Q1 2025 Credo Technology Group Holding Ltd Earnings Call
Ladies and gentlemen, thank you for standing by at this time, all participants are not listening only mode. Later we'll conduct a question and answer session. At that time, if you have a question, you need to press star 1, 1 on your push button phone. I'll now like to turn a conference over to Daniel Neil. Please go ahead, sir.
Speaker Change: Good afternoon. Thank you for joining our earnings call for the first quarter of this twenty-two-three-five.
Speaker Change: Today, I'm joined by Bill Brennan, the CEO of Chief Executive Officer in Dan Fleming for Chief Financial Officer.
Speaker Change: As a reminder, during the call, we'll make certain forward-looking statements. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our document-style with the SEC, which can be found in the investor-relation section of the company's website.
Speaker Change: 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.
Speaker Change: or the extent to which any factor of combination of factors may cause actual results to differ materially from those contains many forward-booking statement.
Speaker Change: Given these risks and certainties 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.
Speaker Change: 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 change in the company's expectations, except as required by law.
Speaker Change: Also during this call, we will refer to certain non-gap financial measures, which we consider to be important measures of the company's performance.
Speaker Change: These non-gap financial measures are provided in addition to and not as a substitute for or superior to, financial performance prepared in accordance with the U.S. gap.
Speaker Change: A discussion of why we use non-gap financial measures and the reconciliation between or gap in non-gap financial measures is available in the earnings release we issue today, which can be accessed using the investor relations portion or website.
Speaker Change: I will now turn the call over to our CEPO. Bill.
Bill Brennan: Welcome to our Q1 Fiscal 25 earnings call. I'll start with a review of our Q1 performance and then discuss our future outlook.
Bill Brennan: Our CFO Dan Fleming will then provide detailed Q1 results and share our expectations for Q2.
Dan Fleming: For Q1, CREEDO reported revenue of $59.7 million and non-gap gross margin of 62.9%.
Speaker Change: Our product revenues of $57.3 million, we're up 30% compared to the prior quarter, establishing a new quarterly record for the company.
Speaker Change: Product revenues were driven by rapidly expanding AI deployments.
Speaker Change: Crito is a pure play high-speed counter-stivity company.
Speaker Change: We deliver a differentiated set of solutions, including active electrical cables or AECs.
Speaker Change: after the SP's.
Speaker Change: Lancard 5.
Speaker Change: 30th check list.
Speaker Change: and Sirdys IP licenses for even at court speeds ranging from 100 gig up to 1.6 terrorists per second.
Speaker Change: The data center market is dynamic and evolving rapidly, which we believe will create even more opportunities for credo.
Speaker Change: Although we are primarily targeting the leading hyperscalers, we are now observing increased spending by the next year of data center operators.
Speaker Change: We see a group of emerging hyperscalers deploying an increasing amount of infrastructure to take advantage of opportunities presented by AI.
Speaker Change: With these customers, we find we have immediate credibility from our prior success with traditional hyperscalers.
Speaker Change: and that has indeed helped us to win new programs across our product lines.
Speaker Change: This is translating its material revenue across several growing customers.
Speaker Change: Notably, we expect to see a new 10% customer in Q2.
Speaker Change: Cretal aims to extend its reach into new markets as data rates rise.
Speaker Change: Later this year, we intend to enter the 64-gick Pamphor PCIe Gen 6 Market, offering the retirement and ADC solutions that are optimized for signal integrity, latency, power efficiency, and cost effectiveness.
Speaker Change: Now regarding our AEC product line.
Speaker Change: During the first quarter, ABCs continued to be our main source of revenue, and we anticipate that ABCs will play a crucial role in driving growth in fiscal 25 and beyond.
Speaker Change: Today, we're in production with solutions for port speeds up to 800 gig and we expect to deliver power up to 3 nanometer products in 2025 for the 1.60 port market.
Speaker Change: We've delivered ATECs in a wide variety of form factors and with a range of functionality designed to meet the diverse needs of our customers.
Speaker Change: We think there are a approach of offering system-level products, blending customized hardware and software with fast turnaround time, is crucial to maintaining our competitive edge, and as a result, we develop deep relationships with our customers to deliver very innovative ABC solutions.
Speaker Change: Based on these customer relationships, market feedback, and the inherited advantages of AECs compared to alternative solutions, we have seen AECs become the de facto solution for in-rack connectivity at 50G per lane speeds and above.
Speaker Change: In addition, increasing rack power densities and the migration to liquid cooling are effectively reducing the physical lengths required for back end network connections, and thereby increasing the opportunity for A-Cs.
Speaker Change: During Q1, our existing and new customer relationships continue to expand and develop, providing us with more confidence in the growth prospects of our AEC business going forward.
Speaker Change: Given that, we continue to expect our ramp of ATECs to drive an inflection point in our sequential growth in the back-up of fiscal 25.
Speaker Change: Now I'll turn to our optical DSP business.
Speaker Change: I'm pleased to report where making continued progress with our optical DSP business on multiple fronts, with AI deployments accelerating adoption of pre-do solutions.
Speaker Change: Our Optical Module Customers shipped AOCs and Transceivers based on period of DSPs to both U.S. and International and Customers.
Speaker Change: Based on Q1 results and our outlook, we remain on track to achieve our goal for optical DSPs to be at least 10% of our fiscal 25 revenue.
Speaker Change: Beyond their existing production programs, we remain excited about future growth prospects in this category for several reasons.
Speaker Change: We are currently working with numerous optical module manufacturers to develop AOCs and transceivers and notably, we secured our first design win with an industry-leading module manufacturer.
Speaker Change: Last fall, Credo introduced the concept of LRO, or linear receive optics, which maintains a DSP only in the transmit path of an optical module, as an innovative way to reduce power in both 800 gig and 1.6T optics.
Speaker Change: The LRO concept is increasingly being adopted within the industry.
Speaker Change: and a new hyperscaler has decided to implement this strategy in the architecture.
Speaker Change: This application will target 800-gig-module power of less than 10 watts significantly below the typical 15 watts seen with full DSP architectures.
Speaker Change: We expect to start seeing LRO deployments in calendar 25.
Speaker Change: At 800 day and 1.6 T port speeds, we see energy efficiency becoming a more critical factor as power delivery and cooling infrastructure becomes even more challenging.
Speaker Change: Notably, power efficiency drove our decision to move directly to three nanometer for Critos 1.6T DSP. And we plan to take out power optimized solutions, both full DSP and the LRO options later this calendar year.
Speaker Change: Taking into account customer feedback and rising momentum, we anticipate sustained growth in our optical business.
Speaker Change: Now, regarding our line card five business, in the first quarter, our line card five business was once again an important contributor to our overall product revenue growth, driven by strong contributions from 400G and 800G solutions.
Speaker Change: Our Lankart Phi Revitive comes from Retimer and Mech Seck encryption products, report speeds up to 1.6
Speaker Change: In this segment, our customers include networking OEMs for traditional switching applications and more recently serve our OEMs for emerging AI appliance applications.
Speaker Change: We've seen new demand for our line-tard fly solutions within Ethernet-based AI appliances for scale-out networks, as rapidly increasing GPU performance places greater signal and it can be demands inside the server.
Speaker Change: He's emerging opportunities to bind with traditional switch opportunities, should lead to Tam growth into the future for our line-car 5 solutions.
Speaker Change: Lastly, I'll review our Sirdy's Life and Seek in Shiplet Businesses.
Speaker Change: We continue to make progress with customers and expand our funnel within our 30s IP licensing and chip-lit businesses.
Speaker Change: for Fiscal 25 while we continue to expect quarterly variability due to the nature of revenue recognition, we seek growth opportunities driven by a combination of licensed, royalty and triplet revenues.
Speaker Change: With comitivity speech rising, fueled mainly by the needs of AI applications, creator is poised for future growth.
Speaker Change: We offer a wide range of 30 solutions up to 224 gig speeds in a wide range of processed geometries from 28-manometer to 3-manometer.
Speaker Change: We continue to win due to our compelling combination of performance, power and exceptional technical support.
Speaker Change: To summarize, I'm very pleased with our team's performance in Q1, specifically in terms of the strong execution of our product ramp and our ongoing success in engaging in customers.
Speaker Change: The rise of generative AI is driving greater demand for cutting edge, power efficient, high-speed connectivity solutions and credo is dedicated to advancing our range of solutions to address this growing demand.
Prida: This month, Prida will have strong presence at the CIOE Optical Conference in Shenzhen.
Prida: followed by the ECOC Optical Conference in Germany.
Prida: We expect these events will add to the momentum we've built since OFC and March. And next month we'll be very visible at the OCP Conference in Silicon Valley showcasing a wide array of advanced solutions for AI clusters.
Prida: Moving forward, we continue to see an inflection point in the second half of fiscal 25 driven by existing and new customer engagements across the entire range of our connectivity solutions.
Prida: I'll now turn the call over to our CFO Dan Fleming and he will provide additional details.
Dan Fleming: Thank you, Bill, and good afternoon. I will first review our Q1 results and then discuss our outlook for Q2 of fiscal year 25.
Dan Fleming: in Q1, we reported revenue of $59.7 million.
Dan Fleming: Down 2% sequentially and up 70% year over year. Our IP business generated $2.4 million of revenue in Q1, down 14% year over year.
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 contracts.
Speaker Change: Well, the mix of IP and product revenue will vary in any given quarter of our time. Our revenue mix in Q1 was 4% IP. Below our long-term expectation for IP, which remains 10 to 15% of revenue.
Speaker Change: Our product business generated $57.3 million of revenue in Q1, up 30% sequentially and up 77% year over year.
Speaker Change: Our product business, excluding product engineering services, generated a record 53.8 million dollars of revenue in Q1, 21% higher than our previous product record, and up 32% sequentially.
Speaker Change: Our top two end customers were each greater than 10% of revenue into one.
Speaker Change: Our team delivered Q1 non-gap gross margin of 62.9% just below the low end of our guidance range and down 323 basis points sequentially as a result of the lower IT contribution in the quarter.
Speaker Change: Our IP non-gap growth margin generally hovers near 100% and was 96.8% in June.
Speaker Change: of our product non-gap growth margin was 61.5% in the quarter, up 784 basis points acclenture weight, and up 472 basis points year over year, primarily due to increasing scale.
Speaker Change: Total non-gap operating expenses in the first quarter were $35.4 million, below the midpoint of our guidance range, and up 8% sequentially due to a 14th week in the quarter.
Speaker Change: Our non-gap operating income was $2.2 million in Q1, compared to non-gap operating income of $7.5 million last quarter.
Speaker Change: Our non-gap operating margin was 3.7% in the quarter, compared to a non-gap operating margin of 12.3% last quarter, a sequential decrease of 8.6% points.
Speaker Change: We reported non-gap net income of $7 million in Q1, compared to non-gap net income of $11.8 million last quarter.
Speaker Change: Cast Flow used in operations in the first quarter was $7.2 million, down sequentially, primarily due to changes in working capital, driven by ramp and product shipments.
Speaker Change: CapEx was 5.9 million dollars in the quarter, driven by R&D Equipment Stamping.
Speaker Change: and free cash flow was negative $13.1 billion, a decrease of $32.4 billion you're over here.
Speaker Change: We ended the quarter with cash in a prevalence of $398.6 million. A decrease of $11.4 million from the fourth quarter.
Speaker Change: We remain well capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer.
Speaker Change: Our Q1 ending inventory was $31.6 million, up at $5.7 million is eventually.
Speaker Change: Now, turning to our guidance, we currently expect to revenue in Q2 of fiscal 25 to be between $65 million and $68 million. Up 11% sequentially at the midpoint.
Speaker Change: We expect Q2 non-dap growth margin to be within a range of 62 to 64%.
Speaker Change: We expect Q2 non-doubt operating expenses to be between $36 million and $38 million.
Speaker Change: and we expect Q2 diluted weighted average share count to be approximately 182 million shares.
Speaker Change: As we move forward through fiscal year 25, we continue to expect sequential growth to accelerate in the second half of the year. We expect non-dap operating expenses to grow at half the rate of top-line growth. And as a result, we look forward to driving operating levers throughout the year.
Speaker Change: and with that, I will open it up for questions.
Speaker Change: Thank you, at this time of ElectroMinerie one day in order to ask a question, press star, then the number 11 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.
Speaker Change: One moment for our first question.
Speaker Change: Our first question, conflaner Toshia Hari from Goldman Sachs, it lines open.
Toshia Hari: Hi, good afternoon. Thanks so much for taking the question. My first question is on the AEC business and how we should be thinking about...
Toshia Hari: The Acceleration and Growth, you guys spoke to as it pertains to the second half. Bill, I think on past, you've talked about your second customer ramping in the AEC space and your engagements with additional customers in that space as well. Can you kind of speak to the key drivers that you see contributing to the Acceleration and Growth in the second half of the year and how you're thinking about your AEC opportunity the outside of Enrak connectivity as you move into calendar 25 and 26?
Toshia Hari: Sure.
Bill Brennan: So, I'll start with, you know, I think we're pretty happy with the fact that AEC adoption.
Bill Brennan: is continuing pretty broadly. It has really become the defective standard for the length that we address.
Bill Brennan: which is primarily in rack at this point, but may expand to rack to rack 5-7 meter tables in the future as we see rack densities increasing.
Bill Brennan: So, as that happens, you know, typically, you know, connections that were made with 10 meter to 20 meter optical solutions can now be made with 5 to 7 meter ATC solutions.
Operator: Remote. Later we'll conduct a question and answer session. At that time, if you have a question you need to press star 1-1 on your push button phone.
Bill Brennan: So we do see, you know, broad adoption continuing, and it's really with US hyperscalers, global hyperscalers, what we introduce the new term with emerging hyperscalers, as well as service providers. So I think as we stand right now we're really well positioned to see.
Operator: Oh, and I'd like to turn a conference over to Daniel Neil. Please go ahead, sir. Good afternoon.
Daniel Neil: Thank you for joining our earnings call for the first quarter of fiscal 2025. Today, I am joined by Bill Brennan, Credo's Chief Executive Officer in Dan Fleming, our Chief Financial Officer. As a reminder, during the call, we'll make certain forward-looking statements. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC, which can be found in the Investor Relations section of the company's website.
Bill Brennan: Future Growth with both 400, getting an 800 gig AEC Solar Shins.
Bill Brennan: in developing now engagements with customers. And as a future, as there's a move towards 1.60, I think we'll be in a really good position to address that market, especially because we'll really bring much differentiated power.
Daniel Neil: 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 statement. Given these risks, some certainties 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.
Speaker Change: Kim Dirk Petigers.
Speaker Change: I will say that as Ethernet back in networks are becoming more mainstream.
Speaker Change: We're seeing a focus shift within our customer base to really network quality.
Speaker Change: and it's important to point out when they have a single hardware failure or a link-flap, it can cost 30 minutes productivity and really cost them tens of thousands of dollars. And so if they look at the Pareto of things that would make their clusters more efficient.
Daniel Neil: 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-gap financial measures, which we consider to be important measures of the company's performance. These non-gap financial measures are provided in addition to, and not as a substitute for or superior to, financial performance prepared in accordance with the US gap.
Speaker Change: You know, having solutions that have really high reliability is becoming really a primary objective. When we think about, you know, 80 Cs with a meantime before failure of 100 million hours and bitter rates of five orders are more better than I triply requirements.
Speaker Change: and the fact that we've had billions of operating hours that will be flatless in a sense.
Speaker Change: There's really what we see as a shipping priority to move to these solutions, to move these active copper solutions.
Daniel Neil: A discussion of why we use non-gap financial measures and the reconciliations between our gap and non-gap financial measures is available in the earnings release we issued today, which can be accessed using the Investor Relations portion of our website.
Speaker Change: and so, you know, to further that, you know, as I mentioned before, the, you know,
Speaker Change: I think there's a desire to even figure out networking topologies that allow them to make a portion of the back end network connections.
William Brennan: I will now turn the call over to our CEO, Bill. Welcome to our Q1 fiscal 25 earnings call. I'll start with a review of our Q1 performance, and then discuss our future outlook.
Speaker Change: with longer 5 to 7 meter AECs that span 2 to 3 racks and you know ultimately I think we see this you know really driving an uplift in the AC market and an expansion of the tamp long term.
William Brennan: Our CFO, Dan Fleming, will then provide detailed Q1 results and share expectations for Q2. For Q1, Credo reported revenue of $59.7 million, and non-gap gross margin of 62.9%. Our product revenues of $57.3 million were up 30% compared to the prior quarter, establishing a new quarterly record for the company. Product revenues were driven by rapidly expanding AI deployments.
Speaker Change: and if I hope that gives you color, we're quite bullish on the space.
Speaker Change: Yeah, that's really helpful. Thanks, Bill. And then I have a quick follow up on the optical DSP side of your portfolio.
Speaker Change: It's really nice to hear the customer traction. I think you guys are reiterated that for fiscal 25, it should be more than 10% or at least 10% of your business. Longer term, given your current engagements, the customer back and forth are having. What are your market share aspirations in this business? I know you're playing the role of this rupture, but curious. How are you thinking about your market presence over time? Then within the context of LROs, I think on the last call you talked about 1.60, potentially being a catalyst for increase adoption, is that still the case? And if so, is that pretty much a 25, 26 dynamic?
William Brennan: Credo is a pure play high-speed connectivity company. We deliver a differentiated set of solutions, including active electrical cables or AECs, optical DSPs, Lankard Fies, Surty's Chiplets, and Surty's IP licenses, or Ethernet port speeds ranging from 100 gig up to 1.6 terabits per second. The data center market is dynamic and evolving rapidly, which we believe will create even more opportunities for Credo. Although we are primarily targeting the leading hyperscalers, we are now observing increased spending by the next tier of data center operators.
Speaker Change: Thank you.
Speaker Change: Good morning.
Speaker Change: So I'll say that we're quite happy with the optical DSP business. We are on track to achieve the goal that you reiterated, which is 10% or higher, of our fiscal 25 revenue. For sure, we're building momentum.
Speaker Change: When we think about our position in the market today, there are more than 2 million modules with the CRED of DSPs that have been deployed in data centers. And this, this year, will ship more units than we've shipped in all previous years combined.
William Brennan: We see a group of emerging hyperscalers deploying an increasing amount of infrastructure to take advantage of opportunities presented by AI. With these customers, we find we have immediate credibility from our prior success with traditional hyperscalers. And that has indeed helped us to win new programs across our product lines. This is translating its material revenue across several growing customers. Notably, we expect to see a new 10% customer in Q2.
Speaker Change: So there is a real moment in this building. We've got programs identified that will drive staying fast growth in fiscal 26th and beyond. And the bottom line is, as we sit here today, we've got a compelling set of solutions at 50 gig and 100 gig per lane, you know, ultimately measured by signaling integrity power and cost.
Speaker Change: I think that the stage is set for there to be continued momentum that Crete of Bill's in this market. From a market share standpoint, we're still small in rising, and the bottom line is it's one design at a time converting one customer at a time is really a focus.
William Brennan: Credo aims to extend its reach into new markets as data rates rise. Later this year, we intend to enter the 64GB PAM4 PCIe Gen 6 market, offering re-timer and AEC solutions that are optimized for signal integrity, latency, power efficiency, and cost effectiveness. Now regarding our AEC product line, during the first quarter, AECs continue to be our main source of revenue and we anticipate that AECs will play a crucial role in driving growth in fiscal 25 and beyond.
Speaker Change: and as I mentioned earlier, we feel very good about engaging in a first program and it will lead to multiple programs with a module manufacturer that's previously considered a lot for the incumbent DSP competitor.
Speaker Change: The competitive landscape is shifting.
Speaker Change: and you know the bottom line as we look towards the 1.6T market, we're going to deliver both full DSP and LRO solutions.
William Brennan: Today, we are in production with solutions for port speeds up to 800 gig and we expect to deliver power optimized three nanometer products in 2025 for the 1.6-T port market. We have delivered AECs in a wide variety of form factors and with a range of functionality designed to meet the diverse needs of our customers. We think our approach of offering system level products, blending customized hardware and software with fast turnaround time is crucial to maintaining our competitive edge and as a result, we've developed deep relationships with our customers to deliver very innovative AEC solutions.
Speaker Change: and the key here for us is to deliver a new definition of what competitive it's for power.
Speaker Change: We believe we're going to deliver a full DSP solution that's on the order of half the power of the devices that have been introduced in the market. Really almost prematurely in a sense that the power is so high in comparison to what the optimal launch market is looking for.
Speaker Change: and so it's all.
Speaker Change: We're agnostic as it relates to full DSP and LRO. The bottom line is we'll deliver a full DSP at the 1.16.
William Brennan: Based on these customer relationships, market feedback, and the inherited advantages of AECs compared to alternative solutions. We have seen AECs become the de facto solution for in-rack connectivity at 50 gig per lane speeds and above. In addition, increasing rack power densities and the migration to liquid cooling are effectively reducing the physical lengths required for back end network connections and thereby increasing the opportunity for AECs. During Q1, our existing and new customer relationships continue to expand and develop, providing us with more confidence in the growth prospects of our AEC business going forward. Given that, we continue to expect our ramp of AECs to drive an inflection point in our sequential growth in the back half of physical 25.
Speaker Change: Speeds that ultimately is in a ten-watt range or less.
Speaker Change: and that will enable any optical player to actually build a standard OSAP or QSAP-DD and fit within the power sailing there. We'll offer options with all our roads to take it even further.
Speaker Change: from an energy efficiency standpoint. So, welcome, William. Our customers make that decision.
William: Thank you.
Speaker Change: Thank you, one moment for an next question.
Speaker Change: All right, question, come from line of tours, funberg from Steve for Nicolas & Company, your line is open.
Tore Svanberg: Yes, thank you, Bill, you just said something that I called attention, you said you're going to ship more DSPs in fiscal 25 than all previous years. I mean, all these are that includes the DAAC business, but you just elaborate a little bit on that because that seems like a pretty high number.
William Brennan: Now I'll turn to our optical DSP business. I'm pleased to report we're making continued progress with our optical DSP business on multiple fronts with AI deployments accelerating adoption of pre-dose solutions. Our optical module customers shipped AOCs and transceivers based on pre-dose DSPs to both US and international and customers.
Speaker Change: Well, the, yeah, the reference was not really in regards to the 80's, this is really in reference to our optical DSP business. And so...
William Brennan: Based on Q1 results and our outlook, we remain on track to achieve our goal for optical DSPs to be at least 10% of our physical 25 Beyond our existing production programs, we remain excited about future growth prospects in this category for several reasons. We are currently working with numerous optical module manufacturers to develop AOCs and transceivers, and notably, we've secured our first design win with an industry-leading module manufacturer. Last fall, Credo introduced the concept of LRO, or linear receive optics, which maintains a DSP only in the transmit path of an optical module as an innovative way to reduce power in both 800 gig and 1.6 T optics.
Speaker Change: I will say that we continue to be engaged with.
Speaker Change: First U.S. hyperscaler in production, as well as we see a return to spending in international space as well. And so I think that...
Speaker Change: You know, from our perspective, that's no surprise. I think we've alluded to the ramp that's going to take place in the fiscal year. And I think we're well positioned to continue that in fiscal 26.
Speaker Change: I've got it now thanks for clarifying that my second question is you mentioned penetration or entrance into the PCIU retirement market.
Speaker Change: Could you just talk a little bit about, you know, why now? I mean, play this as a market that's been around for a few years, but it seems to be expanding. So, help us understand a little bit the timing of entering this market and when should we expect some early revenues for a credo in this market?
William Brennan: The LRO concept is increasingly being adopted within the industry, and a new hyperscaler has decided to implement this strategy in this application will target 800 gig module power of less than 10 watts, significantly below the typical 15 watts seen with full DSP architectures. We expect to start seeing LRO deployments in calendar 25. At 800 gig and 1.6 T port speeds, we see energy efficiency becoming a more critical factor as power delivery and cooling infrastructure becomes even more challenging.
Speaker Change: Yes, so I think that we've talked about the intent to enter the PCIe market, specifically at the Gen 6 speed, which is a 64-gig-pan 4.
Speaker Change: We opted not to pursue the Gen5 market and we probably made a bad call on that, but we felt like from a 30 standpoint that entering the market at 64 give Pam 4 will enable us to deliver the same kind of compelling benefits that we brought to Ethernet.
William Brennan: Notably, power efficiency drove our decision to move directly to 3 nanometer for Credo's 1.6 T DSPs, and we plan to tape out power-optimized solutions with both full DSP and LRO options later this calendar year. Taking into account customer feedback and rising momentum, we anticipate sustained growth in our optical business.
Speaker Change: and really, you know, specifically at the 50 gig and 100 gig level. And so when we talk about signal integrity, we talk about energy efficiency.
Speaker Change: Talk about having the lowest cost basis of any competitor in the market and really with PCIe there's an opportunity here from a late C standpoint and a DSP architecture standpoint.
Speaker Change: for us to really be differentiated as well, in a sense of having a, a certain that's a full blown DSP with latency numbers that are better arrived.
William Brennan: Now regarding our line card 5 business, in the first quarter our line card 5 business was once again an important contributor to our overall product revenue growth driven by strong contributions from 400 gig and 800 gig solutions. Our line card 5 revenue comes from re-timer and max second encryption products report speeds up to 1.6 T per second. In this segment, our customers include networking OEMs for traditional switching applications, and more recently, server ODMs for emerging AI appliance applications.
Speaker Change: You know much lower than competitive solutions that have been announced. And so we think the timing is right. I'll also mention that you'll see us answer the market and then accelerate the market to Gen7. We've already got...
Speaker Change: 1.28 gig silicon that has been tested by a lead partner in the market. And so, as we see AI driving the demand for higher and higher bandwidth, this is something we'll really lean into at BCIE.
William Brennan: We see new demand for our line card 5 solutions within Ethernet-based AI appliances for scale out networks as rapidly increasing GPU performance places greater signal integrity demands inside the server. These emerging opportunities combined with traditional switch opportunities should lead to tam growth into the future for our line card 5 solutions.
Speaker Change: Thank you, a moment for an next question.
Speaker Change: Thank you for watching!
Speaker Change: Nice question, Kafflanov, Suji Dysolva from Ralph Capro, you'll end this open.
Speaker Change: Hi Bill, hi Dan. In terms of the customer concentration, you talked about a new expected 10% customer in F2Q. I just want to get a sense of that customer's kind of starting from the ground floor and F1Q or whether it's been a gradual growth. They're just understand the contributions from that new ramp.
William Brennan: Lastly, I'll review our CERDI's licensing and triplet businesses. We continue to make progress with customers and expand our funnel within our CERDI's IP licensing and triplet businesses. For fiscal 25, while we continue to expect quarterly variability due to the nature of revenue recognition, we see growth opportunities driven by a combination of license, royalty, and triplet revenues. With connectivity speeds rising, fueled mainly by the needs of AI applications, credo is poised for future growth. We offer a wide range of CERDI's solutions up to 224 gig speeds in a wide range of process geometries from 28 nanometer to 3 nanometer.
Speaker Change: Yes, sure. This is not a new customer. This is a customer that we've worked with for, you know, going on a couple, a couple years now.
Speaker Change: and so we've...
Speaker Change: Out!
Speaker Change: We've seen this, but...
Speaker Change: You know, they've been really receptive to the solutions that we're delivering.
Speaker Change: and as they're spending plans increased, we've seen them become much more significant customer for us, but yeah they've been a customer in the past, but we're encouraged by the fact that
Speaker Change: This would be one that we would consider an emerging hyperscaler and we talked about in the past, so the market.
William Brennan: Director. We continue to win due to our compelling combination of performance, power, and exceptional technical support.
Speaker Change: You know really driven by AI solutions, you know, starting to look like.
William Brennan: To summarize, I'm very pleased with our team's performance in Q1, specifically in terms of the strong execution of our product ground and our ongoing success engaging with customers. The rise of generative AI is driving greater demand for cutting edge, power efficient, high-speed connectivity solutions, and Credo is dedicated to advancing our range of solutions to address this growing demand. This month, Credo will have strong presence at the CIOE optical conference in Shenzhen, followed by the ECOC optical conference in Germany.
Speaker Change: More than just the top five US hyperscalers. And so I think this is like a first mover of the emerging hyperscalers. But we've been in a good position and we're in good position with others as well from this standpoint that they've adopted an architecture that that deploys 80 seats.
Speaker Change: Okay, Bill, good to hear the customer base diverse.
Mike: and Mike.
Mike: and then he talked a little bit about the opportunity as Rex.
Speaker Change: Densify, if you would, and being able to handle closer racks and short of reach, can you just give us some sense of metrics and kind of the cooling technology, maybe the hopper to blackwell transition, that makes that possible, and some of the metrics think about in terms of how the Tam increases for you guys.
William Brennan: We expect these events will add to the momentum we've built since OFC in March, and next month will be very visible at the OCP conference in Silicon Valley, showcasing a wide array of advanced solutions for AI clusters. Moving forward, we continue to see an inflection point in the second half of fiscal 25 driven by existing and new customer engagements across the entire range of our connectivity solutions.
Speaker Change: I think we've all seen what leading solutions look like and the increase in densities that you're seeing just with that transition that you mentioned.
Speaker Change: you know but I think from our perspective.
Speaker Change: This is really going to be a customer of the customer architecture decision, but you know theoretically we can see the tan expanding within a customer if they employ a solution that
Daniel Fleming: I'll now turn the call over to our CFO Dan Fleming and he will provide additional details. Thank you, Bill. Good afternoon.
Daniel Fleming: I will first review our Q1 results and then discuss our outlook for Q2 of fiscal year 25. In Q1, we reported revenue of $59.7 million, down 2% sequentially and up 70% year-over-year. Our IP business generated $2.4 million of revenue in Q1, down 14% year-over-year. IP remains a strategic part of our business, but as a reminder, our IP results may vary from quarter to quarter, driven largely by specific deliverables to pre-existing or new contracts.
Speaker Change: Thank you for a moment for our next question.
Mat Ramsey: Our next question of fulfilling a mat Ramsey from TV Kelly, who line his open.
Sean Aloklin: Hey guys, it's actually Sean Aloklin on here for Matt and he sends us regards, but we'll get to that later. I wanted to ask a quick question on the Optical DSP sort of product engagement. You mentioned the module maker, which sounds like really positive momentum there, but I...
Daniel Fleming: While the mix of IP and product revenue will vary in any given quarter over time, our revenue mix in Q1 was 4% IP, below our long-term expectation for IP, which remains 10-15% of revenue. Our product business generated $57.3 million of revenue in Q1, up 30% sequentially and up 77% year-over-year. Our product business excluding product engineering services generated a record $53.8 million of revenue in Q1, 21% higher than our previous product record and up 32% sequentially.
Speaker Change: Is this my naivety or should I be surprised that there's not more sort of connectivity between you guys and the hyperscaler customers themselves on the optical DSP solutions given you have the relationships.
Speaker Change: at the AC level, and it's such an important power level conversation. Is there any engagement on the hyper-scaler side that's kind of helping you get pulled into some of these non-journalic or designs?
Speaker Change: Absolutely.
Speaker Change: Yeah, we've talked about this in the past but this is a market that's a bit unique in a sense that
Speaker Change: You know, if you only engage with the optimal module manufacturers, you really aren't, you know, guaranteed anything. And so we've, you know, had a multi-year effort in...
Daniel Fleming: Our top two end customers were each greater than 10% of revenue in Q1. Our team delivered Q1 non-gap gross margin of 62.9%, just below the low end of our guidance range and down 323 basis points sequentially as a result of the lower IP contribution in the quarter. Our IP non-gap gross margin generally hovers near 100% and was 96.8% Q1. Our product non-gap gross margin was 61.5% in the quarter, up 784 basis points sequentially and up 472 basis points year-over-year, primarily due to increasing scale.
Speaker Change: in working directly with hyperscalers, and we've been successful.
Speaker Change: with some of them in even doing a joint development program where they specified the DSP that is to be used. But this is really an ongoing effort. It's really a three-party conversation between hyperscalers, modemakers, and credo.
Speaker Change: and so that's very much part of our strategy and you know from the standpoint of breaking it down you know we actually you know on a weekly basis internally we break it down you know per hyperskiller as it matches up with muscle makers so it's a very you know it's a very focused strategy that we've gone.
Daniel Fleming: Total non-gap operating expenses in the first quarter were $35.4 million below the midpoint of our guidance range and up 8% sequentially due to a 14th week in the quarter. Our non-gap operating income was $2.2 million in Q1 compared to non-gap operating income of $7.5 million last quarter. Our non-gap operating margin was 3.7% in the quarter compared to a non-gap operating margin of 12.3% last quarter, a sequential decrease of 8.6 percentage points.
Speaker Change: Good morning. Yeah, it's really helpful. And then just one clarification on the IP license revenue. I think last quarter you'd mentioned that you expected that to come in.
Speaker Change: sort of at the higher end of the long-term or the, you know, the long-term model, but
Speaker Change: Lieson's revenue obviously is lumpy and came in a little lower this quarter is that still your expectation For the full year or you know, or we just thinking about it incorrectly. Thanks guys
Daniel Fleming: We reported non-gap net income of $7 million in Q1 compared to non-gap net income of $11.8 million last quarter. Cash flow used in operations in the first quarter was $7.2 million down sequentially primarily due to changes in working capital driven by our ramp and product shipments. CapEx was $5.9 million in the quarter driven by R&D equipment spending. And free cash flow was negative $13.1 million, a decrease of $32.4 million over here.
Speaker Change: Yeah, but for the full year, our expectation hasn't changed, so we expected to be in that long term range of 10 to 15 percent from the full year.
Speaker Change: and you're right and that it was lighter than expected.
Speaker Change: at only 4% and as a quarter evolved, it was offset by strong turns of bookings within the quarter.
Speaker Change: to offset the lightness. But you're thinking about it right, as you say, it's very hard to, it's hard for us to forecast IP in 90 day increments, but we do have confidence over a longer period of time, like just with your 25, that will be within that range, 10 to 15%.
Daniel Fleming: We ended the quarter with cash and equivalence of $398.6 million, a decrease of $11.4 million from the fourth quarter. We remained well capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer. Our Q1 ending inventory was $31.6 million, up $5.7 million sequentially.
Speaker Change: Thank you, one moment for our next question.
Speaker Change: and our next question, come from line of Carl Akerman from B&P Piravos, the line is open.
Carl Akerman: I'm too. Thank you very much.
Carl Akerman: and Gillard first off, I wanted to discuss.
Speaker Change: How active couple cables have received a lot of attention recently.
Daniel Fleming: Now turning to our guidance, we currently expect revenue in Q2 of fiscal 25 to be between $65 million and $68 million, up 11% sequentially at the midpoint. We expect Q2 non-dap gross margin to be within a range of 62 to 64%. We expect Q2 non-dap operating expenses to be between $36 million and $38 million. And we expect Q2 deluded weighted average share count to be approximately 182 million shares. As we move forward through fiscal year 25, we continue to expect sequential growth to accelerate in the second half of the year. We expect non-dap operating expenses to grow at half the rate of top line growth. And as a result, we look forward to driving operating leverage throughout the year.
Carl Akerman: which used a redriver and a red timer that's used in active electrical cables. Each of course has their own trade-offs, but you view these applications can elicit to each other or is the market opportunity.
Speaker Change: for passive copper cables, large enough for both applications. And as you address that question, how am I using an AEC with a half-re-time DSP? Improve the power and cost between perhaps active electrical and active copper cables. I'm sorry, thank you.
Speaker Change: Yeah, so we see the market for passive copper as well as what you're referred to as active or ACC or what we refer to as amplified solutions. We see the market for both of those not being big long-term.
Speaker Change: as it relates to, you know, some of the...
Operator: And with that, I will open it up for questions. Thank you. At this time, I would like to remind everyone that in order to ask a question, press star at the number 11 on your telephone keypad, we'll pause for just a moment to compile the Q&A roster. One moment for our first question.
Speaker Change: You know, some of the references in the market to ACCs, I think that's really been driven by, you know, in video strategy. And so it's really, it's really not something that I would say is a broad market.
Speaker Change: you don't type of opportunity and even with you.
Speaker Change: the introductions that they've made in the past three to six months. I think it's questionable as to what role ACCs will play or amplify solutions will play.
Toshiya Hari: Our first question, conflano Toshia Hari from Goldman Sachs. Your line is open. Hi, good afternoon. Thanks so much for taking the question. My first question is on the AEC business and how we should be thinking about the acceleration and growth you guys spoke to that pertains to the second half. Bill, I think on past calls you've talked about your second customer ramping in the AEC space, and your engagements with additional customers in that space as well.
Speaker Change: you know the key is that.
Speaker Change: We don't see anybody in kind of the rest of the market, meaning hyperscalers that are looking at building their own ecosystems. We don't see anybody considering those solutions.
Speaker Change: and the reason is because really not following the industry standards at this point. And so when we talk about interoperability and we talk about, you know, basic things like sickle integrity.
William Brennan: Can you kind of speak to the key drivers that you see contributing to the acceleration and growth in the second half of the year, and how you're thinking about your AEC opportunity outside of in-rack connectivity as you move into calendar 25 and 20. I'll start with, I think we're pretty happy with the fact that AEC adoption is continuing pretty broadly. It's really become the de facto standard for the lengths that we address, which is primarily in rack at this point, but may expand to rack to rack five to seven meter tables in the future as we see rack densities increasing.
Speaker Change: You know, having the AEC or the fully recime, fully equalized solution, you know, that's really the way you deliver, you know, the kind of fun.
Speaker Change: the kind of interoperability performance that would be expected. And so that's where we really haven't seen any competition, and that's globally, really.
William Brennan: So as that happens, you know, typically, you know, connections that were made with 10 meter to 20 meter optical solutions can now be made with five to seven meter AEC solutions. So we do see, you know, broad adoption continuing and it's really with US hyperscalers, global hyperscalers, what we introduced in the new term with emerging hyperscalers as well as service providers. So I think as we stand right now, we're really well positioned to see future growth with both 400 gig and 800 gig AEC solutions that are, you know, in development now, engagements with customers.
Speaker Change: especially the 100 gig per lane level. As it gets to 200 gig per lane, 1.60, I think it plays even a smaller role. And that's, I think generally in the market, you know, the game is over, you know, fully at the time 80 sees.
Speaker Change: are really the choice by the product market.
Speaker Change: and when I refer to this fact, though, that's really the only solution that's being considered.
Speaker Change: by many of the customers that we talked to.
Speaker Change: and so you know we can kind of go down the path of doing a low-remove for AECs that has not really been a priority for the customer base just because the power levels were delivering are you know meeting the objectives but the opportunity.
Speaker Change: You know what exists in the future if that becomes a priority amongst our customers.
Speaker Change: Yeah, very clear, thanks for that. I want to focus back on licensing revenue. I know it's hard to predict, but is there a seasonality component?
Speaker Change: to the Consumer USB Licensing Revenue, and I guess more importantly, you know, has your view change at all on, you know, the license from a revenue being, you know, toward the 10 to 15% of your
William Brennan: And in the future, as there's a move towards 1.60, I think we'll be in a really good position to address that market, especially because we'll really bring, you know, much differentiated power compared to competitors. I will say that as Ethernet back end networks are becoming more mainstream, we're seeing a focus shift within our customer base to really network quality. And it's important to point out when they have a single hardware failure or a link flap, it can cost 30 minutes productivity and really cost them tens of thousands of dollars.
Speaker Change: Fiscal Year, Revitable Fiscal 25 and for our subject, we look at the Fiscal 26, thank you.
Speaker Change: I would say we have not witnessed any sort of seasonality with IP revenue. In fact, if you look to the last five quarters.
Speaker Change: It goes, you know, each corridor is quite different than the last, in terms of revenue mix or revenue contribution and total.
William Brennan: And so if they look at the Pareto of things, you know, that would make their clusters more efficient, you know, having, having solutions that have really high reliability as becoming really a primary objective. And so when we think about, you know, AECs will have been time before failure of 100 million hours and iterates of five orders or more better than IEEE requirements. And the fact that we've had billions of operating hours that will be flatless in a sense.
Speaker Change: So it's really difficult to draw too many conclusions from that. Again, as we've said in the past, we view IP as a very strategic imperative for us, where we're not...
Speaker Change: We're not incentivized to chase low-value deals, we want to make sure that we get a good over a while on all the IP that we sell, and we win where power tends to be an overriding.
Speaker Change: is a teacher that's required in this solution. So it's stopped to predict quarter to quarter. As we all know, longer term, you know, we've stayed at 10 to 15 percent. We think that'll be that way this year.
William Brennan: There's really what we see as a shifting priority to move to these solutions, to move these active copper solutions. And so, you know, to further that, you know, as I mentioned before, the, you know, I think there's a desire to even, you know, figure out networking topologies that allow them to make a portion of the backend network connections with longer 5 to 7 meter AECs that span two to three racks. And, you know, ultimately, I think we see this, you know, really driving an uplift in the AAC market and an expansion of the TAM long term. And if I hope that gives you color, we're quite bullish on the space.
Speaker Change: Next year, we haven't talked about, but I would expect that would be in the case as well. Longer term when we're talking about much bigger...
Speaker Change: Shipments to customers with products, ultimately, that will reset that expectation, probably lower in the future, maybe FY27 and beyond.
Speaker Change: Thank you, one moment for our next question.
Toshiya Hari: Yeah, that's really helpful. Thanks, Bill.
Speaker Change: and our next question of confeline of Thomas O'Malley from Berkeley's, Atlanta's Open.
Toshiya Hari: And then as a quick follow-up on the optical DSP side of your portfolio, it's really nice to hear the customer traction. I think you guys reiterated that for fiscal 25, it should be more than 10% or at least 10% of your business. Longer term given your current, you know, engagements, the customer back and forth you're having. You know, what are your market share aspirations in this business? I know you're playing the role of disruptor, but curious how you're thinking about your market presence over time.
Thomas O'malley: Hey guys, thanks for taking my question. This one's for Daniel. I just want to be a little bit more specific on a question that's kind of come up a couple times here So in the July quarter product came in much better in licensing came in much lower You just described first, you know what drove that product up tick and also if you look at the gross margins They were there much better as well. I know you said volume on the call, but I'd be surprised if volume drove all of that and then looking into the actual October quarter guidance
Toshiya Hari: And then within the context of LROs, I think on the last call, you talked about 1.6T potentially being a catalyst for increased adoption. Is that still the case? And if so, is that pretty much a 25, 26 dynamic?
Thomas O'malley: like is your assumption that IP goes back to that kind of 10 million a quarter range just because that obviously matters for what product does in the out quarter. I think that's what people are trying to figure out. So both of those will be super helpful.
Daniel Neil: Yeah, so um
Speaker Change: as far as product being a little stronger than normal. It's ordinary that we have some amount of turns booking, so they came in stronger than then we would have expected entering the quarter, so and there's nothing.
William Brennan: Thank you. So I'll say that we're quite happy with the optical DSP business. We are on track to achieve the goal, but you reiterated which is 10% or higher of our fiscal 25 revenue. For sure, we're building momentum. When we think about our position in the market today, there are more than two million modules with Credo DSPs that have been deployed in data centers. And this fiscal year will ship more units than we've shipped in all previous years combined.
Speaker Change: You know, nothing really unanticipated or to talk about in terms of what it was versus what we already talked about, you know, our largest ATEC Hyperscale customer contributed very significantly to the quarter.
William Brennan: So there is real momentum in this building. We've got programs identified that will drive sustained fast growth in fiscal 26 and beyond. And the bottom line is, as we sit here today, we've got a compelling set of solutions at 50 gig and 100 gig per lane, ultimately measured by single integrity power and cost. So I think that the stage is set further to be continued momentum that Credo builds in this market.
Speaker Change: and we expect them to really drive the ramp throughout the fiscal year.
Speaker Change: So, uh...
Speaker Change: Maybe I could talk about gross margin, in fact, as well, since you mentioned.
Speaker Change: you know that expansion of gross margin at the product level. So that's kind of, from my perspective, that's one of the really the headlines for Q-Lonor, one of the key takeaways. If you look at product gross margin,
William Brennan: From a market share standpoint, we're still small and rising. And the bottom line is, one design at the time, converting one customer at a time is really the focus. And as I mentioned earlier, we feel very, very good about engaging in a first program and it will lead to multiple programs with a module manufacturer that's previously been considered a lock for the incumbent DSP competitor. The competitive landscape is shifting. The bottom line is, we look towards the 1.16 market.
Speaker Change: You know, excluding product engineering services, it was up over 900 basis points to 59.6%.
Speaker Change: So recall though for last quarter we had mentioned that we had some one-time reserves in our Q4 number, so that lowered the product gross margin in Q4 at that.
Speaker Change: but we're very happy and Q1 with the excellent progress we've made toward our long-term rose margin expectation of 63 to 65 percent, which has not changed.
William Brennan: We're going to deliver both full DSP and LRO solutions. And the key here for us is to deliver a new definition of what competitive is for power. We believe we're going to deliver a full DSP solution that's on the order of half the power of the devices that have been introduced to the market, really almost prematurely in a sense that the power is so high in comparison to what the optical launch market is looking for.
Speaker Change: So, and as I've mentioned in the past, you know, our long-term model, if you saw for the IP portion being 10 to 15% versus product, that means the product gross margin used to be right around 60% so we're in Q1 we're already in that same zip code.
Speaker Change: So uh
Speaker Change: Throughout FY25, we expect to see some quarterly fluctuations you might see.
Speaker Change: But it really is, it's printed by scale. There's, of course, some product mix impact as well. But the overarching impact of improving margins this year, thematically, is improving scale.
William Brennan: And so we're agnostic as it relates to full DSP and LRO. The bottom line is, we'll deliver a full DSP at the 1.16 speed that ultimately is in a 10 watt range or less. And that will enable any optical player that actually build a standard OSAP or QSF PDD and fit within the power ceiling there. We'll offer options with LRO to take it even further down from an energy efficiency standpoint. So we'll ultimately let our customers make that decision.
Speaker Change: and 32% was the sequential increase from Q4 to Q1 in terms of product shipments. So you do gain a lot of scale when that occurs.
Toshiya Hari: Thank you.
Operator: One moment for our next question.
Speaker Change: and then just the second part about your expectations embedded in the guidance, you're kind of saying 10 to 15% for the year still, obviously lighter in Q1 so you would expect some acceleration but just what is your expectation for October?
Speaker Change: Yes, so for October for IT, you might expect it to be slightly larger contributor to revenue than it was in terms of revenue mixed in Q1.
Speaker Change: But, uh...
Speaker Change: You know what, as you saw in T1, one of the important takeaways is, in order to achieve our gross margin targets that we set out in T2, we don't need an oversized contribution of IP. That's not critical for us to achieve the gross margin goals, but expect IP to contribute to our revenue mix in the quarter in T2 and at T2, 1.
Tore Svanberg: Our next question comes from the line of Tours, Von Berg from Stifle, Nicholas and Company. Your line is open. Yes, thank you. Bill, you just said something that caught the attention. You said you're going to shift more DSPs in fiscal 25 than all previous years. I mean, all these of that includes the DAC business, but can you just elaborate a little bit on that because that seems like a pretty item. Well, the reference was not really in regards to the AECs.
Speaker Change: Thank you, one moment for our next question.
Speaker Change: Thank you for watching!
Speaker Change: Rex Corsion conflaner, Quinn Bolton from Needham, you land is open.
Tore Svanberg: This is really in reference to our optical DSP business. And so, you know, I will say that we continue to be engaged with first U.S, hyperscaler in production, as well as we see a return to spending in international space as well. And so, I think that, you know, from our perspective, that's no surprise. I think we've alluded, you know, to the ramp that's going to take place in this fiscal year. And I think we're well positioned to continue that in fiscal 26. Got it.
Speaker Change: Hey guys, congratulations on the next results and I'm like I guess Dan maybe to, you know, beat on the gross margin here a little bit, you know, would you expect product margins to decline in the October quarter?
Speaker Change #100: Struggling to see why margins wouldn't be, at least at the high end of your 62-64% range if product rose margins flat and IP is a slightly higher percentage of the mix in the October quarter.
William Brennan: Now, thanks for clarifying that. My second question is, you mentioned penetration or entrance into the PCIU V-Timer market. Could you just talk a little bit about, you know, why now? I mean, this is a market that's been around for a few years, but it seems to be expanding. So, help us understand a little bit the timing of entering this market, and when should we expect some early revenues for Credo in this market?
Speaker Change #101: I understand where you're coming at for that question.
Speaker Change #102: The one thing I'll say is, you know, everything is not always linear for us, we had quite a big step up in gross margin percentage in Q1.
Speaker Change #102: We've proved it over the course of time, it's not always linear. We don't have a specific expectation that it will decline by much, but...
William Brennan: So, I think that we've, you know, we've talked about, you know, the intent to enter the PCIE market, specifically at the Gen 6 speed, which is 64GB PAM4. We opted not to pursue the Gen 5 market, and we probably made a bad call on that, but we felt like, you know, from a 30 standpoint that entering the market at 64GB PAM4 will enable us to deliver the same kind of, you know, compelling benefits that we brought to Ethernet, and really, you know, specifically at the 50 gig and 100 gig level.
Speaker Change #103: We remain overarching theme is to remain to serve it in the way we look at things and guide things. So hopefully that helps you a little bit, Clint.
Clint: Got it, you know, that that doesn't just want us to come back to the...
Speaker Change #105: License and I think, you know, in the script you mentioned.
Speaker Change #106: Royalty as part of that IP business and...
Clint: I know you had a big consumer license a few years ago that wondering if you could just give us any update on specific royalties that you're looking for as part of that IP revenue stream just as royalty become.
William Brennan: And so, when we talk about signal integrity, we talked about energy efficiency, we talked about having the lowest cost basis of any competitor in the market, and really with PCIE, there's an opportunity here from a latency standpoint and a DSP architecture standpoint for us to really be differentiated as well in a sense of having a, a 30's that's a full blown DSP with latency numbers that are, that are, you know, much lower than competitive solutions that have been announced. And so, we think the timing is right.
Speaker Change #107: You know, something to call out here at some point over the next year or so, or do you think most of that IP is from straight licensing of your, your surgeries, like it's been historically.
Speaker Change #108: I think you're right on with the assumptions you're making on the royalty and as a relates to our USB customer.
William Brennan: I'll also mention that you'll, you'll see us enter the market and then accelerate the market to Gen 7. We've already got 128 gig silicon that has been tested by a lead partner in the market. And so, you know, as we see AI driving the demand for higher and higher bandwidth, this is something we'll really lean into at PCIE. Thank you.
Operator: A moment for our next question.
Speaker Change #109: We think that, you know, as we think about things going forward, we don't think that's going to be a part of the business that they're...
Speaker Change #109: You know that we look at it as kind of material in comparison to licensing, Japanese themselves. So we think that the waiting is going to still stay the same in a sense, both the revenues and the category will come from licenses.
Suji DeSilva: Our next question, a couple of land of Suji De Silva from Rothcapital. Ilan is open. Hi Bill. Hi Dan. In terms of the customer concentration, you talked about a new expected 10% customer in F2Q. I just wanted to get a sense if that customer is kind of starting from the ground floor in F1Q or whether it's been a gradual growth. I just understand the contributions from that new ramp. Yeah, sure.
Speaker Change #110: Thank you. One moment for our next question.
Speaker Change #111: Our next question, I'm comfortable in a Richard Shannon from Craig Haley. Your line is open.
Richard Shannon: I think you're taking my questions. Maybe a very quick two-parter for Dan here. We called out record product revenues and record a couple ofers, but I don't think it was any seed. You declare whether you had a record agency quarter and then also can give us a percentage of the two-ten percent customers as well.
William Brennan: This is, this is not a new customer. This is a customer that we've worked with for, you know, going on a couple, a couple of years now. And so, we've, you know, we've seen that, that, you know, they've been really receptive to, to the solutions that we're delivering. And as they're, as their spending plan has increased, we've seen them become much more significant customer for us. But yeah, they've been a customer in the past.
William Brennan: But we're encouraged by the fact that, you know, this would be one that we would consider an emerging hyperscaler. And we've talked about in the past how, you know, the market, you know, really driven by AI solutions, you know, starting to look like more than just the top five US hyperscalers. And so I think this is like a first mover of the emerging hyperscalers. But we've been in a good position and we're in good position with others as well. From the standpoint that they've adopted an architecture that that deploys ADCs.
Speaker Change #113: Turn it to 10% customers.
Dan Fleming: We had two 10% end customers in 21, which I have mentioned in the experience in the next couple.
Speaker Change #114: and they were in fact our first two eights in hyperscalers of the park.
Speaker Change #115: I'm one of our two-file in a day or so.
Speaker Change #116: You'll see that our first AEC HyperScale customer remained a 10% customer going to be one right at 10%
Speaker Change #116: in the second 80s, you have the scale customer, it was our large customer, that's 50% of the time.
William Brennan: Okay, Bill, good to hear this, of the customer-based diversifying. And then he talked a little bit about the opportunity as Raxe densify, if you would, and being able to handle closer Raxe and sort of reach. Can you just give us some sense of metrics and kind of the cooling technology, maybe the hopper to black-well transition that makes that possible, and some of the metrics think about in terms of how the TAM increases for you guys?
Speaker Change #116: So we expect that second AEC hyperscaler to continue their meaningful ramp throughout fiscal 25 is what we've talked about. Of course, it might not always be a linear ramp.
Speaker Change #116: but as Bill mentioned earlier.
Speaker Change #117: We expect a new 10% customer in Q2. So even with a meaningful ramp at our second AEC HyperScaler, we expect significant revenue diversification from both a customer and product perspective throughout the 50 years that plays out.
William Brennan: Yeah, sure. I think we've all seen what leading as solutions look like and the increase in densities that you're seeing, just with that transition that you mentioned. But I think from our perspective, this is really going to be a customer of the customer architecture decision. But theoretically, we could see the TAM expanding within a customer if they deploy a solution that implements RAC to RAC ATCs. We can see a doubling in TAM easily when we look at it from that perspective. Thank you.
Speaker Change #118: Great thanks for that Dan and I'll follow up with a question for Bill here.
Bill Brennan: I probably typed in correctly here in a response earlier question here, but you're talking about some.
Speaker Change #119: You know, next gen AI clusters and racks here kind of moving away from, I think, if I clutch grip, I optics and moving towards the active copper and some manner here. Maybe just maybe fill in a little bit more and maybe also comment on whether you think that is a...
Speaker Change #120: Dynamics that can sustain for more than one generation of systems I can go to or three generations, my suspicion is not, but I'd love to get your comment on that, thanks.
Linda Ramsey: One moment for our next question. Our next question for Linda Ramsey from TV Kellen. Your line is open.
Speaker Change #121: Absolutely, and so when we...
Sean O'Lachlan: Hey guys, it's actually Sean O'Lachlan on here for Matt and he sends his regards, but we'll get to that later. I wanted to ask a quick question on the optical DSP sort of product engagements. You mentioned the module maker, which sounds like really positive momentum there, but is this my naivety or should I be surprised that there's not more sort of connectivity between you guys and the hyperscaler customers themselves on the optical DSP solutions, given you have the relationships at the AEC level and it's such an important power level conversation. Is there any engagement on the hyperscaler side that's helping you maybe get pulled into some of these nodule maker designs?
Speaker Change #122: When we work with our customers more and more and really listen to their challenges.
Speaker Change #123: One of the big things that stands out is just the quality of AC's compared to the solutions that are laser-based optics.
Speaker Change #124: and, again, get back to this wing flap phenomenon that has been seen in air clusters and it's becoming more and more of a topic in the industry. Just to reiterate, if you've got a single connection.
Speaker Change #124: that fails and even if it flaps, it just goes down and it comes back up, you can shut down the entire cluster for up to 30 minutes and ultimately measure $1,000 in terms, you know, 30 to 50,000 dollars.
William Brennan: Absolutely. We've talked about this in the past, but this is a market that's a bit unique in a sense that if you only engage with the optical module manufacturers, you really aren't guaranteed anything. We've had a multi-year effort in working directly with hyperscalers and we've been successful with some of them in even doing a joint development program where they specify the DSP that is to be used. But this is really an ongoing effort.
Speaker Change #124: and so if you have three to five of these episodes per day, it becomes something that you really want to pay attention to.
Speaker Change #124: and so as we've worked with customers, more and more the focus is becoming on network quality and when we think about agencies, they just don't have linkflaps, like least basic objects have.
Speaker Change #124: and so it's...
Speaker Change #125: You know, it's absolutely something that will benefit the AECTAM long term.
William Brennan: It's really a three-party conversation between hyperscalers, module makers, and credo, and so that's very much part of our strategy. From the standpoint of breaking it down, we actually on a weekly basis, internally, we break it down per hyperscaler as it matches up with module makers. It's very focused to strategies that we've gone. Gotcha. That's really helpful.
Speaker Change #125: And so you've got this other factor that's happening where racks are being built in a much more dense fashion So now there becomes a possibility to network and really connect racks
Speaker Change #125: and lean on the very high quality reliability of the A.C.
Speaker Change #125: Products, and so moving to an architecture where they're connecting not just in the rack but rack to rack and we're really talking five to seven meters. We're seeing much more activity along these lines and so again it's a customer by customer.
Daniel Fleming: And then just one clarification on the IP license revenue. I think last quarter you'd mentioned that you expected that to come in at the higher end of the long-term model. Licensed revenue obviously is lumpy and came in a little lower this quarter.
Speaker Change #125: Driven Architecture Objective, but this is something that we see that definitely is curging as a relate suit, you know, kind of a new factor that is driving demand direction. I will say that.
Daniel Fleming: Is that still your expectation for the full year or are we just thinking about it incorrectly? Thanks guys. Yeah, for the full year our expectation hasn't changed so we expected to be in that long term range of 10 to 15% for the full year and you're right in that it was lighter than expected at only 4% and as the quarter evolved it was offset by you know strong turns bookings within the quarter to offset the lightness but but you're thinking about it right as you say it's very hard to it's hard for us to forecast IP and 90 day increments but but we do have confidence over a longer period of time like just when you're 25 that will be within that range of 10 to 15%. Thank you.
Karl Ackerman: One moment for next question. Our next question come for a line of Karl Ackerman from BMP Pirabas. Elana is open.
Speaker Change #125: In addition to what we're doing with our AEC family, we're also looking at other system-level solutions that quite frankly help to address.
Speaker Change #125: You know some of these areas of feedback that we're hearing and so.
Speaker Change #125: You know, our experience in the AC Markas taught us a huge amount about these challenges and we see potential to use this knowledge in the optical space.
Speaker Change #125: Specifically to enhance AI plus to performance and energy efficiency.
Speaker Change #125: and so, you know, you've seen the innovations from Creedau along the Lies of El Arro that was specifically for power, but there's other things that we're working on to help improve network quality.
William Brennan: So I have to thank you very much. Joe, the first off I wanted to discuss how you know active couple cables have received a lot of attention recently which use a redriver instead of a re-timer that's used in active electoral cables. Each of course has their own trade-offs but do you view these applications can elicit to each other or is the market opportunity for passive copper cables large enough for both applications and as you address that question how am I using an AEC with a half-ree time DSP? Improve the power and cost between perhaps active electrical and active copper cables not a fault.
Speaker Change #125: Thank you for the moment for the next question.
Speaker Change #126: and next question, come from Tor Svonberg from Stiefland Nicholas and Company, your eyes open.
Tor Svonberg: Yes, thank you. I just had two follow-ups.
Tor Svonberg: Bill, as we sort of look at the second half of fiscal 25, the ramps that you're expecting. Can you talk a little bit about...
Speaker Change #128: you know how broad those ramps are I'm not talking about by customer here but I'm thinking more about
Speaker Change #129: you know, the different AC form factors, and especially when considering you know the 400 gig AI AC back in network solution that you I've been sampling the last few quarters.
William Brennan: Thank you. Yeah, so we see the market for passive copper as well as what you're referred to as active or ACC or what we refer to as amplified solutions. We see the market for both of those not being big long term as it relates to some of the references in market to ACC. I think that's really been driven by Nvidia strategy and so it's really not something that I would say is a broad market type of opportunity.
Speaker Change #130: Sure, sure, so I guess...
Speaker Change #131: You know that would relate to our business with Amazon and we feel good about where we are in the ramp there
Speaker Change #132: As we said previously, their ramp is expected to drive a significant portion of our growth this year, Dan alluded to the fact that we don't expect it to be a linear ramp, quarter quarter, but we do expect them to be our largest customer.
William Brennan: And even with the introductions that they've made in the past three to six months, I think it's questionable as to what role ACC will play or amplified solutions will play. The key is that we don't see anybody in kind of the rest of the market meaning hyperscalers that are looking at building their own ecosystems. We don't see really anybody considering those solutions. And the reason is because really not following industry standards at this point and so when we talk about interoperability and we talk about basic things like signal integrity.
Speaker Change #133: with that said, we see increasing demand across the board for our solutions and really it's from a range of customers that we feel good about in a sense that it will drive customer to the University over the upcoming quarters through the end of this year and even in the fiscal 26th.
Speaker Change #133: So as we've talked about before, we see Microsoft returning the historical levels.
Speaker Change #133: We've talked about a third hyperscaler, that relationship is really progressing and we expect that they will become a significant customer and really towards the tail end of just the real tail end of fiscal 25 but really in the fiscal 26.
Speaker Change #133: You know, we've mentioned that you see continuing to gain traction broadly, optical is going to you know, contribute to that inflection point this year and into 26 as we see that continuing as our fastest growth product line.
William Brennan: Having the AC or the fully re-timed fully equalized solution, that's really the way you deliver the kind of interoperability performance that would be expected. And so that's where we really haven't seen any competition and that's globally really especially at the 100 gig per lane level. As it gets to 200 gig per lane, 1.60 I think it plays even a smaller role and that's I think generally in the market you know the game is over, you know fully re-timed ACCs, are really the choice by the broad market.
Speaker Change #133: and even the other product categories we haven't really spent too much time talking about like like hurt flies or serious chiblets.
Speaker Change #133: and licensing, if it's expected that they're going to be a material contributor in our second half in the end of the fiscal twenty-sex.
Speaker Change #133: and so...
Speaker Change #134: You know that really gives you color in your term, a lot of the fun that we have in Crito is talking about things that are really outside the teeth of the topic of these calls, which is really very near term, folks on Disco 25.
William Brennan: And when I refer to this in facto, that's really the only solution that's being considered by many of the customers that we talked to. And so we can kind of go down the path of doing LRO for AECs. That has not really been a priority for the customer base, just because the power levels were delivering are meeting the objectives. But the opportunity, you know, would exist in the future if that becomes a priority amongst our customers.
Speaker Change #134: We have a lot of fun talking about, you know, next generation solutions that we're developing. There's a lot of energy that we've got around PCI, EGN, 6GN, 7GN exactly, how are we going to, you know, add our unique and compelling value that that market.
William Brennan: Yeah, very clear.
William Brennan: Thank you for that.
Speaker Change #134: [inaudible]
Speaker Change #134: and this idea of continuing to innovate at the system level is something that we're highly engaged on internally and create a, we've had just great experience in the markets that we've pioneered and we're going to continue that and we expect to really bring meaningful and compelling solutions to the market and again, this system level.
Daniel Fleming: I wanted to focus back on licensing revenue.
Daniel Fleming: I know it's hard to predict, but is there a seasonality component to the consumer USB licensing revenue? And I guess, you know, more importantly, you know, has your view changed it at all on, you know, the license for revenue being, you know, toward the 10 to 15% of your fiscal year revenue, fiscal 25, and perhaps other people would look for fiscal 26.
Dan Fleming: That's very helpful. Just last question for Dan. Then you said that optics would grow at half the rate of revenue growth. Is that a specific sort of target for fiscal 25 or was that more reference to sort of your long-term financial model?
Speaker Change #135: [inaudible] Revenue and midpoint, it's up 11%, gross margin flat, up up, up, up, up, up, up, up, up, up.
Daniel Fleming: Thank you. I would say we have not witnessed any sort of seasonality with IP revenue. In fact, if you look at the last five quarters, it goes, you know, each quarter is quite different than the last in terms of revenue mix or revenue contribution in total. So it's really difficult to draw too many conclusions from that. Again, we, as we said in the past, we view IP as a very strategic imperative for us where we're not incentivized to chase low value deals.
Speaker Change #136: So we expect that.
Speaker Change #137: You're over here, fiscal 24 to 25, that'll be the case and it'll extend probably into fiscal 26 as well as we attain kind of that long-term operating model. We're the operating margin should be in the 30 to 35 percent range next next fiscal year.
Speaker Change #137: Thank you and there are no further questions at this time Mr. Brennan, I'll try to call back over to you.
Daniel Fleming: We want to make sure that we get a good ROI on all the IP that we sell, and we win where power tends to be an overriding feature that's required in the solution. So it's tough to predict quarter to quarter. As we all know, longer term, you know, we've stated 10 to 15%. We think that'll be that way this year. Next year, we haven't talked about, but I would expect that would be the case as well. Longer term when we're talking about much bigger shipments to customers with products, ultimately that will probably reset that expectation probably lower in the future, maybe FY27 and beyond.
Brennan: Absolutely. Thanks everybody for joining. We really appreciate the questions and we look forward to the call back.
Brennan: Thanks.
Speaker Change #139: and with that this concludes today's conference call. You may now disconnect, everyone have a great day.
Operator: Thank you.
Operator: One moment for an excursion. All right, an excursion.
Thomas O'malley: I'm Confluent. Thomas O'Malley from Barclays. The line is open.
Daniel Fleming: Hey, guys, thanks for taking my question. This one's for Dan. I just want to be a little bit more specific on a question that's kind of come up a couple of times here. So in the July quarter product came in much better. And licensing came in much lower. You just described first, you know, what drove that product uptick? And also if you look at the gross margins, they were, they were much better as well.
Daniel Fleming: I know you said volume on the call, but I'd be surprised if volume drove all of that. And then looking into the October quarter guidance, like is your assumption that IP goes back to that kind of 10 million a quarter range just because that obviously matters for what product does now quarter. And I think that's what people are trying to figure out.
Daniel Fleming: So both of those Yeah, so as far as product being a little stronger than normal, it's ordinary that we have some amount of turns booking, so they came in stronger than we would have expected entering the quarter, and there's nothing really unanticipated or to talk about in terms of what it was versus what we already talked about, our largest AEC hyperscale customer contributed very significantly to the quarter, and we expect them to really drive the ramp throughout the fiscal year, so maybe I could talk about gross margin impact as well since you mentioned that expansion of gross margin at the product level, so that's kind of, from my perspective, that's one of the really the headlines for Q1 or one of the key takeaways, if you look at product gross margin, you know, excluding product engineering services, it was up over 900 basis points sequentially to 59.6%, so recall though for last quarter, we had mentioned that we had some one-time reserves in our Q4 number, so that lowered the product gross margin in Q4 a bit, but we're very happy in Q1 with the excellent progress we've made toward our long-term gross margin expectation of 63 to 65%, which is not changed, so and as I've mentioned in the past, our long-term model, if you solve for the IP portion, being 10 to 15% versus product, that means the product gross margin used to be right around 60% or in Q1, we were already in that same zip code, so throughout FY25, you know, we expect to see some quarterly fluctuations you might see, but it really is, it's driven by scale, there's, of course, some product mix impact as well, but the overarching impact of improving margins this year, thematically, is improving scale, and you know, 32% was the sequential increase from Q4 to Q1 in terms of product shipments, so so you do gain a lot of scale in that, when that occurs. And then just the second part about your expectations embedded in the guidance, you're kind of saying 10 to 15% for the year still, obviously lighter in Q1, so you would expect some acceleration, but just what is your expectation for October?
Daniel Fleming: Yeah, so for October for IP, you might expect it to be, you know, slightly larger contributor to revenue than it was in terms of revenue makes than Q1, but you know, but as you saw in Q1, one of the important takeaways is, in order to achieve our gross margin targets that we set out in Q2, we don't need an oversized contribution of IP, that's not critical for us to achieve the gross margin goals, but I expect IP to contribute modestly more to our revenue mix in the quarter in Q2, and it didn't Q1.
Daniel Fleming: Thank you, one moment for next question. Next question, I'm going to fly in at Quinn Bolton from Needham, your line is open. Hey guys, congratulations on the nice results now. I guess Dan maybe to beat on the gross margin here a little bit. But would you expect product margins to decline in the October quarter because I'm struggling to sort of see why margins wouldn't be at least at the high end of year 62 to 64% range.
Daniel Fleming: If product margins flat and IP is a slightly higher percentage of the mix in the October quarter. I understand where you're coming at for that question. The one thing I'll say is, you know, everything is not always linear for us. We had quite a big step up in gross margin percentage in Q1. We've proved it over the course of time is not always linear. We don't have a specific expectation that that will decline or decline by much. But, you know, we remain over our overarching theme is to remain conservative in the way we look at things and guide things. So hopefully that helps you a little bit. Yeah, I know that does.
Daniel Fleming: And then just wanted to come back to the license and IP. I think, you know, in the script you'd mentioned royalty as part of that IP business. And I know you had a big consumer license a few years ago that that wondering if you could just give us any update on specific royalties that you're looking for as part of that IP revenue stream.
Daniel Fleming: Does royalty become a, you know, something to call out here at some point over the next year or so. Or do you think most of that IP is from straight licensing of your, your certies like it's been historically? Yeah, I think I think you're right on with, you know, with the assumptions you're making on, you know, the royalty and as it relates to our USB customer. We think that, you know, as we think about things going forward, we don't think that's going to be, you know, a part of the business that, you know, that we look at as kind of material in comparison to licensing revenues themselves. So we think that the waiting is going to still stay the same in a sense that both of the revenues in this category will come from licenses.
Operator: Thank you.
Richard Shannon: One moment for next question. Our next question is going to fly in a Richard Shannon from Craig Halem. Your line is open. Great. I think you're taking my questions.
Daniel Fleming: Maybe a very quick two-parter for Dan here. We called out to record product revenues and record a couplers, but I don't think it was any siege. Can you declare whether you had record a quarter and that also can give us percentages of the two 10% customers as well? Yeah, so we did have a record product revenue and we don't break out, you know, by product line, but you can safely assume that AEC is a large driver of our story for the whole year. So that was, you know, the most significant contribution to revenue.
Daniel Fleming: Turning to 10% customers. We had two 10% end-customers in Q1, which I have mentioned in the previous remarks. And they were, in fact, our first two 8-2 hyper-scalers at the start. One of our Qs files in a day or so. You'll see that our first AEC hyper-scale customer remained a 10% customer during Q1, right at 10%, and the second 8-2 hyper-scale customer was our larger customer. So, you know, we expect that second AEC hyper-scaler to continue their meaningful ramp throughout fiscal 25 is talked about. Of course, it might not always be a minute ramp.
William Brennan: But as Bill mentioned earlier, we expect a new 10% customer in Q2. So even with a meaningful ramp at our second AEC hyper-scaler, we expect significant revenue diversification from both a customer and product perspective throughout calendar or throughout the fiscal year, is that place out? Okay.
William Brennan: Great.
William Brennan: Thanks for that, Dan.
William Brennan: And I'll follow up with a question for Bill here. Bill, I probably typed in incorrectly here in a response to earlier question here, but you talked about some, you know, next gen AI clusters and racks here, kind of moving away from, I think, if I clutch correctly, optics and moving towards the active copper in some manner here. Maybe you just maybe fell into that a little bit more and maybe also commented whether you think that is a dynamic that can sustain for more than one generation of systems.
William Brennan: I can go to or three generations. My suspicion is not, but I'd love to get your comment on that. Thanks. Absolutely. And so, when we work with our customers more and more and really listen to their challenges, one of the, you know, one of the big things that stands out is just the quality of AECs compared to the solutions that are laser-based optics. And again, get back to this link flap phenomenon that's seen in AI clusters, and it's becoming more and more of a topic in the industry.
William Brennan: Just to reiterate, if you've got a single connection that fails, and even if it flaps, it just goes down and it comes back up, it can shut down the entire cluster for up to 30 minutes and ultimately measured in dollar terms, you know, $30 to $50,000. And so, if you have, you know, three to five of these episodes per day, it becomes something that you really want to pay attention to. And so, as we, you know, as we work with customers more and more, the, you know, the focus is becoming on network quality.
William Brennan: And when we think about AECs, they just don't have link flaps like laser-based optics have. And so, it's, you know, it's absolutely something that will benefit the AEC Tam long term. And so, you've got, you've got this other factor that's happening where, where racks are being built in a much more dense fashion. And so, now, there becomes a possibility to, you know, to network and, you know, really connect and lean on the very high-quality reliability of the AEC products.
William Brennan: So moving to an architecture where they're connecting not just in the rack, but rack to rack, and we're really talking 5-7 meters. We're seeing much more activity along these lines, and so again it's a customer-by-customer driven architecture objective. But this is something that we see that definitely is encouraging as it relates to a new factor that is driving demand this direction. I will say that in addition to what we're doing with our AEC family, we're also looking at other system-level solutions that quite frankly help to address some of these areas of feedback that we're hearing.
William Brennan: Our experience in the AEC market has taught us a huge amount of these challenges, and we see potential to use this knowledge in the optical space, specifically to enhance AI cluster performance and energy efficiency. And so, you've seen innovations from Credo along the lines of LRO that were specifically for power, but there's other things that we're working on to help improve network quality.
William Brennan: And that's not something I'm going to details about, but within the next, say, nine to twelve months, we'll probably talk more about it as we deliver these solutions to the market. Thank you. One moment for our next question. Our next question will come from Taurus Fondberg from Stifle Nicholas and Company. Your line is open. Yes, thank you. I just had two follow-ups. Bill, as we sort of look at the second half of fiscal 25, the ramps that you're expecting.
William Brennan: Can you talk a little bit about how broad those ramps are? I'm not talking about by customer here, but I'm thinking more about the different AEC form factors, and especially when considering the 400 gig AI, AEC backend network solution that you have been sampling the last few quarters. Sure, I guess that would relate to our business with Amazon. And we feel good about where we are in the ramp there. As we've said previously, their ramp is expected to drive a significant portion of growth this year.
William Brennan: Dan alluded to the fact that we don't expect it to be a linear ramp quarter to quarter, but we do expect them to be our largest customer. With that said, we see increasing demand across the board for our solutions, and really from a range of customers that we feel good about in a sense that it will drive customer diversity over the upcoming quarters through the end of this year, and even in the fiscal 26.
William Brennan: As we've talked about before, we see Microsoft returning to the historical levels. We've talked about a third hyperscaler. That relationship is really progressing, and we expect that they will become a significant customer, and really towards the tail end of just the real tail end of fiscal 25, but really into fiscal 26. We've mentioned ADC's continuing to gain traction broadly. Optical is going to contribute to that inflection point this year. And into 26, as we see that continuing as our fastest growth product line.
William Brennan: And even the other product categories, we haven't really spent too much time talking about like line-curred flies or series chiplets. And licensing, it's expected that they're going to be a material contributor in our second half in the end of fiscal 26. And so, you know, that really gives you color near term. A lot of the fun that we have at Credo is talking about, you know, things that are really outside the pace of the topic of these calls, which is really very near term focused on fiscal 25.
William Brennan: We have a lot of fun talking about, you know, next generation solutions that we're developing. There's a lot of energy that we've got around PCI eGen 6 and Gen 7 and exactly how are we going to, you know, add our unique and compelling value to that market. And this idea of, you know, continuing to innovate at the system level is something that we're highly engaged on internally at Credo. We've had just great experience in the markets that we pioneered. And we're going to continue that.
Operator: And we expect to really bring meaningful and compelling solutions to the market at again, the system level. That's very helpful. Just last question for Dan, then you said that all picks would grow at half the rate of revenue growth. Is that a specific sort of target for fiscal 25 or was that more a reference to sort of your long term financial model? It's related to fiscal 25. And in fact, I mean, it's even embedded in our Q2 guide right revenue at the midpoint is up 11% gross margin flat outbacks up 5%.
Operator: So, so we expect that, you know, year over year, fiscal 24 to 25, that'll be the case. And it'll extend probably into fiscal 26 as well as we attain kind of that long term operating model, where the operating margin should be in the 30 to 35% range next, next fiscal year. Thank you. And there are no further questions at this time. Mr. Brennan, I try to call back over to you. Absolutely. Thanks everybody for joining. We really appreciate the questions and we look forward to the callbacks. Thanks. That concludes today's conference call. You may now disconnect. Everyone have a great day.
Operator: Thank you.