Earnings Call Transcript - CRDO Q4 2025

Operator, Operator

Thank you for being here today. At this time, all participants are in listen-only mode. We will have a question-and-answer session later. I would now like to hand over the conference to Dan O'Neil. Please proceed.

Dan O'Neil, Corporate Secretary

Good afternoon. Thank you for joining our earnings call for the Fourth Quarter of Fiscal 2025. Today, I'm joined by Bill Brennan, Credo's Chief Executive Officer; and Dan Fleming, our Chief Financial Officer. During this call, we will make certain forward-looking statements. These forward-looking statements are subject to risks and uncertainties 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 is not possible for the company's management to predict all risks, nor can the company assess the impact of all factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statement. Given these risks, 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 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, which can be accessed using the Investor Relations portion of our website. With that, I will turn the call over to our CEO. Bill?

Bill Brennan, CEO

Thanks, Dan. Thank you for joining our earnings call for the fourth quarter of fiscal '25. I'll begin with a review of our results, and then I'll provide highlights for our outlook into fiscal '26. Dan Fleming, our CFO, will follow with a detailed discussion of our Q4 and fiscal year '25 results and then provide our outlook for the first quarter. In the fourth quarter, we delivered revenue of $170 million, a 26% sequential increase and up 180% year-over-year. Our non-GAAP gross margin was 67.4%. For fiscal '25, Credo achieved revenue of $437 million for growth of 126% year-over-year. I'm proud of Credo's achievements in fiscal '25; record-breaking revenue and profitability were fueled by surging demand for our innovative, reliable, and energy-efficient high-performance connectivity solutions. Our long-term commitment to customer-driven innovation paid off significantly in fiscal '25. Quarterly revenue nearly tripled from Q1 to Q4, validating our foresight and our ability to capitalize on a predicted inflection point. Our agile approach strengthened partnerships with hyperscalers amid a rapidly evolving AI landscape. As a pure play high-speed connectivity leader, Credo delivers a growing portfolio of differentiated solutions for global data center operators, currently supporting port speeds from 100 gigabits per second to 1.6 terabits per second. Our innovation spans three tiers: advanced SerDes technology, cutting-edge integrated circuit design, and comprehensive system-level solutions. These innovations are seamlessly integrated with our PILOT software platform. PILOT is an acronym for predictive integrity, link optimization, and telemetry. PILOT offers an industry-leading user interface, robust debugging tools, and advanced telemetry tailored for large-scale deployments. This holistic innovation strategy enables Credo to deliver copper and optical connectivity solutions that surpass industry standards, providing unmatched functionality, reliability, and energy efficiency. While achieving a remarkable revenue ramp in fiscal '25, we continue to build the foundation for sustained growth. Looking ahead, we anticipate increasing customer diversification across copper and optical connectivity for Ethernet, PCIe, UA Link, and other emerging applications in both scale-out and scale-up AI networks. Following the significant revenue inflection in fiscal '25, we're energized by the expanding opportunities and total addressable market that lie ahead. I'll now review our business in more detail. Regarding our active electrical cable product line in Q4, our AEC revenue maintained a steep growth trajectory. As anticipated, our customer base diversified with three hyperscalers each contributing over 10% of our revenue, strengthening our market position. When we pioneered the AEC market years ago, we recognized the compelling advantages over both traditional direct attached cables and laser-based optical solutions, especially at data rates of 50 gig per lane or higher. AECs have extended the viability of copper connectivity, becoming the de facto standard for intra-rack applications. Compared to DACs, AECs deliver superior signal integrity, advanced features, and a more versatile form factor. Now, AECs are gaining traction as a robust rack-to-rack solution for distances up to 7 meters, offering over 100 times greater reliability than laser-based optical modules, virtually eliminating link flaps and significantly improving energy efficiency, which are both key enablers for best-in-class AI deployments. Credo's system level approach has driven substantial competitive advantages by owning the entire solution stack: SerDes IP, Retimer ICs, system-level design, qualification, and production. Our approach positions Credo for significant innovation and time to market advantages. As data center architectures evolve rapidly, we foresee a continued shift towards curated system-level solutions. We are enthusiastic about the ongoing expansion of the AEC market. For instance, our recently demonstrated PCIe Gen6 AECs at GTC promise the same compelling benefits for AI scale-up networks as deployments transition to rack-scale architectures. Our growing traction with hyperscalers is evident with strong customer forecasts and new design wins in qualification, and we're confident in sustained AEC revenue growth. I'll now discuss our progress in the optical market. Fiscal '25 was a standout year for Credo's optical business. We closed the year with strong momentum, expanding customer diversity across lane rates, port speeds, and applications. We achieved our revenue growth targets, delivering 50 gig and 100 gig per lane optical DSPs to a broad base of optical module customers. In Q4, we secured a significant DSP win for an 800 gig transceiver, with initial deployments expected at a U.S. hyperscaler in fiscal '26. At the OFC Conference in San Francisco last month, Credo's latest optical innovations drew widespread attention from industry leaders. We unveiled our ultra-low power 100 gig per lane optical DSPs built on 5 nanometer technology. This family, including full DSP and linear receive optics variants, sets new industry benchmarks for power efficiency. In collaboration with an optical module partner, Credo demonstrated an industry-first 800 gig optical module with total power consumption of roughly 9 watts, powered by our Lark LRO DSP and single-mode optics. We achieved error rates comparable to full DSP solutions, earning significant interest from hyperscalers prioritizing power efficiency for AI deployments. We also showcased our 3 nanometer 200 gig per lane optical DSP, supporting port speeds up to 1.6 terabits per second. With leading signal integrity and power efficiency, this solution positions Credo to drive the industry's transition to 200 gig lane speeds in the coming years. Looking ahead, we see a dynamic and growing market for optical connectivity, where reliability and energy efficiency are increasingly critical. Credo is poised to deliver system-level innovations that provide substantial advantages to our partners. Credo's optical business demonstrated robust execution in fiscal '25. With our growing differentiation and an expanding system-level market opportunity, we anticipate accelerated revenue growth in the years ahead. Turning to our Retimer business. In Q4 and fiscal '25, our Retimer business delivered robust results, reinforcing our leadership. Retimer revenue growth was fueled by our 50 gig and 100 gig per lane Ethernet solutions, offering advanced features like MACsec encryption, gear boxing, and software-enabled functionality tailored to diverse customer requirements. Our customer base now includes leading AI server vendors alongside traditional switching clients, reflecting the growing adoption of our solutions in AI-driven architectures. For fiscal '26, we anticipate strong growth driven by the continued shift to 100 gig per lane solutions and increasing demand for system-level expertise and software capabilities to address hyperscalers' complex AI optimized architectures. Our recently launched PCIe Gen6 Retimer family, led by the 2 CAN Retimer, achieved full compliance at the PCIe workshop, showcasing superior performance and interoperability. Demonstrations at GTC, OFC, and most recently at Computex with two leading ODM partners further validated our capabilities. Customer momentum for our PCIe Retimers is accelerating, positioning Credo to secure design wins in calendar '25 with production revenue expected in calendar '26. Our competitive edge lies in leveraging core SerDes technology, a customer-centric approach, and system-level innovation to deliver differentiated latency, reach, and power efficiency. Additionally, our PILOT development telemetry software platform drives faster time-to-market, improved yields, and enhanced system monitoring, providing clear advantages based on market feedback. In summary, fiscal '25 marked a pivotal year for Credo, achieving record revenue, profit, and market adoption of our innovative connectivity solutions, hitting the inflection point we anticipated. Our operational and customer-facing teams executed flawlessly to deliver these results. Credo pioneered a market that transformed how hyperscalers connect switches and servers. We continue to innovate with recent product announcements reflecting customer-driven solutions. These advancements position us to capture significant opportunities in the global AI infrastructure investment wave, fueling our next phase of growth. Reflecting on our journey, Credo has navigated successes and challenges with a relentless focus on delivering world-class products. This resilience defines our DNA and is our greatest strength. Thank you, Team Credo, for your dedication. I'm excited for what lies ahead. We see growing demand for high-speed connectivity solutions across our hyperscaler customers to power advanced AI services, a trend we anticipate continuing for the foreseeable future. Customers require reliable, power-efficient, high-performance, and tailored solutions to support their diverse architectures. Credo meets this demand with a differentiated portfolio of copper and optical connectivity solutions customized for customers, built on our core SerDes IP, tiered innovation strategy, and system-level approach. With that, Dan Fleming, our CFO, will now provide additional details, and we'll then take questions.

Dan Fleming, CFO

Thank you, Bill, and good afternoon. I will first provide a financial summary of our fiscal year '25, then review our Q4 results, and finally discuss our outlook for Q1 and provide some color on our expectations for fiscal year '26. Revenue for fiscal year '25 was a record at $436.8 million, up 126% year-over-year, driven by product revenue that grew by 157%. Gross margin for the year was 65%, up 257 basis points year-over-year. Our operating margin improved by 2,500 basis points as we continue to generate considerable top line leverage, driven by growth in our products, while growing operating expenses considerably slower than revenue. That step-up in profitability flowed through to the bottom line as we reported earnings per share of $0.70 for the year, a $0.62 improvement over the prior year. In fiscal year '25, Credo not only delivered the dramatic product growth, which we had forecast, but we also demonstrated the earnings power in our business model. Moving on to the fourth quarter. In Q4, we reported revenue of $170 million, up 26% sequentially and up 180% year-over-year and well above the high-end of our guidance range. Our product business generated $165.9 million of revenue in Q4, up 26% sequentially and up 276% year-over-year. Notably, our AEC product line again grew healthy double-digits sequentially to achieve new record revenue levels once again. Our top three end customers were each greater than 10% of revenue in Q4. As a reminder, customer mix will vary from quarter-to-quarter and we continue to make progress in diversifying our customer base. We continue to expect that three to four customers will be greater than 10% of revenue in the coming quarters and fiscal year, as hyperscale customers continue to ramp more significant volumes and as we expect to begin to ramp two new hyperscale customers in the second half of fiscal year '26. Our team delivered Q4 non-GAAP gross margin of 67.4%, above the high end of our guidance range and up 355 basis points sequentially. Our product non-GAAP gross margin was 66.5% in the quarter, up 354 basis points sequentially and up 1,289 basis points year-over-year, primarily due to increasing scale. Total non-GAAP operating expenses in the fourth quarter were $52 million at the high end of our guidance range and up 19% sequentially, primarily driven by headcount. Our non-GAAP operating income was $62.5 million in Q4, compared to non-GAAP operating income of $42.4 million in Q3, up demonstrably due to the leverage attained by achieving 26% sequential top line growth. Our non-GAAP operating margin was 36.8% in the quarter compared to a non-GAAP operating margin of 31.4% in the prior quarter, a sequential increase of 538 basis points. Our non-GAAP net income was $65.3 million in the quarter, a record high compared to non-GAAP net income of $45.4 million in Q3. And our non-GAAP net margin was 38.4% in the quarter, well above the high end of our long-term net margin model of 28% to 33%. Cash flow from operations in the fourth quarter was $57.8 million, up $53.6 million sequentially due to cash collection driven by the significant sequential product ramp. CapEx was $3.7 million in the quarter, driven largely by purchases of production equipment. And free cash flow was $54.2 million, an improvement of $54.6 million from the third quarter. We ended the quarter with cash and equivalents of $431.3 million, an increase of $52.1 million from the third quarter. We remain well-capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer. Our Q4 ending inventory was $90 million, up $36.8 million sequentially. Now turning to our guidance. We currently expect revenue in Q1 of fiscal '26 to be between $185 million and $195 million, up 12% sequentially at the midpoint. We expect Q1 non-GAAP gross margin to be within a range of 64% to 66%. We expect Q1 non-GAAP operating expenses to be between $54 million and $56 million. We expect Q1 diluted weighted average share count to be approximately 188 million shares. These expectations are based on the current tariff regime, which remains fluid. We were pleased to see fiscal year '25 play out as we expected. The rapid shift to AI workloads continues to drive new broad-based customer engagement, and we executed well to deliver the sequential growth we had forecast throughout the year. As we begin fiscal year '26, we expect revenue to exceed $800 million for year-over-year growth in excess of 85%. We expect non-GAAP operating expenses to grow at less than half the rate of revenue from fiscal year '25 to fiscal year '26, and as a result, we expect our non-GAAP net margin to approach 40%. And with that, I will open it up for questions.

Operator, Operator

Your first question comes from Vivek Arya with Bank of America. Your line is open.

Vivek Arya, Analyst

Thanks for taking my questions. For the first one, on the revenue side, I was hoping you could perhaps quantify how large were the three 10% customers, especially the largest one. And thanks for giving the fiscal '26 revenue outlook. That suggests a modest sequential growth through the year, but I think you mentioned that you expect other new hyperscalers to come on board in the second half. So if you could just talk through what the puts and takes are as you look at kind of shaping the year, what could be the upside drivers and downside risks from here through fiscal '26 as you get more customers on board? And then, I had a follow-up.

Dan Fleming, CFO

Sure. This is Dan Fleming. Last quarter, we mentioned that we expected to see three to four customers contributing over 10% each to our revenue in the upcoming quarters and fiscal year. We reiterated this in our prepared comments, and that’s exactly what we observed in Q4. Our largest customer accounted for 61% of our revenue, which was expected, and we also had one customer at 12% and another at 11%. These are the same customers that exceeded the 10% threshold in Q2. Regarding your second point, we plan to continue diversifying our customer base throughout fiscal '26. In addition to these three customers, we anticipate adding two more hyperscalers in the latter half of fiscal '26. It’s somewhat challenging to predict exactly how this will unfold throughout the year, but if we apply a linear trajectory, that seems to be the best projection for now. We're excited about enhancing our revenue diversification across multiple hyperscalers as our innovative solutions gain wider acceptance in the industry.

Vivek Arya, Analyst

Got it. And for my follow-up on gross margin, you mentioned scale as a reason for gross margin expansion. But I think for Q1, you're guiding gross margin to kind of get back to a trend 65%, but you should be getting more scale benefits. So, is there anything else in the mix or customers that are selling? So, just conceptually, how should we think about the gross margin trajectory for the fiscal year? And if for extra credit, if you could also tell us about how you think about EBIT margin because there you are above your longer term model? Thank you.

Dan Fleming, CFO

Yeah. We're certainly seeing the benefit of scale. We saw that in Q3. We saw it even more so in Q4 as that scale continued to grow. So it's a fair question that you asked. We were up 355 basis points from Q3 to Q4 gross margin-wise, and that puts us above the high end of our long-term model. But having said all that, our gross margin expansion won't always be linear as we continue to increase scale and there will always be some differences in product mix from quarter-to-quarter. So we guided Q1 at 65% at the midpoint. But more importantly, we're not setting a new long-term model for gross margin, but we're clearly entering a phase right now where gross margin will be at or above the high end of that long-term expectation.

Vivek Arya, Analyst

And anything on EBIT, Dan? There also you are above target.

Dan Fleming, CFO

You would expect the improvement or expansion in net margin to directly impact EBIT, so you can calculate that in a straightforward way. Regarding our capital expenditures, if you consider all the different tape outs and plans we have for the upcoming fiscal year, our CapEx may be roughly double what it was last year. That would be the final factor you need to determine your EBIT.

Operator, Operator

Your next question comes from the line of Tore Svanberg with Stifel. Your line is open.

Tore Svanberg, Analyst

Yes. Thank you, Bill and Dan. Great results and excellent execution. Bill, could you elaborate on some of the use cases with your large customers that are increasing, particularly on the AEC side? There's clearly an 800 gig upgrade cycle happening, and I understand you're still shipping some 400 gig. Especially considering the two new customers expected in the second half of the year, I would appreciate it if you could discuss the use cases for those as well. Thank you.

Bill Brennan, CEO

Sure. We see the use cases being consistent with what we've discussed previously. There are three main areas. Our primary business is connecting servers with switches. The first area we focused on was front-end connections, which is the traditional concept of networking. The second area involves back-end networks, particularly scale-out networks, which currently represent the majority of our shipments. In fact, I would estimate that more than 50% of our shipments are for scale-out back-end networks used for AI. The third area focuses on disaggregated chassis, which is a growing segment of our business in both back-end and front-end networks. Right now, our highest volume products are 50 gig per lane AECs, but we expect a swift shift towards 100 gig per lane. I hope this provides the clarity you were looking for.

Tore Svanberg, Analyst

Yeah. No, that's great. And maybe as a follow-up, and so related to that, because you mentioned the largest volume is still 50 gig. I assume that that means it's more 400. But where are we sort of then in the inflection point to 800 gig? Is this sort of still very early days for 800 gig upgrades? And I assume it would be very different by customer, right? Some customers probably haven't even moved to 800 gig for your AEC product, is that right?

Bill Brennan, CEO

Right. Yeah. Each one of our customers, we kind of use a different market in of itself. They all have different strategies and there's many different ways to achieve the networking objectives as it relates to AI clusters, as it relates also to the network in general. And so, we see that really towards the end of fiscal '26, we see the transition from 50 gig to 100 gig overall broadly for our business will really start to happen in a bigger way. But again, we've got some customers who are already there, 100% of the shipments that we're making are 100 gig per lane. So it's hard to talk generally about it given the fact that each one of our customers will have a different strategy.

Tore Svanberg, Analyst

Well, that's great. Congrats again.

Bill Brennan, CEO

Thanks, Tore.

Operator, Operator

Your next question comes from the line of Quinn Bolton with Needham and Company. Your line is open.

Quinn Bolton, Analyst

Hey, guys. Let me offer my congratulations as well. Wanted to come back to Dan, to the gross margin and the step down in the July quarter. Wondering if you could just talk to us about the tariff risks. I think you've got BizLink and FoxLink, which manufacture your AEC cables, both located in China and wondering if tariff risks and tariff costs are having any impact on that gross margin in the July quarter? And then, I've got a follow-up.

Dan Fleming, CFO

We do not anticipate any significant tariff risks affecting gross margin percentage at this time. Therefore, that is not the cause of the possibly minor decrease in gross margin percentage from Q1 to Q2 or from Q4 to Q1. However, regarding tariffs in a broader sense, I’ll let Bill provide some additional comments.

Bill Brennan, CEO

Sure. I think what we've observed over the last quarter, since our last call, is that tariffs and the overall macro economy continue to change. We are closely monitoring the situation and collaborating closely with our customers while aiming to be as flexible as possible in providing the best solutions for each customer. Over the past year, we have discussed our efforts to diversify geographically. I'm pleased to say that in a worst-case scenario, we could transition from one location to another within months. Our team and our customers are adopting a dynamic mindset, and we believe that this situation will become more clearly understood in the next three to six months. We will strive to deliver solutions in the most efficient manner possible.

Quinn Bolton, Analyst

Got it. And my follow-up, Bill, just, you've talked about your fourth and your fifth hyperscale customer ramping. It sounds like kind of more second half of the year. You've got three 10% customers, you're saying there could be three to four, I'm wondering if you think either of the two hyperscalers that ramp this year, would you expect them to ramp so quickly that one of those could be a 10% customer on a quarterly basis by the end of fiscal '26 or would you expect a more modest ramp from the two new hyperscalers this year? Thank you.

Bill Brennan, CEO

I believe that all of the hyperscalers have the potential to become a 10% customer in the long run. In the short term, it's difficult for us to be precise about that. I can say that one of the two additional customers we mentioned is set to ramp up around the middle of the year, which is earlier than we had anticipated. The other customer is also becoming more defined, but it seems likely to ramp up in the second half of the year. It's challenging for me to predict the scale of these two customers in that timeframe, but I genuinely believe that both have the potential to reach 10% long-term.

Quinn Bolton, Analyst

Got it. Thank you, Bill. Thanks, Dan.

Operator, Operator

Your next question comes from the line of Tom O'Malley with Barclays. Your line is open.

Tom O'Malley, Analyst

Hey, guys. Thanks for taking my questions. The first one, Bill, to your commentary about a majority of your business being scaled-out today. If you look at the number of connections like you're increasingly seeing a lot of these links are going to be in the scale-up architecture and you're seeing UAL, scale-up Ethernet and then NV Fusion now come out in different methods for conducting those nodes. Could you talk about your play in the scale-up architecture? And do you think that you need to be embedded deeply in one of those protocols/standards to have success? Like to date, it feels like your customer wins are very much one-on-one, but as those standards grow and those protocols grow, do you feel like that's where you will get the next wind of this company is when you get aligned there? And just any comments on the NV Fusion, please?

Bill Brennan, CEO

Sure. Before discussing NVLink Fusion and scaling up Ethernet or SUE and UALink, it's important to note that there is a substantial market for PCIe, currently at Gen5 and transitioning to Gen6. Looking ahead, we anticipate that the upcoming standards will all support 224 gig series. In the near future, we expect to establish and grow our revenue base in PCIe Gen5 and Gen6. Following that, we will have the flexibility to introduce Gen7 or develop products that can support all the mentioned standards. At the physical layer, these are all comparable SerDes, and specifically regarding AECs, we believe that for 224 gig per lane AECs, we will be able to accommodate Ethernet SUE, UALink, and NVLink Fusion. Overall, we view NVIDIA's announcement positively for the market. Open standards are beneficial and will create broader opportunities for the market, including Credo.

Tom O'Malley, Analyst

And that's helpful. As a follow-up, I wanted to kind of dive in on some comments you made in the preamble on the optical side, just talking about the success of the execution this year and then thoughts on growth into next year. In terms of your opportunities at higher speeds, are you seeing more traction with customers today? It seems like there's a lot of diversification going on and just any evidence points of that success in the market thus far? Thanks again, Bill.

Bill Brennan, CEO

Our progress with optical technology has been significant. We are pleased with what our team achieved in fiscal '25, and we anticipate potentially doubling or more our optical revenue in fiscal '26. Currently, our main business revolves around 50 gig per lane, but we have several designs underway and are now seeing revenue growth from 100 gig per lane designs. This trend will continue, and we expect our market share for 100 gig per lane optical DSPs to rise. During our last meeting at OFC, the interest generated from our demonstrations was quite palpable. The most impressive highlight was showcasing an 800 gig LRO DSP integrated into a module that displayed excellent error rates, all while operating at approximately 9 watts. There is a notable emphasis on power efficiency, particularly in AI networks and clusters. I believe we will see considerable success in the 100 gig per lane market within the next 12 to 24 months. Additionally, 200 gig per lane technology is on the horizon. While we anticipate its arrival will be slower than expected, as is often the case, we did demonstrate what we consider to be an industry-leading 200 gig per lane optical DSP solution at OFC. This solution sets a new standard in power efficiency for the 1.6T market. We will be launching both full DSP and LRO variants simultaneously, and we feel well positioned as this market evolves.

Operator, Operator

Your next question comes from the line of Vijay Rakesh with Mizuho. Your line is open.

Vijay Rakesh, Analyst

Hi, Bill and Dan. Congratulations on a great quarter. I have a couple of quick questions as I'm at the airport and it's a bit noisy. Can you discuss the traction you're seeing in optical DSP? At OFC, you mentioned going from three customers to five. Are they all using full DSP or LRO, and when do you anticipate those ramps will significantly increase again?

Bill Brennan, CEO

Sure. So I feel like we're really well positioned right now. If we talk about 100 gig per lane solutions and 200 gig per lane solutions specifically. We're going to have various products that are going to enable our customers to target specifically what they're most interested in. So our 12 nanometer family of DSPs is by far the lowest cost from standpoint of any DSPs in the market. So super cost-effective in 12 nanometer. The product line we came out with recently in 5 nanometer, this sets new benchmarks for power efficiency. And so that is a trend that we see that is something that our customers are pursuing pretty aggressively right now. As it relates to full DSP versus LRO, we're very agnostic. And certain customers, if they can fit under the power ceiling for the module design with a full DSP, they'll go with a full DSP. In other cases, if power efficiency is really critical and we're seeing this market for 800 gig optical DSPs and optical modules, really becoming much more prioritized. So sub 10 watts is very much an objective. And in the past, those in the industry have said that the only way to do that is to go to an LPO solution, which drops the DSP and creates a whole host of issues with Interop and diagnostics. So the LRO is a solution. As we've shown, we can deliver on this requirement of sub-10 watt modules and still maintain the benefits of having the DSP designed into the system.

Vijay Rakesh, Analyst

Got it. Thanks. And then last, on the scale upside, I know you’re short to be able to the DSP, but when do you expect scale-up and where you're used to start to get or start to show up and get material for you? Thanks.

Bill Brennan, CEO

Yeah. For us, we've been pretty consistent saying that our design wins will come this calendar year, and our revenue ramp will start in calendar '26. And I feel like we're absolutely right on top of that time frame. When I think it's going to become a very material and significant part of our business. I think over the next two to five years, this is going to be a part of the network where there's intense demand across the board. And so I see our business growing pretty dramatically beyond, say our fiscal '27 timeframe.

Operator, Operator

Your next question comes from the line of Karl Ackerman with BNP Paribas. Your line is open.

Karl Ackerman, Analyst

Yes. Thank you. I have two, please. First, Dan, you spoke about CapEx doubling this year to support your sales outlook for fiscal '26. Given the capital commitment to support these programs, could you discuss whether any of these programs are take or pay that may give you better visibility into the manufacturing ramp requirements for these programs over the next couple of quarters?

Dan Fleming, CFO

No, the primary factor driving our capital expenditures is the production mask set tape-outs. We've mentioned previously the upcoming 3 nanometer tape-outs planned for fiscal '26. This is really the key motivator behind our spending. It’s somewhat independent of any specific customer contracts or clients; it strictly revolves around the fundamental devices we are tape-outing that we capitalize on.

Karl Ackerman, Analyst

Yeah. Thanks for that. I understand that you may not have full visibility into every AEC connection, but do you have a general rule of thumb to think about your AEC sales being used to connect GPU compute racks versus custom compute server racks? I ask because there's a misperception that you're over indexed to custom basic server racks for AECs. Thank you.

Bill Brennan, CEO

Yeah. I think you got it right that our AECs are used to connect any kind of GPU to any kind of switch. And we've seen that across the board with our customers. There's definitely no way to look at our AEC business as a proxy for any kind of custom GPU solutions. We're connecting broadly at a lot of our customers with both.

Operator, Operator

Your next question comes from the line of Suji Desilva with ROTH Capital. Your line is open.

Suji Desilva, Analyst

Hi, Bill, Dan, and Dan. Congrats on the progress here. Maybe it's been a few quarters since some of your competitors have announced AEC products and talked about them. Can you just update us on the competitive landscape? And obviously, you said it'd be a large market where you get some share, but maybe you can just talk about the competitive advantages that Credo continues to bring to the marketplace with more folks talking about AEC offerings?

Bill Brennan, CEO

From our perspective, the competitive landscape has remained relatively stable in the past three to four months. Our customers are looking for multiple options, and it's becoming increasingly evident that the AEC market can accommodate several successful players. Our objective is to preserve our leadership position, which hinges on our ability to deliver innovative solutions more swiftly than our competitors. We are intensely focused on providing each of our customers with next-generation solutions, starting from initial sampling through to qualification and ultimately leading the ramp-up phase. This efficiency stems from our complete ownership of the system-level product within the Credo organization, overseeing everything from product definition and development to sample delivery, qualification, and production. We eliminate delays and confusion by ensuring that all our engineers, who work on various components like SerDes, ICs, and system-level cabling, are closely collaborating. Our ability to iterate quickly to finalize designs and transition them into production is likely unmatched, and our priority is to ensure our team is the first to meet customer needs, which we feel we have accomplished effectively so far.

Suji Desilva, Analyst

Yeah, that was very helpful, Bill. My second question is about the rack-to-rack 7 meter solution you're developing. Will the timing align with your scale-up plans more in the second half of this year or next year? Can you elaborate on when the demand for rack-to-rack extended cables is expected compared to the ones you're currently selling?

Bill Brennan, CEO

I believe the key drivers are related to how the next generation data centers are constructed. We've discussed liquid cooling and the increase in non-linear power sourcing. This presents a significant opportunity for rack-to-rack solutions as these deployments grow. By enhancing compute density, we can further boost network reliability by replacing optical solutions with AECs, which helps to eliminate link flaps. We have a customer we've mentioned publicly in the AI space, and their outcomes have been excellent; we achieved their goals in building a highly reliable cluster. Additionally, there’s a second customer set to ramp up this year, and their progress is similar, benefiting from the longer AECs that enhance reliability. I expect to see this development over time. In terms of scaling up, we anticipate PCIe Gen6 will kick things off, likely gaining traction around 2026 or 2027.

Operator, Operator

Your next question comes from the line of Christopher Rolland with Susquehanna. Your line is open.

Christopher Rolland, Analyst

Hey, guys. Thanks for the question, and congrats on these results. Bill, just a broad question for you. Beyond AECs, like if we look out maybe three years, five years, you’ve talked about optical becoming larger, I think 10% of revenue or higher at some point. But how would you view your total product mix AECs versus optical versus, let's say, Retimers for scale-up versus other? How do you see this mix broadly playing out three to five years from now?

Bill Brennan, CEO

That's a valid question since there's much discussion around the need to transition to optical in the future. The market has clearly indicated that if copper is an option, it will be used. Companies like NVIDIA have expressed similar views. We anticipate that the copper market will remain substantial in the next three to five years. However, our biggest current investments are in the optical sector. I believe that while optical may represent about 10% of our revenue initially, this figure is likely to increase over time, particularly in the three to five year horizon. We recognize significant opportunities in the optical space, extending beyond conventional optical DSPs. We are applying the same innovative system-level solutions we developed with AEC. There's a lot to learn from this area. Our focus is on pushing beyond industry standards. Additionally, we see a considerable opportunity for integrated circuits, especially related to emerging AI applications, particularly in inference. While I won’t elaborate too much, addressing various bottlenecks in this sector is definitely part of our strategy and is expected to significantly contribute to our revenue over the next five years. Overall, we see many opportunities across different areas.

Christopher Rolland, Analyst

Excellent. I'm eager to learn more about those products. My second question is regarding supply. You are reporting some impressive growth numbers, and typically when a product experiences such a surge, it can lead to bottlenecks. Are you currently facing any constraints on either the front-end or back-end, or with your cable suppliers? How have lead times for your products changed during this growth? Have they increased, and what are the current timelines? Essentially, how far in advance do your customers need to book to obtain a product?

Bill Brennan, CEO

I believe we have demonstrated a strong capability to scale quickly over the past few quarters. Specifically regarding the AEC, there are two main components to consider: the silicon and the system level. We have separate operations teams for silicon and systems. The silicon side has the longest lead times, particularly due to TSMC and our assembly partners. On the system side, it’s crucial for us to maintain close relationships with our various supply chain suppliers, especially our cable assembly partners, where we have shown the ability to rapidly increase production volumes. This situation doesn't present the same challenges as expanding fabrication capacity. For example, adding another production line in a 24/7 operating scenario can add around 1 million units in annual production capacity. The investment required is significantly less than what is needed for developing advanced chips, and the time to acquire equipment and set up the line is shorter than the entire semiconductor manufacturing process. Consequently, even if we experience the same percentage increases over the next year as we have in the past, we are positioned well. Our systems operations team has established strong relationships with all supply chain partners, which is essential for ensuring a smooth ramp-up. All our supply chain partners understand that we are accountable for making commitments and delivering solutions.

Operator, Operator

Your next question comes from the line of Joshua Buchalter with TD Cowen. Your line is open.

Joshua Buchalter, Analyst

Hey, congratulations on the results and guidance, and thank you for taking my question. I wanted to ask about your PILOT software mentioned in the prepared remarks. How does the STK and debug tool differ from what your competitors are offering? Also, are there any synergistic elements that the PILOT software provides across your AEC, DSP, and Retimer hardware? Thank you.

Bill Brennan, CEO

Sure. We recently announced the platform, and this debug and development tool has been crucial to our success over the past decade. In the Ethernet space, the ability to provide a solution like this to customers is essential for them to develop their platforms. As we enter the PCIe space, we bring years of experience and knowledge with us. We're expanding beyond our traditional efforts, particularly regarding system-level features like telemetry. Our work in the AEC space has taught us a lot. The platform known as PILOT addresses all levels of innovation we've discussed and even extends into our customer systems. It provides excellent visibility into the SerDes IP, Retimer ICs, and even the overall system solution. Furthermore, the integration of diagnostic and analytic capabilities with this telemetry sets a new benchmark for reliability and uptime stability in the competitive landscape.

Joshua Buchalter, Analyst

Thank you for all the color there. For my follow-up, I wanted to ask, as your customer base diversifies through the year, can you maybe compare and contrast what types of infrastructure build-outs that you're servicing with your new customers? Are these primarily accelerated AI build? Are they general-purpose servers? Are they for internal versus external offerings? Like anything that we could help us better understand the composition? Thank you.

Bill Brennan, CEO

Sure. I would comment that both of the new customers that we've talked about, the first part of the ramp will definitely be related to AI deployments. And then longer term, we see opportunities related to disaggregated switch chassis. But as you would expect, it's really the AI application that's driving the increased need for AECs.

Operator, Operator

Your next question comes from the line of Richard Shannon with Craig-Hallum Capital Group. Your line is open.

Richard Shannon, Analyst

Well, thanks, Bill and Dan for taking my questions, and I’ll echo congratulations on a couple of great quarters in a row. My first question is on your DSP win with a hyperscaler here. I think you said there's 800 gig, but I'm not sure if you said whether it was full DSP or LRO, if you can share that one? But I think more importantly here, I would love to understand, how you could describe the share allocation here. It does seem like it's a much bigger deal than any of your wins in the past year. So maybe we can get a sense of the size of this win versus the ones you've had in the past.

Bill Brennan, CEO

Yeah. I think it's hard for me to contrast the size of the opportunity. We can look at volumes and we can look at revenue kind of in two different things. And so I think that if you would break it out from a volume standpoint, I think it would be similar in the sense that we expect it to be high volume as you've seen in the past with our designs. Given that it's 100 gig per lane from a revenue standpoint, it's probably going to be the largest opportunity that we've had to date. And so I'm not going to give too much color given the fact that this is a super competitive space we're in, but I will say that this implementation is a full DSP implementation.

Richard Shannon, Analyst

Thank you for that, Bill. My second question is about your IP business, which hasn't been a frequent topic in recent quarters due to the success of your AEC business. I’ve noticed that revenue is declining as you're dedicating more engineering resources to the product side, which makes sense. I’d like to hear your thoughts on the long-term prospects for this business. Additionally, you mentioned UALink and NVLink Fusion in response to a previous question, indicating there are significant opportunities there. Could you elaborate on the long-term outlook for your IP business? Thank you, Bill.

Bill Brennan, CEO

Sure. Going forward, we won't be separating it out since it's not expected to exceed 5% of our revenues. We've actually experienced a faster growth in our product revenue, which has shifted our outlook. When we went public 3.5 years ago, we anticipated our IP business would represent 10% to 15% of our total revenue in the near term. However, it has grown so quickly that it's now less than 5%. From my viewpoint, it's a matter of return on investment. I've consistently stated that in terms of total available market percentage, this segment is small and I don't foresee that changing. Internally, we are focusing on strategic engagements where it makes sense. We've encountered many opportunities, often discussing comprehensive system solutions with customers where our core IP serves as the foundation for their main chipset, along with supplementary solutions that connect to it. These contracts are valuable as we work with such clients, and I anticipate that these partnerships will persist, both with current and new clients. As I consider our IP business, we will remain somewhat opportunistic, but the strategic focus will be on enabling system-level solutions with key customers.

Operator, Operator

Your next question comes from the line of Tore Svanberg with Stifel. Your line is open.

Tore Svanberg, Analyst

Yeah. I just have a follow-up, Bill, because there's a lot of focus on your AEC business. Obviously, copper, you did talk about the optical DSP win, but you've also talked about sort of taking that further and perhaps work on a system-level optical solution. I'm just wondering would you intersect the 200 gig per lane market with that particular product or would you consider doing a 100 gig?

Bill Brennan, CEO

I think yes to both questions. I think yes for 200 gig for sure, 200 gig per lane solutions. But I expect the 100 gig per lane market to extend for several years. And so, we're definitely looking at what kind of value we can add above the standard to make our customers’ networks more reliable and more power efficient. And so I would say, yes, that we're looking at solutions that don't require a significant shift in speeds.

Tore Svanberg, Analyst

Great. Well, we look forward to hearing more updates on that system or the product. Thank you.

Operator, Operator

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

Bill Brennan, CEO

Thank you very much. I'd like to thank everybody for the continued strong interest in Credo and for joining the call and we'll talk shortly. Thank you very much.

Operator, Operator

This concludes today's conference call. You may now disconnect.