Q2 2024 Credo Technology Group Holding Ltd Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by at this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session at that time. If you have a question you will need to press Star 11 on your push button song.
I would now like to turn the conference over to Dan O'neill. Please go ahead Sir.
Good afternoon.
Thank you all for joining us on our fiscal 2024 second quarter earnings call.
Today, I'm joined by Creatives, Chief Executive Officer, and Chief Financial Officer, Dan Funny.
I'd like to remind everyone that certain comments made in this call today.
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.
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 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 statements.
Given these risks uncertainties and assumptions.
Forward looking events discussed during this call may not occur.
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 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.
Reconciliations between our GAAP and non-GAAP financial measures is available earnings release, we issued today.
Which can be accessed using the investor relations portion of our website.
I will now turn the call over to our CEO Bill.
Bill.
Thank you Dan and welcome to everyone. Joining our Q2 fiscal 'twenty four earnings call I will start with an overview of our fiscal Q2 results I will then discuss our views on our outlook.
After my remarks, our CFO, Dan Fleming will provide a detailed review of our Q2 financial results and share the outlook for the third fiscal quarter. We will then be happy to take questions for.
For the second quarter Credo reported revenue of $44 million and non-GAAP gross margin of 59, 9%.
Our Q2 results and our future growth expectations are driven by the accelerating market opportunity for high speed and energy efficient connectivity solutions we.
Target port speeds up to one six terabits per second with solutions, including actively electrical cables or adcs.
Optical DSP is laser drivers and <unk>.
<unk> five <unk> chip lids, and <unk> IP licensing, enabling us to address a broad spectrum of connectivity needs throughout the digital infrastructure market.
Each of these solutions leverage our core <unk> technology, and our unique customer focused design approach.
As a result delivers application specific high speed solutions with optimized energy efficiency and system cost and our advantage expands as the market moves to 100 gig per late and speeds.
Within the data center market today, we've seen it dramatically increasing demand for higher bandwidth higher density and more energy efficient networking. This demand is driven by the proliferation of generative AI applications.
For the past several years credo has been collaborating with our customers on leading edge AI platforms that are now in various stages of ramping production.
In fact, the majority of Accredo revenue will be driven by AI applications for the foreseeable future.
Now I'll review, our overall business in more detail.
First I'll discuss our optical business.
I am pleased with the traction we've been gaining in this market in the quarter. We continued shipping to multiple global Hyperscale end customers and we're making progress in positioning credo to add additional hyperscale end customers in the upcoming quarters targeting 400 gig and 800 gig applications.
<unk> also has optical design movements in various stages with module customers and networking Oems for the fibre channel market.
And with service providers for <unk> infrastructure deployments.
We do place a disruptive role in optical DSP market are fundamental series technology is leveraged to provide a compelling combination of performance energy efficiency and system cost.
Additionally, we focus on solving our customers' problems and market challenges through engineering innovation.
At the OFC optical conference in March of this year, there was an important call to action to address the unsustainable power and cost increases for optical modules and the 800 gig and 160 generations.
Much industry discussions ensued, this year, especially related to the plausibility of the linear plug a hole optics architecture or LPL also sometimes referred to as linear direct drive.
The <unk> architecture is based on eliminating all optical DSP functionality.
The industry has widely concluded that the <unk> architecture will not be feasible for a material percentage of the optical module market.
And the DSP functionality is critical to maintaining industry standards and interoperability as well as achieving the bit error rate performance necessary for high yields and volume production.
However, this does not mean that the industry call to action will be unanswered.
Pre dose response following OFC was to look at innovative ways to drastically reduce DSP power and subsequently cost.
Through architectural innovation.
Today, <unk> issued a press release, introducing our linear receive optical or MRO DSP.
Today, <unk> issued a press release, introducing our linear receive optical or MRO DSP.
Our MRO DSP products provide optimized DSP capability in the optical transmit path only and eliminate the DSP functionality in the optical receiver path.
This innovative architecture as optimized by credo effectively reduces the optical DSP powered by up to 50% and at the same time lowers cost by eliminating unneeded circuitry.
Our MRO products address the pitfalls of the LPL architecture by maintaining standards and enabling interoperability among many components of an optical system.
On the DSP functionality maintains the equalization performance, that's critical to high yields and volume production.
We've already shipped our dove $8 5800 gig <unk> DSP device and evaluation boards to our lead optical and hyperscale and customers for their development and testing.
While any revenue ramp will be a ways out I view. This innovation is the latest example of accretive pioneering a new product category that directly addresses the energy and system cost challenges faced by the Hyperscale, especially for AI deployments.
Regarding our ADC solutions Credo continues to be an ADC market leader.
While our initial success in our ADC business has been connecting front and data center networks for general compute and AI appliances, we've seen an expansion in our AUC opportunity in the backend networks that are fundamental to AI cluster deployments.
Due to the sheer bandwidth required by backend networks and acceleration and singling speeds and networking density is driving the need for Acs given the significant benefits compared to both passive copper cables and active optical cables or afcs in rack connectivity.
We continue to make progress with our first two hyperscale customers for both front end and backend networks and were especially encouraged to see credo Aac's prominently featured in the leading edge deployments introduced at their respective conferences in November.
There is in the making we continue to maintain strong and close working relationships with our customers and I'm pleased to say that in Q2, we made our initial shipments of 800 gig production Adcs and industry first and again, we've demonstrated our market leadership.
We also continued to expand our hyperscale customer base with one and Paul with 400 gig ADC solutions and another in development with 800 gig AUC solutions.
Additionally, we've seen the increased need for 400 gig and 800 gig <unk> among tier two data center operators and service providers as a group these customers contribute meaningful revenue accretive.
I'll also highlight one accretive announcements at the recent open compute conference in October accretive announced the P. Three plug a hole patch panel system, a multi tool that enables service providers and hyperscale.
Freedom by using the <unk> of Adcs to decouple applicable optics from core switching and routing hardware.
The combination of the <unk> <unk> enabled network architects to optimize for power distribution and system cost as.
As well as to bridge varying speeds between switching and optical ports.
We are engaged with several customers and believe the efforts will result in meaningful revenue in the future.
To sum up we remain confident that the increasing demand for greater networking bandwidth driven by AI applications combined with the extraordinary value proposition of our ADC solutions, We will drive continued AUC market expansion.
Now regarding our line card business.
Brito has an established market leader with our line card solutions, which include re timers gearboxes and <unk> for data encryption, our overall value proposition becomes even more compelling as the market is now accelerating to 100 gig per lane deployments. According to our customer base kudos competitive advantage in this market segment.
Derives from the common thread across all of our product lines, which is leading performance and signal integrity that is optimized for energy efficiency and system cost.
We're building momentum and winning design commitments for our screaming Eagle 160, <unk> and for our customer sponsored next generation 160 <unk> five.
We remain excited about the prospects for this business with networking OEM and Hyperscale customers.
Regarding our <unk> IP licensing and series triplet businesses.
Pre dose <unk> IP licensing business remains a strategically important part of our business.
We have a complete portfolio of <unk> IP solutions that span a range of speeds reached distances and applications with process nodes from 28 nanometer to 40 nanometer and our initial three nanometer series IP for 112 gig and 224 gig is in fab now.
During Q2, we secured several licensing wins across networking and data center applications. Our wins include new and recurring customers a testament to our team's execution and contributing to our customers' success.
We're also enthusiastic about the prospects for our chip lit solutions. During Q2, we secured a next generation 112 gig four nanometers 30, cipla when that includes customer sponsorship.
Peter is aligned with industry expectations that <unk> will play an important role in the highest performance designs in the future.
In conclusion Credo delivered strong fiscal Q2 results, we remain enthusiastic about our business given the market demand for dramatically increasing bandwidth.
This plays directly to <unk> strengths and we're one of the few companies that can provide the necessary breath of connectivity solutions at the highest speeds, while also optimizing for energy efficiency and system cost.
As we embark on second half fiscal 'twenty four we expect continued growth that supports a more diversified customer base across a diversified range of connectivity solutions.
Lastly, I am pleased to announce that yesterday credo published our first ESG report, which can be found on our website as reiterated several times today in my comments energy efficiency is built into our DNA and is a key part of our report we aspire to be leaders across the ESG spectrum and.
To help enable our customers to be leaders as well I'm very pleased with how accretive it is pursuing our goals and we look forward to continuing our positive ESG efforts.
At this time, Dan Fleming, our CFO will provide additional financial details. Thank you.
Thank you Bill and good afternoon, I will first review our Q2 results and then discuss our outlook for Q3 of fiscal 'twenty four.
As a reminder, the following financials will be discussed on a non-GAAP basis, unless otherwise noted.
In Q2, we reported revenue of $44 million up 25% sequentially and down 14% year over year.
Our IP business generated $7 $4 million of revenue in Q2.
165% sequentially and up 125% 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 preexisting or new contracts.
While the mix of IP and product revenue will vary in any given quarter over time, our revenue mix in Q2 was 17% IP.
Above our long term expectation for IP, which is 10% to 15% of revenue.
We expect IP as a percentage of revenue to be within our long term expectations for fiscal 'twenty four.
Our product business generated $36 $7 million of revenue in Q2 up 13% sequentially and down 24% year over year.
Our top three end customers, where each greater than 10% of our revenue in Q2 in fact, our top four end customers. Each represented a different product line, which illustrates the increasing diversity of our revenue base.
Our team delivered Q2 gross margin of 59, 9% at the high end of our guidance range and up 10 basis points sequentially.
Our IP gross margin generally hovers near 100% and was 95, 6% in Q2.
Our product gross margin was 52, 7% in the quarter down 405 basis points sequentially due to product mix and some minor inventory related items and up 39 basis points year over year.
Total operating expenses in the second quarter were $27 $1 million at the low end of our guidance range down, 1% sequentially and up 9% year over year.
Our year over year Opex increase was a result of an 11% increase in R&D as we continue to invest in the resources to deliver innovative solutions.
Our SG&A was up 5% year over year.
Our operating loss was $731000 in Q2 compared to operating income of $3 2 million a year ago.
The second quarter operating loss represented a sequential improvement of $5 $7 million.
Our operating margin was negative one 7% in the quarter compared to positive six 1% last year due to reduced top line leverage.
We reported net income of $1 $2 million in Q2 compared to net income of $2 $2 million last year.
Cash flow from operations in the second quarter was $5 million, an increase of $3 $3 million year over year due largely to a net reduction of inventory of $5 million in the quarter.
Capex was $2 million in the quarter, driven by R&D equipment spending and free cash flow was $3 million, an increase of $6 $9 million year over year.
We ended the quarter with cash and equivalents of $245 million, an increase of $2 $9 million from the first quarter.
We remain well capitalized to continue investing in our growth opportunities, while maintaining a substantial cash buffer.
Our accounts receivable balance increased 17% sequentially to $32 $7 million, while days sales outstanding decreased to 68 days down from 73 days in Q1.
Our Q2, ending inventory was $35 8 million.
Down $5 million sequentially.
Now turning to our guidance. We currently expect revenue in Q3 of fiscal 'twenty four to be between $51 million and $53 million up 18% sequentially at the midpoint.
We expect Q3 gross margin to be within a range of 59% to 61%.
We expect Q3 operating expenses to be between $28 million and $30 million.
And we expect Q3 diluted weighted average share count to be approximately 166 million shares.
We are pleased to see fiscal year 2004 continue to play out as expected, while we see some near term upside to our prior expectations. The rapid shift to AI workloads has driven new and broad based customer engagement.
We expect that this rapid shift will enable us to diversify our revenue throughout fiscal year, 'twenty, four and beyond as bill alluded to.
As new programs at new and existing customers ramp we remain conservative with regard to the upcoming quarters as we continue to gain better visibility into your forecast at our ramping customers.
In summary, as we move forward through fiscal year 'twenty four we expect sequential revenue growth expanding gross margins due to increasing scale and improving product mix and modest sequential growth in operating expenses as.
As a result, we look forward to driving operating leverage in the coming quarters.
And with that I will open it up for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number 11 on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Our first question comes from the line.
<unk> Hari of Goldman Sachs.
Hi, good afternoon. Thank you so much for the question.
I had two questions first one on the revenue outlook I just wanted to clarify.
Dan I think you mentioned sequential growth throughout the fiscal year or so so April I'm, assuming goes up sequentially I guess, that's the first part and then the second part.
As you think about calendar 'twenty for Bill you gave quite a bit of color by product line.
At a high level the outlook sounds pretty pretty constructive across AUC in your optical business and I guess your <unk> business as well, but if you can try to quantify the growth that you're expecting into calendar 'twenty four and what the top three key drivers are.
Would be that would be helpful. Thank you.
Yeah, So with regard to fiscal 'twenty four on your first question.
Generally speaking, we're very pleased with our quarterly sequential growth of this year.
And as we stated in our prepared remarks, our Q3 guide was at the midpoint up 18% $52 million at the midpoint, but as we stated on our call previously.
Previously.
We expect modest top line growth fiscal year 'twenty three 'twenty four so the key takeaway there is no.
No change in our overall expectation for fiscal year 'twenty four.
And for the second question I would just reiterate what what Dennis said.
As we look at our fiscal 'twenty four it is playing out.
Very much like we expected.
So really no change there we expect.
I think what should be considered fast sequential growth and it's been driven by multiple factors Acs optical chip, let's really we're firing on all cylinders.
And bill sorry, if I wasn't clear calendar 'twenty for fiscal 'twenty five I realize it's early and you have got many moving parts, but based on.
Customer engagements all of the color you provided across product lines. How are you thinking about the overall business and into next year.
So we're not.
Yes, we're not providing any formal guidance right now at this point for fiscal year 'twenty five however.
As you can imagine we do expect meaningful growth based on all of our customer engagements that we have and as Bill mentioned, we continue to have lots of irons in the fire.
But as we've stated it takes a long time to turn a lot of these engagements into meaningful revenue, which will happen throughout the course of the year.
Okay got it and then as my follow up on gross margins.
As you noted in your remarks, Dan I think your product gross margins were down sequentially in the October quarter.
Off a really high base in July, but curious what drove the sequential decline there and then as you look ahead I think you talked about gross margins expanding.
Over the next couple of quarters, I think you said and what are the drivers there and if you can speak to foundry.
Foundry costs.
Potentially.
Going from a headwind to something more neutral into calendar 'twenty four.
The diversification of your customer base helps your gross margins going forward that would be helpful. Thank you.
Yes, so there was a lot to that question.
Generally speaking so as you correctly note in our Q2 product gross margin was down sequentially from Q1.
And if you recall Q1 was up substantially 700 basis points from Q4.
It's kind of easy to read probably too much into these movements quarter over quarter at the scale that we're at right now.
Because there are slight product mix changes from quarter to quarter.
In Q2, we also had some very minor inventory related items that impacted product gross margin.
But.
The important thing are the most important thing.
There is no change to our long term expectation or our gross margin expectation over the upcoming years is to expand to the 63% to 65% range.
And from fiscal 'twenty three to 'twenty four youre seeing that play out, although it's not quite linear from quarter to quarter and that'll continue to play out through next year as well.
Thank you.
Our next question.
It comes from the line of Tom.
Tom O'malley of Barclays.
Hey, guys. Good afternoon, and thanks for taking my question I just wanted to clarify something you said on the call you guys have talked previously about two customers that you are ramping with AUC you talked about one customer in qualification with 400 G and one in development with 800, <unk> I just want to make sure youre still referring to two processes that you've talked about before.
Or are those new developments that you guys are talking about.
I think we've alluded to those developments in the past, but I think.
These are additional hyperscale customers. So the first two that we've got.
November was kind of a big month, both of them had shows so the Microsoft ignite.
Really prominently displayed there Mike.
Appliance in Iraq and.
You could see the Accredo auc's prominently.
Displayed as part of part of that rack.
So that's really something we've messaged in the past and now it's been publicly announced and shown and also Amazon is having to reinvent show the reinvent conference right now as we speak.
And if you look at the demos on the show floor Youll see our 50 gig and 100 gig per lane.
<unk> as part of those demonstrations and so the two additional.
One more and <unk> and we're expecting qualification to be completed sometime in the upcoming quarter.
Maybe give or take a month or so and then the other one is more of a long term.
Plan is as we're putting together.
And 800 gig.
Customer specific solution for another hyper scaler.
Super Helpful. And then just on the optical side you guys had previously talked about.
400, <unk> customers the upside in the near term the beginning of that ramp or are you just seeing additional traction from customers you've talked about in the past I know that you had there was there was some Chinese customers that you were looking to get back into Rev. Run rate can you just help me understand.
Where the strength youre seeing in the optical DSP side is coming from.
Yes, so generally we continued to ramp with the with the partner.
We are engaged with serving the U S hyperscale or so that ramp is going to happen for the next.
Several quarters, but we're also seeing further signs of life in it.
In our customer base in China, and so we've actually got.
We've got demand that we're seeing from three or four hyperscale is in China.
As far as the new U S hyperscale or that we've talked about.
Really that is not baked into any of the numbers that we've talked about and so that would be if we can ultimately close that we expect that will impact revenues in.
In the fiscal 2005 timeframe.
Thank you.
Our next question comes from the line.
Oh, sorry Svanberg.
Stifel.
<unk>. Your line is open. Please go ahead.
Please make sure your line is muted and speaker phone lift your handset.
Yes can you hear me, yes, Sir please proceed yes.
Yes, sorry about that.
Yes, Bill My first question was on the Tweener Slash Halo product that you just announced this afternoon.
You did say that.
This is something that should generate revenue revenue is longer term, but I think that market is also very very hungry for lower costs near term. So.
What kind of timeframe are we looking at here as far as when that product could be in production.
So I think that the first messages that we've shipped samples.
Samples that are going to be built into modules. We've shipped eval boards that are going to be thoroughly tested by our lead hyperscale customer.
No.
T zero is really now and so the typical development time for an optical module is on the order of.
On the order of 12 months to get to production.
And Thats really based on building and qualifying the module and then going through qualification with the Hyperscale end customer and so as we.
As we look at kind of best case scenario.
Talking about something on the order of 12 months from now so it could impact our fiscal 'twenty five.
That's very helpful and as my follow up I know the first half of the year. There was still some headwinds obviously from your largest customer inventory digestion on the compute side I'm. Just wondering is that now as we look at the January quarter is that headwind completely behind you or is there still some lingering.
There.
Well I think I think as we as we think about.
The front end networks.
At this at this lead customer of ours.
The application is general compute as well as as well as AI and so of course there is.
Both of these applications are kind of contributing to the digestion of the inventory that was built up as a result of the pivot earlier in the year.
So as we look at fiscal 'twenty four I think we've got good visibility.
Exactly when it turns back on I think we're still being conservative in a sense that we've got to wait for that to really develop in our fiscal 'twenty five.
Great. Thank you very much.
Thanks Terry.
Thank you.
For our next question.
Which comes from the line of Karl Ackerman.
BNP Paribas.
Yes. Thank you gentlemen, two questions. If I may just the first question is a follow up.
On the previous one but.
You are introducing Aoc solutions today to address the DSP based and non DSP based optical links.
How do you see the adoption of non DSP based solutions for backend network connections in calendar 'twenty four and as you address that question I guess, why not introduce and AAC solution for backend networks.
So let me take the first part of that question.
Really the two solutions that we've got for optical or what we might call. It full DSP, which is kind of the traditional approach where there is a DSP on the transmit path as well as the receive path on a given optical link.
That activity is going to continue.
The product that we really announced today was.
Eliminating the DSP on the receive path.
And having it on the transmit path only.
So you might say that that would be.
Half half of the DSP on a typical optical link.
And so those are really the two solutions that we're promoting.
We believe that that.
<unk>, eliminating the DSP is really not something that's going to play out in a big way.
<unk> have been upfront, saying that they don't see it ever being more than 10% of the market. If it achieves that level. So you'd have to have a very tight control over the entire link to be able to to be able to manage that.
And Thats just not the.
The typical scenario in the market today.
Typically people are putting together various solutions and interoperability is really the key.
As well as troubleshooting and ultimately yielding in production.
Yes.
Second part of your question was regarding <unk> and we are absolutely building adcs for backend networks and the agencies are really covering in rack <unk>.
<unk> media or less solutions.
There are also rack to rack.
Connections and those are all optical connections, whether they're aoc's whore transceivers.
And especially in that in that.
The situation for.
Our rack to rack connectivity within a cluster thats, where we really believe that the <unk> DSP is going to be highly applicable and and really quite valuable to customers.
Okay. Thanks for that.
For my follow up.
I wanted to pivot to your IP business.
This is primarily tied to data center today.
Data center focused application, but over time the idea is that as Pam <unk> III ramps it will transition more toward consumer how do you expect the end market mix of your IP business transitioning to.
Consumer over the next few quarters. Thank you.
And so as we look at our IP business.
Primarily today, it's Ethernet, we've talked about one large consumer license that we have.
That we've engaged on for consumer and Thats moving to 40 gig Pam <unk> III.
For the CIO 80.
Or 80 Gigabits per second.
Two lanes of 40 gig for that market and that market is going to be out sometime in the future.
Probably on the order of two to three years before that ramps production.
Now I don't expect it to be a big part of our IP business long term.
I expect that that our Ethernet IP business will continue.
Strongly and I also believe that from a PCI E perspective, we'll be able to talk about that as we bring our 64 gig and 128 gig solutions to market.
Thank you our next question.
Standby comes from the line.
Vijay Rakesh Mizuho. Please go ahead Vijay.
Yes.
And then just on the PPP.
Bats Pan.
Hello.
Is that including the ACM.
Yes.
The three customers using it or is it.
How do you see that lapping I guess.
Yes, So you broke up a little on the line but.
Yes, I'll answer the question by saying that this this <unk> was something that was developed in conjunction.
With a leading service provider so they spoke about their challenges as they were connecting.
ZR optics to routers.
Switch ports.
And so this.
This was really developed with them in their application in mind also knowing that <unk>.
Developing the solution that will become a multi tool in a sense to be able to solve.
Different networking problems associated with with power and cooling and control plane access and so.
Our lead customer is as a service provider, but we're seeing that.
Also applications, where this.
Really.
Fits well.
When we talk about.
The situation, where switch and router port speeds are different from the optic speaks that a customer wants to use so.
Our customer connect 800 gig ZR optics with 400 gig switch ports or vice versa that can move to the fastest switches 800 gig ports, but still use 400 gig ZR. So in a sense. This is P. Three system can can gearbox and really.
Seamlessly connect.
Different speed optics with with different speed ports on routers and switches.
Also from a thermal distribution standpoint.
This is a really useful tool in a sense because some customers.
Want to use.
Lower cost smaller switches that lack the power and cooling envelope.
Advanced C. Our optics. So you would have a lot of stranded ports. So in a sense you can pick that.
Thermal management away from the away from the switch.
And so.
There's multiple applications, we introduced this at ICP, and we realized putting out a multi tool like this.
Basically enables.
<unk> to be connected directly with adcs as a different type of solution. We were surprised at the ideas that some of the engineers that came by our booth.
Otp, we're surprised in some of the great ideas that they came up with it. So generally when we think about this product.
We think about it in terms of a combination of the <unk> III and Adcs. So we developed a <unk> to two.
So basically be a catalyst for more AUC demand.
Got it and so.
Better utilizing.
Stranded cost I guess does the PPP with the AC actually.
Content.
So it doesn't recur.
Okay.
It's hard to say I don't think Theres, a relative reference point on contact these are new applications and with our lead customer we think.
Content can be significant but the nice thing is is this is really an application.
As we prove out our lead customer this is one that.
Many many service providers, we think will pick up.
Got it and then the last question on your 10% customers. How many are at the end of quarter and if you were to look out lets say fiscal exiting calendar 'twenty five any thoughts on how many 10% customers. You think you would be working on.
Yes. So for Q2, we had as Youll see when our Q is filed we had 310% and customers.
Our call last quarter, we added an additional disclosure to show and customers.
So a three youll see the largest one was 29%.
Generally we don't.
Disclose who are 10% customers are but obviously the 29% one was was Microsoft.
Most importantly.
We continue to expand our customer base throughout the year one of the customers one of those three and customers is our new end customer as youll see in our disclosure.
So it's hard to answer the latter part of your question. How many will have at the end of the year, but I would guess.
Maybe four.
Thank you please standby for our next question.
Our next question comes from the line of.
<unk> de Silva of Roth M M.
Hi, Bill Hi, Dan My questions on the competitive landscape I'm wondering what youre seeing in the chip.
Chip based AC efforts chip plus cable guys of meeting with you are you guys able to provide a faster time to market is that one of the reasons you're in some of these demo racks perhaps.
Maybe you can talk about the share you might think you'd be having an AC market versus the size.
Thanks.
I think we've been consistent.
Saying that we don't expect to maintain a 100% of the AC market and we do see competitors.
As this product category becomes really.
More and more established as a de facto way of making sure in rack connections, we do see more competitors.
Way that we're organized for sure we're going to be able to deliver better time to market and what we're seeing is that for the high volume applications customers are asking for special.
Features special functions and.
Fundamentally.
We are.
We are responsible for working.
Our company, although we're a chip company I've built a system organization for Adcs and so we're the ones that are working directly with the Hyperscale is where the ones having daily conversations when when crunch time comps and so for sure. We've got a time to market advantage.
And so I think the way this will play out I think that our market share.
Will it.
Ultimately play out and I hope that.
<unk>.
We maintained more than 50% long term and I think that's a function of being first thats the function of having a model that.
Delivers just a better better experience with hyperscale customers directly.
Okay, Alright, Thanks, Bill and then my other question is on the.
The customer base and where they are in the racks you talked about.
Amazon and Microsoft Demoing, the racks and they seem like they're a little bit ahead of the rest of the customer base, but perhaps you can clarify that and if so are there other folks really close behind them or did those guys have maybe a substantial technical lead just trying to figure out of the customers may waterfall endpoint.
Yes, I think from a from a timing standpoint, I would expect.
The third customer would probably ramp.
The upcoming.
Two to three quarters. It takes time for these these.
New platforms to be deployed and then the fourth customer would be following that by a number of quarters. So I think it's.
I think it's one where the first two customers of course.
The architectures that they've decided to take the market really each one of these customers is different in a sense. So I wouldn't say that they're necessarily ahead from a technology standpoint.
Or.
Just that.
But they've chosen to move forward more quickly than the others.
Thank you.
Next question.
It comes from the line of Richard Shannon of Craig Hallum.
Okay.
Richard Please make sure your line is muted speaker phone lift your handset.
Okay.
Can you hear me now yes, Sir Please proceed alright, great. Thanks.
Dan I have a question for you on based on the comments in your prepared remarks, so I'm not sure if I caught it correctly, but I think you said you had 310% customers and including your next largest one of the top four all came at her supporting a different product line I think we can all guests with the first one as well first one is but I wonder if you can delineate specifically, which.
Product lines each of the next three customers.
We're primarily purchasing.
Yes kind of.
That covers the broad gamut of our product lines actually.
<unk>.
Obviously, the largest one being Microsoft as AUC, but.
For a long time.
Our line card five business has been strong so that would be in there.
Optical ESP, we have been gaining traction there starting with Q1 as we described last quarter.
So.
And then our chocolate business, we described it last quarter as well so.
That kind of covers.
All of the different product lines that are materially contributing at this point in time.
Okay.
Since you didn't say it in your prepared remarks and have talked about it in this context in the past you didn't say DSP was 10% that would seem that the fourth customers that or is it one of the 10% customers in DSV.
Yes, you can assume it's near that if it's not at that.
Being being where it is and what we said we haven't changed our expectation there we expect for.
Next fiscal year, our target is to be at 10% or more of revenue for optical DSP.
As our first production ramp is occurring.
With a large hyperscale or you might expect that we'd have a quarter or two this year, where it trips 10% based upon their build schedule.
Okay, Alright fair enough. Thanks for that characterization I guess my second question is on product gross margins that we've had a couple a couple of quarters I guess somewhat somewhat volatile, but I think youre still talking directionally upwards over time here, maybe specifically on the product gross margins here would you with the growth in Acs.
Is it fair to think that product line has gross margins that continue to grow in.
And it's been somewhat steady or is it the volatility coming from that line.
Yes.
I would expect all of our over the long term most of our product lines will grow a bit in gross margin really due to increasing scale.
That had been a large part of our story last year last fiscal year.
With the Microsoft reset this year fluctuations in gross margin have really been more about product mix as opposed to scale. Although now that we're approaching a point, where we'll be exiting the year at.
Record levels of revenue that scale factor will come in again, so I would expect some uplift in aac's and as well as kind of really across the board as we stay on target to achieve that 63% to 65% overall gross margin.
Yes.
Thank you.
Our next question.
Comes from the line of Quinn Bolton of Needham <unk> Company.
Thanks for taking my question I guess I wanted to follow up on your comments about both Microsoft.
And the re invent conference for Amazon you talked about the mine 100 accelerator racks.
Yes, I think in the Microsoft blog, there was certainly lots of purple cable. So it's great to see but can you give us some sense in that Myer 100 rack or are we talking about.
As many as 48 mulch.
Multi hundred gig ECS for the backend network.
As well as a number of lower speed for the front end network and then for the re event.
Amazon looking at similar architectures or can you just give us some sense of what the AUC content might look like in some of those AI racks.
Yes.
On the <unk> platform I think you've got it absolutely right that the backend network is.
Prices.
800 gig 100 gig per lane <unk>. The front end network is also connected with credo Adcs and those are lower speed.
So youre right in terms of the number total in the rack and you can kind of visually see that when when they introduced that.
As part of the keynote.
I would say that for Amazon.
There are also.
Utilizing credo Auc's for front end connections as well as back end and so I think just the nature of of those two different types of networks, there's going to be some strong similarities between.
The architectures.
And Bill I think in the past you had talked about some of these AI applications and I think you are referring to the backend networks here might not ramp until kind of late.
<unk> 24, and then maybe not until fiscal 'twenty five.
It sounds like at least in the sorry in the Microsoft announcement that they may be starting to ship. These racks.
It really is kind of early next year and so I'm kind of wondering could you give us an update when do you think you see volume revenue from from AUC in the back end network could that be over the next couple of quarters or you still think it may be.
Further out than that.
Well I think it's.
Playing out the way that we've we've expected and we've spoken about this on earlier calls that in our fiscal 'twenty four.
The types of.
Volume.
Revenue that we built into the model is really based on.
Qualification small pilot types are built so it's meaningful but not necessarily.
You would expect to see from.
Our production ramp and so as we look out into fiscal 'twenty five.
We still are.
Being somewhat conservative about when exactly these are going to ramp and so it was nice to see all of these things talked about publicly.
In November however.
Deploying these that our volume scale, it's a complicated thing that they've got to work through and so when we talk about when exactly does the linear ramp start that's when we.
We're confident it's going to happen in fiscal 'twenty, five, but we can't necessarily pinpoint what quarter.
Understood.
Thank you our next question please standby.
Comes from the line of Cory <unk> of Stifel. Please go ahead sorry.
Yes. Thank you I just had a follow up.
So bill I think you've said in the past that the AAC business with AI Youre looking at sort of a five to 10 X.
Attunity versus general compute.
And I guess related to Quinn's question.
Sort of the timing of how that plays out.
Is again that $5 to 10, primarily on the back end side or are you also starting to see the contribution on the front end side of the AI clusters.
Yes, so I think generally as we as we talk about AI versus general compute.
Starting to think about it in terms of front end networks and backend networks.
And so when we see.
Lack of AI appliances.
Of course, theres going to be upfront and network that looks very similar to what we see for general compute and so to a certain extent the way it plays out from a ratio perspective.
Serving the front of the network is really.
Something that's common for both general compute and you might see a larger number of Jonathan.
The general compute servers in Iraq, so it might say.
Per rack front end opportunity for general compute might be a little bit larger than AI, but just generally when we think about the backend networks.
The network that is really networking every GPU within a cluster thats, where we see the.
The big increase in overall networking density.
Colin earlier talked about.
Idea of having 48 connections to the backend network of 48 Aac's within a client's rack that are dedicated the backend network versus say if it's if it's a rack with eight appliances there'll be eight AUC for the front end. So that's where we see an actual appliance rack, we can talk about five to six times.
Volume, but then when we think about the switch tracks that are part of that backend network. There is also an additional opportunity there and that's when we can think about the overall opportunity compared to front end being five to 10 times.
The volume.
That's very helpful and as my last question.
And I have to ask this question just given your strong <unk> IP, but.
As it relates to that shipment market, obviously, the CPU market is there.
First to embrace that but are you starting to see the GPU market.
Moving in the direction of Gpus, as well or is it just way too early for that.
I think that bet.
The standard that Intel has been promoting the use of E. Standard I think that that is going to be a big market for triplets.
And that for us ties and closely with the efforts that we're making on pcie.
And so.
One thing I would note is that is that.
The acceleration in speeds is happening really across the board and so we've been targeting the 64 gig.
Pam four.
Pcie Gen six <unk> three market, but.
We'll see an acceleration for the next generation of 128 gig and so that's very much.
Part of what's happening with.
This explosion in the AI market is this need for faster and faster speeds and so I think that youre going to see the same type of thing Thats happened in Ethernet, you're going to see that happen with pcie.
<unk>.
At ICP this year.
We had kind of a vision piece that we presented.
With the possibility of CSL.
Really.
And pcie.
Possibly being the protocol for for backend network connectivity as well as an expansion in front of the networks. So there's really exciting things coming in the future as we as we see that.
That standard accelerating.
Great. Thank you so much.
Thank you there are no further questions at this time, Mr. Brennan I turn the call back over to you.
Thank you very much for the questions. We really appreciate the participation and we look forward to following up on the call backs. Thank you.
This concludes today's conference call you may now disconnect.
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