet business.
We've received very positive feedback from customers on our $5 four nanometer 112 gig <unk> IP announcements and it confirms the accretive solution offers a 40% 50% power advantage over our competition, depending on the reach required and the application.
This highlights the credo is extended what we referred to as our N minus one process advantage, which means to compete with the power efficiency of crude was $5 four nanometer solutions, our competitors will need to move to three nanometer.
As every industry seeks to lower its carbon footprint credo as core <unk> technology is delivering on the need to lower electricity use.
Were also an early leader in that chip with market.
And are in production with multiple customers, notably Tesla selected Credo series IP and shipments for their dojo supercomputer program.
Going forward, we're excited about the prospects for <unk> in light of the UCI E consortium.
This Intel led consortium, where were a contributing member is coalescing to standardize the broad use of chiclets inside servers.
In summary, we remain highly encouraged about creatives prospects due to our current solutions in production near and mid term opportunities, we're deeply engaged in and longer term opportunities in emerging markets.
Today, we remain focused on delivering strong execution on our fiscal 'twenty three and we continue to expect to achieve at least $200 million in revenue representing more than 88% growth compared to fiscal 'twenty two.
I'll now turn the call over to our CFO , Dan Fleming to provide more details on our second quarter and to give guidance on Q3.
Thank you Bill and good afternoon, I will first review our Q2 fiscal 'twenty three results and then discuss our outlook for Q3 of fiscal 'twenty three.
As a reminder, the following financials will be discussed on a non-GAAP basis, unless otherwise noted I.
I am pleased to share with you that in Q2, we achieved another quarter of record revenue at $51 $4 million.
Up 11% sequentially and up 94% year over year.
Sequential growth was driven by strong revenue growth of our products, which also reached a record of $48 1 million for the quarter up 33% sequentially and up 143% year over year.
This growth in product revenue was led by a continued wave of AAC adoption.
The fundamental driver of our product grows a strong HSBC expansion outlook at the higher speeds remains in place in the face of an uncertain economic and geopolitical landscape.
Okay.
Our IP business generated $3 $3 million of revenue in Q2.
It remains 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 pre existing contracts.
While the mix of IP and product revenue will vary in any given quarter over time, our revenue mix in Q2 was 6% IP well below our long term expectation for IP, which is 10% to 15% of revenue.
The timing of IP deliverables, and therefore, IP revenue recognition shifted during the quarter. We continue to expect IP as a percentage of revenue to come in above our long term expectations for the fiscal year.
Due to the revenue mix between product and IP. This quarter. Our gross margin came in at 54, 9% below our guidance range. However, more importantly, our product gross margin was 52, 6% in the quarter up 80 basis points sequentially and up four eight.
Percentage point's year over year.
This product margin expansion is principally due to leverage from our strong product growth.
Total operating expenses in the second quarter were $25 million within our guidance range and up 37% year over year as we scaled the organization for growth.
I think it's important to note that this is considerably below our 94% year over year revenue growth. We generally expect that our topline will grow at least twice as fast as our opex for the foreseeable future.
With this we expect to continue to deliver considerable leverage in the business.
Our Opex increase was driven by a 38% year over year increase in R&D as we continue to invest in the resources to deliver innovative solutions.
Our SG&A was up 34% year over year as we continue to build out public company infrastructure.
We delivered operating income of $3 4 million in Q2, an improvement of $5 $6 million year over year, but down 41% sequentially.
Our operating margin was six 6% in the quarter, an improvement of 15, one percentage points year over year, but down 561 basis points sequentially due to revenue mix that resulted in lower gross profit.
We delivered net income of $2 $4 million in Q2, an increase of $5 $7 million year over year and down 55% sequentially.
Cash flow from operations in the second quarter was $1 $8 million, an increase of $27 $7 million year over year, and an increase of $14 million sequentially.
Capex was $5 7 million in the quarter driven by production mask spending.
And free cash flow was negative $3 9 million, an increase of $25 $7 million year over year, and an increase of $13 $6 million sequentially.
We ended the quarter with cash and equivalents of $245 million, a decrease of $3 $2 million from the first quarter. This.
This decrease in cash was a result of continued working capital investments to support our top line revenue growth.
Our accounts receivable balance decreased to five 5% sequentially to $51 $8 million, while days sales outstanding decreased to 92 days down from 107 days in Q1.
Our Q2, ending inventory was $47 8 million up $10 $8 million sequentially as we continue our product ramp.
Now turning to our guidance for the third quarter.
We currently expect revenue in Q3 fiscal 'twenty three to be between $54 million and $56 million.
Up 7% sequentially at the midpoint and 73% year over year.
We expect Q3 gross margin to be within a range of 59% to 61%.
We expect Q3 operating expenses to be between $25 million and $27 million.
And finally, we expect Q3 weighted average diluted share count to be approximately 160 million shares.
And with that I will open it up for questions.
Thank you.
A reminder to ask a question you will need to press star one one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Quinn Bolton with Needham <unk> Company.
Hey, guys. Congratulations on the strong product results Bill I guess I wanted to start on the AUC business.
Several questions here it sounds like you continue to expand your hyperscale.
Relationships, but I'm wondering if you can sort of.
Talking about the <unk>.
Growth in the I think you mentioned a couple of these guys looking at switch applications, rather than server applications and was hoping you could expand.
On on that thought.
Is this the distributed disaggregated switch chassis applications.
During the fourth hyper scaler as well as I think you mentioned does switch application for your second hyper scaler.
Yes, let me say that we really have two opportunities for <unk> within the <unk>.
Switching hierarchy.
The server racks as well so the largest opportunity that we see our server racks and the market forecasters show that.
That market in comparison to the disaggregated chassis or what we call <unk> market, it's probably a five to one.
Now in the in the switching architecture, it's really a big choice between sticking with what has traditionally been.
Sure.
Most popular which is a big chassis filled with switches connected internally over back claim.
Two.
Segregation, which means pulling those switches out of the chassis and basically stacking them vertically interac those back plane connections become connections between the switches within Iraq, two five meters or less.
So we fully expect that over time, each data center customer is going to make their own decision about the architecture that they pursue.
But it is good we're encouraged with the fact that.
As switch.
Switching lanes speeds increased to $50 and 100 gig.
But for those customers that are moving or have been.
Using <unk> compared to chassis that.
Our solution is naturally getting picked up.
Understood second question, just just on the competitive landscape for the.
Nick Tour application I know the first couple of Hyperscale as Youre working with I believe are using proprietary or non standard cables are you seeing any evidence that.
Those customers are looking to second source those designs or do you feel pretty comfortable that credo remains the sole source of those cables for the.
Foreseeable future, which hopefully would extend that at least a few quarters.
So I think that.
There's no question that the datacenter customers generally speaking want multiple sources so.
It's absolutely part of the World that we live in.
My feeling is that.
More and more as the data center customers recognize that.
I can add functionality.
<unk> hundred ADC that they haven't even been able to think about with Daxor our optical solutions.
The idea of having this fabric become more intelligent.
It's natural that the team that we've built which is.
A large team of.
Engineers and.
Different functions to be able to entertain.
Specific requests for added functionality to the AUC. So we're open for business.
The engineers within the data centers that were working with have ideas will entertain those ideas as a way to make their jobs easier make the innovations better from there and from a server rack or switchback perspective now.
Now competitively we've talked about the competitive both that we've established and the fact that I've got the team that's doing the full system integration.
It's not as if selling a chip to copper cable manufacture really opens that door for this kind of innovation.
So I think that yes, we naturally see competitors, we naturally see our customers wanting to second source.
And.
I think that.
We still haven't seen competitors in the wild in the labs at our customers we've heard about competitors attention to enter the market. We've seen static demos, where they'll have a cable that's not hooked up to anything and they described with the cable does and we've seen demos with thought with eval boards that are connected to passive copper cables. So these are <unk>.
Far from actual qualification at a hyperscale.
And I think that.
I think if we look at the <unk> conference in October It was a really great measure of our leadership, especially in contract in contrast to the other competitors.
Think that any anybody that attended the conference could not avoid seeing purple, which is the color of our cables.
We were.
The purple Aac's ubiquitous and end to end on the show floor.
And to note the progress that we've made year over year last year, we showed the world's largest router to date of three rack deployment.
That's made up of 350 Terabits per second router, which is built with 400 gig ports each with eight lanes of 56 gig 50 gig.
This year, we showed the clear benefit of going faster on the lane speed and wider.
The number of lanes and so we introduced our one six terabits per second AAC at this show.
<unk> 16 lanes of 100 gig and we just demonstrated that same capacity or that same bandwidth. The 350 terabits per second in a single rack deployment.
And so.
This was one of many many demonstrations that we gave and it was just clear anybody to show that.
If you can just physically you can see it we're far ahead of our competition.
Great. Thank you for all that color Bill.
Thank you.
And our next question comes from the line of Toshi Hari with Goldman Sachs.
Hi, good afternoon. Thanks, so much for taking my questions first one for you Bill based on the fact that you are reiterating the full year guide you guys are clearly doing really well, but curious if you've sensed any change in customer behavior, whether it be the <unk>.
Hyperscale or is there some of the enterprise Oems.
Across your business have you seen any projects get pushed out or downsized or.
As the adoption of AUC for instance, two strategic and too important for your customers to really.
Tweak tweak projects, even going into fiscal year 'twenty four.
Yes, I think that what we see in our customer base is really.
Two different threats.
We have seen a reduction in capex and a delay.
Within our Chinese Hyperscale customers, there's no question about that over the past quarter.
We've seen.
It kind of a shift in the ramp to high volume.
On the next generation optical.
And I think everybody is well aware of the macro situation in China.
These hyperscale.
Don't necessarily serve.
A wide customer base globally and.
And so the second part is really the U S Hyperscale and.
Although we've heard that there may be.
A slight bending the curve, we havent heard that anyone is going.
The decreased spending year over year.
And these are with the customers that we're engaged with that.
We've ramped to production then we will ramp production with so it might be a slowing of the growth, but the growth still has very significant I will reiterate that.
For us it looks a little bit different because we haven't reached a point of saturation and so every new product ramp that we see as next generation.
Better than the current generation technology, and so if anything there is still a fierce competition amongst datacenters to deliver better services to their customer base.
Order to win market share and.
And so we see that there is a very very consistent pull for next generation better than technology.
They get better productivity to get better performance and.
Even in an environment like this at a macro level that becomes critical to be able to differentiate.
We still remain quite bullish on the customers that we're ramping we haven't seen any.
Any major shifts.
That's great. Thank you and then as my follow up on the second customer.
And your AUC business you talked about.
And recognition.
Towards the end of this fiscal year, and then a meaningful ramp in fiscal year 'twenty four.
I understand you can't give too.
You can't get too specific with these customers, but I was hoping you could compare and contrast, the ramp that you're expecting in fiscal year 'twenty four with the second constant customer vis vis what you've experienced so far with the first customer.
I think you've talked about.
A potential uplift in pricing just given the complexity, but if you can kind of level set us on your thoughts there into fiscal year 'twenty for that would be super helpful. Thank you.
As a contrast.
I think we've been relatively pleased with with what we've been seeing from the second customer in a sense that.
Over a year ago.
We engaged with them we delivered samples for samples of this unique cable that we built in December of last year and we've now finished a very stringent qualification.
And so it's a full green light on ramping as soon as they're ready.
Their schedule has been really consistent over the over the past several quarters and the contrast, there is that with our first customer.
Our our solution was enabling a new architecture, but it wasn't necessarily that.
The servers were changing so they had a high volume stream of deployments and what they were trying to do is shift to an architecture.
That gave them.
Much much better utilization of floor space much better utilization of equipment, but it wasn't like it was the next generation server and so we kind of naturally saw the customer kind of dual passing it and trying to.
I'm trying to cut it over.
In an orderly fashion and so it was a little bit delayed compared to what their first objectives work. So thats kind of the Big contrast is that the second customer. This is a brand new generation and so there is an extremely.
Extremely strong pull to deploy them deploy on time, so that's something.
Something that we're pretty encouraged about.
Okay.
And our next question comes from the line of Vivek Arya with Bank of America.
Thanks for taking my questions I actually had two for the first one bill.
Bill you mentioned.
Engagements with the third and fourth Hyperscale are also that that seems like a positive.
Yes.
The adoption of AUC seems like a no brainer on surface what are the main pushback that youll get is it just a matter of find is it.
The ramp of a certain speed.
Speed is at 400 gig or at 800 gig what do you think drives that sharp inflection upwards.
Multiple customers.
I think there's really.
Two catalysts to cause people to to think about the AUC solution.
One catalysts that we've seen first as added functionality.
And that's a real differentiation and that's why you've seen our first customer ramp with 25 gig lanes.
Clearly if you weren't doing something special you can get the job done with with Dax. Our second customer is a combination of functionality as well as speed.
And so as the world goes to 50 gig lanes.
For our bulk for a large number of customers that we're talking to they don't want to fight the signal integrity and form factor challenges of staying with the DAC.
And so speed is the other catalyst and so where we see fit the 50 gig per lane market being kind of a crossover generation, where some will move.
We will battle.
The deployment with Dax, others, it becomes a very almost a default decision at this point.
They see a solution thats half the power half the cost way more reliable way more rugged and Aoc.
And so for short in rack connections, we don't really see.
A big decision, making that has to occur if they are not going to fight the challenges Dax theyre going to use ADC. So we've seen it across the board.
As we progress towards 100 gig, which is just a function of time for sure. There is no tax and now it becomes just a question about.
AUC for <unk> and I think we've established that that game is over.
People will choose adcs, just because of that.
Huge capex and Opex advantage right. If you look at the total cost of ownership, it's hands down a better idea.
And with the fact that you throw.
The fact that the <unk>.
Solar is not going to break the cables routing a huge number of them in a very tight space. So it's a much more rugged design.
Got it and for my follow up maybe one for you Dan.
In Q2.
It seems like <unk>.
Five to 7 million kind of below expectations, but more than made up for it.
Because of the upside on the product side I am curious what is the expectation for this IP.
Q3, and do you expect to make up for that.
Five to 7 million shortfall.
<unk> had in Q2, because I think you mentioned something about a shift so is the Q C just that.
The missing part of the IP revenue from Q2 that comes into Q3 or just how should we look at Q3 and what happened to that missing IP revenue from Q2. Thank you.
Yeah. Thanks, So the important thing to note here is that there is no change in our expectation for IP revenue for the full year. So in other words.
Our revenue mix for fiscal year 'twenty three is exactly what we have expected it to be.
For the year plus that we've been talking.
Okay.
And also bear in mind that.
For the full year, we expect IP revenue to be above our long term target, which is 10% to 15% of the overall revenue mix, but we've talked a lot about historically about the quarter to quarter variability in revenue.
When it comes to IP and this is largely driven by ASC 606, and the way the revenue recognition rules work around license revenue.
Where we recognize the lion's share of the contract value on most of our contracts at the point of delivery of that IP database.
The last two quarters Q4 of fiscal 'twenty two in Q1 of fiscal 'twenty three we happen to be on the higher end of revenue contribution from IP.
But that of course swings both ways.
The one of the things that we track critically from a gross margin perspective of course is our product gross margin.
And that has continued to expand as we have increased our product shipment volumes.
And in fact, it was up 80 basis points the product gross margin. So we're quite pleased with with our margins for the quarter and we are exactly where we expect to be.
For the full year.
Hopefully that helps.
Thank you Beth.
Okay.
Okay.
Okay.
And our next question comes from the line of Richard Shannon with Craig Hallum.
Okay.
Hi, guys. Thanks for taking my questions.
And then I guess I wanted to follow up on the topic of product gross margins.
If I'm running my numbers right here and if I exclude the product's NRG from the calculation looks like.
Product margins were actually down very slightly am I calculating that right and if so can you help us understand the dynamic that.
I took that down slightly.
Yes, I wouldn't read too much into that we we look at product gross margin a little bit more holistically and if you look at the elements that come into the other cost of goods sold bucket that similar to our IP revenue can vary quite a bit quarter over quarter.
So the way our view is that from an overall.
Product gross margin perspective, as our volume continues to increase at this stage, where we are as a company. We should we should have that a slight uptick in our in our product gross margin.
You are right that <unk>.
<unk> in this particular quarter addicted ticked down a little bit if.
If you just look at the product margin.
Okay, and then as we go forward, especially if and I think most people are assuming that your AUC mix is going to increase here should we should expect those product gross margins, excluding NRT again to grow yes, very slightly is that fair.
Yes, that's fair or long term.
Our model remains the same.
So just to reiterate what that is.
10% to 15% of our overall revenue mix will be IP, the remainder being product.
And from a gross margin perspective, 63% to 65% gross margin in that long term model. So what is long term, we really view that as a three plus year.
Model and we stated in the past that this fiscal year.
We expect the gross margins to expand purely out of increasing scale. There are subsequent factors in FY 'twenty, four and 'twenty five that rollout increased the product margin as well.
One notable difference if you kind of read into some of Bill's comments for the year.
AAC has been ramping faster than we initially expected. So if you look out a year from now in our FY 'twenty four.
That has an implicit.
Margin impact and with optical taking a little bit longer to ramp than we initially expected again.
Somewhat of an impact in FY 'twenty four.
No.
So overall, our corporate gross margin in FY 'twenty form is probably going to be similar to what it is.
For the full year of fiscal 'twenty three.
Okay perfect. Thanks for that detail Dan.
Bill maybe.
Big Picture question for you, obviously Ethernet as Youre dominant.
Call standard, you're supporting and obviously a lot of growth opportunities there, but you have talked about USB and PCI express in the past and I think you even alluded here recently too.
Cable opportunities AAC opportunities that existed with one or both of those maybe you can just kind of give us a big picture on your thought process on when those technologies and products start contributing more meaningfully to your outlook.
Okay.
For for Pcie, our intent is to really enter the market in a big way when the market moves to Gen six.
Of course, we will build a product that is compatible with earlier generations and we expect to get traction.
Earlier to get cycles prior to Gen six, but thats really what we expect as is.
The point when we're going to enter the market in a big way.
So we see that being in the $25 26 timeframe.
And it's really dependent on.
The schedules.
Okay.
Service schedules and hopefully things get back on track in the World.
If it goes faster.
Well I'll say that debt.
Our view of the overall market opportunity for Pcie and it can be measured from a pcie re timer within the server and also within the <unk> chip.
We view this as a.
A very large market opportunity.
On the USB front.
The same kind of timeframe that debt.
We see the CIO 80, or 80 Gigabits per second or two lanes of 40 gig Pam three.
It's probably the same timeframe that we see that opportunity now as it relates to the AUC opportunity, we definitely see opportunity within both segments are both standards.
And it's a very natural extension for us.
Two to look at that opportunity.
The same way that we look at AUC for Ethernet.
Now for USB I'll tell you that the consumer bucket will probably not be the one.
The company.
Building cables will probably go straight to a reference design model.
Thank you.
And our next question comes from the line of Tsuji diesel.
Okay.
Hi, Bill Hi, Dan So.
A question specifically on the revenue breakout perhaps for Dan.
The product engineering services.
I know, it's a smaller part of the revenue, but with good growth in that revenue be a lead indicator of.
Activity, you have with Hyperscale or <unk> those are those kind of indicators as you go from one to two to three or four <unk>.
That grow is that the way to read that line.
I would not read it that way.
From day, one as a company we've.
Been able to.
Capture some NRA dollars from customers as we've developed chips in solutions for them.
It really speaks to the innovative nature of our solutions.
And longer term, we don't expect that to grow necessarily in absolute dollars.
And just like our IP revenue it can vary quite a bit quarter over quarter. So it is not.
I wouldn't really read it as a lead indicator for anything such as that.
Okay. Thanks, Dan and then the second question, perhaps for Bill.
You've talked about that.
The Tam for AAC being four to 5 billion I think I heard the number correct if I heard it correctly.
Is that is the vast majority of that hyper scaler or is there a meaningful non hyperscale part that could kick in as you kind of evolve your offering beyond these initial customers.
Yes, just to clarify.
I referenced a multibillion dollar market that the market forecast, our forecasting and it's really in the four to five year timeframe for five year.
Yes, I definitely see the hyperscale market as the market, that's going to drive the near term growth but.
But I can say that as.
As the enterprise moves higher speed theres going to be an opportunity there.
Would say that even markets that are outside of what we consider hyperscale.
I think there can be significant contribution from a revenue standpoint, we're already engaged with the first 50 carriers and thats not the same order of magnitude is hyperscale.
But if we look at it.
The different engagements that we've kind of quickly converted into customers I think collectively.
They can they can look like one of the major hyperscale.
In the total size of revenue for us.
So I don't think there is.
In the near term I guess are are very very primary focus is on the hyperscale is to drive the revenue quickly.
But we are engaging across the board with many others that.
Again collectively can add significant revenue for us.
Okay. Thanks Bill.
Thank you.
And our next question comes from the line of Vijay Rakesh with Mizuho.
Yes, Hi, Bill and then just a quick question on the quarter I know that it became in light, but it looks like you've made up made up well with this product side, just wondering where the strength to us was it in cable or optical can you give some color and.
Was it specific to some customers and markets.
So it was strength in AUC as you would expect.
Yes.
And and that has been with our with our lead customer that we've that we've discussed in the past.
And then on the on the <unk> said the giant Dennis <unk> program do you expect that to become a bigger.
Mix of distribution as you look at.
Tim Becker any clear fiscal 'twenty four.
Wood doors have similar margins to.
<unk>.
Oh definitely.
When we talk about a joint development model, what we're really referring to is that the hyperscale or would be involved in the in the selection of the DSP or other components.
Typically even under a JDM model.
We would be selling to the optical module manufacturer.
So I do expect that.
This JDM model or if we kind of back up and we say the model, where the hyperscale or it gets involved in the decision, making I expect that to be more and more popular as we go forward for crude oil.
If we kind of look at it from a.
<unk>.
From our accretive development perspective in the market, how we have been progressing.
It really I view at that first we succeeded engaging three JDM customers, where the end customer.
Selected the DSP component.
Credo.
Now the ramp to high volume looks delayed due to the first two hyperscale there as being in China, but.
It kind of in the second kind of second phase here, we've gained traction among tier ones, we're talking with all of them directly.
On high volume deployments and so we see multiple programs or insight on 200 400.
And the major benefit that we give as a refresh that's got a better.
Better combination of performance power and cost and it's becoming more important to the hyperscale and the optical companies running high volumes Capex and Opex are more and more can focus recently and so if there is low hanging fruit.
It seems like it makes sense.
I might have mentioned on the last call, but I feel even more confident.
We're going to <unk>.
Officially engaged with a tier one hyperscale or the U S. On a 400 gig optical solution and it will include the DSP with an integrated driver as well as the TIAA and so that that's more than kind of line of sight.
Basically.
A few stages left to entering a contract with them.
And then I would say the kind of the third phase of this is for the next generation or 800 gig and now that we've opened up conversations about their existing high volume deployment.
The same kind of compelling performance power and cost benefit that we offer.
Added to that will be the fact that we're.
On time or time to market is good for the 800 gig devices and for the 800 gig market and so does.
The first testing that's been done by the customer base has been very well received so they see very clearly that performances is clearly good enough. The power is clearly good enough and the cost is compelling in a sense because we are building in 12 nanometer versus a more advanced process like seven or five.
And so given the fact that we've established market credibility through our first three engagements and the engagements that we're pursuing on existing programs I expect the wins for 800 gig to come as the market takes off.
Got it and just a quick question.
No.
China is again going back into Covid.
Fixes and all that.
It looks like you have been successfully resolved many AGA supply constraints it feels like because it didn't really come up on the commentary. So can you talk to what youre doing in terms of might be diversifying their supply chain I think you talked about maybe Vietnam Philippines.
Are you doing that.
In terms of getting around this whole restriction.
So I feel good about where we are today, even if we face disruptions in China, We've cigna.
Signaled that we're going to build inventory, that's a surefire way of making sure that we've got the the product that our customers need as they ramp.
We're going to continue.
To be in that mode until we can land ourselves in.
And something that.
And in a location that's not dependent on China.
We've made progress in the last 90 days and my expectation is that.
We will be in production in less than a year in an alternative locations for our our current supply chain and I think that that kind of matches with what the customer base is looking for as well.
Got it great. Thanks, a lot.
Thank you Andrew.
Our next question comes from the line of tore Svanberg with Stifel.
Yes, Thank you Bill and thank you Dan Congrats on the record results I.
I have a non ADC related question, you talked about the UCI express opportunity and I do recognize that this is kind of further out but as we as we think about chip leads and licensing.
How should we think about this playing out for you over the next few years.
Well I think that.
First of all we kind of classify <unk> as a product because we're building and selling those and so as it relates to the IP I think our long term guidance.
Fits in the 10% to 15% range that Dan has articulated for.
For the UCI triplets.
We see this I mean, we were very early on in <unk>.
By far ahead of the rest of the competition.
Given that given that we kind of saw this move towards disaggregation.
Early.
It didn't really play out, but now that we see you say E on the on the Horizon, we are very big believers if you.
Look at the.
The consortium that Intel has really driven and you look at what Theyre doing today triplets are.
Going to be popular and high volume.
I think they're relatively.
Near term so as speeds move too.
Two to 32 gig.
To 64 gig this is going to be become more and more popular and I think that if you look within a server you can see eight to 16 triplets per server in the future and so with that kind of volume. It becomes you can do the math, it's going to be a very large revenue opportunity.
That's very exciting.
Then to follow up on AUC in the sort of the second hyperscale as it's expected to launch it sounds like you have a lot of confidence in the timing. There I was just hoping you could give us a little bit more back.
Background information when obviously, when we think about the hyperscale or cutting capex.
Im sure Theres, some priority capex and some not so priority capex. So I mean with this fall into like the really highest priority for that particular customer.
Is that how we should think about it.
That's the way that I think about it.
For sure.
This program is something that is.
As a strategic imperative as they talk about it.
The supply chain as well as within our customer base.
So I feel.
Pretty confident that this is going to be mainstream.
And although.
They have been pretty consistent with their schedule.
Of course things can happen.
Might cause.
My cousin delay, we're not seeing any signs of that and the closer we got obviously the more confidence we have in there.
Ramp.
But it's not as if I can make.
Firm commitment on exactly when theyre going to go to production, but it feels.
Like no change from our end.
That's very fair last question for Dan Dan You signaled last quarter, you would build inventory you did that the inventory days now just over 100.
Based on Bill's comment about sort of the key.
Keep building inventory until you feel better about the whole China Lockdown situation, how high should we expect inventory days to potentially get to.
Before you feel like you've got the situation under control.
I don't expect that the days will increase from where they are right now or if they do it would be a very small increase we were essentially flat quarter over quarter, even though it looked like.
A significant increase in inventory.
It's actually kind of in line with our product growth quarter over quarter. So.
So bearing that in mind, we're comfortable with where we are we continue to build.
An excess amount of days of inventory of cable inventory to ensure that we don't run into a situation that we had back in Q4.
When that Covid lockdown kind of interrupted our fulfillment.
Demand.
So we're comfortable with we are where we are right now and I wouldn't expect any major deviation from a days of inventory perspective longer term of course settle down settle down to maybe 100 days of inventory, but thats.
Yes.
In the future.
Okay sounds good congrats again, thank you.
Thanks.
Thank you and our next question comes from the line of Matt Ramsey with Cowen.
Hi, This is lanny on for Matt Ramsey I wanted to extend my congratulations for the quarter as well.
Going back to the optical solutions alright. Thank you.
We confirm that the pushout with NASA.
Your first two customers in China.
Chinese hyperscale or.
Is there any line of sight as to how long that program, where you are in terms of the qualification product volume ramp.
Yes, I will confirm that the first two hyperscale customers or Chinese data centers and.
During the last quarter.
We.
We were told that there is going to be a shift in the timing of the deployment I haven't got clarity on specifics on when thats going to ramp and and.
I mean from my perspective, it's really when it goes to high volume and so we might be doing small volume, but our focus is really on how.
Long as the shift to high volume I will say in the.
And the efforts that we're making with the the U S hyperscale or as we continue to make progress.
And.
If anything I think that Thats, we got more clarity on that even though it might be.
A bit further and I think thats going to drive higher volume as well.
Understood. That's helpful. Thank you.
Hum.
Past earnings calls.
Consumer customer for USC USB C I believe for licensing.
Any updates there that we should know about in terms of progress.
Yes, we are.
Hip deep in and.
Executing on that IP license.
We were selected by this large consumer company as the partner for this really important next generation USB.
Standard, which is 80 gigabits total bandwidth two lanes of 40 gig and Pam modulation.
I think it's reflective of the fact that our architecture is unique.
We delivered lower power than anybody in the industry. So it is really a <unk>.
Great confirmation.
That they would select us as their partner and this goes back to <unk>.
Even four years ago that they were doing due diligence and I think we signed the contract finally.
A little more a little more than a year ago, but we're hip deep on execution and we expect to be wrapping up.
The technical part of the work.
Really within the next six months and then we'll absolutely be there as they move from their own samples to production.
Got it thank you so much.
Thank you and our next question comes from the line of Quinn Bolton with Needham <unk> Company.
Hi, Thanks for taking a quick couple of follow ups first Dan could you give us a sense your lead customer what percent of revenue.
It was in the quarter I know <unk> been above 10% for the past several quarters and then a follow up for bill.
As you look to the PCI E market wondering if that also includes opportunities.
In CX sales since you sell does run on the PCI E electricals. Thanks.
Yes, so quinn so what youll see in our Q as we file it in a day or two is that we had 310% customers in the quarter.
The largest of which was 44% and then there was 119 and a 16% customer. So you can kind of filling the blank from there.
Disclose the specifics of who those customers are but.
In the 44% cases, it's pretty obvious.
And to answer yes.
Yes to answer your question on Pcie, we definitely include <unk>.
Kind of talk about that collectively.
Perfect. Okay. Thank you.
Thank you there are no further questions at this time, Mr. Brennan I will turn the call back over to you.
I'd like to thank everybody for joining the call I appreciate all the thoughtful questions and with that we will end the call. Thank you very much.
This concludes today's conference calls you may now disconnect.
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