Q1 2025 Astera Labs Inc Earnings Call

Good afternoon. My name is Amy and I will be your conference operator today. At this time I would like to welcome everyone to the Astera Labs first quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise.

After the management remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star and the number one. Thank you.

Speaker Change: It is now my pleasure to turn the call over to Leslie Green, Investor Relations with Astera Labs. Leslie, you may begin.

Leslie Green: Thank you Amy, good afternoon everyone and welcome to the Astera Labs first quarter 2025 earnings conference call.

Speaker Change: Joining us on the call today are Jitendra Mohan, Chief Executive Officer and Co-Founder.

Speaker Change: Sanjay Gajendra, President and Chief Operating Officer and co-founder and Mike Tate, Chief Financial Officer. Before we get started, I would like to remind everyone that certain comments made in this call today may include forward-looking statements regarding, among other things, the expected future financial results.

Unknown Attendee, Sanjay Gajendra, Jitendra Mohan, Leslie Green

Speaker Change: These forward-looking statements reflect management's current beliefs, expectations and assumptions about future events.

Speaker Change: which are inherently subject to risks and uncertainties that are discussed in detail in today's earnings release and the periodic reports and filing.

Speaker Change: We file from time to time with the SEC, including our risks set forth in our most recent annual report on Form 10K and our upcoming filing on Form 10Q.

Speaker Change: It is not possible for the company's management to predict all risks and uncertainties that could have an impact on these forward-looking statements or the extent to which any factor or combination of factors may cause actual result to different materially from those contained in any forward-looking statement.

Speaker Change: These non-GAAP financial measures are provided in addition to and not as a substitute for.

Speaker Change: Financial results prepared in accordance with US Gap. A discussion of why we use non-GAAP financial measures and reconciliation between our Gap and non-GAAP financial measures is available in the earnings release.

Speaker Change: Thank you Leslie, good afternoon everyone and thanks for joining our first quarter conference call for fiscal year 2025.

Speaker Change: Today I will provide an overview of our Cuban results followed by a high-level discussion around our long-term growth strategy. I will then turn the call over to Sanjay to walk through the key AI-insolved infrastructure applications that are driving our market opportunity.

Speaker Change: Finally, Michael given overview of our Q1 2025 financial results and provide details regarding our financial guidance for Q2.

Speaker Change: Astera Labs had a strong start to 2025 with Q1 results coming in above guidance.

Speaker Change: Portally revenues of 159.4 million dollars was up 13% from the fair quarter and up 144% versus Q1 of last year. Our Aries product family continues to see strong demand and is diversifying across both GPU and custom basic based systems for a variety of applications including scale up and scale out connectivity.

Speaker Change: Artora's product family also demonstrated strong growth driven by continued deployment on AI and general purpose systems that are leading hyper-skiller customers.

Speaker Change: Newer continues to ship in pre-production volumes as customers progress through the qualification of their next generation systems, leveraging new CXL capable data center server CPUs.

Speaker Change: On the organizational fund, we are very excited to announce the appointment of Dr. Craig Barrett as an addition to our Board of Directors. Craig brings a wealth of experience across execution and innovation that will help Astera Labs expand our connectivity leadership position in cloud and AI infrastructure.

Speaker Change: Arvijan has to provide a broad portfolio of connectivity solutions for the entire AI rack through purpose built silicon hardware and software to support computing platforms based on both custom A6 and Merchant GPUs.

Speaker Change: Significant progress towards this vision began in the second half of 2024 as the company transitioned from primarily supplying PCIe retimals for NVIDIA AI servers to now become again integral supplier for AI RAC level connectivity to apologies.

Speaker Change: We are in an ideal position to enable these new rack level connections with our broadening portfolio, scarf, your fabric switches, Ethernet and PCIe active cable modules, re-timers, TXL Memory Expansion, Optical Interconnects, and other products on the development.

Unknown Attendee: A revenue is diversifying across multiple AI platforms based on both custom A6 and GPUs across different product families thereby enhancing a revenue profile and delivering the increasing value across the AI rack.

Unknown Attendee: On the product front, we recently expanded our market leading PCI-6 connectivity portfolio to now also include gearboxes and optical connectivity technology to complement our existing traffic switches, re-timals and smart cable modules.

Unknown Attendee: The new 86 PCI Smart Gearbox is purpose built to break the speed cap between the latest generation PCI 6 devices and the existing PCI 5 ecosystem.

Unknown Attendee: This holistic portfolio approach is essential given the increasing complexity of BCI-6 topologies. Point solutions are no longer sufficient.

Unknown Attendee: Increasing our market opportunity also remains a crucial focus for Astera Labs

Unknown Attendee: We believe we are in a great position to address a large emerging opportunity associated with the scale of connectivity, open industry standard, ultra-accelerator link or UL link.

Unknown Attendee: Ueling combines the best of two words, natively offering memory semantics of PCIe and the fast speed of Ethernet, but without the software complexity and performance limitations of

Unknown Attendee: Your option of ULINK will enable the industry to move beyond proprietary solutions toward the scalable and interoperable AI ecosystem.

Unknown Attendee: With broad industry support and adoption, the proliferation of U.L. Inc. can represent a multi-billion-dollar additional market opportunity for Astera Labs 2019.

Unknown Attendee: Beyond UL Inc., we look for next generation standards including PCIe Gen 7, 800 Ethernet, NCXL 3 to drive additional market opportunity for Astera Labs to increase unit shipments in higher dollar content for platform.

Unknown Attendee: Killing our platform approach is another important strategic priority for the company. A rack skill connectivity

Unknown Attendee: The Stara Labs Intelligent Connectivity Platform provides technology for our hyper-scaler customers, while also enhancing performance and productivity, driven by a better together product portfolio design approach.

Unknown Attendee: While Aries can track the reliability and robustness of PCIe 6 links, Scorpio provides packet-level visibility for increased observation of data center traffic.

Thanks, Jitendra, and good afternoon everyone.

Speaker Change: Today I want to provide an update on our progress and opportunities within three key AI and cloud infrastructure application categories, as we establish Astera as a critical connectivity supplier for the entire AI rack.

Speaker Change: First off, Caleb Connectivity for AI and Cloud Infrastructure represents a significant and rapidly growing marketplace.

Speaker Change: These opportunities are driving strong demand for our reach extension solutions in the near term and we expect these trends to drive additional revenue growth across multiple product

Speaker Change: designed to maximize AI accelerator utilization with consistent performance and reliability Scorpio X solutions will be central to next generation AI racks.

Speaker Change: This trend will increase our Silicon content opportunity to hundreds of dollars per accelerator and serve as an ankle socket for integrating additional Astral Labs connectivity solutions.

along with our Cosmos Software Suite at the Rack Scale.

Next, the Scale Out Connectivity Applications

Speaker Change: Over the past few years, we have established a robust business within scale-out topologies through our reach extension portfolio of 80s and Tore's products across PCIE and Ethernet protocols.

Speaker Change: As the market transitions to PCIe 6 capable GPUs, we now see an expanded market opportunity that includes our Scorpio P series product family and 80s 6V timer and gearbox solutions.

Speaker Change: Our Cosmos Software Framework enables seamless expansion into these additional sockets in our customers platforms.

Speaker Change: Utilizing PTI-6 data rates to support 800-gay-scale-out connectivity will be a primary focus for AI infrastructure providers in the coming years.

Speaker Change: The Scorpio PCRIES, combined with 86, represents the first to market solution specifically designed to achieve this objective.

Speaker Change: Looking ahead to Q2, we anticipate accelerated shipments of Scorpio P-Series switches and 86th re-timers on customized RAC scale AI platform based on market leading GPUs.

Speaker Change: Additionally, we continue to identify further opportunities for Scorpio P series outside of rack scale systems with multiple engagements on modular topologies that support enhanced customization.

Speaker Change: Our reference design and collaboration with Wistrom on NVIDIA Blackwell-based MGX systems exemplifies this expanding opportunity set as we aim to bolster our presence within OEM and Enterprise

Speaker Change: We remain the sole connectivity provider that has demonstrated complete end-to-end PCIe 6 interoperability with NVIDIA's Blackwell GPUs and we are actively working across the ecosystem to enable future proof infrastructure capable of leveraging the increased throughput.

and Performance of the PCI Sixth Standard.

We expect revenue growth from general compute-based platform opportunities.

featuring next-generation CPUs. [inaudible]

Speaker Change: Network Cards, and SSDs with our 80s PCIe 6 retimals, 80s PCIe gearboxes, Tore S Ethernet SEMs, and Leo CXL product families.

Speaker Change: For the next couple years, the transition of data center server CPUs to support PCIe 6 will be a catalyst for additional unit growth and higher ASPs for our ADS product family.

Speaker Change: For Ethernet, Tore S continues to see growth on general-purpose platforms leveraging 400-gig switching port speeds.

Speaker Change: CXL will also expand our general-purpose compute exposure with expected volume ramps on hyperscaler, customer programs in second half of 2025.

Speaker Change: Overall, General Purpose Compute remains an important application for our intelligent connectivity platform and is expected to drive diversification of our revenue profile over the long term.

to support PCRE and UVA Link based scale-up.

Speaker Change: Ethernet-based scale-out, TCI-based peripheral and CXL-based memory connectivity with all these components seamlessly integrated with our Cosmos software suite for advanced observability, fleet management and rapid market deployment.

Speaker Change: With that, I will turn the call over to our CFO , Mike Tate, who will discuss a Q1 financial resource and our Q2 Outlook.

Mike Tate: Thanks, Anjay, and thanks to everyone for joining the call. This overview of our Q1 financial results and Q2 guidance will be on a non-GAAP basis. The primary difference in Astera Labs non-GAAP metrics is stock-based compensation and its related income tax effects.

Mike Tate: Please refer to today's press release available on the Investor Relations section of our website for more details on both our gap and non-GAAP Q2 financial outlook, as well as the reconciliation of our gap to non-GAAP financial measures presented on this call.

Speaker Change: For Q1 of 2025, Astera Labs delivered quarterly revenue of $159.4 million, which was up 13% versus the previous quarter, and 144% higher than the revenue in Q1 of 2024.

Speaker Change: Leo CXL Controllers and Scorpio Smart Fabric Switches, both ship pre-production volumes as their customers work to qualify their platforms for volume deployment and mid to late 2025.

Speaker Change: non-GAAP operating expenses for Q1 of $65.6 million were up from the previous quarter as we continue to scale our R&D organization to expand and broaden our long-term market opportunity.

Speaker Change: Within Q1, non-GAAP operating expenses R&D expenses were $45 4 million sales and marketing expenses were $9 4 million and general and administrative expenses were $10 9 million non.

Speaker Change: non-GAAP operating margin for Q1 was 33, 7%.

Speaker Change: Interest income in Q1 was $10 $4 million.

Speaker Change: Our non-GAAP tax rate for Q1 was seven 1%.

Speaker Change: non-GAAP fully diluted share count for Q1 was 178 million shares and our non-GAAP diluted earnings per share for the quarter was 33.

Speaker Change: Cash flow from operating activities for Q1 was $10 5 million and we ended the quarter with cash cash equivalents in marketable securities of $925 million.

Speaker Change: Now turning to our guidance for Q2 of fiscal 2025.

Speaker Change: We are aware and focused on navigating the rapidly changing and dynamic macro environment.

Speaker Change: Policy initiatives, including tariffs and changing export restrictions are few of the variables that are likely to have at least some impact on demand across the global economy, including the AI and cloud infrastructure markets.

Speaker Change: These factors our business continues to have strong momentum as we execute on our long term growth strategy.

Speaker Change: With that said, we expect Q2 revenue to increase to within a range of $170 million and $175 million up roughly 7% to 10% from the prior quarter for.

Speaker Change: For Q2, we expect Aries and tourists revenues to grow on a sequential basis.

Speaker Change: Our <unk> controller family will continue shipping and pre production quantities to support ongoing qualifications ahead of an expected production ramp in the second half of 2025.

Speaker Change: Finally, we expect our Scorpio product revenues to grow sequentially in Q2 as the initial designs of customized GPU based rack level systems begin to ramp in volume late in the quarter.

Speaker Change: We continue to expect Scorpio revenue to comprise at least 10% of our total revenue for 2025.

Speaker Change: We expect non-GAAP gross margins to be approximately 74% as the mix between our silicon and hardware modules remains largely consistent with Q1.

Speaker Change: We expect.

Speaker Change: Second quarter non-GAAP operating expenses to be in a range of approximately $73 million to $75 million operating expenses.

Speaker Change: Operating expense growth in Q2 is driven is being driven by continued investment in our research and development function as we look to expand our product portfolio and grow our addressable market opportunity.

Speaker Change: Interest income is expected to be approximately $10 million.

Speaker Change: Our non-GAAP tax rate should be approximately 10% and our non-GAAP fully diluted share count is expected to be approximately 178 million shares.

Speaker Change: Adding this all up we are expecting our non-GAAP fully diluted earnings per share in a range of approximately 32.

Speaker Change: 233.

Speaker Change: This concludes our prepared remarks and once again, we appreciate everyone joining the call and now we'd like to open the lines for questions operator.

Speaker Change: Thank you.

Speaker Change: The floor is now open for questions as a reminder to enter the queue Press star followed by the number one on your telephone keypad. You May also withdraw your question via the Star one as well.

Speaker Change: If you are called upon to ask your question and our listening via loud speaker on on your device. Please pick up your handset and ensure that your phone is not on mute when asking your question.

Speaker Change: Request for today's session that you please limit to one question and one follow up.

Speaker Change: Do invite you to re enter the queue for additional questions.

Speaker Change: Again press star and the number one.

Speaker Change: Our first question comes from the line of Harlan sur with Jpmorgan. Your line is now open.

Harlan Sur: Good afternoon. Thanks for taking my question high level question on the overall AI and data center spending environment, they're getting some concerns on the capex spending momentum potentially peaking this year, maybe some AI continued digestion. We also recently saw some of the AI bans to China recently.

Harlan Sur: And then obviously tariff and trade concerns as you guys articulated in your prepared remarks on the flip side, you've got the strong ramp of your merchant GPU customers on their next generation AI platforms strong new AI ASIC extra you Ram So you've got new entrants into the AI.

Harlan Sur: Basic extra yield market. So since last earnings I mean has anything changed meaningfully positive or negative on the customer programs or the demand outlook for this year and more importantly, your confidence level on continued strong growth for next year.

Thanks, Harlan Yeah first off on the tariffs, we have not seen any material impact on our business but.

Harlan Sur: It is fluid.

Harlan Sur: And the rules are still subject to change so it's something we're watching closely.

Harlan Sur: But so far we have not seen an impact we do note that the hyperscale is stuck to their capex in the recent calls and one actually increased so that was encouraging.

So we'll continue to monitor that in regards to restrictions to China.

Harlan Sur: We did see an impact on that in this year and we do have design set.

Harlan Sur: Where the re timer on those programs so to extent.

Harlan Sur: Our customers cannot procure the gpus that does have a headwind for us that we've contemplated in our guidance.

Harlan Sur: Yeah, and then on the calculation.

Harlan Sur: Yeah on the customer on the business side.

Harlan Sur: Touch on that question that you asked.

Harlan Sur: The great thing about.

Harlan Sur: Our overall revenue profile is that there are multiple.

Waste in which we are approaching the market the diversity across both custom ASIC based platforms versus merchant GPU based platforms scale up forces key low and the multiple product lines that we have enables us to approach the market in many different ways and.

Harlan Sur: So that 10 point for us for first half what we're expecting is that our revenue will be driven.

Harlan Sur: Lastly, by the Pcie scale up and the Ethernet scale out opportunities along with the initial shipment of Scorpio <unk> and 86 going into the customized track and second half cause layoffs nicely on top with some of the production ramps that we're expecting with the cut.

Harlan Sur: <unk>, which again for US is the schofield of switches along with the PCI six three timeless. These are now qualified so we are starting to see that.

Harlan Sur: Shipments Scott.

Harlan Sur: Coming significant so that's part of the second half and second half of course, we have the <unk> initial.

Harlan Sur: Initial shipments that were expecting for production volumes and the Scorpio X.

Harlan Sur: Switches for the scale up going into the custom Asics. Those are also expected to start hitting production initial production volumes in the second half of this year, which essentially gives us multiple waves, if you will and sets us up nicely for future revenue growth.

Harlan Sur: Beyond 'twenty five.

Speaker Change: Thank you. Your next question comes from the line of Blayne Curtis with Jefferies. Your line is now open.

Blayne Curtis: Hey, guys nice thrilled to know thanks for taking my question I.

Blayne Curtis: I wanted to talk about scale up you mentioned several times I think even set a couple of hundred dollars per accelerator today, yes, I think youre selling some re timers and then some pcie cabling can you walk us through the progression of scale up and your participation and kind of maybe set some timing because I know <unk> probably later next year. So what's the scale of opportunity for you in between now and then.

Blayne Curtis: Yes.

Blayne Curtis: Alright, now because as you can.

Speaker Change: Taylor presents a very good opportunity for us as you know so far revenues have been driven primarily by scale out opportunities.

Speaker Change: But for the first half essentially laid out we have a significant contribution from scalar and the reason that's so important for us.

Speaker Change: <unk> is really a very rich opportunity of high speed interconnects that need to deliver low latency and high throughput.

Speaker Change: And that's where we play today with our <unk> retirement products and starting shipments of coffee X family and we fully expect this opportunity to continue to grow as cluster sizes growing the data rates increase.

Speaker Change: So we have significant opportunity that we're working on for PCI Express based.

Speaker Change: Caleb networks based on our current scope Dx family, but then it also dovetails very nicely in the U S and we expect this to be a multibillion dollar opportunity as we provide a full holistic portfolio of devices to address <unk> infrastructure.

Speaker Change: And as far as the UL itself is concerned we expect as Dol final. It will release, the one that respect and so you can imagine that the products will start to be worked on now and starting to see firsthand both in 2026.

Speaker Change: With the revenue contribution the following year. So that is a very big opportunity that we are very well positioned to take advantage of.

Speaker Change: Thanks, So much and then I want to ask you on tourists you called out growth in March and that continued growth in June.

Speaker Change: Can you talk about I don't know if you want to frame how big that business is gone. So there is some rough metrics you can kind of give us and then just kind of curious the diversity of the customer base beyond the lead customer.

Speaker Change: Currently we are shipping.

Speaker Change: 50 gig solution.

Speaker Change: That continues to grow we have multiple designs.

Speaker Change: Our lead customer.

Speaker Change: Which which are.

Speaker Change: The largest one being the internal AI accelerator based platform, which is still in a kind of a ramp phase.

Speaker Change: We do look to broaden it out to be heightened beyond our lead customer that should probably give you. The next.

Speaker Change: Technology.

Speaker Change: Jumped to 100 gig.

Speaker Change: Speeds.

Speaker Change: Thank you.

Speaker Change: Your next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.

Ross Seymore: Guys. Thanks for me ask a question on last quarter's call you really made a big point about the diversification of your customer base today. It seems like it's a lot more about the diversification of your products that you're offering so I guess, if we kind of blend those two together what are you seeing as the changes in the environment on the ASIC side versus the merchant GPU and how youre broadened.

Speaker Change: <unk> technology is being applied differently between them.

Yes, so for us again.

Speaker Change: We play in both the space with different strategies and different products now the key thing that we're excited about is the growing interest on Scorpio X families. So these are.

Speaker Change: Fabric switches that are used to interconnect multi.

Speaker Change: Multiple accelerators together so to that standpoint.

Speaker Change: It's not only a significant dollar opportunity because the ESP of this product tends to be high but these are also products that are turning out to be anchored sockets for us if you think of AI.

Speaker Change: <unk> being built Youll have the accelerators and then you have the fabric that interconnect the accelerators. So what we are transitioning and what we're excited about is that the core pure equity wise is now translating to be an anchor socket incorporate as like a mother ship around which we are able to now add lot more.

Speaker Change: Products that.

Speaker Change: Go along with that whether it's the silicon level products all around module or other form factors that we're considering so overall I want to say that from an operation space.

For us that the custom ASIC based.

Speaker Change: Implementation tends to offer a lot more opportunities and with Scorpio ex becoming more and more.

Speaker Change: Of gaining more and more traction we do believe that we are in a good position looking forward not just to service near term business, but also longer term with potentially <unk> being the industry wide standard for scale up apologies.

Speaker Change: Thanks for all those details I guess as my follow up just sticking on the custom silicon side of things does the competitive environment change at all there I think this was a question that was asked on the last call as well, but considering the <unk> providers are often times. Your primary connectivity competitors I know the best technology always wins, but does the bundling capability.

Speaker Change: That could occur in that <unk> market actually lead to more competition on your side or is that something youre not seeing.

Speaker Change: The competition will always be there and competition will always try to sell more I think thats a given.

Speaker Change: What you need to keep in mind is that we are working with large hyperscale is that needs to also consider the supply chain and ecosystem and other considerations.

Speaker Change: From a risk management standpoint, so thats, where we are.

Speaker Change: As what we see and in general It also comes down to technology differentiation for us the five big devices and in fact, all of our connectivity devices or develop ground up for AI type of workloads. So there is a clear advantage and benefit that we offer which is recognized in <unk>.

Speaker Change: <unk> customers our cost more software provides unprecedented visibility into what's happening in the network being able to predict performance being able to predict upcoming failures and so on which are all critical requirements. If you think about how complex and AI that looks like.

Speaker Change: And then we will continue to become more complex. So all in all for the reasons I like noted both from a risk management commercial and technology differentiation standpoint, we are seeing that customers continue to work with us and we see an increasing interest photo of skol pure line of products.

Speaker Change: Thank you.

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

Thomas O'malley: Hey, guys. Thanks for taking my questions and nice results first one is for you. Mike you mentioned that there was a China impact on yourself, that's never been a significant portion of your model, but could you give us a feeling just how large that impact was and what that impact will be over the next couple of quarters.

Thomas O'malley: Yes.

Thomas O'malley: We ship into China with their retirees predominantly right now and they are attached to third party merchant GPU systems both both.

Speaker Change: We're restricted.

Thomas O'malley: The hard stuff during during the quarter so.

Thomas O'malley: There was a modest impact that we have to over overcome China.

Thomas O'malley: Revenues when you look at end customer demand is less than 10% over revenues. So it's been manageable enough given the strength of our business and other product lines to to continue to grow through this challenge.

Speaker Change: Helpful and then Ginger maybe a broader question. So you guys have been very consistent kind of describing the year as first half pcie scale up Ethernet scale out in a lot of the custom silicon risks.

Speaker Change: The second half you see more Scorpio more re timers, there's been a ton of noise in the market and Thats just the price you pay for being very visible and attached to Nvidia, but you heard about a lot of differences in terms of like what's the ramp cadence was coming into this year versus where we were today, some large hyperscale or maybe some weakness in their programs.

Speaker Change: Potentially with your large customers. Some systems that are may be delayed and moving to more <unk> solutions I understand you have to be sensitive about talking about customers, but to the best extent that you can coming into this year versus where you are today could you maybe describe if there is any differences to what you saw in the ramp of your revenue and maybe comment on anything that maybe has changed.

Unknown Attendee: <unk> that can help us understand what's going on thank you.

Speaker Change: Yes.

Speaker Change: Good thing good point that you bring up these systems are incredibly complex.

And a lot of things have to go right in order for the whole system will not only get deployed but then get deployed at scale.

Speaker Change: And we of course try to do our best to make sure that we have narrowed the bottleneck in terms of the deployment of these systems and as Sanjay mentioned earlier, we have done a pretty good job so far with our pre production shipments in getting the product qualified and so on.

Speaker Change: But we always have to take some buffer some kind of conservative in terms of what it would take for our end customers to kind of complete that qualification and deployment and so far I would say that our expectations have come through largely unchanged from when we started the year.

Speaker Change: Which is what our judgment was based on what we were getting from our customers.

Speaker Change: Want to add any more color yeah, I think the city will always continue to be conservative just to underline what it in the third but having said that the revenue models and the guidance that we're providing the outlook that we're sharing.

Speaker Change: Comprehensive this because we are so close to these customers that we see lot of stuff and we're able to consider and contemplate that when we provide guidance so put that standpoint.

Speaker Change: We do feel comfortable and confident about where we are we just need to continue to make sure that we execute and deliver our part of the the subsystem and then rest of it likely noted will account for that.

Speaker Change: In a conservative model, knowing how complete the systems start to get deployed.

Joe Moore: Thank you. Your next question comes from the line of Joe Moore with Morgan Stanley. Your line is now open.

Joe Moore: Great. Thank you.

Joe Moore: I guess, we've heard a lot of.

Speaker Change: Large language model developers talk about.

Speaker Change: Sort of tightness in fringe markets and kind of a lack of hardware to deal with in France.

Speaker Change: Are you guys seeing that does that translate into strengthen any part of the business for you or just anything you can do to collaborate or mitigate those concerns.

Joe Moore: Great. Thanks, Joe.

Joe Moore: For us to the first level influence and changing about the same same products get used in both of these systems. So we do benefit from both streaming and influence.

Joe Moore: As you look at some of these larger modules mixture of experts and so on.

Joe Moore: What we're finding is that the amount of compute best required to draw inferences from these models, because even higher <unk> higher than previously.

The basic limit of compute and starting to become era.

Joe Moore: Kind of a rack level system of Gpus, which also happens to be the same basic unit for a trailing.

Joe Moore: And so with the increased complexity of the exact level systems, we actually see more opportunities overall.

Joe Moore: In France, as well as for cleaning.

Sanjay Gajendra: As Sanjay mentioned earlier this quarter, we also released a.

Speaker Change: Scorpio based influences stone for smaller scale influence so that should allow us to kind of benefit for some of these smaller scale influence assistance as well.

Speaker Change: Having said all of that we can see today that our customers are also using the same set of systems to move both inference and training and we benefit from both.

Speaker Change: Great that's helpful and for my follow up.

Speaker Change: You mentioned racks, a lot of the rack scale systems seem to be sort of tricky to get it get up and running.

Speaker Change: I guess those issues seem to be worse for a few months ago, but how does that affect you guys. I know you have good content across.

Speaker Change: Both <unk> and non <unk> solutions, and Asics, but just is that kind of.

Speaker Change: Change in ramp schedule is that having any impact on you guys.

Speaker Change: That is the oldest complex that <unk> I would say, but like we noted we are modeling that and providing guidance that takes a conservative view on how some of the systems have been built and deployed that.

Speaker Change: Probably be the right thing to do from a business outlook standpoint, but having said that going forward. What we're doing is also something I do want to.

Speaker Change: Sure, Joe which is to take a more of an AI rack level view in how we approach the market. The vision that we outlined is to be the connectivity supplier for the entire AI back. Unlike noted in my prepared remarks are focused on four main protocols, which is pcie.

Speaker Change: Are you willing for scale up Ethernet for scale out.

Speaker Change: <unk> for peripheral connectivity in <unk> for memory expansion and approach. It holistically. So we are providing a variety of different products, but the three timeless gearboxes tablet devises switches.

Speaker Change: Across both corporate and optical so that going forward for next generation AI system at least from a connectivity infrastructure standpoint, it's a holistic solution that not only considers silicon products, but also hardware and software. That's how we see the evolution, if you will and as Sarah we believe it is.

Speaker Change: Well as.

Speaker Change: He is well suited and to deliver the entire connectivity at the rack level, which we are executing both in terms of what we are servicing today and then going forward of course with ULE.

Speaker Change: Thank you. Your next question comes from the line of Torrey Swanberg with Stifel. Your line is now open.

Torrey Swanberg: Yes, Thank you and congrats on the quarter to tender I was hoping you could elaborate a little bit more on the areas six.

Speaker Change: Upgrade cycle here, especially in reference to gearbox products.

Torrey Swanberg: If you could add any color on.

Unknown Attendee: How diversified.

Torrey Swanberg: Are the use cases going to be four six.

Torrey Swanberg: <unk> gearbox products.

Speaker Change: Yes, So let me just take a second to kind of explain what a gearbox device does its primarily used to match two generations of the same standard meaning in this particular case one side of the device talks.

Torrey Swanberg: Pcie Gen five.

Speaker Change: Other sites stops Gen six.

Speaker Change: The reason these products are essential is if you look at the Cpus today. There is still a gen. Five gpus have already transitioned for Gen. Six the same thing could happen with the networking and storage interfaces. So what a gearbox devices does is.

Speaker Change: It does two things one it takes care of the signal quality similar to our lead timer and on top of that takes care of matching the protocol generations on two ends of the of the chip. So in terms of opportunities we have multiple.

Speaker Change: Engagements today that we are servicing for the gearbox device. In fact, we have already started shipping preproduction volume for supporting some of the opportunities and this was again not create an additional <unk> two or <unk> business, because it's adding to the re timer pan but.

Essentially bringing in a higher level of ASP simply because you are able to not only to lead timing, but also do some of the speed matching that I noted and we will continue to offer products like that which is critical because if you think of it of a typical engineer thats working on an AI system.

Speaker Change: Need multiple tools and Stella is providing that to them. Both in terms of lead time was gearboxes tablet devices, providing the software. So overall, we are providing the holistic portfolio that is also opening up that added interest and momentum for customers to use those products.

Speaker Change: Okay. Thank you for that color Sanjay as my follow up for Mike.

Speaker Change: Not to nitpick here, but I mean, your Dsos came in at 40 days I think throughout most of last year there were around mid twenties.

Speaker Change: Anything going on there too.

Speaker Change: It's really just the linearity was more balanced during the quarter than previous quarters. I think this going forward to be a more typical level of dsos as we.

Speaker Change: Grow as a company and have more multiple product lines shipping.

Speaker Change: Perfect. Thank you Mike.

Speaker Change: Thank you. The next question comes from the line of Quinn Bolton with Needham and company. Your line is now open.

Quinn Bolton: Maybe just a quick clarification guys, Mike I think in your prepared comments, you said that Ares and tourists.

Speaker Change: Grow in the June quarter, just wanted to make sure that area does that is that only the.

Speaker Change: On the board retirement products does that include the Aries SCM for scale up applications. I know you talked about strength and scale up but just wanted to just wanted to see if you could make a specific comment on that Eric SCM product because it certainly sounds like lead ASIC platform is still in a ramp phase.

Speaker Change: Yes. It is theories STM is doing very well for us but also.

Speaker Change: Other internal AI accelerator.

Speaker Change: Our cloud platform providers are also ramping so we're seeing growth and that's more on chip on board for scale out and the areas assumes for scale up so we're seeing both contributing growth. So these are on.

Speaker Change: Internal AI accelerator systems.

Speaker Change: Got it okay. Thank you for that and then.

Speaker Change: Maybe just turning to your Sanjay just just longer term I know youre ramping Scorpio P series switches first because it sounds like.

Speaker Change: The X series is a larger Tam as that starts to enter production late this year.

Speaker Change: With higher dollar content per accelerator would you expect.

Speaker Change: X series substantially crossover P revenue day by the end of 'twenty, six or would that be more of a 'twenty seven event, just trying to get some sense of what you think the pace of the ramp might be once X series enters production.

Speaker Change: Yes, so if you consider the P series and the <unk>. So we kind of outlined them to be brought about $1 5 billion each.

Speaker Change: But if you look at the activity is.

Speaker Change: The available time today is nearly veto.

Speaker Change: And video so it's a very very rapidly growing market for us and we do.

Speaker Change: We estimate that it will be the single largest sort of product line for us.

Speaker Change: As I mentioned earlier, we ex family shipments are just going to start have just started in this quarter and will start to ramp later on this year for the full volume of them really coming in 2026. So we do expect in the 2006 in 2007 timeframe for the X family to become a larger contribution to our revenues.

Speaker Change: Okay.

Speaker Change: If I can add to that not just the revenue like noted X series is our anchors pocket, it's a pocket around which we are building the entire product line Cosmos.

Speaker Change: <unk> operates at a completely higher level when it comes to supporting the <unk>. So overall, we do believe that that anchors socket and the fact that this is a greenfield Tam that's rapidly growing puts us in a great position to be able to.

Speaker Change: Offer multiple product lines in order to service the entire AI rack.

Speaker Change: Thank you. Your next question comes from the line of <unk> Malik with Citi. Your line is now open.

Speaker Change: Thank you for taking my question. This is.

Speaker Change: <unk> interactive.

Speaker Change: I guess my first question might be more of a broader question for just under one Sanjay.

Speaker Change: I believe one year ago.

Speaker Change: <unk> announced some progress made around PCI upticks in this year at OFC show in Vegas demands on the technology.

Speaker Change: I guess, a higher level does <unk>.

Speaker Change: C <unk>.

Speaker Change: <unk> is a path forward to extend.

Speaker Change: E beyond copper and beyond scale up or perhaps the focus is still on comfort.

Speaker Change: Yeah. So.

Speaker Change: Well good question. The focus right now is definitely on top of as we have discussed through the entirety of this call, but as Sanjay mentioned earlier, our job really is to provide all of the tools that our customers require in order for them to deploy their infrastructure.

Speaker Change: Customers generally prefer to deploy over copper just because it's kind of more reliable low power <unk> and so on and so we will continue to support that for as long as.

Speaker Change: We can but at some point in time as data rates go up and the REIT requirements increase you will have to go to optical solution centers, where we have a very innovative feature express over optical demonstration to provide that additional capability to our customers kind of more broadly speaking as you go into <unk>.

Speaker Change: The line rates are even higher we believe that copper will still be the dominant media at 200 gig per second.

Speaker Change: If you start looking at speed even beyond that.

Speaker Change: Optical may start to have a play and we are very actively working with our customers to figure out what that intercepted.

Speaker Change: And there are different type of innovations that are required to deploy scaleup opex based solution.

Speaker Change: Database.

Speaker Change: Got it that's helpful.

Speaker Change: And for my follow.

Speaker Change: Follow up discussion might be more for Mike and I totally get you don't guide beyond the next quarter, but if our math is right and scope yourselves in September and December could reach mid teens to 20% of sales on a quarterly basis. If you take into account the 10% plus sales.

Speaker Change: You gave out for the year.

Speaker Change: With that in mind can we think of actually the second half.

Speaker Change: Gross margin actually being up versus the first half qualitatively.

Speaker Change: Yes overall for gross margins as we diversify our product lines.

Speaker Change: See a wider range of margins per product offering.

Speaker Change: Just given how quick the markets moving you have less time to optimize the product portfolio for cost optimization, you're always chasing that exploration for revenue growth. So with a wider range of margins, we still expect our longer term gross margin targets of 70% to be the.

Speaker Change: The direction, we're headed.

Speaker Change: Not all this year, but over time so.

Speaker Change: I would still encourage people to think about the margins as we grow the company to trend towards 70%.

Speaker Change: Thank you.

Speaker Change: Your next question comes from the line of shiny per jewelry with.

Speaker Change: Raymond James Your line is now open.

Speaker Change: Thank you a question on the custom racks.

Speaker Change: Also what sort of mix I think you are assuming for custom racks as we go into second half maybe first of all first.

Speaker Change: You can talk about what's what's driving that inflection I know, it's been it's always been middle of the year for our custom racks, but is there any.

Speaker Change: I guess in a software or is it related to the black will ultra or some other hardware component touch you know kind of.

Speaker Change: Enabling customers to switch over to custom racks and.

Speaker Change: As I said before if you could talk about what sort of mix assumptions you are making as we go into the second half of the year.

Speaker Change: Great question, Unfortunately difficult to give out an exact mix because it actually keeps changing what keeps evolving.

Speaker Change: Go back to the point that you made.

Speaker Change: Well first of all is a fantastic architecture, a fantastic platform for customers to take advantage of but they also have the challenges are restrictions talking about their data center looks like and so on so there is a lot of incentive for our customers to customize this drag to take advantage of existing data centers their existing hardware and the software infrastructure.

Speaker Change: They have security even their supply chain.

Speaker Change: Why we do believe that many of the Hyperscale is will customize the racks and deploying their data centers. However, the timing of that already so hyperscale customers that are kind of more focused on time to market low engineering effort will likely side with the reference designs to get started and then customize the rash.

Speaker Change: Later on.

Speaker Change: We can definitely talk about the information that's not publicly released.

We are the first first application partners customization was to use.

Speaker Change: In how smart mix in order to attach them to the black oil platform and that's a fantastic opportunity for us and we expect that to start to ramp in the second half of this year.

Speaker Change: Got it thanks for that and then more of a longer term question just tender on UA link.

Speaker Change: Obviously, it seems like a very large market potential out there, but at the same time some of your competitors are focusing on Ethernet.

Speaker Change: These are obviously pretty large competitors and I am guessing so much of our customers are probably going to stick to Ethernet as well just wondering how you think about how the market might shake out longer term Ethernet worse, if you will link in terms of.

Speaker Change: I guess sort of applications might adapt Ethernet for scale.

Speaker Change: Scale up horses <unk>, Inc. Thank you.

Speaker Change: Yeah. So as you correctly pointed out the value standard it's been purpose built for AI.

Speaker Change: Specific vertical is around training as well as inference.

Speaker Change: Ethernet is has been very widely deployed I mean, it's probably the most widely deployed protocol for scale out and now whats happening is with the UAC Altra Internet consortium, they're trying to retrofit Ethernet to maybe work on scale up.

Speaker Change: You look at kind of longer term horizon, probably fair to say that you won't be able to build scale up network using both UL as well as <unk>.

Speaker Change: But there are pretty significant differences between the two and I can maybe categorize them into two buckets. One is on technical performance and the other one is ecosystem diversity.

Speaker Change: Just look at it from a technical performance standpoint, you will bring the best of two words right. It gets the memory demand takes the ease of software the lower latencies of our PCI Express protocol and then combining that with the fastest speeds that are available for Ethernet.

Speaker Change: At the end of the day, you'll get a very efficient system with loss less packet transmission.

Speaker Change: Very low latency and very high throughput, whereas in the case of Ethernet Youre trying to retrofit. Some of these features while keeping Ethernet backwards compatible are keeping UEC and backwards compatible. So overall our belief is that just purely from a performance standpoint, <unk> will be more performance compared to USD.

Speaker Change: The other part of it is ecosystem diversity and being on the board of UL, We see a lot of traction both from customers as well as our vendors to build products into this ecosystem. We believe that over time, we will have a rich ecosystem, where multiple vendors are building different components that will go into <unk>.

Speaker Change: <unk> tracked with euro infrastructure and certainly as that allows us also very well positioned to play into their ecosystem.

Speaker Change: We believe that Hyperscale facilities will prefer this diverse ecosystem or one that is more proprietary are locked into one large.

Speaker Change: A component provider.

Speaker Change: Thank you and our final question comes from the line of <unk> de Silva with Roth Capital Partners. Your line is now open hi.

Speaker Change: Alright, you tend to foundry Mike.

Question on Scorpio products should we think of there being any appreciable price difference between the X product and the product or are they fairly similarly priced.

Speaker Change: Yes, so in general the functionality is much more.

Speaker Change: <unk> more.

Speaker Change: Valuable if you will from on the <unk>, because it's used to interconnect Gpus and the GPU utilization of course being a prime factor. If you think of the overall performance of a of a cleaning cluster or an influence cluster. So thats 10, <unk> does bring a lot more.

Speaker Change: And therefore, you can assume that the ESP tends to be <unk>.

Speaker Change: <unk> higher.

And Thats again, there are different the exited is not one device to be very clear there are multiple part numbers. So they would be situations, where maybe one part number is not at the same level of P series, but in general you can just look at it from a per lane standpoint, our port standpoint, and look at the value.

Speaker Change: <unk> and on that basis, the exits will always be a much much more valuable and much more higher ASP product than a P series.

Speaker Change: Okay, Great and then the other question I have is sort of updating on the thoughts you know versus kind of coming out of the IPO of mostly chips, but then tourists being a paddle board could you update on your thoughts on chips versus using board level solutions or even do module level solutions makes sense here given how much content you have to integrate all of that.

Speaker Change: Yes, so I think like as you kind of laid out our vision really is to be a connectivity supplier at the AI is rack scale right, we want to solve customers.

Speaker Change: Needs and challenges.

And we are sort of uniquely set up as a company in the sense that we have our silicon engineering team, we have our hardware engineering team and we have our software engineering team that includes.

Speaker Change: What the service on the <unk> side, so what I wanted to say it's in that context. Obviously, we are trying to provide a rack scale solution to our customers with the one one variable which is the computer is coming from either third party or internally developed.

Speaker Change: Basic platforms, but rest of the connectivity, whether it's based on corporate optical we seek to address that and service debt and the exact form factors that we would take really depends on the customer needs, but we have the capability to go from silicon to hardware or software. So we will always look at trying.

Speaker Change: To maximize the opportunity that's available to US data. So we can continue to grow in time with the company.

Speaker Change: Thank you there are no.

Speaker Change: No further questions at this time, so I'd like to turn the call back over to Leslie Green for closing remarks.

Speaker Change: Thank you Amy and thank you everyone for your participation and questions. We look forward to updating you on our progress as we announced today, we will be conducting a webinar hosted by JP Morgan on expanding opportunities in AI infrastructure with UA link you can find full details in our press release and you can also check the investor relations portion.

Speaker Change: Of our website for this and other upcoming financial conferences and events. Thank you.

Speaker Change: Yeah.

Speaker Change: Thank you. This concludes today's conference call you may now disconnect.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: [music].