Q3 2023 Credo Technology Group Holding Ltd Earnings Call

Speaker 2: The conference will begin shortly to raise and lower your hand during Q&A. Thank you. Ladies and gentlemen, thank you for standing by at this time.

Speaker 2: All participants are in a listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press star 1-1 on your push button phone. I would now like to turn the conference over to Dan O'Neill. Please go ahead, sir. Good afternoon.

Speaker 3: Thank you for joining us on our fiscal 2023 third quarter earnings call. Joining me today is in CREDO, our Bill Brennan, our chief executive officer, in Dan Plemming, our chief financial officer. I'd like to remind everyone that certain comments made in this call today may include forward-looking statements regarding expected future financial results, strategies, and plans, future operations, the markets in which we operate, and other areas of discussion.

Speaker 3: These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. Not possible for the company's management to predict all risks, nor can the company assess the impact of all factors on its business, or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statement.

Speaker 3: Given these risks, uncertainties, and assumptions, the forward-looking events discussed during this call may not occur, and actual results could differ materially and adversely from those anticipated or implied. The company undertakes no obligation to publicly update forward-looking statements for any reason after the date of this call to conform these statements to actual results or to changes in the company's 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 company's performance. These non-GAAP financial measures are provided in addition to, and not as a substitute for or superior to, the non-GAAP financial measures.

Speaker 3: financial performance prepared in accordance with US 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 mission 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, everyone, and thank you for joining the call. During this call, I'll discuss Credo's FY23 third quarter results.

Speaker 3: and our updated outlook, along with the industry trends and customer engagements that have us optimistic about our future growth. Credo is a pure play, high speed connectivity company. We built our first solutions for the Ethernet market. Our current portfolio of high performance and low power connectivity solutions include active electrical cables, or AECs, integrated circuits, or ICs, SerDes Chiplets, and intellectual property, or IP.

Speaker 3: All of our product and IP solutions leverage our unique application-specific CERTIS portfolio, enabling us to deliver optimized, secure, high-speed solutions with better power efficiency and cost. Our connectivity solutions address both electrical and optical applications at port speeds currently ranging from 50 gigabits per second up to 1.6 terabits per second.

Speaker 3: Our customers include hyperscale data center operators, networking equipment OEMs and ODMs, optical module manufacturers, and others in the Ethernet ecosystem. While we primarily serve the Ethernet market today, we continue to expand into other standards-based markets as the need for higher speed and more power-efficient connectivity increases exponentially. For Q3, Credo reported revenue of $54.3 million, representing a 6% sequential growth and year-over-year growth of more than 71%. Additionally, we reported non-GAAP gross margin of 59.3%.

Speaker 3: Both revenue and gross margin were within our guidance for Q3. Prior to giving an update on our progress with our business, I would like to briefly discuss the 8K we filed two weeks ago. We filed the 8K because our largest customer reduced their near-term demand forecast for our products. We continue to believe the reduction due to reasons unrelated to our performance and that we've maintained our sole source position as customer. This reduction in forecasts along with the overall macroeconomic headwinds in the market.

Speaker 3: will impact our revenue in Q4 and fiscal 24. We strongly believe the fundamental connectivity technology trends remain consistent across the data infrastructure market. The need for speed, power efficiency, and collaborative problem solving is ever increasing. Our long-term financial model remains unchanged and we remain optimistic about our growth opportunities. Given our ongoing engagements in several advanced programs with our largest customer and other hyperscalers as well as 5G carriers.

Speaker 3: Now, moving on to an update on our overall business, beginning with AEC. During Q3, our growth was driven by our AEC solutions. A product category we pioneered in which continues to gain broad industry acceptance. Our growing list of AEC customers are migrating to AECs for short, in-rack cable solutions for various reasons, including the limitations of alternative solutions and the unique tailored feature set of our products. As data center and other network operators migrate higher speed laterates, a 50 gig or greater.

Speaker 3: AECs to become a multi-billion dollar market within four or five years as AECs become the most prevalent solution for N-Rack connectivity.

Speaker 3: While we'll be shipping reduced volumes to our largest agency customer in the near term, we continue to engage with them on future programs on the roadmap for both compute and AI server racks, and we remain confident in the strength of this relationship. I'm happy to report that Credo has begun the early stages of the production ramp with our second hyperscale customer, and although the detailed timeline of their volume ramp is still developing, I am pleased to say that C transferring as early as 2018 is part of

Speaker 3: We expect meaningful contribution in fiscal 24. We're also deeply engaged in developing advanced AEC solutions with this customer for their next generation's server rack and switch rack applications as they move to 100 gig single length speeds.

Speaker 3: Additionally, we continue to make progress with other customers as well. We're in flight with two additional hyperscalers for SWITRAC and AI server rack applications using both 400-gig and 800-gig AECs. While hyperscalers remain our primary focus, we're engaged in meaningful opportunities with other data center operators and 5G carriers.

Speaker 3: Regarding our progress on optical solutions, Credo also leverages or differentiated service technology to deliver disruptive solutions to the optical market. In this category, we deliver a breadth of products across DSPs, laser drivers, anti-AAs, for 50 gig through 800 gig port applications. We've seen success thus far securing wins with both optical module manufacturers, as well as with hyperscalers directly through joint development models. While the time to achieve our volume production revenue ramp is shifted in the current environment, we continue to play the role of disruptor in the optical market. Our initial success has come with optical DSPs for the 200 gig and 400 gig port markets.

Speaker 3: and we're confident a recently introduced DOV-800 optical DSP provides considerable differentiation. Enabled by our superior 30th technology, we remain confident we will gain share over time due to our compelling combination of performance, power and cost. Creed will have a strong presence at the OFC conference in San Diego next week, where we'll be showing several demonstrations with our DOV-800 family of products.

Speaker 3: I look forward to seeing many of you there. Moving through our Line Card 5 solutions, Credo continues to extend our leadership in the Ethernet Line Card 5 market across hyper-staylers and networking OEMs and ODMs. Our solutions include MACSEC files for high security applications, needing encryption, as well as Re-timer and Gearbox solutions at 50GIG and 100GIG lane speeds.

Speaker 3: A recently announced 1.6T screaming Eagle Line Card 5, which is a long-reach DSP Re-timer gearbox, highlights our performance and power leadership in this product category. I will note that we've delivered the most power efficient Line Card 5 solutions in the market using the 12 nanometer process. As we move to 5 nanometer, we expect to achieve a 40% decrease in power, forcing our competition to move to 3 nanometer to compete, and as a result, creating a significant time to market and cost advantages for CRETA. I would now like to give an update on our 30s IP licensing and 30s chiplet business. Our Q3 results were bolstered by revenue attributable to the company.

Speaker 3: Customers would need to move to three nanometer if considering our competition.

Speaker 3: Finally, regarding the Certi's Chiplet opportunity, market trends including the advancement of the UCIE consortium suggests the Certi's Chiplet market will become a meaningful long-term opportunity for us.

Speaker 3: Our leadership position in the service triplet market is evidenced by our multiple production revenue wins in this category, including with Tesla and Intel.

Speaker 3: In summary, CRETA remains laser focused on the large opportunity afforded us by our differentiated solutions in a market that's demanding higher speeds and better power efficiency. Our N-1 process advantage gives us a distinct advantage across multiple competitive axes.

Speaker 3: but maybe most importantly, power efficiency is increasingly important and credo can help our customers lower electricity consumption through use of all of our products. Clearly, we're disappointed about the adjustment in the near-term outlook given the disruption with our largest customer.

Speaker 3: However, the feedback from that customer, as well as from other customers and the additional developments I just discussed, fuel our optimism about our growth prospects in the future. We remain committed to close customer collaboration, continued innovation, and the expansion of our solution portfolio to address the ever increasing needs for higher bandwidth and more power efficient connectivity solutions. At this time, I'll turn the call over to our CFO Dan Fleming.

Speaker 3: who will provide additional details. We'll then open the line for questions. Thank you. Thank you, Bill, and good afternoon. Our first review are Q3 fiscal 2023 results, and then discuss our outlook for Q4 fiscal 23. As a reminder, the following financials will be discussed on a non-depth basis, unless otherwise noted. In Q3, we reported revenue of $54.3 million within our guidance range, up 6% sequentially, and up 71% year-over-year.

Speaker 3: So, Quential Growth was driven by continued traction in our IP business, which reached $12.6 million in Q3, up 285% sequentially, and up 145% year-over-year. IP 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 Q3 was 23% IP, above our long-term expectation for IP, which is 10 to 15% of revenue. We continue to expect IP as a percentage of revenue to come in above our long-term expectation for the current fiscal year.

Speaker 3: Our product business generated $41.7 million of revenue in Q3, down 13% sequentially, and up 56% year-over-year. Year-over-year growth in product revenue was driven principally by AEC growth. With a strong IP result this quarter, our team delivered gross margin of 59.3%, within our guidance range, and up 438 basis points sequentially. Our IP gross margin generally hovers near 100%.

Speaker 3: and was 98.2% in Q3D. Our product gross margin was 47.6% in the quarter, down 496 basis points sequentially, and down 585 basis points year over year, due principally to revenue mix. Total operating expenses in the third quarter were $25.7 million below the midpoint of our guidance, and up 41% year over year, considerably below our 71% year over year revenue growth.

Speaker 3: Our op-X increase was driven by a 53% year-over-year increase in R&D as we continue to invest in the resources needed to deliver innovative solutions. Our SGNA was up 26% year-over-year as we built out public company infrastructure. We delivered non-gap operating income of $6.7 million in Q3, an improvement of $5.3 million year-over-year and up 97% sequentially.

Speaker 3: Our operating margin was 12.3% in the quarter, an improvement of 8 percentage points year over year, and up 569 basis points sequentially due to top line growth that resulted in higher growth profit. We delivered net income of $7.5 million in Q3, an increase of $5.1 million year over year, and up 208% sequentially. Cash flow used by operations in the third quarter was $2.3 million, a decrease of $4 million year over year, and a decrease of $4.1 million sequentially due largely to an increase in inventory. CapEx was $6.9 million in the quarter driven by production mask spending, and free cash flow was negative $9.2 million.

Speaker 3: a decrease of $8 million year over year, and a decrease of $5.3 million sequentially. We ended the quarter with cash in equivalence of $233 million, a decrease of $7.5 million from the second quarter. This decrease in cash was a result of capital expenditures and working capital investments. Our accounts receivable balance decreased 16.6% sequentially to $43.2 million, while day sales outstanding decreased to 72 days, down from 92 days in Q2. Our Q3 ending inventory was $50.3 million, up $2.5 million sequentially. Nowseries will show Alright television him in humanity. Wait, what,

Speaker 3: Turning to our guidance, we currently expect revenue in Q4 official 23 to be between $30 million and $32 million down 43% sequentially at the midpoint. We expect Q4 gross margin to be within a range of 56 to 58%. We expect Q4 operating expenses to be between $26 million and $28 million. We expect Q4 weighted average deluded share count to be approximately 163 million shares. And finally, we expect fiscal year 2024 revenue to be flat compared to fiscal year 2021.

Speaker 4: if I may, the first one is on your largest customer. Bill, I just want to, you know, better understand what's driving the change in the near-term outlook here. Is it simply a push in the customers' timeline and projects or are you seeing cancellations from them?

Speaker 4: is an inventory dynamic. I think in your prepared remarks, you mentioned that you're confident that you're still soul source there, but any risk of a fundamental change of their infrastructure going forward.

Speaker 3: Sure. So clearly this is a complex customer that we're working with. We fundamentally believe that the combination of two things. One is inventory that they're working through. I think there's a change in behavior coming off of the supply constraints that we saw over the the last few years.

Speaker 3: And I think they're bringing their inventory levels down to more of a normal level. This is combined with other pockets of inventory that were built up within their supply chain.

Speaker 3: So I think that's the first factor. The second factor is really that they've seen pushouts in key programs, additional programs that use our AECs. There's been delays of qualification that pushouts do the various factors.

Speaker 4: I will reiterate that we have nothing to suggest that we're no longer a sole source position with this customer and feel pretty confident with that. And we feel pretty confident that there's no technical issues with our products. So I think it really boils down to inventory as well as new skew pushouts and delays. Got it. And then as my second question on the fiscal 24 outlook, maybe for Dan or Bill, for that matter. So you're guiding to a flatish revenue outlook, prior to the 8K, I think the street.

Speaker 4: as well. So can you talk through the individual components as you think about fiscal 24? Thank you.

Speaker 3: Yeah, Toshia, let me address that initially. So starting with our largest customer, what you'll see in our queue as we file it in a day or so, is that our largest customer was 52% of our revenue in Q3, which was up from 44% in the prior quarter. So I mentioned that because the trajectory of that customer was still on the upswing. Right. So with this new forecast reduction, that trajectory obviously changes.

Speaker 3: Previously, two weeks ago, we had described this FY24 reduction as about two-thirds related to this largest customer, and then about a third due to just increased conservatism that we're applying across the board based on just macroeconomic factors that we see. So if you do the math, our largest customer remains still a very large customer in FY24. The second hyper-scaler we expect to see ramping throughout the course of the year, but we're quite comfortable right now with analyst estimates for the full fiscal year 24.

Speaker 4: That's helpful. And so I want to quick follow up to that, Dan, the one third of the fiscal year, 24 cut, are you baking in conservatism in your IP business as well? Or is that primarily the product side outside of your largest customer? You should consider it just kind of across the board. Okay. So all right. So thanks so much.

Speaker 4: So, I'm sorry, one quick follow up to that, Dan. The one third of the fiscal year, 24 cut, are you baking in conservatism in your IP business as well or is that primarily the product side outside of your largest customer? It's, you should consider it just kind of across the board. Okay, so, all right, so thanks so much. One moment for our next question.

Speaker 4: And our next question will come from Quinn Bolton of Needham & Company. Your line is open, Quinn. Hey guys, wanted to follow up on questions around your largest customer. I guess, you know, at the end of the day, do you think the opportunity set for AECs has changed at that customer meeting that the steady state revenue you thought you would get to say six months ago? Do you still think you can get there? And I guess, related question. It seems like there may be some confusion, you know, in the application of your cables. What percent of your largest customers servers today are connected with an FINABAND for AI applications versus Ethernet for just standard compute applications or instances? Let me answer the second part first. The...

Speaker 4: in the future about could we build InfiniBand cable? Yes, we could, but right now the way that we view it, the market is a pretty closed market and it's not something that we're spending cycles on. And Quinn, will you repeat the first part of your question?

Speaker 4: I've got a follow up on an infinibend, but let me come back to the first part of the question, which is six months ago, if you had an internal estimate of what you think AECs could reach at a steady state, an annualized revenue opportunity if that customer has that changed given the customer forecast or the push out and skews that you mentioned. Well, I think the way that I look at that is two ways. I look short-term and then I look long-term. And I would say short-term, look, I mean, we were, you know, our confidence was bolstered by, you know, the backlog I had in hand, the forecast that I had in hand, you know, clearly we're learning that things can change. And I don't think this is something fundamental with the change in strategy on one side.

Speaker 4: are being adopted at any given customer. And that's...

Speaker 4: First of all, functionality, we're able to build innovative functionality into our solutions, which is why our first customer ramped. Quite frankly, the wide cable, the switch cable that we're selling plays a role that no other cable solution in the market could accomplish.

Speaker 3: First of all, functionality, we're able to build innovative functionality into our solutions, which is why our first customer ran. Quite frankly, the wide cable, the switch cable that we're selling plays a role that no other cable solution in the market could accomplish. The other reason that...

Speaker 3: seeing conversion at speed. And we talked about this as lane rates go faster, DAX become obsolete, DAX being passive copper cables. And there's a fundamental advantage with AECs when we're talking about just a pure head-to-head competitive situation with AOCs. We're a much lower cost, much lower power solution. And maybe reliability is the most important thing, well, 10 times at a minimum, more reliable than an AOC. And so the way I see it playing out at our largest customers, that over time.

Speaker 3: our opportunity will really expand as they move from just compute to factoring in more of an AI spend. I see all of the server racks, whether they be compute or AI long term, will be a really robust opportunity for us as speeds move from 25 gig to 50 gig and then ultimately 100 gig per lane. That's what quantum Buffrom has taught us in the lastcountry.

Speaker 4: and then it's not like an architecture change may have to occur. And then one for just quickly for Dan, maybe my numbers are off, but Dan, it looks to me that despite, I know you're mixed shifting to AECs, but the product gross margins look like even on the AEC, they've probably come down over the past couple of quarters, even though AECs have ramped pretty nicely and I would have thought they're...

Speaker 3: would have been some volume benefits to that AEC ramp. So can you give us some sense specifically what's going on with AEC margins because it looks like even with the MiX shift, the AECs, that the AEC margins themselves have come down over the past couple of quarters? So let me start just by addressing your project margin question. So what I mentioned earlier in my script is that really it was revenue mix related. In Q3, but there are, as you'd imagine, a number of factors. Revenue mix being the key one because a higher percentage of our overall revenue was AEC. So simply the fact that AEC is a lower gross margin than our corporate average, that mitigates some of the scaling benefit we would get. But the second item over the prior six quarters that you allude to, you had in your Weilered Exhibition

Speaker 3: Product margin has expanded quite nicely due to that increasing scale, but our overall product revenue was actually slightly down to quantically at Q3. So that mitigated some of that gain you might have expected. And then finally, the last thing just to mention with product margin in general for Q3 is that, you know, our forecast recently declined for fiscal year 24. So when you calculate things such as inventory reserves, you know, the math changes because you're comparing against your forecast. So you would expect us to take a greater reserve position than in prior quarters, just fundamentally. So so those combination of those factors really drove that decline in product margin sequentially. Okay, so it sounds like there might have been some inventory reserves, a higher inventory reserves in the January quarter given the forecast change. That that we might have missed. Okay. And then Bill, I don't know if you have a sense what what what part of the AI.

Speaker 3: infrastructure today's InfiniBand versus Ethernet? You know, I can't be specific about that, but I can tell you my thoughts are that I think FirstMover has been InfiniBand from a protocol perspective, but I can tell you there's, you know, across the industry, there's an extremely robust pipeline of Ethernet applications for the AI space. Perfect, thank you. One moment for our next question. And our next question comes from Torres Vanberg of Steeple. Your line is open.

Speaker 3: in Finnevan versus Ethernet. You know, I can't be specific about that, but I can tell you my thoughts are that, I think first mover has been in Finnevan from a protocol perspective, but I can tell you there's, you know, cross the industry, there's an extremely robust pipeline of Ethernet applications for the AI space. Perfect, thank you. One moment for our next question. And our next question comes from Tours Van Berg of Stiefel. Your line is open. Yes, thank you.

Speaker 3: Build, this is a bit of a longer term question, but it's kind of like due to recent events. So, you know, you're vertically integrated. You sell the whole system in AC. You know, could that have led to a larger customer perhaps building a little bit more inventory? And as you think longer term, is there a strategy to, you know, selling semiconductors and perhaps then outsourcing the manufacturing of the cable or the sale of the cable letters? Sure. Sure. So, I think that, you know, I think our model, I guess I would say that it really wouldn't impact the amount of inventory somebody would hold, I would say. You know, the bottom line is, you know, we were one component of many that were being sourced for the racks that were being built. I don't think there was any kind of special.

Speaker 3: scenarios for CRETA. I don't think the model generally would lead to that in a general sense. The second part of your question, I think we've talked about before, it was an necessity for us to take ownership of the complete system. We go back four or five years ago and it was really necessary for us to build a vertical organization, a group that was fully responsible for the AEC definition, development, engineering, qualification, and ultimately fulfillment.

and support, uh, following production. I think that was critical for the, you know, the success of a credo with our customers, and that includes our, you know, the first multiple customers that we've got. And I think it's gonna be important long-term that we maintain ownership of the complete system. Um, the idea of us selling a semiconductor to a company that makes passive copper cables today, and thinking that they would have the role with all to bring a highly complex solution to market. You know, I think, you know, that was, uh, that was the first idea that we had, and, and we, we quickly shifted our strategy.

following production. I think that was critical for the success of Credo with our customers, and that includes the first multiple customers that we've got. And I think it's gonna be important long term that we maintain ownership of the complete system. The idea of us selling a semiconductor to a company that makes passive copper cables today and thinking that they would have the wherewithal to bring a highly complex solution to market. I think that was the first idea that we had, and we quickly shifted our strategy.

And so when we think about is there a different model, you know, than us selling the complete AEC solution, I think long term there is and we've talked about the idea in certain cases where it would make sense going to a reference design model. And you know that would be on a case by case basis where volumes were justified, but our role in the development and support of the solution will not change. You know this is one where we would stand behind the design, we would bring it up, certify it and we would support it in production the same way that we do today. So we've really had a chance to think through this and you know this scenario without selling a chip to a copper cable company is not a scenario that exists, but we will be able to achieve a shift in business model that eliminates you know full margin stacking and that will play itself out the future.

And my second question is, could you just give us a timeline update on going from 12 to 5 nanometer? You mentioned it a little bit when you talk about the Line Card Fires, but if you look at the different business units, obviously IP is different, right? But when should we expect products in 5 nanometer across the various product lines? So this is something that we're actively in flight on today. And we've got 5 nanometer developments.

really across the board for all of our product segments. The tape outs will occur in the upcoming quarters and we'll have products probably within the next 12 to 18 months. Very good. This one last question. I think there's a lot of focus on AAC. I see that you did highlight the chiplet IP, especially with some non-communications customers.

How should we think about that business purpose for fiscal 24? Will that actually grow with the others declining? Well I would say that our IP business remains something that's strategic to us. We don't see it growing beyond our long-term model, which has been stated at 10 to 15% of our revenue. There's no change in that. Short-term will probably outperform that based on the reduction in the product forecasts that we're giving, but I don't think there's any fundamental shift in the way we're looking at that business. I think that we...

You know, see in the future that we will have success in advanced processes, high speeds. I think we will have success with other protocols as well because we offer really unique solutions for those markets. I guess I was talking more specifically about chiplets. It sounds like that's probably more of a physical 25 driver, but you know, will you have any growth at all in physical 24? No, I think it really is a physical 25 driver. And I think the inflection point will be the UCIe chiplet market as that takes off. And so, you know, the original, I guess the idea is that as

PCIe lane rates move from 32 to 64. That's where we're going to enter the market. And it maps directly to UCIe chiplets as well.

Thank you very much. One moment for our next question. And our next question comes from Shouzi. Suji, De Silva of Ross Capital. Your line is open.

Hi Bill, hi Dan. So first question really to understand the AEC at the lead customer. Can you give us a more if I do how many programs you're in kind of ballpark to understand if the impact was uniform across those programs or whether certain programs are impacted and others weren't? I think as we look at the number of different rack skews that were involved in is probably on the order of four to five.

And, you know, the different SKUs, you know, there's different components that change within the SKUs from, you know, from the servers and NICs that they're using to the TORS that they're using, but our AECs are consistent. I don't think there's anything that I could point to that would, you know, suggest there's something fundamental that's changing. The first SKUs grant and I think the other, you know, high-volume SKUs that were planned –

have been delayed. All right, thanks Bill. And then the other question, as you guided fiscal 24 along with the fourth quarter, wondering if you could kind of give a some sense of linearity or shape of the quarters and the recovery, would it be more back and loaded or perhaps a linear recovery from the current inventory Yes, so from a revenue perspective, it should be relatively linear throughout the year in terms of a state progression. Recall that we...

We stated our, we expect our bottom to be either Q4 or Q1. Q4, we got a 30 to 32 million. So if you kind of view something similar to that in Q1, to get to, you know, the flat year over year, it shows pretty strong sequential growth throughout the year.

So we do expect to exit the year at a very high rate of revenue. All right, thanks, Dan. Thanks, Beth. One moment for our next question. And our next question will come from the Vick Arya. Thanks.

in fiscal 24th custody. Yeah, so we haven't given specific guidance on that, but in a lot of that really depends on the shape of the curve from a second hyper-tailed, but right now to get to flat year over here, I would expect it to be down a little bit, but that could change as we kind of...

get closer to entering FY 24 and get more specific guidance. All right, because then when I look at, you know, you mentioned a very steep ramp in the back half. So when you look at your second half of fiscal 24 growth versus the first half, is that mainly coming from the AEC ramp at the second hyper-staylor? Is that kind of the big ramp or is there anything else in the non-AEC part of the business that can also grow

significantly on right here on here in that time. So the short answer that is yes, it's largely AUC related. We'll be at a lower point in Q4 and Q1 and that recovers throughout the year. And my quick follow up, Dan, is if let's say your revenues next year are sort of flatish, what happens to the gross margins and opX that you are roughly thinking about a four-fisker.

However, AEC has come down versus what we had originally thought. Again, that's favorable to overall margin. And even though the remaining, let's say, third of the reduction is kind of across the board, things like IP do become a larger percentage of the overall revenue mix.

So those favorable revenue mix things really offset the loss of scale at these are expectation. So FY24 we would expect to be somewhere to FY23 gross margin.

regular ball revenue mix things really offset the loss of scale at these are expectation. So FY24 we would expect to be similar to FY23 gross margin. An off- burn source. An off- suicide.

So, OPEX, you know, we guided the midpoint of our guidance for Q4, it was $27 million. So, a couple of things to bear in mind there is that, you know, we have an annual focal process that's calendar year based. So, that's kind of our Q4 numbers should be kind of all in OPEX from a head count related perspective. As work kind of maintaining our overall head count and not adding incremental heads through the year. So, there will be some variability quarter, or we would expect.

Bill and Organa, I guess could you discuss whether the qualification ramps of your AEC off-ring?

At the previously announced three other hyperscalers has been impacted at all from the design considerations or the pause at your largest customer? I think they're largely unrelated. I don't see any kind of correlation between the two. What's happening at a largest customer is a function of

you know, their own planning. The second customer that, you know, we're in the early stages of ramping, you know, the situation there is that I think the overall plan is coming together. You know, the sequence that they go through that seems similar with these large hyperscalers is there's, you know, a group of engineers that are responsible for developing and qualifying a given SKU and that when that qualification is complete that SKU becomes available for different businesses to pick up.

and deploy. We've made it through the qualification portion with our second customer and now I think that you know the detailed forecast is going to be coming together you know over the next several months and so as we you know look at that program generally we think that it can drive volume but we you know don't want to be overly aggressive in how we're planning and that's why we've you know kind of you know step back a bit and put a more conservative look on it until we've got really good visibility. Understood that's that's clear thanks for that.

I guess, Dan, then a question for you, if I may. I did notice a small impairment charge in the quarter. I was curious if you could discuss what that is. And then second, how fungible are your AEC products across the design engagements you have at some of these hyperscalers? I guess, is your current inventory reusable or is there obsolescence risk that we should worry about or think about, given this revised outlook? Thank you very much. Yeah, so we don't expect there to be, generally speaking, an AEC product.

extremely fortunate with our success across a lot of different investments that we've made over the years.

But in this case, we made the decision to move forward with a different, you know, higher ROI product.

which can happen from time to time. So you can expect us to continue following, this is the very strict fiscal discipline as we look at our various ROI's on products that we chape out. And eventually, you know, this will lead us toward our long-term financial target model.

Thank you. And there are no further questions at this time. I'd like to turn the call back to Mr. Brennan.

All right, well, I'd like to thank everybody for joining me in the call. I appreciate all the questions and with that, we'll end the call. Thank you very much.

It's for today's conference call. You may now disconnect. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 11.

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