Earnings Call Transcript - CRDO Q4 2022

Operator, Operator

Good afternoon and thank you all for joining us today for our Fiscal 2022 Fourth Quarter and Year-End Earnings Call. Joining me today from Credo are Bill Brennan, our Chief Executive Officer, and Dan Fleming, our Chief Financial Officer. I'd like to remind everyone that certain comments made in this call today may include forward-looking statements regarding expected future results, strategies, and plans, future operations, and markets in which we operate, and other areas of discussion. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. It's not possible for the company's management to predict all risks, nor can the company assess the impact of all factors on its business, or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statement. In light of 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 an important measure of the company's performance. These non-GAAP financial measures are provided in addition to and not as a substitute for or superior to financial performance prepared in accordance with U.S. GAAP. A discussion of why we use non-GAAP financial measures and reconciliations between our GAAP and non-GAAP financial measures is available in the earnings release we issued today, as well as in our SEC filings, which can all be accessed using the Investor Relations portion of our website. With that, I'll now turn the call over to our CEO. Bill?

Bill Brennan, CEO

Thanks Dan and thank you all for joining our call. During this call, I'll provide an overview of our Q4 and fiscal 2022 accomplishments and then show why we're optimistic about continued strong growth in fiscal 2023. After my remarks, our Chief Financial Officer, Dan Fleming, will provide a more in-depth review of our fourth quarter and full year results. We'll then be happy to take questions. While we face some challenges in April, fiscal 2022 was in total another great year for Credo, notably due to the tremendous work of our team partners. We became a public company on January 27. Our IPO has provided us with more than ample capital to support the investments required to deliver the leading products our fast-growing markets demand. Our IPO not only bolstered our liquidity, but solidified our path as an independent company, both of which enhanced our relationships with our customers and supply chain partners. During fiscal 2022, we achieved record revenue of $106.5 million, up more than 80% from the prior year. That total included product growth of 120%. We achieved revenue growth in all our Ethernet product lines, including Active Electrical Cables, optical DSPs, Line Card PHYs, and SerDes Chiplets, and we also achieved growth in our IP licensing business. This success is a testament to the hard work of our team and the trust they've earned with our customers. Customers choose Credo Solutions for several reasons, but at its heart, we differentiate ourselves with our architectural approach. Our advantage truly lies in our engineering. We optimize analog and DSP architectures to deliver low-power and very small die sizes. Also, our N minus one process mode approach provides an advantage on development cost as well as wafer cost. These factors, combined with our purpose-built mentality where we optimize solutions for the many different lengths we serve, enable us to provide tremendous value to our customers across the entire range of their connectivity applications. Our dedication to engineering optimal system solutions translates to innovations across our product lines and nowhere is this more evident than our Active Electrical Cable or AEC Solutions. We've worked closely with hyperscale customers to understand their core needs and through engineering ingenuity and a customer-first mindset, we've been successful in delivering the leading edge AEC System Solutions and effectively, we've pioneered a new high-speed connectivity category. Let me share some of our accomplishments and highlights from the past year across our Ethernet Connectivity Solutions. Within our AEC Solutions, we began ramping at our first hyperscale data center customer. We also deepened our engagements with additional customers, including hyperscalars in several Tier 2 data center operators. Our customer progress has validated the AEC market and we continue to expect it to grow rapidly. Fiscal 2022 also included notable achievements for the solutions we provide to the optical module manufacturers and their end customers. We developed and deepened engagements with several optical module manufacturers and are working closely with them to proliferate our solutions into their data center, 5G carriers, and OEM customers. During fiscal 2022, we ramped initial production with several optical module customers. In March, our team attended OFC to meet with customers and partners; it was a great opportunity to meet in-person and it was also a great opportunity to see the strong interest in our optical offerings. Next, let me discuss our Line Card PHYs. Data security continues to become more and more important and we've continued to see a strong adoption of our MACsec solutions that provide data encryption. We also gain traction with our retimer and gearbox solutions and this is based on our leading power efficiency and cost-effectiveness. During fiscal 2022, we ramped our Line Card PHY solutions at several new customers, including hyperscalars and leading network OEMs. Lastly, customers continue to seek out our IP for licensing and our SerDes Chiplets for ASIC solutions with multi-chip module packaging. While we have clearly transitioned to a product company, these solutions remain a strategic part of our overall business. In the past year, we had wins with several new and existing IP customers and we continue to recognize revenue from IP contract backlog. We also achieved volume production with the first two of our SerDes Chiplet customers. From a supply chain perspective, we've been navigating the challenges facing the entire electronics industry. As we announced in our 8-K on April 13th, one of our key supply chain partners in China was shut down due to COVID lockdown mandates. While we did not face any other supply chain issues, this lockdown limited our ability to deliver to the customer demand we had in Q4 and it impacted our revenue in the quarter. Going forward, we will add geographic diversity to our supply chain strategy. And given the fact that we have good forecast visibility, we will also judiciously build inventory. In fact, with many of our large customers, we affirm backlog that extends to 52 weeks. Despite the supply complexity experienced in April, we delivered record quarterly revenue of $37.5 million, an increase of 18% from last quarter and 90% year-over-year. Given we had strong relative performance on the IP side of our business, we also achieved very good gross margins. There were several key drivers to our record-setting quarter, which included the continued ramp of a Nick-to-ToR AEC Solution at a leading hyperscalar, as well as multiple new IP license wins and IP revenue recognition from backlog with an industry leader in the consumer market. We're encouraged as we move into fiscal 2023, as we see increasing strengthened demand for our solutions, as we deepen our customer engagements with industry leaders including hyperscalers, optical module manufacturers, and networking OEMs and ODMs. As we previously mentioned, we're addressing a large and fast-growing Total Addressable Market within the high end of the Ethernet Connectivity market. Based on industry reports, we believe our overall Total Addressable Market will exceed $5 billion in the upcoming years. We also believe our emerging solutions for new target markets such as USB and PCIe will add an incremental $3 billion to our Total Addressable Market. Our team has been working very hard to meet and drive customer demand through continued customer engagement and innovation. The hard work has been paying off and we have many reasons to be excited about our prospects in fiscal 2023 and beyond. Within AEC, we expect to launch a third major program at our first hyperscale customer during fiscal 2023, which is indicative of our strong execution on the first engagements and also indicative of the credibility Credo has earned to be trusted with a third key program. Additionally, we continue to make progress in our AEC engagement with a second hyperscale customer and we expect to begin ramping that program in fiscal 2023. We're also bullish on the opportunity for 800-gig ports in the future, having already sampled 800-gig AEC solutions to several leading partners. We continue to strongly believe that 800-gig DAC is dead. Based on customer traction, we also expect the continued ramp of our optical DSP solutions. We continue to work jointly with customers across a variety of applications targeting various hyperscalers. While hyperscalers will remain the most significant customers for optical DSPs, we're encouraged by our products for applications for the 5G infrastructure, PON, and Fibre Channel markets. We're one of the few established leaders in the Line Card PHY market and we've been very pleased with the growth of this product line, which was driven by the expansion of our customer base of hyperscalers and networking OEMs and ODMs. Going forward, we believe that we will continue our market leadership for MACsec solutions that provide encryption for the growing number of applications requiring high security, and we expect our retimers and gearbox solutions to continue to gain momentum based on our ability to deliver more power-efficient and cost-effective solutions. Lastly, some thoughts on our SerDes IP and Chiplets, which remain a highly strategic part of our overall business. While our IP business is variable on a quarter-to-quarter basis, we continue to build our backlog and maintain a robust pipeline of new opportunities for fiscal 2023 and beyond. We're certainly excited to further deepen our relationships with Ethernet customers as well as further engaging leading USB customers. Credo's diverse portfolio of low power SerDes IP offers our customers optimal solutions for their needs. Looking forward, our engineering teams are working aggressively on next-generation 800-gig and 1.6T Ethernet solutions across all of our product and IP offerings. Our expectations are that we will be very well-positioned to continue to deliver the same compelling advantages to our customers as these cutting-edge markets ramp in the upcoming years. Fortunately, customer demand for our solutions continues to look very robust. We had growth in every part of our business in fiscal 2022, and we expect the same in fiscal 2023. Given the breadth of our solutions, our technical innovation, our operational capabilities, the favorable market trends, and ultimately, the strong demand from customers, we look forward to another record-setting year in fiscal 2023, where we expect to achieve at least $200 million in revenue, which would represent growth of more than 88%. With that, I'd now like to turn the call over to Dan Fleming, our CFO to provide more details on our fourth quarter and full fiscal year results, as well as to give guidance moving forward.

Dan Fleming, CFO

Thank you, Bill and good afternoon. I will first provide a financial summary of our fiscal year 2022, then review our Q4 fiscal 2022 results, and finally discuss our outlook for Q1 of fiscal 2023. As a reminder, the following financials will be discussed on a non-GAAP basis unless otherwise noted. As Bill mentioned, this past year has been truly transformative for Credo. We have scaled our business considerably and expanded our Total Addressable Market, thanks to the strong progress made with our AEC product. In addition, we are well-capitalized to continue investing in our strong growth trajectory while maintaining a substantial cash buffer in this volatile environment. I'm pleased to share with you that revenue for fiscal year 2022 was a record at $106.5 million, up 81% year-over-year, driven by product revenue that grew by 120%. Gross margin for the year was 60.6% as we continued to gain scale. Our operating margin improved by 11% even as we dramatically grew our product revenue mix from 63% in fiscal year 2021 to 77% in fiscal year 2022. This illustrates the leverage we can deliver with our strong topline growth. While product will continue to drive substantial topline growth, IP remains strategically important to us. This source of high-margin revenue grew 16% for the year, which translated into a $4.1 million improvement in gross profit. In Q4, we achieved another quarter of record revenue at $37.5 million, up 18% sequentially and up 90% year-over-year. Our sequential growth was largely driven by strong revenue growth of our IP. Our product revenue was $26.4 million for the quarter. While it was flat sequentially, product revenue grew 104% year-over-year. While our Q4 revenue represented strong year-over-year topline growth, this result was at the low end of our guidance range. As we previously disclosed, the product revenue was limited by government COVID lockdown mandates in China, which caused certain disruptions in the manufacturing of some of our products in the fourth quarter. With the lockdown impacting our supplier, we were simply not able to fulfill all demand. As Bill mentioned, we're taking mitigating actions to ensure we're better positioned to deliver to demand should we encounter similar issues in the future. Most importantly, we continue to see extraordinary demand across all of our product lines. In fact, we saw each product category, Line Card PHY, Optical, and AEC grow for the quarter and full year. Additionally, we're pleased to share that we expect this to occur again in fiscal 2023 with our product growth being led by a wave of AEC adoption. The fundamental driver of a strong HSDC expansion outlook at the highest speeds remains in place in the face of an uncertain economic and geopolitical landscape. So, we're thrilled to be well-positioned with a leading set of products. Our first large AEC customer was again much greater than 10% of our revenue and was 30% of revenue for the full year. We expect this customer to remain a large portion of our revenue in the coming quarters as their AEC ramp continues. Our IP business generated $11.1 million of revenue in Q4, up 64% year-over-year. IP will remain 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 contracts. While the mix of IP and product revenue will fluctuate in any given quarter, our revenue mix in Q4 was 30% IP due to strong IP execution. This is above our long-term expectation for IP, which is 10% to 15% of revenue. With a strong IP result this quarter, we delivered a gross margin of 63.7%, above the high end of our guidance. This was up 292 basis points sequentially. Our IP gross margin generally hovers near 100% and our product gross margin was 48.5% in Q4, down 495 basis points sequentially, due to a sequential decline in our product engineering services, a high-margin contributor to our product gross margin. Total operating expenses in the fourth quarter were $21.6 million at the low end of our guidance and up 50% year-over-year as we scaled the organization for growth. Now, I think it's important to note that this is considerably below our 90% year-over-year revenue growth. We expect to continue to deliver considerable leverage in the business. Our OpEx increase was driven by a 59% increase in R&D as we continue to invest in the resources to deliver leading solutions. Our SG&A conversely was up 40% as we built out public company infrastructure. We delivered net income of $2.8 million in Q4, an increase of $0.4 million sequentially and $5.1 million year-over-year. Cash flow from operations in the fourth quarter was $2.4 million, an increase of $0.6 million sequentially and $13.9 million year-over-year. CapEx was $9.6 million in the quarter, driven by production MACsec, and free cash flow was negative $7.3 million, an improvement of $3.7 million year-over-year. We ended the quarter with cash and equivalents of $259.3 million, an increase of $18.8 million over the third quarter. This increase in cash came from the net proceeds of a green shoe offering in connection with our successful IPO completed in January. Our accounts receivable balance increased 36% sequentially to $29.5 million, while days sales outstanding increased slightly to 72 days, up from 71 days in Q3. Our Q4 ending inventory was $27.3 million, up $1.2 million sequentially as we continue our product ramp. Now, turning to guidance for the first quarter, we currently expect revenue in Q1 fiscal 2023 to be between $43.5 million and $47.5 million, up 21% sequentially at the midpoint and 324% year-over-year. We expect Q1 gross margin to be within the range of 59% to 61%. We expect Q1 operating expenses to be between $21.5 million and $23.5 million. Finally, we expect Q1 weighted average diluted share count to be approximately 161 million shares. As Bill mentioned, we expect to achieve at least $200 million of revenue in fiscal 2023. Coupling our strong growth and our fiscal discipline, we will continue to generate leverage in the business and expect to deliver a double-digit operating margin for the full year. And with that, I will open it up for questions. Thank you.

Toshiya Hari, Analyst

Hi, good afternoon. Thank you so much for taking the question. I had two if I may. First one, Bill just on kind of the supply dynamic, curious how significant or how meaningful the hit was to revenue in the April quarter. And if you can kind of share with us how your partner is doing today again, from a supplier operations perspective, that would be helpful? And will you be caught up from a supply perspective exiting this quarter? And I've got a quick follow-up. Thank you.

Bill Brennan, CEO

Thank you for the question. To provide some context, the disruption we experienced started in the first half of April, but we were back to full production by the end of April. We filed the 8-K to ensure transparency with our investors. As a newly public company with significant interest from investors, we had several meetings the same week we learned about the mandate from our supply chain partner. We aimed to be as transparent as possible. We managed to meet the low end of our guidance for the quarter, which we are pleased about. Our growth continued across all our products and intellectual property, allowing us to perform well despite the production shortfall in April. Regarding your question about the future, we anticipate making up for this in the first quarter.

Toshiya Hari, Analyst

Got it. And then as of my follow-up, you talked about fiscal year 2023 revenue outlook of at least $200 million, or I think Bill, you said up 88%. I was hoping you could give a little bit more color or differentiate between your product business and your IP business. And more importantly, within your product business, I'm guessing the vast majority of that growth is going to be coming from AEC, but how are you thinking about Line Card PHYs, optical DSPs? And then within AEC, I mean, if you can kind of differentiate between your largest customer and your second largest customer, that would be super helpful. Thank you.

Bill Brennan, CEO

Sure. So, again, appreciate your question. The way that the growth is going to break down, I think it's going to be consistent in a sense that we see growth across all of our businesses. If I were to summarize by product line, I think Line Card will be very steady growth, as we've seen over the last several years. AEC will, I think, make up the majority of the absolute growth. If we look at from a percentage growth standpoint, I think optical will be growing the fastest from a percentage standpoint, although it's from a smaller base. From an IP perspective, Dan has given guidance that we expect long-term to be on the order of 10% to 15%, and we think for the year that we will probably exceed that expectation. And so hopefully, that gives you an idea about the growth that we see in the upcoming year.

Toshiya Hari, Analyst

And Bill, sorry, within AEC, your largest customer and the second customer which you expect to ramp in fiscal 2023, should we expect the majority of the growth to still come from your largest customer? Could your number two customer be as impactful in fiscal 2023?

Bill Brennan, CEO

We anticipate that the ramp with the second hyperscaler will begin in fiscal 2023. However, it's difficult to determine the exact timing of the ramp due to the complexities of our end customers' deployment schedules. We will be prepared to start ramping in the first half of our fiscal year, but we are guiding that the initial ramp will likely occur towards the end of the year. To address your question more directly, we do not expect a significant amount of revenue from this second hyperscaler in fiscal 2023, but we anticipate very high growth in the following year.

Vivek Arya, Analyst

Thanks for taking my question. I actually had a question on the Q1 outlook and then for fiscal 2023. So, when I look at your Q1 outlook, right, and assume let's say 80% is going to come from product and 20% from IP or so, that's a just a very strong sequential growth in your product segment. So, I just wanted to make sure you have the inventory to support that kind of product? And I imagine part of it is just the swing from the prior quarter that you were not able to deliver. So, just kind of the confidence and the support to deliver on this kind of sequential product ramp going into Q1?

Dan Fleming, CFO

Yes, thanks Vivek, that's a great question. Let me address that. You are absolutely right that we had some delays in Q4 which affected our supply. However, our factory in Qingshan is now operational again, and we expect to meet the demand for the gap we experienced last quarter. Additionally, as Bill mentioned, we are seeing strong performance across our entire product range. We have been increasing our inventory across all products, which is reflected in our Q4 balance sheet. Therefore, we are very confident that we can achieve our goals for Q1.

Vivek Arya, Analyst

All right. And then on a fiscal 2023, Bill, you gave this very strong outlook of $200 million plus, can you give us a sense of backlog to support that view, just given a lot of the macro concerns about spending slowdowns and whatnot? I understand that a lot of your growth is very company-specific and product cycles, but it's still a very strong outlook for next year. So, maybe a sense of backlog? And part B of that is how are you thinking Dan about the gross margins that can go with the mix that you have in mind for next year?

Bill Brennan, CEO

Thank you for the question. I want to start by noting that the unusually tight supply chain has significantly altered how our customers plan their demand, which has also affected our demand planning. Many customers are taking extensive steps to secure product flow over the next year. It's difficult to specify how exactly demand has become more robust, but we are seeing backlogs, binding forecasts, and other commitments. Overall, as we look ahead to the upcoming year, we feel confident in our relationships with key customers and believe there is assurance that the demand we're observing is a reliable trend over the next 52 weeks, with updates every month. As we enter the year, I feel optimistic about the demand from our customers.

Dan Fleming, CFO

Let me address your question about gross margin. It's important to remember that our IP revenue can fluctuate from quarter to quarter, which naturally affects our gross margin percentage. However, in terms of margin expansion opportunities over the long term, everything is aligning with our expectations based on the past few quarters. For fiscal year 2023, we have a diverse product mix, and we anticipate that our margins will continue to grow as we achieve greater scale. Looking beyond fiscal 2023, we believe the market fundamentals will support margin expansion, particularly with our AEC product line. While we recognize that DAC technology may be reaching its peak at 800-gig ports, we also see a shift in our product mix, with optical products becoming a more significant contributor in 2023 and even more so in 2024, which will influence margin expansion as well. To clarify, our long-term corporate gross margin expectation remains between 63% and 65%. Our IP will contribute 10% to 15% of that revenue mix, meaning that if we focus solely on product margins, we expect around 60% for the product margin excluding IP. I hope this provides some insight into our margin expectations.

Tore Svanberg, Analyst

Yes. Congratulations on a continuous store execution. Bill, you talked about a third program ramping with your largest customer for AEC here in fiscal 2023, could you just elaborate a little bit more on the magnitude of the third program? I mean, obviously, you can't disclose too much, but any metric that you can perhaps share with us, just so we understand the magnitude of the third program versus the previous two?

Bill Brennan, CEO

Sure. So, let me first give some color on the first two programs. The first two programs were both Nick-to-ToR AECs. The first was a 50-gig AEC solution that was two lanes of 25. The second one was a next-generation 100-gig, or four lanes of 25 Nick-to-ToR solution. So, I can't provide too many details about this third program, but it's in the same Nick-to-ToR space and it does have the potential to be significant, although we don't have details on the specifics related to the volume expectations. From our perspective, we think that this can be the third significant program that we've engaged on.

Tore Svanberg, Analyst

That's fair. And as my follow-up, could you also elaborate a little bit on the diversification strategy of your supply chain? Obviously, you were impacted by the China lockdown this quarter, help us understand a little bit how difficult it is to diversify? How long will it take just so we can get a sense of how quickly you can have multiple suppliers to alleviate the current issues?

Bill Brennan, CEO

Sure. A great question. Since April, it's become kind of top of mind for us. There's really two different approaches here. One is a mid to long-term approach, which is to gain geographic diversity. We've established a very large volume capability in Qingshan with the supply partners that we've got there. Both of these supply partners are large global corporations. As we think about becoming more geographically diverse, we're now actively looking at different locations globally and the timeframe that it would really take for us to bring up production in a significant way. One of the challenges we're faced with is that we're still in the early stages of ramp and so we've had a relatively large investment with our partners in the current locations. This would be in addition to that. In any case, we don't expect that in the near term we're going to be able to establish this geographic diversity. That's why we've talked about judiciously building inventory. We expect in this quarter that we'll establish a significant buffer of inventory to more smoothly navigate any future impacts that are force majeure types. That is something that we've decided to do due to the strength of the forecast and the backing forecast commitments, we're comfortable making that investment. So, really, our short-term strategy is to build some inventory smartly. And in the long-term, of course, you'll see us bring up production outside of Qingshan.

Tore Svanberg, Analyst

That's a great perspective. Congrats again.

Quinn Bolton, Analyst

Thanks guys and congratulations on the results and outlook. Wanted to follow-up on Tore's question just sort of around the current supply chain in Qingshan, you mentioned the suppliers, I think, are now back up and running. But we've heard stories that many factories may only be at 50% of labor staff given the effects of the lockdowns. Is your supplier backup sort of running full steam and are both suppliers providing you with AECs in the first quarter?

Bill Brennan, CEO

I can say that the feedback you're getting from your contacts is accurate. Coming back, there's really phases towards coming back. The first phase is basically re-establishing production with a smaller group of employees that will maintain that facility. Our partners are now hiring again and increasing capacity. We're not quite back to the full capacity where we have been running, but I think in the next couple of weeks or next few weeks, we're on a good path to achieve what we consider full capacity at this point. Yes, both of our partners will get back up and shipping.

Quinn Bolton, Analyst

Great. The second question is you mentioned sampling the 800-gig AECs to multiple vendors. Just wondering it sounds like 800-gig modules may be starting to be deployed for sort of AI cluster applications. Wondering if you could give us some sense, when do you think given the 800-gig AECs going into volume productions, whether it's AI clusters, or whether it's the distributed disaggregated chassis application?

Bill Brennan, CEO

Yes, great question. I'll start by saying that we do see a lot of 100-gigabit per second per lane silicon, 800-gig for switches, and 400-gig for four lanes of 100 for high-end servers. We see a lot of silicon that is sampling and in development with leading hyperscalars and switch OEMs. A lot of activity right now on 100-gig per lane AEs, as a result of our solution being readily available and customers need to source some form of 800-gig connectivity solution for their development. From a timing standpoint on deployment, this is hard for us to have a great opinion on. We'd like to see it sooner than later as everybody in the industry would. But in reality, we think that it's going to be in the 12 to 18-month timeframe from now before we see it in volume. I will say that, again, we'll be ready for production much in advance of when actual deployment begins. I think we're in a great position. We believe, just to reiterate, at 800-gig or 100-gigabit per second per lane, there's no customers really trying to make DAC work anymore. So now it's a function of deploying with AECs for short connections and deploying with optical solutions for longer connections.

Vijay Rakesh, Analyst

Yes. Hi, Bill and Dan. Great quarter and guide. Just a quick question on the mix of revenues on the product side, when you look at the 4Q and 1Q, if you can use the split of AEC versus optical and Line Card?

Dan Fleming, CFO

Yes, thanks Vijay. We unfortunately don't disclose specifics when it comes to our product line mix, but from a long-term perspective, the expectations that we've set out where we're trending toward those amounts, which longer term, we would expect AEC to be nearly half of our revenue. IP is right now, we're not quite at the long-term model, so we're slightly above the 10% to 15%. The Line Card business has been a very strong business for us and continues its strength and is growing. Longer term, it'll probably be in the 15% range. The balance, optical will be a significant contributor this year, especially towards the end of the year and then even more so next year. Hopefully, that gives you just kind of broad strokes about the direction that we're headed.

Vijay Rakesh, Analyst

Got it. Regarding the AEC side, I understand you have a wide range of MACsec, phase shift, speed-shift, and Nick-to-ToR products. I’m curious about your perspective on the competitive landscape, considering your extensive portfolio and qualifications with many enterprise hyperscale clients. What do you see as your competitive advantage? Do you believe you have a lead time of 12 to 24 months or more compared to the competition, many of whom are still working to establish their products? I'd appreciate any insights you can provide on that area.

Bill Brennan, CEO

Yes, that’s a great question. We're pleased to see competitors validating the AEC product category. We believe we have a significant advantage since we've been focused on this category for nearly four years. Our approach is unique because we have established an internal team at Credo responsible for the design, development, and delivery of the AEC System Solution. This ensures we are accountable for the entire AEC System Solution, which simplifies the process for our customers. Our manufacturing partners excel in their areas, but we realized that fully owning the system design, from the firmware to testing programs and tester design, would create a stronger offering than relying on others. Our business has evolved beyond our initial thoughts, and we're now providing distinctive solutions in volume. These are truly system-level solutions that could be considered the most advanced connectivity solutions for data centers. For instance, the solution we are shipping to our first hyperscaler enabled them to deploy a dual ToR architecture in a single rack due to the intelligence built into our cable. It can detect when a ToR port is failing and automatically redirect data to a second port. This level of intelligence has never been delivered in the form of DAC or other optical connections. Our business direction stems from our internal capabilities. We are also developing a second unique solution that isn't just a standard cable, and we anticipate increased demand for innovation from our customers as they recognize this new category of system solutions. Additionally, there will be opportunities in the switching and routing layer with advanced 800-gig ports, which will create a strong market. Overall, we believe our strategic approach is paying off as we establish ourselves as a clear leader in this space. The presence of competition is beneficial, and we appreciate that more companies are investing in this area, recognizing AEC as the primary solution for shorter connections, specifically those three meters or less.

Vijay Rakesh, Analyst

Yes, I understand. I know you have discussed MACsec cables and other related topics. My other question is, considering that you are in the N minus one position on the SerDes Chip side, does that provide you with greater capacity at the foundry, since you are not competing for the leading edge? I realize you've addressed the cable aspect of the supply chain, but can we assume that you can negotiate better capacity on the chip side?

Bill Brennan, CEO

Yes, absolutely. You're right on with that and so the strategy that we've taken with our process choices is really based on the fact that connectivity solutions are a primary decision for us. We're not being driven to advanced processes due to memory or large amounts of logic. We can choose a process that's the most suitable for our design. We've always had this mentality, if we can use a more mature process and achieve best-in-class power, best-in-class performance, and best-in-class die size, of course, that's the approach we're going to take because we can, in turn, become the disruptor in the market. That strategy has turned into a supply chain advantage for us. Because we are in an N minus one, 12 nanometer is really our workhorse. We've had a lot of success; we've really never been limited from a capacity standpoint. I will say on top of that, if you look at our die sizes, our demand for wafers is less because our die sizes are smaller. It's turned into a big advantage from a supplier perspective as well. That really wasn't intended when we made the decision, but it sure is a strength that we've got going into this year.

Suji Desilva, Analyst

Hi Bill, hi Dan, congratulations on the execution here. A question on AEC and then a bigger picture question. On AEC, the customer going from one to three wins, can you give a sense of how big that denominator is? How many opportunities there are to give to a customer like this? And then are those sole-sourced or are they built-sourced, remind us that? Thanks.

Bill Brennan, CEO

Yes, I think that we view every hyperscaler as kind of an independent market. We also view that the work that they're doing at a Nick-to-ToR level, as well as the work that they're doing in the switching and routing layers. We view all of these things as, kind of, separate markets related to a given hyperscaler. We view that the opportunities we see for AECs for the Nick-ToR space within each one of these hyperscalers, long-term, there will be an AEC opportunity for every server deployed. Looking at the switching and routing layer, there are different strategies and different deployment strategies and different port speed strategies. More hyperscalers is the same as another. AEC is a unique solution because it puts us in the architectural discussion with the hyperscalars we're engaged with. Long-term, I expect all the hyperscalars. I can't put a nice bow on it, but I believe that the opportunity is going to track the server shipments and be based on the switching and routing layer based on architectural decisions on disaggregation versus chassis.

Suji Desilva, Analyst

Okay. Are those sole-sourced, just to follow-up?

Bill Brennan, CEO

I think that where we may be sole-sourced today, we expect long-term that we'll be in a dual-source environment. That's driven by the desires that the hyperscalers have. They live in a world where dual-sourcing is an absolute requirement, so we expect that we'll be living in that world for sure. We may be sole-sourced for some period of time and we're in a mode of, if we can be the partner that moves quickly and delivers successfully, we'll maintain a large market share.

Suji Desilva, Analyst

Okay. And then a follow-up just bigger picture, are you able to guide ahead for fiscal 2023 and in the visibility you have? I'm curious if various cloud vendors have seen a buy-and-pause cycle, maybe the processor guys. Can you tell me if it feels like you're more immune to that sort of cycle, or whether that could be a factor in your core visibility, any color there would be helpful?

Bill Brennan, CEO

Yes, I don't think that we would ever say that we're immune to the cycles that we've seen in the past. I will say that we've got discussions ongoing with our customers that are really discussions where we're outlining at a 52-week horizon very specific demand and specific commitments, so we can go and source and build to those schedules. I feel comfortable. Even with that, we do apply some conservatism. I feel confident as we go into the year with the demand outlook we've got, but I will never say that we're going to be immune to big changes if unforeseen things pop up. I will say that the deployments we're on right now are adding significant efficiency improvements. Deploying a dual ToR server rack is supposed to deploy two racks side-by-side. There are enormous savings in cost and power, plus better equipment utilization. I will say that, even with unforeseen things, this is the type of investment that customers will continue to make because the benefit is just so compelling and that’s why this has been a strategic imperative for our first customers they've ramped.

Operator, Operator

Thank you. There are no further questions at this time. Bill, I'll turn the call over to you.

Bill Brennan, CEO

Great. Well, let me thank you all for attending the call. I really appreciate the great questions and I also appreciate the strong interest that you've got in Credo. So, we'll look forward to talking with you in the future. Thank you very much.

Operator, Operator

This concludes today's conference call. You may now disconnect. Everyone, have a great day.