Conference Transcript - CRDO 2026-09-10

Jim Schneider, Analyst — Goldman Sachs

Okay, good morning everybody. Welcome to the Goldman Sachs Communicopia Technology Conference. My name is Jim Schneider. I'm a semiconductor analyst here at Goldman Sachs. It's my pleasure to welcome CREDO Technologies CEO Bill Brennan and CFO Dan Fleming. Welcome guys to the stage. For investors who may be new to the CREDO story, how do you describe your positioning in the AI infrastructure layer and what are your biggest and most defendable competitive advantages?

Bill Brennan, CEO

Sure. So CREDO is a pure play high-speed connectivity solutions company. The role we play in AI infrastructure is moving data reliably and efficiently across the network. And specifically, you know, our business has really taken off as AI clusters have taken off. Given the fact that we connect GPU to GPU, GPU to switches, switches to switches, we play that role. We help customers optimize the valuable compute resources. So our North Star is really reliability and power efficiency. And if we can deliver solutions that can help customers get clusters up more quickly in days versus weeks, there's a compelling financial impact to that. And if we can keep clusters up at 99.9% availability, there's also a huge return on that. We focus on a broad range of solutions, from millimeter length all the way to kilometer length. Our flagship product is really a system-level solution where, if you think about us as a semiconductor company, we have very unique and differentiated leading-edge CERTES IP. With that platform, we build semiconductor solutions. But beyond that, we have gone to the system level, designing complete connectivity solutions. And you'll see that more and more as we develop as a company. One of the things that, you know, for the new people to the story, incredible story during the last three to four years. If we go back to our IPO, we were sub-$200 million in revenue. And over the past two years, we've more than doubled and then more than tripled. We actually had six quarters in a row where we achieved more than 20% sequential growth over that period of time. And that puts us at a base going into fiscal 27 at more than $1.3 billion. We've indicated that we're going to grow at a 10% or greater sequential level quarterly throughout the year. And I think as we look at the markets that we address now, you can measure those markets, that market opportunity, in tens of billions of dollars. And so I think the growth story, although we've had an incredible run so far, we're still at the early stages of the growth story.

Jim Schneider, Analyst — Goldman Sachs

Yeah, fair enough. Now, there's been a lot of investor debate around this, kind of like the idea of copper versus optical. I realize that it's oversimplifying things here a lot, but how do you frame it for people in terms of the timeline for the transition between the two, and at what point do you think copper starts to hit these physical limitations?

Bill Brennan, CEO

Yes, I think I've been in this role 13 years, and the first time I got that question was about 12 years ago. As I talked about Credo being a company that was going to develop connectivity solutions for both copper and optical. At that point, the number of copper connections in the data center was greater than 95%, and today the same ratio exists. With that said, we've been very successful extending the life of copper over the last five or six years. We've grown into, you know, what is going to be a multibillion-dollar revenue company. But our investments over the last couple of years have been almost exclusively from a real innovation and disruption standpoint in the optical area. Customers will decide on what type of connectivity solution they use based on the requirements of that connection. For short connections where copper can be used, copper will be used. because it's fundamentally more reliable, more power efficient, and a lot of times lower cost. When you've got connections that are longer than you can achieve with copper, of course optical is the default choice. With that comes opportunity because with laser-based solutions, there's a fundamental reliability challenge as compared to copper, which is probably 100 or 1,000 times more reliable. And with reliability becoming much more important as AI clusters become a much bigger part of the market, and considering that the connection between a GPU or NIC and that first switching layer, that there's no redundancy, and now you've got tens of thousands of GPUs all interconnected together and dependent on each other, there's an increasing requirement for better reliability. And so, you know, and that's our North Star, right? That's our differentiation, and we'll get into that more. But as it relates to the debate, you know, I think it's going to be heterogeneous. We've got a complete portfolio of solutions from millimeter to kilometer, from copper to optical. And even with optical, we've got different flavors of light sources, micro emitters as well as laser-based. So we're agnostic to the conversation, although some people identify us as a copper company. We self-identify as a connectivity company that is agnostic to the medium.

Jim Schneider, Analyst — Goldman Sachs

And to maybe that point, if we are back on stage here again in five years, what is the thing that you think investors can be surprised at looking back?

Bill Brennan, CEO

Well, I think there will be a very strong understanding at that point that we're a broad-based connectivity company, that just as I emphasized, You'll see us doing very well with products that are laser-based, reliability-differentiated. You'll see us with different light sources. You'll see us with copper solutions as well. You'll see us as a company that is not only addressing the pluggable market broadly. You'll see us playing a role in a big way in scale-up networks. And you'll see us being a company that's helping to break the memory wall, the fan-out, the physical fan-out issues that exist and become a more popular topic in the upcoming years. I think five years from now, I think people will be surprised that although we've scaled tremendously over the last three or four years, that that's really the beginning of the story, that five years from now I expect to be a much larger company.

Jim Schneider, Analyst — Goldman Sachs

In a more shorter term, if you look at investor expectations for your business heading into 2027 or calendar 27, whichever fiscal calendar, if you were to outperform what would be the key areas of upside for the business as you see it and maybe talk about the one or two operational kind of key drivers for the company that you're using to kind of execute or you're driving the company towards.

Bill Brennan, CEO

Yeah, I would say number one is execution and if you look at the path that we've been on the last few years is execution is by far the most important thing. Scaling like we have as a company and broadening our portfolio and making sure that we deliver the same level of quality, reliability, you know, responsiveness to customers, it's really an execution game. And in the upcoming years, that's going to continue as the number one key priority. I would say the ramp of our optical portfolio is probably next on that list. We're in the very early stages. Of course, we've been an optical DSP component supplier for quite some time, and that business is going very well. We acquired a team, Dust Photonics, that focuses on leading at silicon photonics picks. That will broaden our components portfolio, but also we're going to be in the module. We're going to build zero-flap optics, which are a very differentiated optical transceiver solution that addresses that reliability challenge. So I think that, I guess the question was about outperforming? Yeah, so I think I wouldn't be surprised if we were to outperform. I think you could see contributions from expanding our footprint with our core business today, which is AECs, expanding in the application area on the customer front as well, deepening existing partnerships, expanding in the neocloud area. I think a faster ramp, you know, and we've got to be careful about the timeframe we talk about, but I think there's a great opportunity to, you know, to look at what we're doing in the optical front and see outperformance over a given period of time. And really with the new efforts that we've got with micro-emitter technology, with ALCs, as well as the memory wall, Well, in the fiscal 28 timeframe, we're going to see those products take off, and there's a great opportunity to outperform there as well.

Jim Schneider, Analyst — Goldman Sachs

Maybe let's talk about the optical business for a second then, which you just raised. You know, what is driving the customer adoption of your ZeroFlight optical products today? How has that customer aperture broadened over, like, the last few quarters? and how do you expect the customer base to sort of broaden further across hyperscalers, neoclouds, and enterprises over the next year or so?

Bill Brennan, CEO

Sure. So maybe a little bit of background on how we landed on this idea. And this is all, you know, public information that we've talked about. So XAI was a customer that we paid a lot of attention to before they, you know, before they actually started changing the competitive dynamics in the industry as they are today. And they were building in another data center at the time, and they were struggling mightily with link flaps. And link flaps is a case where you've got a connection that doesn't hard fail, but it disconnects and reconnects in effect flaps. And it really, you know, screws things up from a data standpoint because you get bad data that's propagated across the cluster, needing to bring the cluster down and reset So they were complaining about their ability to bring a cluster up quickly. They were complaining about keeping that utilization or that availability above even 90 percent. They weren't able to achieve that. And so they came to us and said, look, we're moving into our own data center. It's going to be liquid-cooled. We're going to source tons of power to the racks. It's a completely different scenario than the air-cooled kind of small power sourcing that they were dealing with. And what we want you to do is extend your AEC family from three meters to seven meters because if you can do seven meters, we can cover every connection in the row and we can build a zero-flap cluster. And so in this case, back to the litigation about copper and optical, You know, the only transition between the two has been copper replacing optical for lengths up to seven meters. And so the, you know, the bottom line is I visited Memphis over the summer. And, you know, even the folks that I was meeting with, they were talking about they can bring a cluster up in five days. If you can do that versus six to eight weeks, we all know what the value of a month of this compute is worth. You can measure a month in a billion-dollar increment from a revenue standpoint. So it's compelling, but they were saying they've achieved that. They've achieved 99.9% uptime. After we made this transition, Oracle came to us and said, look, I mean, we'd love to address these problems as well, but our connections between the NIC and the first switch are longer than seven meters, and we can't redesign. We've got what we've got. And so we went to work with them thinking about how could we identify link instabilities early and then mitigate in an orderly way by taking likely link flaps out of the cluster, take that link down in an orderly fashion so it didn't disrupt the whole cluster. Some of the work that we've done with Microsoft, maybe going back five years ago, where we He designed a cable that was smart enough to be able to identify when a Tor port was likely to fail and when it was likely to fail, transitioning, you know, basically changing the data flow to a redundant Tor. It helped them build a single-rack architecture that achieved 5.9's reliability. What was involved with that was a huge amount of effort on designing a device that was capable of doing the telemetry required to sense and make decisions and act in a cable solution, a really, really smart solution. So we kind of leveraged that background, and we started thinking about, well, if we did design a custom DSP that could light up telemetry on a continuous real-time basis for each link between doing a switch, which there's actually six. There's three in one direction and three in the other. To do that, it was a very special DSP design. And along with that, we had to develop a software platform. And the types of things that we're measuring on a continuous basis are very deep, you know, technical measurements related to the SERDEs even. So going back to that being an expertise of ours. So things like eye height, SNR, post-tech bit error rates, histograms, All of these things are what we're able to do and ultimately creating a yellow, almost check engine light for the link, where previously we've given green or red. Basically, it's either good or it's... In addition to that, when they said, you know, hey, you know, when we're bringing a cluster up, it's tough for us to sense dust on the fiber plant. Is there something we can do to identify multipath interference? Because if you've got a particle of dust, light will actually bounce back the other direction and create this signal integrity degradation. And so being able to identify, you know, which links need to be addressed, even ESD damage, not the type that would actually fail a transceiver, but would become a latent defect that would become a problem later. So we actually went way beyond, you know, way beyond what the original ideas were. And so now they, you know, we've brought a product to market that not only can bring clusters up in the same kind of time period, days versus weeks, it's not playing the cat and mouse game of trying to identify which connections are failing. But really we've, you know, accomplished the goal of being able to identify instabilities and mitigate proactively. That's the reason that the conversation is a rich conversation. with every customer that we talk to. And, you know, I think that, if anything, the number of conversations are expanding, and, you know, we've given an indication about the very fast ramp that we expect this fiscal year, and I think that's just the beginning of the ramp.

Jim Schneider, Analyst — Goldman Sachs

Yeah. Okay. Then maybe ALCs, talk about that as a driver for you. You know, what feedback have you been hearing from customers on that front, and sort of are deployments kind of moving from evaluation phase to production fast than you expected and maybe talk about the kinds of customers you're seeing the strongest demand signals from.

Bill Brennan, CEO

Yeah. So why are we doing this? You know, it's interesting because if you just consider, you know, the reason that people love copper, it's just bulletproof reliability at a core technology level and very power efficient. Micro-amender technology, we've been looking at working, in the space for three years now because at a core level technology, wide and slow can get that base level bulletproof reliability and have much better power efficiency than laser-based optics. And so that was really the reason that we started investing three years ago. And I will say that what's compelling about the technology is also that it'll reach 30 meters. So we're going from, say, a seven meter reach with AECs extending from seven to 30 with an equal level of reliability and power efficiency. That's the promise of the technology. And, you know, again, I think it speaks to the fact that we're agnostic on medium, we're agnostic on light source. What we're trying to do is give our customers optionality and let them choose. So the conversation is quite easy with customers. Oh, especially another benefit you get from the technology is an actual cable that's 75% smaller from a total volume, if you look volumetrically. So it's a much more elegant solution. If you look at these seven-meter AECs, they're pretty bulky at the speeds at 200 gig per lane. and so the conversation is quite easy if you talk about the promise of the technology and the customers know that we're going to put these products, these system level products these cabled solutions through the same rigor that we've put our AECs through and that we've put our ZF optics through we're talking about a rigor that we've built, a qualification capability where we take our customers switches, we take our customers NICs and we run live traffic and we vary corner imaginable and the whole goal of that process is to break the link and then strengthen the link through firmware. When we deliver the solution to customers, they will simply plug it in and qualify it. The interest in the product is very high and not to get too ahead of the announcements but we'll be demonstrating at OCP next month and from there we expect to go through qualification and then be in production at FY28.

Jim Schneider, Analyst — Goldman Sachs

Okay, excellent. Then if you sort of roll up all the things we talked about with optical together, based on customer engagements, your visibility, how do you encourage investors to think about the growth rate specifically for optics as we progress through fiscal 27 and into 28?

Bill Brennan, CEO

My expectation that I would like investors to have is that it's going to be a very fast growth rate. I've indicated previously that by the end of this fiscal year, we'll be producing hundreds of thousands of units per month, and then we will increase that production rate to double and then even triple by the end of fiscal year 28. So the ramp is going to be quite fast. It's going to be quite significant. And we expect to even go beyond that in fiscal 29.

Jim Schneider, Analyst — Goldman Sachs

Maybe talk about AECs for a second, so the core bread and butter business. You know, what are you seeing in terms of the near-term AEC demand across customers? You know, are kind of the deployment timelines, purchasing patterns, and visibility changing in any way as sort of your customers move to larger and larger scale infrastructure builds?

Bill Brennan, CEO

Yes. So it's, you know, the AEC business in general, the way that we look at the market is it is the short segment, the seven meter and below segment of the pluggable market. We believe the market's growing. I think there's no debate in the industry about seven meter and longer being optical modules or optical transceivers growing at great growth rates from 60 million units this year to what, you know, the forecast that I saw was 175 million units by 2030. It makes sense for us that, you know, that the shorter reach segment of that market is going to grow as well. And I've talked about the different growth drivers. If we look, you know, at kind of a micro level, like a given quarter, it's important to understand that each one of our customers is kind of a market in and of themselves. They're not customers that buy product and ship it, like a customer like Cisco or Arista. They're consuming internally. They're selling services. And so they're all marching to a different drumbeat. And you've seen, if you analyze our financials and you look at our 10% customers, you've seen great variations quarter to quarter in customers surging and then pausing. And so it's a little bit, you know, I think it can be a little confusing if you take too short a period of time and you overanalyze it. But I think we see AECs as a market and our business growing over the next several years.

Jim Schneider, Analyst — Goldman Sachs

And so, you know, I guess, how long do you expect AEC connectivity to be a meaningful growth driver for the company at the corporate level? And as, you know, AI cluster sizes continue to scale, what gives you confidence in that durability of that product demand over, like, a three- to five-year period?

Bill Brennan, CEO

Yeah, so there's trends in the market towards densification that really play in favor of AECs and copper. But I think generally for us, we're looking more at the broad portfolio that we're bringing to market. that we can definitely focus on, we can just drill down on AECs, and I can build a great case for a continued expansion of that, especially as we go to 1.6T and with this trend towards densification. But what we're focused on is building a much larger business based on giving customers choices. And so there's a lot of different networking decisions that will be made if they've got products that can deliver on what they're trying to achieve at a very high level regarding reliability as well as power efficiency. So I think it's fair to focus on AECs because that's the bulk of our business right now, but I think over, you know, over the next several quarters, the conversation will shift to what part of your portfolio, you know, is also growing even at a much, much faster rate.

Jim Schneider, Analyst — Goldman Sachs

Right, right. Wanted to just ask a couple questions on competition and competitive landscape for a second. First of all, in AECs, you know, how is that competitive landscape evolving I think more players have entered the market. I haven't heard a lot of evidence of them getting large traction yet, but are you seeing competition intensify in any way, pricing, technology, ecosystem relationships, or anything like that?

Bill Brennan, CEO

So we respect all of the competitors. That's for sure. I think it's a great indicator of – it's another indicator of what the expectation is for market size. I think it's all quite good. The approach that we've taken in building the business is fundamentally different in a sense that we've decided to own the entire system solution. And that means from a CERDES level to an IC level, to a system design perspective, from a firmware perspective, qualification, and ultimately we manage our supply chain. We're the single throat to choke when it comes to delivering the SKUs that our customer wants, the qualification. We never fail qualification because we do have more rigorous qualification before we even, and being flawless in the way that we deliver. We take complete ownership of that. I think that's unique in the market, and I think that's probably our biggest competitive moat. And my expectation long-term is that the way that we're focusing competitively is to be the first to deliver the next generation solutions. And you do that by being in the room with your customers, being first to qualify, being first to ramp, and delivering flawlessly. That's the way that we've built the market share, and that's the way we're going to maintain market share in this space. It's the same conversation as it relates to the other products we're bringing to markets. It's not only an AEC discussion. That's the way we approach relationships with customers.

Jim Schneider, Analyst — Goldman Sachs

In your transceiver business, I think most investors kind of think about that business as being somewhat more commoditized in some ways because there's just more competitors there. How would you describe your competitive moat in that area specifically and maybe kind of share your confidence level in, you know, keeping those kind of near corporate average gross margins for that business over time?

Bill Brennan, CEO

Sure. So I think it's two basic things. The product that we're delivering to market is not a product that's targeting the commodity space, you know, the IEEE standard, you know, say 1.6T transceiver. That wasn't the objective, and that was never the goal. the features that we're delivering and, you know, the better reliability that we're offering for the parts of the network that we're really, you know, targeting, very, very, very easy to monetize those features. And so the ASP is one factor. So when we think about your margin question, we think about two things. We think about what ASP can we achieve, What value can we achieve in the market as opposed to maybe a commodity-style competition? The other thing is COGS. So Cost of Goods Sold, we're the only vertically integrated player in the market. So we build our own ESP. We build our own Silicon Platonics pick. Look for us to maybe make more investments, either, you know, make versus buy investments on other components on the vertical stack. But those two things, it's not a hard exercise to run when you consider ASPs and COGS widening the gross margin. You know, I think it will play itself out as we ramp that business.

Jim Schneider, Analyst — Goldman Sachs

Okay, fair enough. Dan's been waiting patiently on the other end of the stage for quite a while now. So I'm going to bring you that conversation and I've asked a couple of financial questions. You know, you just reported last week, you took up your fiscal 27 guidance to growth of 85% while maintaining the outlook for $600 million in optics revenue. How are you thinking about the shape of the rest of this year in terms of the growth rate in Q3 and in Q4? And as you exit the year, what does that higher growth rate sort of imply about sort of the run rate growth you expect into 2028?

Dan Fleming, CFO

Yeah, as Bill alluded to in his earlier comments, you know, this year from a sequential growth standpoint has been and will be 10% plus each quarter sequentially. We guided about 11% sequentially into Q2, and if you look at the way we've discussed things for the back half of the year, it's really an accelerating growth rate, call it 20% into Q3, 30% into Q4. That sets you up where, you know, A billion-dollar quarter is within our sites, within early fiscal 28. So a lot of exciting growth in our future.

Jim Schneider, Analyst — Goldman Sachs

As optics becomes a bigger part of the mix, how should investors think about the long-term margins in your business? Like, Bill, you sort of alluded to some of these answers before, but maybe optics overall, tailwind, headwind, or kind of like just overall you can say where you are at now.

Dan Fleming, CFO

Yeah, the way we look at it right now, it's straight down the fairway. So we guided our gross margin in fiscal 27 to be broadly consistent with last year. I think this was the five years of being a public company, this was the first quarter where I didn't get a gross margin question on the earnings call because we were right at 68%, which is what we had alluded to. We guided to 68% in Q2, and as ZF Optics ramp, Bill kind of went through the logic as to why we expect that to be in that neighborhood. But our other areas, ALCs, OmniConnect, these are highly differentiated products in the market that we're bringing to market. So our expectation now as we sit here is we should be able to maintain our margin profile as we proceed forward.

Jim Schneider, Analyst — Goldman Sachs

OPEX, you've historically said two-to-one revenue growth, OPEX growth, obviously investing heavily in optical today. You've talked about OPEX increasing 55% for your fiscal year. Once you get sort of past this and the acquisition effects, do you get back to that two-to-one leverage?

Dan Fleming, CFO

We may. We haven't been too specific in our guidance until 28. This year, the way it's looking is our top line is growing about 50% faster than our OPEX. So we're continuing to, you know, expand or benefit from that operating leverage. And as we accelerate in the back half of the year, you may see us get back to a two-to-one ratio as we enter fiscal 28.

Jim Schneider, Analyst — Goldman Sachs

Yeah, great. Then maybe last question relative to M&A. You've obviously done a little bit more on the M&A side recently with DUST. Maybe talk about sort of the overall appetite for M&A, both in terms of kind of deepening your portfolio in optical but then potentially diversifying the company further, you know, into other areas of connectivity or something else entirely.

Bill Brennan, CEO

Yeah, I think we've really enjoyed the acquisitions that we've made as far as three. The first one was a group in Canada that was focusing on micro-LED technology. And we had been working on micro LED technology for a couple of years, and we decided that instead of working with startups, we should bring a team in-house. And it's been exceptionally beneficial to, you know, to have those experts combined with the signal processing experts within Credo. That worked very well. Comera helped us with protocol and security. the acquisition of DUST, I think, up the most attention because it added leading-edge FIC technology to the stack that we're building internally, not only from a components perspective, but also from a system solution perspective. We'll continue down that path from the standpoint of identifying great engineering teams, great technology that is additive to what we're trying to build. As far as adjacencies, we're addressing a very large market right now, and there's things that we can do to enhance our position. But if we were to look outside of core connectivity, it would have to be related to a very differentiated system-level solution that we'd be able to offer the market. So we're very open-minded. One of the things that's made us successful is that I don't draw bright lines around what we do and what we don't do. A lot of people were confused as a semiconductor company going up the stack. there's another really big green company that did that really successfully but think about us as not being bounded we'll go to where there's value with our customers very good I think with that we're almost on time thank you very much Bill and Dan for being here with us we appreciate it thanks so much