Thank you for your patience. All participants are currently in a listen-only mode. We will have a question-and-answer session later. Now, I would like to turn the conference over to Dan O'Neil. Please proceed.

Good afternoon. Thank you for joining our earnings call for the first quarter of fiscal 2025. Today, I'm joined by Bill Brennan, Credo's Chief Executive Officer; and Dan Fleming, our Chief Financial Officer. As a reminder, during the call, we will make certain 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. It's not possible for the company's management to predict all risks nor can the company assess the impact of all factors on this business. For the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks, uncertainties and assumptions, the forward-looking events discussed during this call may not occur and actual results could differ materially and adversely from those anticipated or implied. The company undertakes no obligation to publicly update forward-looking statements for any reason after the date of this call, to conform these statements to actual results or to changes in the company's expectations except as required by law. Also during this call, we will refer to certain non-GAAP financial measures which we consider to be important measures of the company's performance. These non-GAAP financial measures are provided in addition to and not as a substitute for or superior to, financial performance prepared in accordance with US GAAP. A discussion of why we use non-GAAP financial measures and the reconciliations between our GAAP and non-GAAP financial measures is available in the earnings release we issued today, which can be accessed using the Investor Relations portion of our website. I will now turn the call over to our CEO. Bill?

Welcome to our Q1 fiscal '25 earnings call. I'll start with a review of our Q1 performance and then discuss our future outlook. 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-GAAP 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. Credo is a pure-play high-speed connectivity company. We deliver a differentiated set of solutions, including active electrical cables or AECs, Optical DSPs, Line Card PHYs, SerDes Chiplets and SerDes 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. 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 into material revenue across several growing customers. Notably, we expect to see a new 10% customer in Q2. Credo aims to extend its reach into new markets as data rates rise. Later this year, we intend to enter the 64 gig PAM4 PCIe Gen 6 market offering Retimer 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, AEC has continued 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. Today, we're in production with solutions for port speeds up to 800 gig and we expect to deliver power optimized 3-nanometer products in 2025 for the 1.6T port market. We've 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. Based on these customer relationships, market feedback and the inherent 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 length required for backend 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 fiscal '25. 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 Credo solutions. Our optical module customers shipped AOCs and transceivers based on Credo DSPs to both US and international end customers. 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. 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 1.6T optics. The LRO concept is increasingly being adopted within the industry and a new hyperscaler has decided to implement this strategy in their architecture. 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 1.6T port speeds, we see energy efficiency becoming a more critical factor as power delivery and cooling infrastructure becomes even more challenging. Notably, power efficiency drove our decision to move directly to 3-nanometer for Credo's 1.6T 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. Now regarding our Line Card PHY business. In the first quarter, our Line Card PHY 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 PHY revenue comes from Retimer and MACsec encryption products for port speeds up to 1.6 terabits per second. In this segment, our customers include networking OEMs for traditional switching applications and more recently, server ODMs for emerging AI appliance applications. We see new demand for our Line Card PHY 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 PHY solutions. Lastly, I'll review our SerDes licensing and chiplet businesses. We continue to make progress with customers and expand our funnel within our SerDes IP licensing and chiplet 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 chiplet 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 SerDes solutions up to 224 gig speeds in a wide range of process geometries from 28 nanometer to 3-nanometer. We continue to win due to our compelling combination of performance, power and exceptional technical support. 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 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 a strong presence at the CIOE Optical Conference in Shenzhen, followed by the ECOC Optical Conference in Germany. We expect these events will add to the momentum we've built since OFC in 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. 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. I'll now turn the call over to our CFO, Dan Fleming, and he will provide additional details.

Thank you, Bill, and good afternoon. 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. 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% to 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. Our top two end customers were each greater than 10% of revenue in Q1. Our team delivered Q1 non-GAAP gross margin of 62.9% and 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-GAAP gross margin generally hovers near 100% and was 96.8% in Q1. Our product non-GAAP 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. Total non-GAAP 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-GAAP operating income was $2.2 million in Q1 compared to non-GAAP operating income of $7.5 million last quarter. Our non-GAAP operating margin was 3.7% in the quarter compared to a non-GAAP operating margin of 12.3% last quarter, a sequential decrease of 8.6 percentage points. We reported non-GAAP net income of $7 million in Q1 compared to non-GAAP 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 a ramp in 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 year-over-year. We ended the quarter with cash and equivalents of $398.6 million, a decrease of $11.4 million from the fourth quarter. We remain 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. 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-GAAP gross margin to be within a range of 62% to 64%. We expect Q2 non-GAAP operating expenses to be between $36 million and $38 million. And we expect Q2 diluted 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-GAAP 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. And with that, I will open it up for questions.

Thank you. One moment for our next question. Our first question will come from Toshiya 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 in growth you guys spoke to as it 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. Can you kind of speak to the key drivers that you see contributing to the acceleration in 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 '26.

Sure. So I'll start with, I think, we're pretty happy with the fact that AEC adoption is continuing pretty broadly. It has really become a de facto standard for the lengths that we address, which is primarily in-rack at this point. But may expand to rack-to-rack 5 to 7 meter cables in the future as we see rack densities increasing. So as that happens, typically, connections that were made with 10 meter, 20 meter optical solutions can now be made with 5 to 7 meter AEC solutions. So we do see broad adoption continuing and it's really with US hyperscalers, global hyperscalers. What we introduced a 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 in development now engagements with customers. And in the future, as there's a move towards 1.6T, I think, we'll be in a really good position to address that market, especially because we'll really bring 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. And so if they look at the Pareto of things that would make their clusters more efficient, having solutions that have really high reliability is becoming really a primary objective. And so when we think about AECs with the mean time before failure of 100 million hours and bit error rates 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. There's really what we see is a shifting priority to move to these solutions, to move these active copper solutions. And so to further that, as I mentioned before, 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 with longer 5 to 7 meter AECs that span two to three racks. And ultimately, I think, we see this really driving an uplift in the AEC market and an expansion of the TAM long-term. I hope that gives you color, we're quite bullish on this space.

Yes. That's really helpful. Thanks, Bill. 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 engagements, the customer back and forth you're having, 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. 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? Thank you.

Sure. So I'll say that we're quite happy with the Optical DSP business. We are on track to achieve a goal that you reiterated, which is 10% or higher. Our fiscal '25 revenue. For sure, we're building momentum. When we think about our position in the market today, there are more than 2 million modules with Credo DSPs that have been deployed in data centers. And this fiscal year, we'll ship more units than we've shipped in all previous years combined. So there is real momentum that is 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 of 50 gig and 100 gig per lane ultimately measured by signal integrity, power and cost. So I think that the stage is set for there to be continued momentum that Credo builds in this market. From a market share standpoint, we're still small and rising. And the bottom line is it's one design at a 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. And the bottom line, as we look towards the 1.6T market, we're going to deliver both full DSP and LRO solutions and the key here for us is to deliver kind of 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 into 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. 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 1.6T speed that ultimately is in the 10 watt range or less. And that will enable any optical player that actually build a standard OSFP or QSFP-DD 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.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Tore Svanberg from Stifel, Nicholas & Company. Your line is open.

Yes. Thank you. Bill, you just said something that caught my attention. You said you're going to ship more DSPs in fiscal '25 than all previous years. I mean, obviously, that includes the AEC business. But can you just elaborate a little bit on that because that seems like a pretty high number.

Yes, the reference was not really in regards to AECs. This is really in reference to our optical DSP business. And so I will say that we continue to be engaged with the first US hyperscaler in production as well as we see a return to spending in the international space as well. And so I think that, from our perspective, that's no surprise. I think we've alluded 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. Thanks for clarifying that. My second question is, you mentioned penetration or entrance into the PCIe retimer market. Could you just talk a little bit about why now? I mean, clearly, 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?

Yes. So I think that we've talked about the intent to enter the PCIe market, specifically at the Gen 6 speed, which is 64 gig PAM4. We opted not to pursue the Gen 5 market and we probably made a bad call on that. But we felt like from a SerDes standpoint that entering the market at 64 gig PAM4 will enable us to deliver the same kind of compelling benefits that we brought to Ethernet and really specifically the 50 gig and 100 gig level. And so when we talk about signal integrity, we talked about energy efficiency, talk 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 SerDes that's a full-blown DSP with latency numbers that are 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 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 as we see AI driving the demand for higher and higher bandwidth, this is something we'll really lean into with PCIe.

Thank you. One moment for our next question. Next question comes from the line of Suji Desilva from Roth Capital. Your line is open.

Hi, Bill. Hi, Dan. In terms of the customer concentration, you talked about a new expected 10% customer in Q2. I just wanted to get a sense if that customer is kind of starting from the ground floor in Q1 or whether it's been a gradual growth. I just want to understand the contribution from that new ramp.

Yes, sure. This is not a new customer. This is a customer that we've worked with for going on a couple of years now. And so we've seen that they've been really receptive to the solutions that we're delivering. And as their spending plan has increased, we've seen them become a much more significant customer for us. But yes, they've been a customer in the past. But we're encouraged by the fact that this would be one that we would consider an emerging hyperscaler. And we've talked about in the past how the market really driven by AI solutions starting to look like more than just the top 5 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 a good position with others as well from the standpoint that they've adopted an architecture that deploys AECs.

Okay, Bill. Good to hear the customer base diversifying. And then you talked a little bit about the opportunity as racks densify, if you would, and being able to handle closer racks and shorter 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 to think about in terms of how the TAM increases for you guys?

Yes. Sure. I think we've all seen what leading edge 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-by-customer architecture decision. But theoretically, we could see the TAM expanding within a customer if they deploy a solution that implements direct rack-to-rack AECs, we can see a doubling in TAM easily when we look at it from that perspective.

Thank you. One moment for our next question. Our next question comes from the line of Matt Ramsey from TD Cowen. Your line is open.

Hey, guys. It's actually Sean O'Loughlin 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 engagement. You mentioned the module maker, which sounds like a 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 kind of helping you maybe get pulled into some of these module maker designs?

Absolutely. Yes, we've talked about this in the past that 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. And so we've had a multiyear effort in working directly with hyperscalers and we've been successful with some of them and even doing a joint development program where they specify the DSP that is to be used. But this is really an ongoing effort it's really a three-party conversation between hyperscalers, module makers and Credo. And so that's very much part of our strategy. And 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. So it's a very focused strategy that we've got.

Got you. That's really helpful. And then just one clarification on the IP license revenue. I think last quarter, you had mentioned that you expected that to come in sort of at the higher end of the long-term or the long-term model, but license revenue obviously is lumpy and came in a little lower this quarter. Is that still your expectation for the full year or are we just thinking about it incorrectly? Thanks guys.

Yes. For the full year, our expectation hasn't changed. So we expect it 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 strong turns bookings within the quarter 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 fiscal year '25 that will be within that range of 10% to 15%.

Thank you. One moment for our next question. Our next question comes from the line of Karl Ackerman from BNP Paribas. Your line is open.

I have two. Thank you very much. Gentlemen, first off, I wanted to discuss how active copper cables have received a lot of attention recently which use a redriver instead of retimer that's used in active electrical cables. Each, of course, has their own trade-offs. But do you view these applications as catalysts to each other or is the market opportunity for passive copper cable is large enough for both applications. And as you address that question, how am I using an AEC with a half free time DSP improve the power and cost between perhaps active electrical and active copper cables. And I have a follow-up. Thank you.

We perceive the market for both passive copper and what are known as active or amplified solutions as being limited in the long term. The references to amplified solutions are largely influenced by NVIDIA's strategy, and I wouldn't categorize it as a significant market opportunity. Even considering the recent introductions made in the last three to six months, it's uncertain what impact these solutions will have. Importantly, we haven't observed any hyperscalers looking to create their own ecosystems or considering those solutions, primarily because they are not adhering to industry standards at this time. When discussing interoperability and aspects such as signal integrity, the fully retimed, fully equalized solution is essential for achieving the expected interoperability and performance. Consequently, we have not encountered any competition globally, particularly at the 100 gig per lane level. As we shift to 200 gig per lane and 1.6T, the relevance appears to diminish further. In this market context, fully retimed AECs are the clear preferred choice. When I say "de facto," I mean that this is the only solution many of our customers are considering. While we could explore doing LRO for AECs, it hasn't been a priority for our customer base since the power levels we're offering already meet their needs. However, there could be future opportunities if this becomes more important to our customers.

Yes. Very clear. Thank you for that. I wanted to focus back on licensing revenue. I know it's hard to predict, but is there a seasonality component to the consumer USB licensing revenue? And I guess, more importantly, has your view changed at all on the licensing revenue being towards the 10% to 15% of your fiscal year revenue in fiscal '25 and perhaps obviously look for fiscal '26. Thank you.

I would say we've not witnessed any sort of seasonality with IP revenue. In fact, if you look at the last five quarters, it goes 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, as we've said in the past, we view IP as a very strategic imperative for us where we're not incentivized to chase low value deals. 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 a solution. So it's tough to predict quarter-to-quarter as we all know. Longer term, we stated 10% to 15%. We think that will 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 will reset that expectation probably lower in the future, maybe FY'27 and beyond.

Thank you. One moment for our next question. Our next question comes from the line of Thomas O'Malley from Barclays. Your line is open.

Hey, guys. Thanks for taking my question. This one is 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. Could you just describe first what drove that product uptick? And also if you look at the gross margins, they were 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 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 in a quarter. I think that's what people are trying to figure out.

Yes. So as far as product being a little stronger than normal, it's ordinary that we have some amount of turns bookings, so they came in stronger than we would have expected entering the quarter. So and there's nothing really unanticipated or to talk about in terms of what it was versus what we've 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 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 onetime 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 has not changed. So and as I've mentioned in the past, our long-term model, that 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, in Q1, we were already in that same ZIP code. So throughout FY'25, 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 32% was the sequential increase from Q4 to Q1 in terms of product shipments. 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?

Yes. So for October for IP, you might expect it to be a slightly larger contributor to revenue than it was in terms of revenue mix than Q1. 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 expect IP to contribute modestly more to our revenue mix in the quarter Q2 than it did in Q1.

Thank you. One moment for our next question. Our next question comes from the line of Quinn Bolton from Needham. Your line is open.

Hey, guys. Congratulations on the nice results and outlook. I guess, Dan, maybe to beat on the gross margin here a little bit. 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 your 62% to 64% range if product gross margin is flat and IP is a slightly higher percentage of the mix in the October quarter?

I understand your question. However, our performance doesn't always follow a straight path. We saw a significant increase in gross margin percentage in the first quarter. Historically, it's been clear that this isn't always a consistent trend. We don't specifically foresee a decline or a significant downturn. Our overall approach is to remain cautious in our outlook and guidance. I hope that provides some clarity, Quinn.

Got it. Yes, that does. And then just wanted to come back to the license and IP. I think 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 wondering if you could just give us any update on specific royalties that you're looking for as part of that IP revenue stream? Does royalty become 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 SerDes like it's been historically?

I think you're right on with the assumptions you're making on the royalty and as it relates to our USB customer. We think that as we think about things going forward, we don't think that's going to be a part of the business that we look at as kind of material in comparison to licensing revenues themselves. So we think that the weighting is going to still stay the same in a sense that the bulk of the revenues in this category will come from licenses.

Thank you. One moment for our next question. Our next question comes from the line of Richard Shannon from Craig-Hallum. Your line is open.

Great, guys. Thanks for taking my questions. Maybe a very quick two-parter for Dan here. You called out record product revenues, record in couplers, but I don't think it was in AECs. Can you declare whether you had a record AEC quarter? And then also can you give us the percentages of the two 10% customers as well.

Yes. So we did have record product revenue. We don't break out by product line, but you can safely assume that AEC is a large driver of our story for the full year. So that was the most significant contributor to revenue. Turning to 10% customers. We had two 10% end customers in Q1, which I have mentioned in the prepared remarks. And they were, in fact, our first two AEC hyperscalers at the top. When our Q is filed in a day or so, you'll see that our first AEC hyperscale customer remained a 10% customer during Q1 right at 10%. And the second AEC hyperscale customer was our largest customer at 62%. So we expect that second AEC hyperscaler to continue their meaningful ramp throughout fiscal '25, as we talked about. Of course, it might not always be a linear ramp. But as Bill mentioned earlier, 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 calendar year or throughout the fiscal year as that plays out.

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

Absolutely. Thanks, everybody, for joining. We really appreciate the questions and we look forward to the call backs. Thanks.

And with that, this concludes today's conference call. You may now disconnect. Everyone, have a great day.