Q3 2024 Credo Technology Group Holding Ltd Earnings Call

Operator: Good day, and thank you for standing by. Welcome to the Credo Fiscal 2024 Q3 Earnings Conference Call. At this time, all participants are in a listen-only mode.

Good day, and thank you for standing by.

Welcome to the accretive in fiscal 'twenty 'twenty four Q3 earnings conference call.

At this time all participants are in a listen only mode.

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After the Speakers' presentation, there will be a question and answer session.

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Operator: To ask your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan O'Neill. Please go ahead. Good afternoon.

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Okay.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over your Speaker today, Dan O'neill. Please go ahead.

Good afternoon. Thank you for joining us on our fiscal 2024 third quarter earnings call.

Dan O'Neill: Thank you for joining us for our Fiscal 2024 Third Quarter Earnings. Today, I'm joined by Bill Brennan, Credo's Chief Executive Officer, and Dan Fleming, our Chief Financial Officer. As a reminder, during the call, we will make certain to look forward. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in documents filed with the SEC, which can be found in the investor relations section of the website. 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 foregoing 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 imagined.

I'm joined by Bill Brennan, <unk>, Chief Executive Officer, and Dan Fleming, Our Chief Financial Officer.

As a reminder, during the call we will make certain forward looking statements.

These forward looking statements are subject to risks and uncertainties that are discussed in detail in documents filed with the SEC, which can be found in the investor Relations section of the company's website.

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 the forward looking events discussed during this call may not occur and actual results could differ materially and adversely from those anticipated or implied.

Dan O'Neill: 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. 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.

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.

Dan O'Neill: The 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. I will now turn the call over to our CEO, Bill. Thank you, Dan.

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.

I'll now turn the call over to our CEO Bill.

Bill Brennan: I'll begin by providing an overview of our fiscal Q3 results and our outlook for the future. Our CFO, Dan Fleming, will then provide a detailed review of our Q3 financial results and answer your expectations for fiscal Q4. For Q3, Credo reported revenue of $53.1 million and a non-GAAP gross margin of 62.2%.

Thank you Dan I'll begin by providing an overview of our fiscal Q3 results and our outlook for the future.

Our CFO Dan Fleming will then provide a detailed review of our Q3 financial results.

Your expectations for fiscal Q4.

For Q3 accretive reported revenue of $53 1 million and non-GAAP gross margin of 62, 2%.

Bill Brennan: These results and our future growth expectations continue to be driven by the accelerating opportunity for high-speed and energy efficient connectivity solutions throughout the data infrastructure market. Our connectivity solutions include Active Electrical Cables, or AECs, optical DSPs, laser drivers, and TIAs. Line Cardvise, Serdes Chiplets, and Serdes IP Licensing, each leveraging our Serdes technology. Core to Credo's success is our service technology, which is the fundamental connectivity building block of all of our solutions. Credo continues to invest deeply in SERTI's architectures that enable application-specific solutions optimized for speed, reach performance, energy efficiency, and cost. Our 100 gigabit per lane 30s portfolio spans process geometries from 12 nanometer to 3 nanometer with optimized reach performance from the longest reach links to the most power sensitive die-to-die links for chiplets.

These results and our future growth expectations continue to be driven by the accelerating opportunity for high speed and energy efficient connectivity solutions throughout the data infrastructure market.

Our connectivity solutions include activity electrical cables or <unk> optical dsp's laser drivers and <unk>.

Line card bias sort of these triplets and <unk> IP licensing each leveraging our surface technology.

CT accretive success is our <unk> technology, which is the fundamental connectivity building block of all of our solutions Credo continues to invest deeply in series architectures that enable application specific solutions optimized for speed reach performance energy efficiency and cost are 100 gig.

<unk> portfolio spans process geometries with 12 nanometer to three nanometer with optimized for each performance from the longest reach links to the most power sensitive die to die lengths for triplets.

Bill Brennan: Credo will continue its innovation for 200 gigabits per lane service as the opportunity to differentiate increases, specifically related to the optimization of tradeoffs between process geometry, DSP architecture, performance, and energy efficiency. Credo's technology expertise combined with our system-level, customer-focused design approach has led to our success with a diverse and growing set of industry-leading customers. In 2023, the technology industry will experience an inflection point driven by generative AI applications. The acceleration in the deployment of AI clusters has put high-speed connectivity on center stage, given the fundamental need for higher bandwidth.

We will continue our innovation for 200 gig per latest series as the opportunity to differentiate increases specifically related to the optimization of tradeoffs between process geometry, DSP architecture performance and energy efficiency.

Peter <unk> technology expertise combined with our system level customer focused design approach has led to our success with a diverse and growing set of industry leading customers.

2023, the technology industry experienced spend inflection point driven by generative AI applications.

The acceleration in the deployment of AI clusters as put high speed connectivity on center stage, given the fundamental need for higher bandwidth for.

Bill Brennan: For Credo, this need for higher bandwidth translates to the demand for higher speed, higher density, and more energy efficient connectivity solutions. This plays directly to Credo's strengths and underpins our growth expectations. I'll now provide more detail on our overall business. First, I'll discuss our AEC business, where Credo continued to build momentum during the third quarter. We believe our AEC leadership derives from our comprehensive, systems-level approach to the AEC market. We've built this from the ground up over many years, and as a result, we now have the ability to quickly innovate to support the diverse AEC needs of our customers. Given increasing single-lane speeds and the shortcomings of both passive copper cables and active optical cables and transceivers, we foresee the continuing adoption of AECs for in-rack connectivity.

Our credo this need for higher bandwidth translates to the demand for higher speed higher density and more energy efficient connectivity solutions.

Plays directly to <unk> strengths and underpins our growth expectations.

I'll now provide more detail of our overall business.

First I'll discuss our ADC business were accretive continued to build momentum during the third quarter.

We believe our AUC leadership derives from our comprehensive systems level approach to the AC market. We've built this from the ground up over many years and as a result, we now have the ability to quickly innovate to support the diverse AUC needs of our customers.

Given the increasing single lane speeds and the shortcomings of both passive copper cables and active optical cables and transceivers, we foresee continuing adoption of Auc's for Internet connectivity.

Bill Brennan: We expect U.S. hyperscalers to remain the majority portion of AEC demand in the foreseeable future. Many of these customers have distinct architectural requirements that demand innovation and tight collaboration between the engineering teams at Credo and the customers. We're engaged at different stages with the five US hyperscalers, as well as other global hyperscalers and Tier 2 data center operators. We've delivered a range of products with non-standard, optimized hardware and firmware features to meet our customers' needs for port speeds from 100 gigabits to 800 gigabits, depending on the customer application.

We expect U S. Hyperscale is to remain the majority portion of AUC demand in the foreseeable future. Many of these customers have distinct architectural requirements that demand innovation and tight collaboration between the engineering teams accredo and the customer.

We're engaged at different stages with the five U S hyperscale as well as other global Hyperscale and tier two data center operators.

We've delivered a range of products with non standard optimized hardware and firmware features to meet our customers' needs for port speeds from 100 gig to 800 gig depending on the customer application.

Bill Brennan: Credo continues to work closely with our first two hyperscale customers, delivering AEC solutions for both front-end and back-end Ethernet networks, as each publicly highlighted during their conferences last quarter. We're gaining better visibility with these customers into their near-term product ramps, and we're also engaged in a range of ABC solutions to address longer-term roadmaps. While advanced programs of this nature take time to achieve material deployment rates,

Credo continues to work closely with our first two hyperscale customers delivering ADC solutions for both front end and backend Ethernet networks as each publicly highlighted during their conference this last quarter.

We're gaining better visibility with these customers into their near term product ramps and we're also engaged in a range of ADC solutions to address longer term roadmaps, while advanced programs of this nature take time to achieve material deployment rates. We continue to expect an inflection point in the second half of our fiscal 'twenty five.

Bill Brennan: We continue to expect an inflection point in the second half of fiscal 25. Credo is also working with additional US and global hyperscalers to develop 400 gigabit and 800 gigabit AEC solutions that we expect will yield significant revenue for Credo in the future as next-generation network architectures transition to AEC solutions. Additionally, we see broader acceptance of AEC solutions among service providers and Tier 2 data centers. As a group, these customers represent a meaningful and growing revenue opportunity. Last quarter, we discussed the introduction of our P3, Pledible Patch Panel, solution, developed in collaboration with a lead service provider.

Credo is also working with additional U S and global Hyperscale to develop 400 gig and 800 gig ADC solutions that we expect will yield significant revenue for accretive in the future as next generation network architectures transitioned to ADC solutions.

Additionally, we see broader acceptance of ADC solutions amongst service providers and tier two data centers as a group these customers represent a meaningful and growing revenue opportunity last quarter. We discussed the introduction of our P. Three plausible patch panel solution.

Developed in collaboration with the lead service provider.

Bill Brennan: Over the past quarter, we've been encouraged by customer feedback that the combination of the P3 and the AECs can help overcome multiple networking challenges related to power and thermal distribution, lane speed disparities, and the tradeoffs of operational efficiency, latency, and power. We expect to generate meaningful future revenue as the P3 enables AECs to be easily utilized in a more broad set of opportunities, thereby expanding our addressable market. In summary, we were very pleased with our AEC progress in Q3, and due to our expanding customer base and focus on innovation, we expect further progress in Q4, Fiscal 25 and beyond. Now, regarding our optical solution.

Over the past quarter, we've been encouraged by customer feedback that the combination of the <unk> and the Adcs can help overcome multiple networking challenges related to power and thermal distribution lane speed disparities and the trade offs of operational efficiency latency empower.

We expect to generate meaningful future revenue as the P. Three enables adcs to be easily utilized in a more broad set of opportunities, thereby expanding our addressable market.

In summary, we were very pleased with our AUC progress in Q3.

And due to our expanding customer base and focus on innovation.

We expect further progress in Q4 fiscal 'twenty five and beyond.

Now regarding our optical solutions credo continues to gain traction in the optical DSP market.

Bill Brennan: Credo continues to gain traction in the optical DSP market. During the third quarter, we continued production shipments of optical DSPs to multiple global hyperscale end customers for a variety of applications across numerous port speeds. We closely target the combination of optical module partners and hyperscale end customers, and we're making progress on optical DSPs for 400 gigabit and 800 gigabit optical transceiver and AOC opportunities. Enabled by our SERTES design approach, Credo wins by delivering a compelling combination of performance, energy efficiency, and value, as well as focusing on innovative ways to solve complex customer needs. Last quarter, we talked extensively about the industry call for action for better power efficiency for 800 gigabit and 1.6 T optical solutions. As we discussed, we believe eliminating the DSP with the linear pluggable optics or LPO architecture is simply too much of a leap, especially for 1.6T.

During the third quarter, we continued production shipments of optical DSP to.

To multiple global Hyperscale customers for a variety of applications across numerous port speeds.

We closely target the combination of optical module partners, and Hyperscale and customers and we're making progress on optical DSP for 400 gig and 800 gig optical transceiver and Aoc opportunities.

Enabled by our <unk> design approach credo wins by delivering a compelling combination of performance energy efficiency and value as well as focusing on innovative ways to solve complex customer needs.

Last quarter, we talked extensively about the industry call for action for better power efficiency for 800 gig and 160 optical solutions.

As we discussed we believe eliminating the DSP with the linear pleasurable optics or <unk> architecture is simply too far elite, especially for 116.

Bill Brennan: Credo quickly responded with our innovative Linear Receive Optics, or LRO DSP architecture, that directly addresses the power challenge while delivering better signal integrity, maintaining industry standards, IEEE compliance, and interoperability, and extending to 1.6T solutions. Since our discussion last quarter, we've made meaningful progress. Our first 800-gig LRO DSP partner has built and tested 800-gig optical modules, and the results are exactly as expected, successfully delivering on the promise of much reduced power and great signal integrity while overcoming the shortfalls of the aspirational LTO architecture.

Credo quickly responded with our innovative linear receive optics or <unk> DSP architecture that directly addresses the power challenged while delivering better signal integrity, maintaining industry standards, I Tripoli compliance and interoperability.

And extending to 160 solutions.

Since our discussion last quarter, we've made meaningful progress our first 800 gig <unk> DSP partner has built and tested 800 gig optical modules and the results are exactly as expected.

<unk> fully delivering on the promise of much reduced power and great signal integrity, while overcoming the shortfalls of the aspirational <unk> architecture.

Bill Brennan: Next month at OFC in San Diego, we'll be demonstrating both 800 gigabit LRO DSP and full DSP solutions, highlighting our progress. We'll be demonstrating 800-gigabit solutions with five different optical module partners. Our 1.6T road map includes both LRO DSP and full DSP solutions, with 200 gigabits per lane, with our top priorities being energy efficiency and signal integrity, which are both critical to achieve robust 1.6T optical solutions. We believe the growth in our optical business will be primarily driven by U.S. hyperscaler end customers, with further contributions from Global Hyperscale. I'll now discuss our Line Card 5-Bis, which delivered another solid quarter in Q3. In this segment, our customers include networking OEMs and hyperscalers, and our products include re-timers, gearboxes, and MaxExIs for data encryption.

Next month at OFC in San Diego, we will be demonstrating both 800 gig <unk> DSP and full DSP solutions highlighting our progress.

We will be demonstrating 800 gig solutions with five different optical module partners.

Our 160 roadmap includes both MRO DSP and full DSP solutions.

With 200 gig per lane speeds with our top priorities being energy efficiency signal integrity, which are both critical to achieve robust 160 optical solutions. We believe the growth in our optical business will be primarily driven by U S hyperscale or end customers with.

With further contributions from global Hyperscale.

I will now discuss our line card five business, which delivered another solid quarter in Q3.

In this segment our customers include networking Oems at Hyperscale.

And our products include re timers, gearboxes and <unk> for data encryption or.

Bill Brennan: Our customers are the leaders in this space. We have close working relationships, and our design wins typically have long life cycles once they ramp to production, contributing nicely to our overall result in the upcoming months. We'll tape out our customer-sponsored 5nm 1.6T MaxTec PHY and our power-optimized 1.6T retimers and gearboxes. Credo is one of the industry leaders for 50 gigabit and 100 gigabit per lane LimeCard 5 applications.

Our customers are the leaders in this space, we have close working relationships and our design wins typically have long life cycles once they ramp to production contributing nicely to our overall results.

In the upcoming months, we will tape out our customer sponsored five nanometer 160, <unk> five and our power optimized 116 re timers and gearboxes.

<unk> is among the industry leaders for 50 gig 100 gig per lane line card applications. We have many customers that have deployed our 50 gig per lane solutions in production and we count more than 10 customers designing in our 100 gig per lane screaming Eagle line card fives, and now turning to our IP and triplet business are certainties.

Bill Brennan: We have many customers that have deployed our 50 gigabit per lane solutions in production, and we count more than 10 customers designing in our 100 gigabit per lane, Screaming Eagle LimeCard 5. Now, turning to our IP and chiplet business. Our CERTI IP and CERTI's triplet businesses continue to be a strategic component of our overall business. These solutions enable our partners to address the ASIC market for next-generation solutions. Due to revenue recognition rules, our CERTI's IP revenue can vary meaningfully from quarter to quarter, which is what we saw in Q3, and we'll likely see in upcoming quarters. However, our funnel for CERTI licensing opportunities remains strong, bolstered by the increased opportunity on ASICs with high-speed CERTIs for data center applications. We have a comprehensive portfolio of SERDES IP for our ASIC customers, including 100 gigabits per lane SERDES across the broadest range of process geometries from 12 nanometer to 3 nanometer and the broadest range of reach performance from long reach to die-to-die reach.

And the <unk> triplet businesses continue to be a strategic component of our overall business. These solutions enable our partners to address the <unk> market for next generation solutions.

Due to revenue recognition rules, our <unk> IP revenue can vary meaningfully from quarter to quarter, which is what we saw in Q3, and we will likely see in upcoming quarters. Our funnel for 30 licensing opportunities remained strong bolstered by the increased opportunity on Asics with high speed <unk> for datacenter applications.

We have a comprehensive.

Prehensile portfolio of surgeries IP for our Asa customers, including 100 gig per lane <unk> across the broadest range of process geometries from 12 nanometer to three nanometer and the broadest range of reach performance from long reach to die to die reach our series IP offering enables our <unk> partners to optimize there.

Bill Brennan: Our SERDES IP offering enables our ASIC partners to optimize their solutions for process geometry, reach, and power. Last quarter, our chiplet business was highlighted by a win with significant NRE at one of our leading customers for a next generation five nanometer chiplet solution, which speaks loudly about our differentiated service portfolio. When complete, Credo will be able to market and sell this chiplet to the broad market. Overall, we remain optimistic about the prospects of the chiplet category, given our results to date, and due to our belief that chiplets will be a key enabler in the most advanced system solutions. In summary, we're pleased with our results for Fiscal Q3, and we're optimistic about the increasing market demand for high-speed connectivity. Credo's competitive advantage is driven by our focus and execution on our core SERTES technology, which leads Credo to being one of the few companies capable of delivering the necessary breadth of connectivity solutions at the highest speeds while optimizing for energy efficiency and system cost.

Solutions for process geometry.

Each empower.

Last quarter, our chip business was highlighted by a win with significant NRI at one of our leading customers for next generation five nanometer chip solution, which speaks loudly regarding our differentiated <unk> portfolio.

When complete accretive we'll be able to market and sell this triplet to the broad market.

Overall, we remain optimistic about the prospects of the triplet category given our results to date and due to our belief that triplets will be a key enabler in the most advanced system solutions.

In summary, we're pleased with our results for fiscal Q3, and we're optimistic about the increasing market demand for high speed connectivity.

Kudos competitive advantages driven by our focus and execution on our core <unk> technology and that leaves credo to being one of the few companies capable of delivering the necessary breath of connectivity solutions at the highest speeds, while optimizing for energy efficiency and system cost.

For these reasons, we expect continued long term growth across a diversified customer base and a diversified set of connectivity applications.

I'll now turn the call over to our CFO Dan Fleming.

Dan will provide additional financial details and then we'll be happy to take questions. Thank you.

Dan Fleming: For these reasons, we expect continued long-term growth across a diversified customer base and a diversified set of connectivity applications. I'll now turn the call over to our CFO, Dan Fleming. Dan will provide additional financial details, and then we'll be happy to take questions. Thank you.

Thank you Bill and good afternoon, I'll first review, our Q3 results and then discuss our outlook for Q4 of fiscal 'twenty four and.

In Q3, we reported revenue of $53 1 million up 20% sequentially and down 2% year over year, our IP business generated $1 $3 million of revenue in Q3.

83% sequentially and down 90% year over year.

Dan Fleming: I'll first review our Q3 results and then discuss our outlook for Q4 of Fiscal 24. In Q3, we reported revenue of $53.1 million, up 20% sequentially and down 2% year over year. Our IP business generated $1.3 million of revenue in Q3, down 83% sequentially and down 90% 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 Q3 was 2% IP below our long term expectation for IP, which is 10% to 15% of revenue.

Dan Fleming: 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 or new customers. While the mix of IP and product revenue will vary in any given quarter over time, our revenue mix in Q3 was 2% IP, below 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 24 and near the high end of the range. Our product business generated $51.8 million in revenue in Q3, up 41% sequentially and up 24% year over year.

We expect IP as a percentage of revenue to be within our long term expectations for fiscal 'twenty, four and near the high end of the range.

Our product business generated $51 $8 million in revenue in Q3 up 41% sequentially and up 24% year over year.

Our top three end customers, where each greater than 10% of our revenue in Q3.

Our team delivered Q3, non-GAAP gross margin of 62, 2% above the high end of our guidance range and up 235 basis points sequentially.

Our IP non-GAAP gross margin generally hovered near 100% and was 92, 7% in Q3.

Dan Fleming: Our top three end customers were each greater than 10% of our revenue in Q3. Our team delivered a Q3 non-GAAP gross margin of 62.2%, above the high end of our guidance range and up 235 basis points sequentially. Our IP non-GAAP gross margin generally hovers near 100% and was 92.7% in Q3. Our product non-GAAP gross margin was 61.5% in the quarter, up 877 basis points sequentially due to a large increase in product NRE revenue and up 1,420 basis points year over year. Total non-GAAP operating expenses in the third quarter were $30.6 million, above the high end of our guidance range, up 13% sequentially, and up 19% year over year.

Our product non-GAAP gross margin was 61, 5% in the quarter up 877 basis points sequentially.

Due to a large increase in product in our <unk> revenue and up one 420 basis points year over year.

Total non-GAAP operating expenses in the third quarter were $36 million above the high end of our guidance range up 13% sequentially and up 19% year over year.

Our Opex increase was a result of a 24% year over year increase in R&D as we continue to invest in the resources to deliver innovative solutions.

Our SG&A was up 12% year over year.

Our non-GAAP operating income was $2 4 million in Q3 compared to a non-GAAP operating loss of zero point $7 million last quarter due to increased top line leverage.

Dan Fleming: Our OPEX increase was a result of a 24% year-over-year increase in R&D as we continue to invest in the resources to deliver innovative solutions. Our SG&A was up 12% year over year. Our non-GAAP operating income was $2.4 million in Q3 compared to a non-GAAP operating loss of $0.7 million last quarter due to increased top-line leverage.

Our non-GAAP operating margin was four 6% in the quarter compared to a non-GAAP operating margin of negative one 7% last quarter, a sequential increase of 622 basis points.

We reported non-GAAP net income of $6 3 million in Q3 compared to non-GAAP net income of $1 $2 million last quarter.

Cash flow used in operations in the third quarter was $1 million.

Dan Fleming: Our non-GAAP operating margin was 4.6% in the quarter, compared to a non-GAAP operating margin of negative 1.7% last quarter, a sequential increase of 622 basis points. We reported non-GAAP net income of $6.3 million in Q3 compared to non-GAAP net income of $1.2 million last quarter. Cash flow used in operations in the third quarter was $1 million.

Capex was $5 1 million in the quarter, driven by R&D equipment and production mask spending.

And free cash flow was negative $6 1 million, an increase of $3 $1 million year over year.

We ended the quarter with cash and equivalents of $409 1 million, an increase of $168 $6 million from the second quarter.

Dan Fleming: CapEx was $5.1 million in the quarter, driven by R&D equipment and production mask spending, and free cash flow was negative $6.1 million, an increase of $3.1 million year over year. We ended the quarter with cash and equivalents of $409.1 million, an increase of $168.6 million from the second quarter. This increase in cash came from the net proceeds of our successful follow-on offering of shares completed in December of 2023. We remain well capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer. Our accounts receivable balance increased 36.8% sequentially to $44.8 million, while days sales outstanding increased to 77 days, up from 68 days in Q2. Our Q3 ending inventory was $31.5 million, down $4.3 million sequentially.

This increase in cash came from the net proceeds of our successful follow on offering of shares completed in December of 2023.

We remain well capitalized to continue investing in our growth opportunities, while maintaining a substantial cash buffer.

Our accounts receivable balance increased 36, 8% sequentially to $44 $8 million, while days sales outstanding increased to 77 days up from 68 days in Q2.

Our Q3, ending inventory was $31 5 million.

Down $4 $3 million sequentially.

Now turning to our guidance.

We currently expect revenue in Q4 of fiscal 'twenty four it could be between $59 million and $62 million up 14% sequentially at the midpoint.

We expect Q4 non-GAAP gross margin to be.

Within a range of 64% to 66%.

We expect Q4, non-GAAP operating expenses to be between $33 million and $35 million.

And we expect Q4 diluted weighted average share count to be approximately 180 million shares.

We are pleased to see fiscal year 'twenty for planning out as expected the rapid shift to AI workloads has driven new and broad based customer engagement, which has continued to enable us to diversify our revenue through fiscal year 'twenty four and beyond.

Dan Fleming: Now turning to our guidance. We currently expect revenue in Q4 of Fiscal 24 to be between $59 million and $62 million, up 14% sequentially at the midpoint. We expect Q4 non-GAAP gross margin to be within a range of 64 to 66 percent. We expect Q4 non-GAAP operating expenses to be between $33 million and $35 million, and we expect Q4 diluted weighted average share count to be approximately 180 million shares.

As a result, we look forward to driving operating leverage in the coming quarters.

And with that I will open it up for questions.

As a reminder to ask a question. Please press star one on your telephone and.

And wait for your name to be announced.

To withdraw your question. Please press star one one again.

In the interest of time, we ask that you. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.

Operator: We are pleased to see Fiscal Year 24 playing out as expected. The rapid shift to AI workloads has driven new and broad-based customer engagement, which has continued to enable us to diversify our revenue through Fiscal Year 24 and beyond. As a result, we look forward to driving operating leverage in the coming quarters. And with that, I will open it up to questions. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be called. To withdraw your question, please press star 1 1 again.

Our first question comes from Toshi Hari with Goldman Sachs. Your line is now open.

Hi, good afternoon. Thank you so much for taking the question.

Bill I wanted to ask you.

How youre thinking about your business over the next year or so I thought the way you framed the AUC opportunity and the optical DSP opportunity both in the near term and the medium term was pretty consistent with how you sort of framed it three months ago.

Toshi Akari: In the interest of time, we ask that you please limit yourself to one question and one follow-up. Stand by while we compile the Q&A. Our first question comes from Toshi Akari with Goldman Sachs. Your line is now open. Hi, good afternoon.

But I'm curious just given the significant increase in spending infrastructure broadly have you seen any of your customer projects either get pulled in or the sizing increase over the past 90 days or the way youre thinking about.

The additional customer and AAC the engagements on the DSP side or are they pretty consistent with 90 days ago.

Bill Brennan: Thank you so much for taking the question. Bill, I wanted to ask you how you're thinking about your business over the next year or so. I thought the way you framed the AEC opportunity and the optical DSP opportunity, both in the near term and the medium term, was pretty consistent with how you sort of framed it three months ago. But I'm curious, just given the significant increase in AI spending infrastructure broadly, have you seen any of your customer projects, you know, either get pulled in, or the sizing increase over the past 90 days or the way you're thinking about, you know, and then I have a follow-up. Sure.

And then I have a follow up.

Sure I would say generally speaking, it's pretty consistent with what we've communicated in the past.

We're really in the early innings of many of the opportunities and we're going to see some.

Some variability as each one of these things ramp.

And I can say that we feel great about the fact that we got more irons in the fire than ever before.

But I think from a revenue profile standpoint, we've been pretty consistent in saying that we see an inflection point in the second half of fiscal 'twenty five.

So really really no change.

Got it okay. Thank you and then a follow up on gross margins for Dan.

In the quarter I guess, even if you exclude the increase in NRT revenue your product gross margins I thought were pretty good on a sequential basis are they improved quite nicely.

Toshi Akari: I would say, generally speaking, it's pretty consistent with what we've communicated in the past. We're really in the early innings of many of the opportunities, and we're going to see some, you know, some variability as each one of these things ramps up. And you know, I can say that we feel great about the fact that we've got more irons in the fire than ever before. But I think, you know, from a revenue profile standpoint, we've been pretty consistent in saying that we see an inflection point in the second half of fiscal 25. So really, really no change. Got it.

What were the drivers there.

And if you can provide a bridge from $62 two last quarter to 65 at the midpoint for this quarter that would be helpful. And is there anything kind of onetime in nature embedded in the <unk> 65 for this quarter. Thank you.

Yes.

A great pick up on your part because as we look at things, we thought kind of the hidden story is really that due to increasing scale and product mix.

Dan Fleming: Okay. Thank you. And then a follow-up on gross margins for Dan. In the quarter, I guess even if you exclude the increase in NRE revenue, your product gross margins were pretty good on a sequential basis. They improved quite nicely. What were the drivers there?

If you exclude <unk> from a product gross margin. It was up 328 basis points sequentially as you say from 50% to 53%.

And that's in line with our messaging.

That we've given historically, we think we're well on track for.

Dan Fleming: And if you can provide a bridge from 62.2 last quarter to, I guess, 65 at the midpoint for this quarter, that would be helpful. And is there anything kind of one-time in nature embedded in the 65 for this quarter? Thank you.

Attaining our long term gross margin expectation, which is again, 63% to 65% within the next two years and this is kind of a key part of that story is it increasing product margins now.

Dan Fleming: Yeah, that's a great pick-up on your part because as we look at things, we thought kind of a hidden story is really that due to increasing scale and product mix, If you exclude NRE from our product gross margin, it was up 328 basis points sequentially, as you say, from 50% to 53%. And that's in line with the messaging that we've given historically. We think we're well on track for attaining our long-term gross margin expectation, which is again, 63% to 65% within the next two years. And this is kind of a key part of that story: increasing product margins. Now when it comes to Q4, the other thing I mentioned... or alluded to, IP in Q3 was only 2% of our overall revenue mix, yet we said in our prepared remarks that we expect for the full year that IP as a percentage of the overall revenue mix will be at the high end of our long-term range of 10 to 15%. So, if you look year-to-date, you know, IP has only been 9% of our overall revenue mix.

Now when it comes to Q4 and the other thing I mentioned.

Or alluded to.

In Q3 was only 2% of our mix.

Yet we said in our prepared remarks that we expect for the full year that IP as a percentage of the overall revenue mix will be at the high end of our long term range of 10% to 15%.

So if you look year to date.

Theres only been 9% of our overall revenue mix. So you could expect Q4 to be.

Very strong in terms of IP deliverables, which again, we recognize revenue upon those deliverables of IP databases under ASC 606. So.

Got it.

It has been quite variable quarter to quarter throughout FY 'twenty four it's been high.

Billy variable that's been very illustrative of that pattern.

So in a sense you might say the IP portion contributing to the gross margin being 65% at the midpoint.

That Ken.

That's a variable part of it but.

Dan Fleming: So, you could expect Q4 to be very strong in terms of IP deliverables, which, again, we recognize revenue upon those deliverables of IP databases under ASC 606. So, you know, IP has been quite volatile quarter-to-quarter. Throughout FY24, it's been, you know, highly volatile. It's been very illustrative of that pattern.

Having said that the underlying thing to focus on is really product gross margin exclusive of NRG and the trend there has been very favorable to us due to product mix and increasing scale.

Thank you.

For our next question.

Hello.

Our next question comes from Karl Ackerman with BNP Paribas. Your line is now open.

Yes, Thank you gentlemen.

Dan Fleming: So, in a sense, you might say the IP portion contributing to the gross margin being 65% at the midpoint, you know, that's a variable part of it. Having said that, the underlying thing to focus on is really product gross margin, exclusive of NRE. And the trend there has been very favorable to us due to the product mix and increasing scale. Thank you. One moment for our next question. Our next question comes from Karl Ackerman with VMP Paribas. Your line is now open.

You tend to not be dictated by the seasonal variations of market each quarter.

But since you having to sell primarily into front end traditional server market applications I'm curious to hear whether you are seeing a cyclical recovery.

And traditional servers as new data centers are being built to really ameliorate the power limitations.

Installing gpus and therefore, you are seeing that happening to ramp now.

Karl Ackerman: Thank you, gentlemen. You tend not to be dictated by the seasonal variations of the market each quarter. But since you happen to sell primarily into front-end traditional server market applications, what's the best way to market? I'm curious to hear whether you are seeing a cyclical recovery in traditional services, as new data centers are being built to really ameliorate the power limitation of installing GPUs, and therefore you are seeing that happen in RAMP now. So I think that the way that we view our AEC business is really broken out into two parts, front-end networks and back-end networks. And so the front-end connections that we're making for general compute as well as AI, they look very similar in a sense. I can tell you that the most history that we've got on the front-end network connections is really with our first AEC customer, Microsoft.

Okay.

Okay.

So I think that the.

We view, our our ADC business is really broken out into two parts front end networks and backend networks and so the front end can that connections that were making.

For general compute as well as AI, they look very similar in a sense.

I can tell you that the most history that we've got.

On the front end network connections is really with our first agency customer.

Microsoft.

If we think back on history.

A number of front end collections associated with AI clusters is fewer than.

If you're in an overall volumes.

Because you've got one one front end network connections for maybe six to eight Gpus.

Whereas there's one connection for every general compute server in comparison and so we saw a big reduction in the forecast, which would clearly imply that.

Karl Ackerman: You know, if we think back on history, the number of front-end connections associated with AI clusters is fewer than, you know, it's fewer in an overall volume sense because you've got one, you know, one front-end network connection for maybe six to eight GPUs, whereas, you know, there's one connection for every general compute server in comparison. And so we saw a big reduction in the forecast, which would, you know, clearly imply that, you know, they made a huge pivot towards AI.

It made a huge pivot towards towards the AI.

I can say that we've always expected.

A rebalancing and.

I think based on forecast I think we see that coming.

Within the next 12 months, probably backend weighted on the 12 month forecast so I do think.

That were.

That we're seeing some of that movement, but again, we don't really get.

Bill Brennan: I can say that we've always expected, you know, a rebalancing. And you know, based on forecasts, I think we see that coming within the next 12 months, probably at the back end weighted on the 12-month forecast. So I do think, you know, that we're... you know, that we're seeing some of that movement. But again, we don't really get super specific visibility on that. I see. Thanks for that for my follow-up.

Super specific.

Visibility on that.

I see thanks for that.

For my follow up.

I was hoping you could address how large is your triplet business today and is that broadening into multiple customers or is it still dominated by a single customer at this point. Thank you.

We've got two customers in production now.

One is one is Tesla and one is Intel and <unk> and both have been publicly discussed.

The.

The expectation that we've had we've been working on <unk> for several years.

Karl Ackerman: I was hoping you could address, you know, how large is your chiplet business today? And is that broadening to multiple customers? Or is it still dominated by a single customer? We've got two customers in production now. One is Tesla, and one is Intel, and both have been publicly discussed.

We've been bullish on the space probably before the.

The industry at large was talking about it.

I think that.

The discussion that we've had about this recently is that it has become.

A nice portion of our business, but.

But if I think about long term and I think about.

Bill Brennan: The expectation that we've had, we've been working on chiplets for several years, and you know, we've been bullish on the space probably before, you know, the industry at large was talking about it. I think that, you know, the discussion that we've had about this recently is that it has become a nice portion of our business, but if I think about the long term, and I think about, you know, how the different businesses will break down. This is not going to probably rival the AEC business that we've got or the optical DSP business long term. So it'll be a smaller component of our business, but still very meaningful. And to answer the second part of your question, we've got a handful of customers that are engaging with us for chiplet designs. Understand that chiplets we design will be generally available to the market, even though typically we have an initial sponsor that moves us in a direction on a given spec. Thank you. One moment for our next question. Our next question comes from... Svanberg, was it Stiefel?

How the different businesses will break down this is not going to probably rival the AUC business that we've got or the optical DSP business long term. So it will be a smaller component of our business, but still very meaningful.

And to answer your.

The second part of your question.

Got a handful of customers that are.

That are engaging with us for triplet designs understand that Chipmos, we design will be generally available to the market, even though typically we have an initial sponsor that moves us in a direction on the given spec.

Thank you.

One moment for our next question.

Okay.

Our next question comes from.

Steenburgh with Stifel. Your line is now open.

Yes, Thank you bill.

Bill I was hoping you could update us on the AUC market.

Perhaps more in sort of form factor right. So I mean, it's very clear that the ASC market is heating up.

We're starting to see more competitors in the market, but everybody seems to take a different approach on the on the <unk> system versus chips. So I was hoping you could update us on where you see the market evolving over the next 18 to 24 months.

Tore Egil Svanberg: Your line is now open. Yes, thank you. Bill, I was hoping you could update us on the AEC market, perhaps just, you know, more in terms of form factor, right? So, I mean, it's very clear that the AEC market is heating up. We're starting to see more competitors in the market, but everybody seems to take a different approach to the form factor, you know, system versus chip. So I was hoping you could update us on where you see the market evolving over the next 18 to 24 months. And it's, again, filling the power system is still the way.

Again, filling and filling our system is still the way to go.

Yes, I think that the key for US is that we see the work required to bring AUC to production.

With great performance high quality high reliable high reliability.

It's really the same whether one company is taking responsibility like we are.

Or if many companies are trying to work together and sharing responsibility.

Feeling has always been that the most effective approach to bringing these products to market quickly is to take full ownership of all aspects of the.

Bill Brennan: I think that the key for us is that we see the work required to bring an AEC to production, with great performance, high quality, and high reliability. It's really the same whether one company is taking responsibility like we are, or if many companies are trying to work together and sharing responsibility. Our feeling has always been that the most effective approach to bringing these products to market quickly is to take full ownership of all aspects of the hardware and the firmware design, the entire process to qualify and bring a product to production, and then ultimately be the responsible party for directly servicing and supporting during production. And so there's no lack of clarity for us and our customers as to who owns the responsibility during any stage.

The hardware and the firmware design.

Tire process to qualify and bring a product to production and then ultimately BV.

The responsible party for directly servicing and supporting during production.

So there is no lack of clarity for us and our customers as to who owns the responsibility during any stage.

And as a result, we've been first of samples.

Several times and first qualification.

Now with several different customers.

So there is there is different approaches, but I think there is.

There is always going to be some signal loss as it relates to multiple parties trying to respond to.

Into urgent needs within the customer base, and so where we are.

Quite good about.

Bill Brennan: And as a result, we've been first to samples several times and first to qualification now with several different customers. And so there's, you know, different approaches, but, you know, I think there's always going to be some signal loss as it relates to, you know, multiple parties trying to respond to urgent needs within the customer base. And so we're feeling quite good about the efforts that we've made over the last several years in not only developing customer relationships but also just developing a core capability. I estimate that we have more than 100 people that are dedicated to our AEC business at a system level. And so we can also talk about. If we want to make a direct apples-to-apples comparison, I think it's important to point out that our core SERTIs, which is a key point that I want to emphasize, if we're head-to-head, apples-to-apples, we're always going to have the most energy-efficient solutions, just given the advantages that we bring with our SERTIs technology. Yeah, that's really helpful.

The efforts that we've made over the last several years and.

Not only developing customer relationships, but also just developing a core capability.

I estimate that we have more than 100 people that are dedicated to our AUC business at a at a system level.

So we can also talk about.

Yes.

If we want to make it a direct apples to apples comparison, I think it's important to point out that.

Our core <unk>, which is a key point that I want to emphasize if were head to head apples to apples, we're always going to have the most energy efficient solutions just given the advantages that we bring with our our <unk> technology.

Yes, that's really helpful. And then as my follow up in on Pam four DSP and nothing sort of stealing my Thunder from OFC, but you've had the LPL DSP out now for a few months and I was just wondering what the early reaction has been.

From from customers.

Assuming you've been able to discuss this in more detail with the customer base.

I think the reaction has been.

Tore Egil Svanberg: And as my follow-up to PEMFOR DSP, and not to sort of steal away the thunder from OFC, but you've had the LTO DSP out now for a few months, and I'm just wondering what the early reaction has been from customers, you know, assuming you've been able to, you know, discuss this in more detail with. I think the reaction has been as expected. We've seen certain customers really become very Especially for the 800 gigabyte market, there's quite a broad spectrum. Tore Svanberg, Karl Ackerman, Richard Shannon, Credo Technology. The call to action during OFC last year was really talking about 1.6T modules and just the fact that the curve was almost unsustainable from a power standpoint, so looking at options.

Has been as expected we've seen certain customers.

Really become very interested in this approach.

Especially for the 800 gig market there is.

There is quite a broad spectrum.

The way that customers are thinking about the market and we can go back to OFC a year ago. When this whole concept of linear applicable optics or.

Optical module without a DSP was really introduced in.

Although.

The.

The call to action during all of last year was really talking about 160 modules and.

Just the fact that the.

The curve was almost unsustainable from a power standpoint, so looking at options.

Tore Egil Svanberg: So, you know, of course, there are certain people in the market that are investing resources in trying to play out the LPO architecture in the 800-gig space. But, of course, in a sense, the 800-gig horse is already out of the barn. Full DSP is, you know, what you're seeing in every 800-gig module that's being built right now. But I think there's still a desire to lower power and potentially lower costs.

So yes.

Of course, there are certain people in the market that our investing resources and trying to play out the <unk> architecture in the 800 gig space but of course.

In a sense the 800 gig horse is already out of the barn full DSP is.

What youre seeing in every 800 gig module is being built right now.

I think there is still a desire to lower power and potentially lower cost.

And the key there is that our solution, which is really deploying DSP.

Bill Brennan: You know, and the key there is that our solution, which is really deploying DSP on, you know, half of the connection within the module versus what we refer to as a full DSP. We're giving a path to maintain industry standards, signal integrity, and basically overcoming all the obstacles that people face by eliminating the DSP, and so we're offering a path to much reduced power and potentially cost. And so it's played out quite well.

On.

On behalf of the connection within the module.

<unk>, what we refer to as a full DSP.

We're giving we're giving a path to maintain industry standards signal integrity, and basically overcoming all the obstacles that people face by eliminating the DSP and so offering a path to a much reduced power and potentially cost.

And so it's played out quite well what will actually be demonstrating with two optical module partners at OFC.

Bill Brennan: We'll actually be demonstrating the two optical module partners at OFC, and we'll have the first sample units from our partners being shipped to the first interested hyperscaler in the next fiscal quarter. So we're pretty, you're pretty satisfied with the efforts that have been made over the last quarter in collaboration with our module partners. But I will say that as we look towards the future, we're offering great solutions that are LRO, which is half DSP and full DSP. And as we look at 200 gigabits per lane or 1.6 T optical DSPs, we're going to deliver both full DSP solutions and half DSP or LRO solutions at the same time. The design that we're pursuing in 3 nanometer, we've designed in that flexibility.

And we will have first.

Simple units from our partners being shipped into the first.

Interested hyperscale or in.

In the next fiscal quarter, So we're pretty.

You are pretty satisfied with with the efforts that.

They have been made over the last quarter.

In collaborate in collaboration with our module partners, but I will say that.

As we look towards the future.

We're offering a great solutions that our MRO, which is half DSP and full DSP.

And as we look at 200 gig per leaner, one <unk> optical DSP. So we're going to deliver both full DSP solutions and have DSP or MRO.

Solutions at the same time.

The design that we're pursuing and three nanometer.

Designed in that flexibility and so it's really we're really putting the decision to enhance the customer now note that we've chosen three nanometer as our as our process geometry based really on on power efficiency and so we believe we're going to deliver a full DSP optical DSP that is.

Bill Brennan: And so it's really, you know, we're really putting the decision in the hands of the customer. Now, note that we've chosen 3 nanometers as our process geometry based really on power efficiency. And so we believe we're going to deliver a full optical DSP that is capable of being integrated within the current connector specifications and within the power ceilings that are already out there with the IEEE standard connectors. Thank you. One moment for our next question. Our next question comes from Matt Ramsey with TD Cowen. Your line is now open. Thank you very much, guys. Good afternoon.

Capable of being integrated within the.

The.

The current connector specs and within the power ceilings.

That are already out there with the <unk> standard connectors.

Thank you one moment for our next question.

Our next question comes from Matt Ramsay with TD Cowen. Your line is now open.

Thank you very much guys good afternoon.

Matthew D. Ramsay: I guess, Bill, I wanted to follow up on the conversation you were just having in your last answer, and I guess with OFC coming up... My observation has been there's been, developed in the networking and optics space, two or three sort of polarizing religious technical debates over the last 12 months with InfiniBand and Ethernet, Linear Drive versus DSP, whether to do whole system solutions or just chip. And I guess what I wanted to ask you is, when you're engaging with your customer base and talking about solutions going forward, are you noticing that hyperscale companies are making bets in all areas here, and there's sort of... room and area under the curve for companies like yourselves and your competitors that may take different approaches to all succeed because the pie is big enough for people or the customer base? Thank you. Sure, I think it's, you know, from our perspective, it's a little bit more clear. I think the churn that you see, you know, the polarizing opinions in the market. Those are really observers or participants, you know, some momentum.

I guess bill I wanted to follow up on kind of the tenor of the conversation you were just having your last answer and I guess with OFC coming up I think my observation has been.

Developed in the networking and optic space.

Two or three sort of polarizing religious technical debates over the last 12 months.

Infiniband and Ethernet with.

Linear drivers and DSP.

Or whether to do whole system solutions are just chips.

And I guess, what I wanted to ask you is when you're engaging with your customer base and talking about solutions going forward.

You noticing that.

Hyperscale companies are making bets in all areas here and there is sort of <unk>.

And area under the curve for companies like yourselves and your competitors that may take different approaches to all succeed because the pie is big enough, our people or the customer base, making sort of binary.

Seasons, along some of those axes that might open or close opportunities for your company at different customers I'm, just trying to get it seems like things have gotten very.

Polarized around several different access over the last 12 months and I'd just be kind of interested in your thoughts. Thanks.

Sure I think from our perspective, it's a little bit more clear I think the churn that you see.

Bill Brennan: The way that we view it is really, you know, the decision-making happens in the conversations that are ongoing directly with hyperscalers. We view each one of them as kind of a separate market, and each one has a different architectural strategy.

Rising.

Opinions in the market.

Those are really observers.

That are or participants trying to create.

Okay.

Some some momentum there.

We view it as really the decision making happens in the conversations that we have.

Bill Brennan: Each one has kind of a different timeline that they're working on. Ultimately, they all have, you know, an end objective that they're trying to strive for, but by no means does this market have a kind of a common cadence or a common roadmap between the hyperscalers. And so our big focus is, you know, hey, let's have these conversations and identify the right connectivity solutions for each one of our hyperscale customers. And so we're, you know, we're agnostic in the sense that, you know, if a customer, if a hyperscaler customer wants to go in a certain direction, we're going to try to find a way to support that direction and deliver the And so I think it's from our perspective, yes, we see all of the hyperscalers spending their efforts, you know, kind of on different ends of the spectrums that you just described. But for us, it's all part of our overall, you know, pursuit of these customers. Now, thanks for the thought there.

That our ongoing directly with hyper scaler, we view each one of them is kind of a separate market. Each one has a different architectural strategy. Each one has kind of a different timeline that theyre working on.

Ultimate ultimately.

I'll have.

A.

And objectives, they are trying to strive for but by no means does this market.

Have a kind of a common cadence or a common roadmap between hyperscale and so our big focus is hey.

Hey, let's have these conversations and identify the right connectivity solutions for each one of our hyperscale customers and so we're we're agnostic in a sense that.

If a customer if hyperscale customer wants to go in a certain direction, we're going to try to find a way to support.

That direction and deliver the value that theyre looking for and so I think it's from our perspective, yes, we see all of the Hyperscale spending.

Efforts kind of on different ends of the spectrum that you that you just described but for US. It's it's all part of our overall pursuit of these customers.

Thanks for the thought there I guess this is Mike.

Matthew D. Ramsay: I guess as my follow-up question. Dan, I just wanted to have you reflect a little bit on the last year or so and compare where things were. I mean, obviously, the AI was way more severe and.

Follow up question, Dan I, just wanted to have you reflect a little bit on the last year, or so and compare where things were obviously.

AI tidbit.

What was way more severe than in magnitude and timing than I think anybody in the market really anticipated 12 months ago, but I just wanted to meet your customer base has broadened.

Dan Fleming: magnitude and timing than I think anybody in the market really anticipated 12 months ago. But I just want to see your customer base is broad, and I wonder if you could spend a few minutes talking about how you're viewing sort of quarterly revenue visibility. It's been my observation that there are some components in data center bills that are really tight; large hyperscalers want to make sure that some components like you guys sell into certain markets are not the bottleneck of deploying systems. So just, I don't know, the confidence in quarter-to-quarter revenue visibility, given the large nature and concentration of some of your customers, and maybe contrast that to where we were 12 months ago. Thanks.

And I Wonder if you could spend a few minutes talking about how you're viewing sort of quarterly revenue visibility. It's been my observation that there are some components in data center builds that are really tight.

Large hyperscale just want to make sure that some components like you guys sell into certain markets are not the bottleneck of deploying systems. So just I don't know the competence and quarter to quarter revenue visibility given the large nature and concentration of some of your customers and maybe contrast that to where we were 12 months.

Dan Fleming: Yes, some of the key observations there are that if we go back just about a year ago today to when we had that Microsoft reset, you know, I think we've done a very good job at executing on what we had laid out at that point in time. And what's really driving that is our product diversification throughout the year and also customer diversification, as you mentioned. So as we sit here today and we're, you know, preparing to close out our fiscal year 24, our revenue is up just modestly versus our FY23.

Thank you Pete.

Yes, some of the key observations there are.

If we go back about a year ago today to when we had that Microsoft reset.

I think we've done a very good job of executing to what we had laid out at that point in time, and what's really driven that as our product diversification throughout the year and also customer diversification as you mentioned.

So as we sit here today, and we are preparing to close out our fiscal year 'twenty four.

Our revenue was up just modestly versus our FY2023 but again, if you were to exclude Microsoft from the equation, it's up quite dramatically.

Dan Fleming: But again, if you were to exclude Microsoft from the equation, it's up quite dramatically, driven by those underlying currents, driven by AI spend. A lot of these programs are AI-related that we've been given uplift for throughout the year. So we're much more comfortable, or I'm much more comfortable right now where we stand versus, say, a year ago in terms of our visibility. And that's because of a diversified customer base and diversified product base. So we're in quite a different position than we were when we spoke a year ago. Thank you.

Driven by those underlying currents driven by AI spend a lot of these programs are AI related that we've been given uplift for throughout the year.

So we're much more comfortable where I am.

Much more comfortable right now, where we stand versus say a year ago in terms of our visibility and thats because of.

<unk>.

Diversified customer base diversified product.

Base, so we're in quite a different.

Physician and we had been.

As we spoke a year ago.

Vijay Raghavan Rakesh: One moment for our next question. Our next question comes from Vijay Rakesh with Mizuho. Your line's now open.

Thank you one moment for our next question.

Our next question comes from Vijay Rakesh with Mizuho. Your line is now open.

Bill Brennan: Yeah. Thanks, Bill and Dan. Just a quick question on the AEC side. I think you mentioned working on five hyperscalers now. As you go down the back path, do you see the AEC ramp broadening out to others like Google or OpenAI or Dell? How do you see any of the other partner ramps starting in the back?

Yes, Thanks, Bill and then just a quick question on the AC side just wondering.

Yes, I think you mentioned looking at.

Now as you go into backlog do you see.

The AC.

Two others like Google are opening.

Yes.

Obviously, the other partner them starting in tobacco.

Okay.

Okay.

Bill Brennan: I think we've been pretty consistent in talking about new ramps with two of our existing customers, and both on front-end networks and back-end networks for future deployments. Both of these companies demonstrated last quarter at their respective conferences. And so, you know, I think that as we look at our fiscal 25 and we talk about this inflection point in the second half, it's really related to these first two customers. And I would say that as we look at, you know, the balance of the US hyperscalers, for maybe what will be our third production customer, we have concluded a qualification with that customer for that first program that we've been working on. There is a possibility that we'll see some contribution in the second half as well in 2025, although we don't have good visibility on when they're exactly going to be deployed.

I think we've been pretty consistent in talking about new ramps.

Good.

Two of our existing customers.

<unk>.

Both on the front end networks and backend networks for future deployments.

Both of these companies demonstrated last quarter at their respective conferences.

And so I think that as we as we look at our fiscal 'twenty five and we talk about this inflection point in the second half.

Really related to these first two customers and.

I would say that as we look at the balance of the U S. Hyperscale.

Four.

Maybe what will be our third production customer.

We have concluded.

Qualification with that customer for that first program that we've been working on.

There is a possibility that that we'll see some contribution in the second half as well in 25, although we don't have good visibility on when they're exactly going to deploy I don't have an idea as to timing volume yet, but we have passed qualification.

Bill Brennan: I don't have an idea as to timing and volume yet, but we have past qualifications. And the other two hyperscalers, five total, are in an earlier development stage. And when we think about earlier development, you know, we're talking about architecture discussions, spec definition, product development, early samples. And those are the stages that we're working through now.

And the other.

The other two Hyperscale is five five total.

We're in an earlier development stage.

And when we think about earlier development.

I'm talking about architecture discussions spec definition product development early samples and those are the stages that we're working through now and I would say that.

Bill Brennan: And I would say that, as it relates to revenue layering in, on the first three, I would point to fiscal year 26. And that would be for the actual round, and so hopefully that gives you some color, and another question that a lot of people have asked me, "It's very encouraging to see how fast you came to market with that with the received side DSP, and now it seems like you're ramping with a hyperscale in the next quarter. Can you talk about how big that business would be? Do you see the optical DSP ramping a whole lot faster An optical DSP design has a long development cycle associated with it, in the sense that the first step you've got to do is build a module with a module partner.

As it relates to revenue layering in.

To the first three.

Point to fiscal year 'twenty six.

And that would be for the initial ramps and.

And so hopefully that gives some color.

Yes.

And then the Caribbean.

A lateral side.

And then good to see how fast you came to market with that.

<unk> DSP.

And now it seems like Youre ramping.

And just getting into the next quarter can you talk to how big that business would be.

Optical DSP back a whole lot faster, obviously is much better margins as well.

Yes, Im not sure if I give you I'm not sure if that came across.

Correctly.

Optical DSP design has a long development cycle associated with it in a sense that the first step you got to do is build a module with the module partner Ulta.

Bill Brennan: Ultimately, there's a qualification cycle that they've got to go through before they can even be considered for qualification at a hyperscaler. So I look at the timeline from start T0 to being in production as being a little bit longer, maybe significantly longer than some of the AEC experience that we've had. And so as we're looking at the near term for the optical DSP business, we're in the early innings of ramping up our first US hyperscale end customer through our module partner. We're seeing continued

Ultimately there is a qualification cycle that they've got to go through.

Before they can.

Even be considered for qualification at Hyperscale or so I look at the timeline from start T zero to being in production is being a little bit longer.

Maybe significantly longer than.

Some of the AAC experience that we've had and so as we're looking at kind of the near term profitable DSP business. We're in the early innings of ramping our first U S hyperscale customer end customer.

Through through our module partner.

We're seeing.

Bill Brennan: Maybe we can come back in spending with the customers that we've already qualified in China. There is a second US hyperscaler that we're in the stages of competing for a next generation ramp that could impact our fiscal 25. And then, you know, beyond that, I would say that, you know, there are opportunities, other opportunities that we're pursuing, but from a significant volume perspective, probably more in fiscal 26. Thank you.

Continued.

Maybe come back in spending.

With the customers that we've got already qualified in China.

Our second U S hyperscale or that we are in the in the stages of competing for a next generation ramp that could impact our fiscal 'twenty five.

And then b.

Beyond that I would say that.

There are.

There are opportunities other opportunities that we're pursuing.

But from a significant volume ramp perspective, probably more in fiscal 'twenty six.

Thomas O'malley: One moment for our next question. Our next question comes from Thomas O'Malley with Barclays. Your line's now open. Hey, guys, thanks for taking my question. My first one's a bit of a multi-parter, so forgive me.

Thank you one moment for our next question.

Our next question comes from Thomas O'malley with Barclays. Your line is now open.

Hey, guys. Thanks for taking my question.

First one is a bit of a multi parter. So forgive me so in the quarter you saw a big engineering services contribution.

Thomas O'malley: So in the quarter, you saw a big engineering services contribution. I think Dan mentioned product NRE. You know, if you look historically, those have kind of come in on a quarterly basis, like 2 to 3 million. Could you maybe give us some color on why this one was so big?

I think Dan you mentioned product and a re.

Historically, those have kind of come in on a quarterly basis like two to 3 million could you maybe give us some color why this one was so big is that one customer or multiple customers.

Dan Fleming: Is it one customer, multiple customers? Is that volume related? Maybe a little color on whether it's AEC or DSP, anything that would, you know, give us a little color, just given how significant it was in the January quarter? Thank you. Yes, certainly.

Is that volume related it.

Maybe a little color of its AAC or DSP anything that would.

Give us a little color just given how significant was in the January quarter. Thank you. Okay, Yes, certainly so.

Dan Fleming: Yeah, as you correctly identify, historically, our product entries range from maybe, I'd call it two to 4 million per quarter. So Q3 was higher than usual. But again, this really speaks to the value of the innovative solutions that we're bringing to market. In this particular case, it was largely for a single customer in the development, as Bill mentioned, of our next generation chiplet. Now, the other piece of that, of course, as we're going down the process node geometry, this particular development was for 5 nanometers, so the engineering resources required for that were more engineering heavy historically than what we've had in 7 nanometer and prior geometry.

Yeah as you correctly identify historically, our product <unk> range for maybe I'd call it $2 million to $4 million per quarter. So Q3 was higher than than historically, but again, that's really speaks to the value of the innovative solutions that we're bringing to market.

And this particular case it was largely for a single customer and the development as Bill mentioned for our next generation chip lift.

Now the other the other piece of that of course, as we're going down the process node.

Commentary.

This particular development was for five nanometer. So the engineering resources required for that was more engineering heavy historically than what we've had.

And seven nanometer and prior geometries.

Dan Fleming: So those are the things that are impacting that. Now, having said all that... I don't think this sets a new bar or level for NRE engineering services. I would expect it to kind of trend back to the mean of our historical average.

So those are the things that are impacting that now having said all of that.

I don't think that sets, a new bar or level.

And our reengineering services I would expect it to kind of trend back to the mean of our of our historical averages.

Thomas O'malley: Gotcha, super helpful. And then I just had one just for clarification for the guide. So you kind of said the IP license for the full year is going to be kind of at the high end of your range. You're kind of saying product engineering and services go back to the historical levels, which is like two to three million. You've spoken pretty positively about the AEC business, but when you got to take all those pieces together in April, other products seem to be down a little bit. Could you give us a little color on where you may be seeing some sequential weakness? That'd be super helpful.

Got you Super helpful. And then I just had one just on a clarification for the guide.

So you kind of said IP license for the full year is going to be kind of at the high end of your range Youre kind of saying product engineering and services goes back to the historical levels, which is like $2 million to $3 million.

You've spoken pretty positively on the AUC business, but when you've got to take all those pieces together in April other products seems to be down a little bit could you give us a little color on where you may be seeing some sequential weakness that we see.

Dan Fleming: Thank you very much, guys. I don't know if I would characterize anything as sequential weakness, if you put all those pieces together, you know, if you exclude NRE from product, it's, you know, flat to up quarter over quarter. And that's based on a very strong sequential performance in Q3. So, you know, some programs. You know, as programs ramp up, they become large, there might be pauses in certain things, just speaking generically around programs of this nature. So there's nothing, no seasonal weakness.

Super helpful. Thank you very much guys.

Yes, I don't know if I would characterize anything as sequential weakness.

You put all those pieces together.

If you exclude <unk> from product.

Flat to up quarter over quarter, and that's based off of a very strong sequential performance in Q3.

So.

So some programs.

As programs ramp they become large there might be pauses in certain things.

Speaking generically.

Around programs of this nature, so nothing no seasonal weakness, but I wouldn't say.

Vivek Baria: Thank you. As a reminder, to ask a question, please press star 11 on your telephone. One moment for our next question. Thank you. Our next question comes from Vivek Baria with Bank of America Securities. Your line is now open.

Thank you.

As a reminder to ask a question. Please press star one one on your telephone.

One moment for our next question.

Our next question comes from.

ARIA with Banc of America Securities. Your line is now open.

Bill Brennan: So thank you for taking my questions. The quarterly product revenues are running in this 40, 45-ish million range, and I was hoping you could give us a sense of how much of that is AEC run rate right now, and how you think about that quarterly trend over the next few quarters. Yeah, I would.

Thank you for taking my questions.

The quarterly product revenue is running.

Running in that 40 to 45 ish million range and I was hoping you could give us a sense of how much of that is AUC run rating right now and how do you think about that quarterly trend over the next few quarters.

Okay.

Vivek Baria: So one of the things we don't break it out specifically by product line, but what you'll kind of infer when we file our queue and you look through that is, um, one of our 10% customers is going through the initial stages of a production ramp for AECs. This is our second hyperscaler that we've talked a lot about. So, AEC drove a lot of the sequential growth from Q2 to Q3. In the upcoming quarters, again, as these programs start to ramp, it's a little hard to predict the linearity of it. So, there may be some variability quarter to quarter until we hit this second half of fiscal 25 inflection point. Hopefully, that gives you some sub-colors.

Yes, I would.

So what are the and we don't break it out specifically by product line, but.

What youll kind of infer when we file our Q and you look through that is.

One of our 10% customers is going through.

The initial stages of a production ramp of Aac's. This is our second hyperscale and that we've talked a lot about.

So AAC drove a lot of our sequential growth from Q2 to Q3.

In the upcoming quarters again as these programs start to ramp it's a little hard to predict.

<unk> of it but so there may be.

Some variability quarter to quarter until we hit this.

Second half of fiscal 'twenty client inflection point.

Hopefully that gives you some color.

Bill Brennan: Thank you, Dan. My bigger question is... How should we gain confidence that AEC will be a preferred choice by your customers? Because, you know, they deployed a lot of GPUs last year. They're already deploying a lot of GPUs, they are deploying a lot of optical transceivers, and so far, they have not deployed as much AEC. So what will change in the second half for them to start deploying more AEC and consider that a more mainstream choice as opposed to, you know, kind of a one-off or niche choice in a handful of deployments? I think that that's really the key question.

Thank you then my bigger question is.

How should we get the confidence that AAC will be a preferred choice.

Customers because they're deployed a lot of Gpus last year that already deploying a lot of.

Gpus, they are deploying a lot of optical transceivers and so far they have not deployed as much AUC. So what really changed in the second half for them to start deploying more AUC and consider that a more mainstream choice as opposed to kind of a one off or niche.

Joyce and a handful of deployments I think that that's really the key.

Bill Brennan: I think the question is maybe related to architectures for the backend networks and whether there are, you know, top-of-rack switches in the AI appliance racks. And I think that, you know, if we look at the work that we're doing with our customers, I think the long-term preferences to, you know, first of all, deploy Ethernet networks are pretty commonly understood amongst the five US hyperscalers. And I think that each one will have kind of a different timeline for when they go into high volume with Ethernet networks. Some of them are already deploying with InfiniBand today. And I think from the standpoint of designing with top-of-the-rack switching versus pulling all of the connections from the AI appliance using optical connections to the LeapSpine dedicated switching network for the back end.

Question.

Yes, I think the question is maybe related to architectures for the backend networks and whether there are top of rack switches in the AI plants racks.

And I think that.

If we look at the work that we're doing with our customers I think the long term preferences too.

First of all deploy Ethernet network. So I think that's pretty commonly understood amongst the five U S. Hyperscale.

And I think that each one will have kind of a different timeline on.

When they go into high volume with Ethernet network some of them are deploying.

With Infiniband today.

And I think from a standpoint of of designing with top of rack switching.

Versus pulling all of the connections from the AI appliance using optical connections to the.

The leaf spine dedicated switching.

Bill Brennan: You know, the question, I think it's around operational efficiency, and, you know, it's around, you know, how do you build and deploy these? And, you know, if you were to look at not implementing top of rack switching, you're talking about not being able to build known good racks, and then those known good racks being kind of forklift installed, you know, in the data center. You would be looking at having to assemble these, you know, these clusters almost on site, which there's a real trade-off for operational efficiency. But nonetheless, all of our discussions that we're having are directly associated with feedback from customers. And I don't think anything that we're, you know, that we're talking about is a real one-off.

Network for the backend.

The question I think it's around operational efficiency and it's around.

How do you how do you build and deploy these in.

If you were to look at it not implementing top of rack switching youre talking about not being able to.

Build known good racks and then those.

Don good racks being kind of forklift installed.

In the data center, you would be looking at having to assemble these these.

These clusters, almost onsite, which is there's a real tradeoff on operational efficiency.

But nonetheless, all of our all of our <unk>.

Discussions.

We're having.

Are directly associated with feedback from customers. So I don't think anything that we're that we're talking about is a real one off.

Bill Brennan: So as I think, you know, as I think, you know, customers come to execute on their long-term plans, this will come more into view. Thank you. Our next question comes from Quinn Bolton with Needham. Your line is now open. Hey, guys, thanks for taking my question. I guess, you know, kind of following up on the next question a little bit.

So as I think.

Customers come to execute to their long term plans.

This will give us will come more into view.

Hey, Kevin.

Thank you for our next question.

Okay.

Our next question comes from Quinn Bolton with Needham. Your line is now open.

Hey, guys. Thanks for taking my question.

Kind of following up on Nick's question, a little bit.

Quinn Bolton: You know, last quarter, you had four top customers; each represented a different product line. This quarter, you talked about three 10% plus customers. I was wondering, can you give us those 10% customers? What was their set of revenues? And were they all representing different product lines?

Last quarter, you had or top customers. Each represented a different product line goes part and you're talking about 310% plus customer I was wondering if you can give us the 10% customer quite fulsome set of revenues that were and were they all representing different product lines are you starting to see.

Dan Fleming: Are you starting to see AEC, you know, kind of coming to the top? representing the majority of revenue from at least two of your top three..., and then, again, a follow-up. Yeah, so we have, as I mentioned in my prepared remarks, we had three 10% end customers in the quarter. And again, it's important to realize that, you know, when our queue is filed in the next day or so, you'll see our end customer disclosure and our MD&A, but to give you color on what they were. The largest customer was our first AEC, you know, hyperscale customer that we've talked about; they came in at 28%. And that was followed by a lead chiplet customer, much of which was NRE-driven, at 23%. And then the final of the top three, which you'll be able to figure out who that is based on the warrant, was our second AEC hyperscaler customer at 19%. Two of the top three then would be AEC-driven, the other being chiplet.

<unk> seen kind of coming to the top.

Representing the majority of revenue in the year three topical tomorrow, and then I've got a follow up thank you.

Yes, so we have.

As I mentioned in my prepared remarks, we had 310% and customers in the quarter.

And again, it's important to realize that with.

When our Q is filed in the next day or so youll see our end customer disclosure in our MD&A.

But to give you color on what they were.

The largest customer was our first AUC.

Hyperscale customer that we've talked about they came in at 28%.

And that's followed by lead triplet customer much of which was NRG driven at 23% and then the final of the top three which you'll be able to figure out who that is based on the warrant which was our second AAC hyper scaler customer at 19%.

No.

Sure.

Two of the top three then would be AAC driven the other being shipment driven so theres going to be variability in that.

Dan Fleming: So there's going to be variability in that as we go. Last quarter was a bit interesting and unique in that the top four customers all represented different, you know, four different product lines. Got it. Thanks for that additional detail, Dan.

As we go ahead.

Last quarter was a bit interesting and unique in that the top four customers all represent a different for different product lines.

Got it thanks for that additional detail Daniel and then I guess.

Quinn Bolton: And then I guess, Bill, you know, the US Cypress Oilers wanting to, you know, deploy Ethernet-based backend networks instead of relying on InfiniBand. Obviously, to date, most of those GPU networks that have been deployed have been NVIDIA-based, and therefore, InfiniBand is, you know, a logical choice. But, you know, you've got a second GPU customer, AMD, that's beginning to ramp up meaningful volumes. I'm just wondering, can you talk about, from a high level, what are you seeing across your actual customer base for the back end connection? in AMD GPU networks? Are they deploying Ethernet? Are they deploying InfiniBand? Or is there some other fabric?

Bill you talked a lot about.

The U S Hyperscale and one in Q2.

Ploy Ethernet based backend networks and centered relied on infiniband.

To date most of those GPU networks that have been deployed had been Nvidia base and therefore an abandoned.

Yes, certainly logical choice, but you've kind of second GPU customer AMD that that's beginning to ramp in meaningful volumes.

I'm just wondering can you talk about.

High level, what are you seeing across your hyperscale customer base for the backend connections in AMD GPU networks are they deploying Ethernet are they deploying infiniband is there some other fabric.

Bill Brennan: Because it certainly seemed like there'd be a pretty good opportunity for AECs with that, AMD, and i300 deployments going forward. I think that, generally speaking, you're right. But I would say that the visibility we get into the GPUs that are actually being used is really somewhat masked by the NIC. So we see a certain number of lanes of ethernet at a certain speed. And really, our solutions are the same. I'm sure we're connecting to NVIDIA GPUs, AMD GPUs, and internally developed GPUs as well. So I don't think that, you know, we would be the best, you know, the best, to the best, you know, group to comment on. The decision making around Ethernet versus InfiniBand, I can just tell you, based on the discussions that we've had, it seems very clear that the U.S. hyperscalers have a strong intention to deploy Ethernet, you know, each hyperscaler, you know, and do And I think you'll see that, you know, Microsoft is clearly out there as kind of the lead hyperscaler that is deploying InfiniBand. But I think, you know, after that, the list becomes pretty short. And I think, you know, everything that we're seeing, it's, you know, Ethernet is going to be preferred.

It certainly seemed like there would be a pretty good opportunity for agencies with that.

AMD.

Mm 300 deployments going forward.

I think that generally speaking you're right.

I would say that the visibility we get into the Gpus that are actually being used.

Really somewhat masked by the knick so.

So we see a certain number of lanes of Ethernet.

At a certain speed.

And really our solutions are the same I am sure we're connecting to.

Two Nvidia Gpus, AMD Gpus and internally developed.

Abuse as well, so I don't think that.

We would be the best.

Best.

To the best group to comment on.

The decision, making around Ethernet versus versus Infiniband I can just tell you based on the discussions that we've had it seems that it seems very clear that the U S. Hyperscale is have a strong intention to deploy Ethernet and you can.

You can go.

Each each hyper scaler.

Do a bottoms up on it and I think youll see that Microsoft is clearly out there is kind of the lead hyperscale or depth.

Is the point with Infiniband, but I think after that the list becomes pretty shortly and I think everything that we're seeing it's Ethernet is going to be preferred.

Bill Brennan: Thank you. I'm showing no further questions at this time. Now I'd like to turn it back to Bill Brennan, CEO, for closing remarks. Thank you very much for the questions. We really appreciate the participation, and we look forward to following up on the callbacks. Very much appreciated. Thank you. This concludes today's conference call. Thank you for participating, you may now disconnect.

Thank you.

I'm showing no further questions at this time I would now like to turn it back to Bill Brennan CEO for closing remarks.

Thank you very much for the questions. We really appreciate the participation and we look forward to following up on the call backs. So much appreciate it. Thank you.

This concludes today's conference call. Thank.

Thank you for participating you may now disconnect.

Okay.

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Okay.

Okay.