Earnings Call Transcript - CRDO Q1 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. I would now like to turn the conference over to Dan O'Neil. Please go ahead, sir.

Dan O'Neil, CEO

Good afternoon, and thank you for joining us on our first quarter earnings call for fiscal 2024. Joining me today from Credo are our Chief Executive Officer, Bill Brennan; and our Chief Financial Officer, Dan Fleming. I'd like to remind everyone that certain comments made in this call today may include forward-looking statements regarding expected future financial results, strategies and plans, future operations, the 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 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 statements. Given these risks, uncertainties, and assumptions, the forward-looking events discussed during this call may not occur and actual results could differ materially and adversely from those anticipated or implied. The company undertakes no obligation to publicly update forward-looking statements for any reason after the date of this call to conform these statements to actual results or to changes in the company's expectations except as required by law. Also during this call, we will refer to certain non-GAAP financial measures, which we consider to be important measures of the company's performance. These non-GAAP financial measures are provided in addition to and not as a substitute for or superior to financial performance prepared in accordance with 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. I'll now turn the call over to our CEO. Bill?

Bill Brennan, CEO

Thank you, Dan, and thank you all for joining our Q1 fiscal '24 earnings call. I'll begin by providing an overview of our fiscal Q1 results. I'll then highlight what we see going forward into fiscal '24. Dan Fleming, our CFO will follow my remarks with a detailed discussion of our Q1 financial results and share the outlook for the second quarter. We would then be happy to take questions. For Q1, Credo reported revenue of $35.1 million. Additionally, we reported non-GAAP gross margin of 59.8%. Our Q1 results and future growth are driven by the accelerating market opportunity for high-speed connectivity solutions. Our electrical and optical connectivity solutions delivered leading performance of port speeds ranging from 50 gigabits per second up to 1.6 terabits per second. While we primarily serve the data center Ethernet market today, we continue to extend into other standard-based markets as the need for higher speed and more power-efficient connectivity increases exponentially. The changing workloads in the data center specifically with regards to the onset of generative AI applications are driving the demand for higher bandwidth and higher-density networking. This aligns directly with Credo's strengths. All of Credo's connectivity solutions leverage our core SerDes technology and our unique customer-focused design approach, enabling Credo to deliver optimized, secure high-speed solutions with significant benefits in power efficiency and cost. Credo continues to see increasing customer engagements across our products and IP solutions, which include active electric cables (AECs), optical DSPs, laser drivers, and TIAs, Line Card PHYs, SerDes Chiplets, and SerDes IP licensing. I'll now review our overall business to provide more context. First, regarding our AEC business. Credo remains a pioneer in the AEC market. Industry analysts forecast increasing AEC market penetration as port speeds increase for intra-rack connectivity. Our AEC solutions offer significant benefits compared to both passive direct-attached copper cables, which are physically cumbersome and exhibit poor signal integrity at higher speeds, and active optical cables (AOCs) which are significantly higher in power consumption and cost. Today, our largest customer deploys our AECs for both general compute and AI applications. Additionally, we continue to design custom AEC solutions to address their next-generation deployments, including our first internally developed 100 gig per lane AI deployment. At our second hyperscaler customer, our production ramp for both general compute and AI programs remains on track with expectations for continued growth throughout this fiscal year and fiscal '25. We also continue to make progress on their next-generation platforms with Credo receiving commitments from multiple 100 gig per lane AEC programs. We attribute much of our success with existing customers to our system-level approach to the AEC market. Our approach enables us to quickly respond to customers' requests and deliver innovative feature-rich AEC solutions tailored to our customers' specific requirements. This approach has allowed us to make further progress with additional hyperscalers who are in various stages of evaluation and qualification of our AECs. We've also seen a growing number of Tier 2 data center operators and service providers adopting Credo AEC solutions. We have earned meaningful revenue from these customers to date and expect this customer category to grow in the future. In summary, we're pleased with our progress with customers and we're encouraged by the accelerating market demand for 50-gig and 100-gig lane rates for in-rack connectivity. Regarding our optical solutions, within this market, we remain a disruptor. We leverage our core SerDes technology and customer-specific approach to deliver a compelling combination of performance, power, and cost. Credo's optical solutions comprise DSPs, laser drivers, and TIAs for 50-gig through 800-gig port applications, including optical transceivers and AOCs. We expect AI deployments to drive a large optical opportunity given the high-density rack-to-rack connections with AOCs or optical transceivers in the backend RDMA network within a cluster. I'm pleased that during Q1, we started the ramp-up of our 400-gig optical DSP for a U.S. hyperscaler. Our optical manufacturing partner is delivering 400-gig AOC solutions for an AI deployment at this hyperscaler. We expect the production ramp will continue throughout our fiscal '24 and into fiscal '25. We're also seeing demand restart from data centers in China. While it is too early to create meaningful expectations, Credo stands to benefit as spending returns in this market. Credo has designs in progress with several optical manufacturers and hyperscalers targeting next-generation 800-gig and 400-gig programs. We expect ongoing progress in winning production commitments. Beyond the hyperscalers, we see additional optical opportunities with networking OEMs and service providers. We remain engaged with many partners and prospective customers for Fibre Channel, 5G, OTN, and PON applications. The optical market seems to have turned a corner in the last couple of quarters. We aim to announce and demonstrate new optical solutions at upcoming optical trade shows later this calendar year, and we remain optimistic about the prospects for our optical solutions business. Within our Line Card PHY business, we are an established market leader with our Line Card PHY solutions for port speeds up to 1.6 terabits per second. We believe our overall value proposition becomes even more compelling as the market is now accelerating for 100-gig per lane deployments. During the first quarter, we saw design engagements increasing specifically with our Screaming Eagle 1.6 terabit per second PHYs. We've received stronger customer feedback, confirming that we have once again achieved a leading combination of performance, signal integrity, and power efficiency, and we've already had success in winning design commitments from leading networking OEMs and ODMs. We've also made significant development progress with our customer-sponsored next-generation 1.6 terabit per second MACsec PHY, which we believe will extend our MACsec leadership well into the future for applications requiring encryption. Going forward, we expect to remain a leader in this category given our core technology differentiation and deep collaborative relationships with leading networking OEMs and ODMs, as well as hyperscalers directly. Regarding our SerDes IP licensing and SerDes chiplets business, while we see quarter-to-quarter variability in revenue for our SerDes IP licensing business, our customer traction and funnel remain consistently strong. We've seen a breadth of wins in this category, including 50-gig and 100-gig lane speeds and process nodes ranging from 5-nanometer to 28-nanometer. End applications include networking, AI, 5G, as well as a wide range of other applications. In addition to IP, we've also developed SerDes chiplet solutions with two high-profile lead customers reaching production, and Credo is beginning to see meaningful revenue in our fiscal '24. One of our lead customers is Tesla, who has publicly presented us as their connectivity partner for their Dojo supercomputer, delivering SerDes IP for their D1 ASIC and SerDes chiplets for off-tiled connectivity. We're receiving increased interest in our SerDes chiplets from additional customers and prospects, which supports industry expectations that chiplets will play an important future role in the highest-performance designs. To sum up, we're happy with our results in fiscal Q1 and we're encouraged about the demand drivers for the balance of the year and beyond. Credo's position as a market leader for high-speed connectivity solutions has been years in the making, and the market acceleration towards high bandwidth solutions at low power with more networking density plays to our strengths. We continue to expect sequential growth throughout fiscal '24. We believe our growth will be led by multiple customers across our range of connectivity solutions, which would result in a more diversified revenue base as we exit fiscal '24. I'll now hand the call over to our CFO, Dan Fleming, who will provide additional details. Thank you.

Dan Fleming, CFO

Thank you, Bill, and good afternoon. I will first review our Q1 results and then discuss our outlook for Q2 of fiscal '24. As a reminder, the following financials will be discussed on a non-GAAP basis unless otherwise noted. In Q1, we reported revenue of $35.1 million, up 9% sequentially and down 24% year-over-year. Our IP business generated $2.8 million of revenue in Q1, down 51% sequentially and down 73% year-over-year. IP remains a strategic part of our business, but our IP results may vary from quarter to quarter, driven largely by specific deliverables to preexisting contracts. While the mix of IP and product revenue will vary in any given quarter over time, our revenue mix in Q1 was 8% IP, below our long-term expectation for IP which is 10% to 15% of revenue. We expect IP as a percentage of revenue to come in within our long-term expectations for fiscal '24. Our product business generated $32.3 million of revenue in Q1, up 22% sequentially and down 10% year-over-year. Our team delivered Q1 gross margin of 59.8% at the high end of our guidance range and up 160 basis points sequentially due to product mix. Our IP gross margin generally hovers near 100% and was 94.8% in Q1. Our product gross margin was 56.8% in the quarter, up 703 basis points sequentially and up 551 basis points year-over-year, primarily due to product mix. Total operating expenses in the first quarter were $27.4 million, within our guidance range and up 1% sequentially and 21% year-over-year. Our year-over-year OpEx increase was a result of a 30% increase in R&D as we continue to invest in the resources to deliver innovative solutions. Our SG&A was up 8% year-over-year as we built out public company infrastructure. Our operating loss was $6.4 million in Q1 compared to operating income of $5.3 million a year ago. Our operating margin was negative 18.3% in the quarter compared to 11.5% last year due to reduced top-line leverage. We reported a net loss of $4.7 million in Q1 compared to net income of $5.0 million last year. Cash flow from operations in the first quarter was $24.6 million, an increase of $36.8 million year-over-year, due largely to large receivables collected in the quarter. CapEx was $5.3 million in the quarter driven by R&D equipment spending. Free cash flow was positive at $19.3 million, an increase of $36.8 million year-over-year. We ended the quarter with cash and equivalents of $237.6 million, an increase of $19.8 million from the previous quarter. This increase in cash was a result of large receivables collected during the quarter. We remain well capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer. Our accounts receivable balance decreased 43.5% sequentially to $28.0 million, while days sales outstanding decreased to 73 days, down from 140 days in Q4 due to collection of several large receivables. Our Q1 ending inventory was $40.8 million, down $5.2 million sequentially. Now turning to our guidance. We currently expect revenue in Q2 of fiscal '24 to be between $42 million and $44 million, up 23% sequentially at the midpoint. We expect Q2 gross margin to be within a range of 58% to 60%. We expect Q2 operating expenses to be between $27 million and $29 million. We expect Q2 basic weighted average share count to be approximately 150 million shares. We're pleased to see FY '24 continue to play out as expected. While we see some near-term upside to our prior expectations, the rapid shift to AI workloads has driven new and broad-based customer engagement. We expect that this rapid shift will enable us to diversify our revenue throughout fiscal year '24 and beyond as Bill alluded to. However, as new programs add new and existing customers ramp, we remain cautious about the back half of our fiscal year until we gain better visibility into forecasts. In summary, as we move forward through fiscal year '24, we expect sequential revenue growth, expanding gross margins due to increasing scale and improving product mix, and modest sequential growth in operating expenses. As a result, we look forward to driving operating leverage and returning to double-digit operating margins by Q4. And with that, I will open it up for questions.

Operator, Operator

Thank you. Our first question comes from Toshiya Hari from Goldman Sachs. Your line is now open.

Toshiya Hari, Analyst

Hi, good afternoon. Thank you so much for taking the question. Just one question from me. Bill, I was hoping you could talk about the revenue drivers for the current quarter. You're guiding revenue up 23%. It's really nice to see you guys reiterate the sequential growth in the back half as well. You talked extensively about your AEC business obviously your largest customer your number two customer, you seem to talk up the Tier 2 customers there as well. And then you sounded quite good on optical. So I was hoping you could rank order the drivers again for the current quarter on a sequential basis, and what you're most excited about as you go into the second half? Thank you.

Bill Brennan, CEO

So I can say that we're seeing strength really across the board with all of the product lines that we've got from AECs to optical to Line Card PHYs, even SerDes chiplets. It's hard for us to rank order in such a short period of time. We really see things generally moving in a positive direction. I'll say that if you look at the year, I think we've been pretty clear thus far to say that our AEC business is not going to grow this year, and that's really due to the fact that our largest customer had a significant reduction in the forecast that they have for the current year. With that said, our other AEC business is growing quite rapidly as well as our other product lines. So we see significant growth year-over-year if we exclude the number from our largest customer. So we feel pretty good about the way that demand is shaping up. I think we've got growing visibility for this year. Again, I see us really benefiting from the acceleration in lane rates generally. This is positively impacting all of our businesses.

Toshiya Hari, Analyst

Sorry, one quick follow-up. Thank you for that, Bill. Just the optical DSP business. You talked about the 400-gig opportunity with the U.S. hyperscaler and the production ramp in fiscal 24 through '25. You also talked about China coming back a little bit. Again, if you can - I know it's a relatively small percentage of your business today, but how should we think about the contribution from your DSP business over the next, call it 12 months to 18 months? Thank you.

Bill Brennan, CEO

Right. So I've said in the past that one of my benchmarks for this business is when do we achieve 10% of our overall revenue, and I have signaled that we don't expect that to happen this year, but we've got all of the activity indicating we'll see that in FY '25. With that said, I feel good about where we are. The fact that we're executing to the ramp, we are seeing signs of life in China, we're qualified at multiple hyperscalers there, and as spending returns in that market, we will see benefit. Now, as far as what Dan has built in for the year, it's not a big number for China; it's a relatively small number. However, I think this year we'll do a good job of approaching that 10% threshold, and then we're on track for next year.

Operator, Operator

Thank you. And one moment for our next question. And our next question comes from Quinn Bolton from Needham & Company. Your line is now open.

Quinn Bolton, Analyst

Hi, Bill. Congratulations on the nice results. I just wanted to see if you could give a little bit more color on what you see going on at the largest customer. Obviously, they had a big forecast change back in February. Wondering if the forecasts have held fairly stable since that time? And I think if I caught it right in your prepared remarks, you mentioned AECs not only for general compute but also AI at your largest AEC customer. And I'm wondering if you could share some more details there? I thought the AI opportunity with your largest AEC customers was really more of a calendar '24, maybe even calendar '25 opportunity, so wondering if things have pulled in on that front?

Bill Brennan, CEO

So generally at our largest customer, we're still hard at work executing to the backlog and forecast that we've got. We're doing a good job there. The recent information we've received regarding how they're using our current generation of AECs indicates that there are certainly deployments at this customer that are utilizing our switch cable as part of their front-end network. It has been noted that a significant portion of the AECs that we're shipping today are going into AI applications in addition to general compute. It is not a secret that there has been a substantial shift in their spend that we've witnessed over the last six months. Looking long-term, I believe we're well positioned for both general compute and AI. I've discussed at length the program we've been working on for more than a year, which is this internally developed program that is moving straight to 100-gig lanes. They're going to use AECs for inter-rack connectivity between their appliances and the top-of-rack switches for the back-end network. I expect us to participate in both the back-end and front-end network of those clusters that are deployed, and for next-generation general compute, as they move to 50-gig lane speeds, I believe we're well aligned with this customer on AEC solutions.

Quinn Bolton, Analyst

And maybe just two quick clarifications there. Was that AI internally developed AI rack, because that's still kind of should we be thinking kind of later in calendar '24 or early calendar '25, any update on timing? And can you guys share what percent of revenue the largest customer was in the July quarter?

Dan Fleming, CFO

Yes. So from a 10% customer basis, what you'll see in a couple of days when we file our Q is that we had three 10% customers. The largest of which was 41%, and so that largest customer has remained the largest customer over recent history. So obviously they are still a material contributor to our overall revenue mix.

Bill Brennan, CEO

As for your question regarding timing, it is difficult to nail down when these new programs will ramp. I can state that it is very highly prioritized within our customer, and we are very, very active in executing on the design and qualification. I think we've indicated that it is possible for the early part of the ramp to occur within this fiscal year, but broadly speaking, it's more of a fiscal '25 overall around.

Quinn Bolton, Analyst

Okay. And then for Dan. Congratulations on the gross margins, especially coming at the high end of the range with the IP mix being fairly low this quarter. You talked about margins benefiting from product mix. But it sounds like AECs are still a pretty significant contribution to product revenues. Can you give us any more color on what's driving that margin strength within the product group?

Dan Fleming, CFO

Yes, it really goes back to the theme that you'll be picking up on here, which is a lot of the current trends are emphasizing the uptick in the need for 50 gig to 100 gig lanes, and we're seeing that benefit across all of our product lines. I would like to highlight that both optical and chiplets contributed materially to the quarter, while Line Card has always been a strong performer for us. Overall, there is just broad-based favorable product mix that we experienced within Q1. And as noted, our overall gross margin was 60%, which we achieved with IP being only 8% of our revenue mix. So we're quite pleased with the performance of our operations group and the entire organization to achieve that.

Quinn Bolton, Analyst

Yes. Nice job. Thank you.

Operator, Operator

And thank you. And one moment for our next question. And our next question comes from Matt Ramsay from TD Cowen. Your line is now open.

Matt Ramsay, Analyst

Thank you very much. Good afternoon, guys. I guess for my first question, there's a lot of things that picked up in the commentary over the last 20 minutes that seem pretty positive three different 10% customers, the guidance being what it was sort of above consensus and the expectation to grow for the remainder of the fiscal year. So I guess I'm wondering if you could detail a little bit more A) Are you now expecting to sort of grow for the fiscal year of '24 over '23? I know you guys have kind of set a ballpark for it being flat when the reset happened in February and a lot has happened since. It seems like with the momentum you're describing here you should easily be able to grow this year, but then there was some commentary that you gave, Bill, maybe a little bit more caution in the back half of the year in other parts of the business. Maybe you could just unpack that a little bit more, and if you have a new sort of expectation for the year that would be helpful. Thanks.

Dan O'Neil, CEO

Yes, let me address that for him. Thanks for the question. We - so as I mentioned in my prepared remarks actually, we do remain cautious as you say in the back half because a lot of the shift that's happened in hyperscale data center spend to AI has given us a lot of opportunity to engage with customers that are existing customers and new customers on new programs, in which we are finding a lot of success. However, as these new customers and programs ramp, it's always challenging to pinpoint exactly the impact or how quickly they will ramp. So we remain cautious in the back half as we're continuing to gain better clarity for that period. If we were to boil that down to simple math, Q1 we did what we did. Q2, if you take the midpoint of the guide, there is a little bit of upside over what the expectation was that we had said previously. But at this point, we're not providing further guidance for the latter half of the year.

Matt Ramsay, Analyst

Got it. No. Thank you. And understand the moving parts. I guess, as my follow-up, I wanted to dig in a little bit more on the optical. Exciting to hear about the hyperscale win there. I'd like to understand two things. One, if you could talk a bit more about the competitive advantage that you have in those products, particularly around sort of the N-1. The advantage that you have in some other parts. Does that apply to optical? And second, if you need to scale that optical business to support these large customer wins, what are the key points that you need to hit and the limitations on scaling, or the significant projects ahead of you in that area because it seems like that's something that might need to ramp up really quickly. I'm just trying to check on your capabilities here. Thank you.

Dan O'Neil, CEO

Sure. I would say that the N-1 factor we've discussed definitely applies to optical. In this market, we're the disruptor. There is a strong incumbent position that Marvell has built, and they've done a very good job with that business. The reality is that the optical industry is somewhat of a commodity business in that it is a very difficult market for our end customers to compete in, so we play the role of disruptor, and what we have to offer is excellent performance, excellent power consumption, along with a disruptive value proposition. This is why we've been very much welcomed. I feel confident about where we are with this generation of products. It's been a long time coming for us to demonstrate absolute competitive performance in terms of bit error rates, competitive power, and delivering the kind of disruption we anticipated with the N-1 process advantage that we possess. I believe the dominos will start to fall as one by one of our customers achieves production with hyperscalers. Regarding your question about capacity, I expect no issues. I foresee our ability to ramp to any kind of volumes that could be anticipated. This is a fairly straightforward manufacturing challenge for our team. My team is accustomed to building millions of units, and with our supply partners, we are well prepared in terms of wafers, substrates, packaging, and test perspective. Therefore, I perceive no obstacles in our ability to meet the anticipated ramp.

Matt Ramsay, Analyst

Thanks, Dan. Really appreciate it.

Operator, Operator

Thank you. One moment for our next question. And our next question comes from Karl Ackerman from BNP Paribas. Your line is now open.

Karl Ackerman, Analyst

Yes, thank you, gentlemen. Two questions if I may. First, I guess how are you thinking about the competitive landscape for AECs? I ask because our checks suggest that some of your peers have made incremental progress in that market, but at the same time, it validates the AEC opportunity as Ethernet captures a growing portion of AI clusters. So your thoughts on that would be helpful.

Dan O'Neil, CEO

Sure. I think that naturally, we're going to see competition make progress. One of the things I feel quite confident about is the organizational structure we have in comparison to the groups of companies that are trying to compete with us. We're organized vertically, with over 100 people each day focusing on AEC system solutions. Essentially, they're the clients of our IC development team. This allows us to be very flexible and respond quickly to special requests from customers. When we first considered this market more than five years ago, we anticipated it would be more of a standard product environment where we would implement a 400-gig connector on each end. However, the deeper we've delved into this, I can confirm that all of the high-volume programs we've mentioned have special features that have been implemented. All of our high-volume relationships and discussions have engineered solutions with unique specifications. The engineering teams understand there is an opportunity for innovation and our team is well-equipped to deliver those differentiated features that enhance the value of their rack designs. This will be a long-term advantage and act as a competitive moat. As it relates to developing a 400-gig or 800-gig standard AEC, I anticipate we will see competition make progress there, but I believe that's a smaller volume part of the overall market.

Karl Ackerman, Analyst

Yes. No, I appreciate that, Bill. For my follow-up, it seems the opportunity in front of you for your discrete optical DSPs is broadening and can address optical - active optical cable solutions, but I'm just curious, what are the margin implications as your discrete 400-gig DSP business ramps over the next couple of quarters? Thank you.

Dan O'Neil, CEO

Yes. Regarding the guidance we've provided about our product gross margins, we expect optical, in the near and long term, to be at the higher end of our product portfolio. This is not dissimilar to standalone optical companies you've tracked in the past. Our Line Card PHY business typically falls right in the sweet spot, while emerging product groups like chiplets and our AEC category generally sit below that target margin. Just to provide some clarity, there has been no change to our long-term target model. Our expectation for long-term gross margins remains at 63% to 65%, assuming that IP contributes 10% to 15% of the overall product mix as these product lines mature and as we execute our plans.

Operator, Operator

Thank you. And one moment for our next question. And our next question comes from Suji Desilva from ROTH MKM. Your line is now open.

Suji Desilva, Analyst

Hi, Bill. Hi, Dan. I wanted to clarify some comments you had in the prepared remarks around, I think you said Tier 2 customers, you're making progress. I just want to understand are you referring to customers beyond your first two hyperscale customers, three, four, five, and six or are you referring to a second-tier of cloud customers? And if it is the latter, is it traditional or newer AI - gen-AI type applications?

Dan O'Neil, CEO

So we've mentioned before that we've engaged with multiple customers using our AECs and these are not hyperscalers; these would be considered Tier 2. We've also seen success with service providers. We referenced that because this product category is solidifying. When a new customer initiates engagement with our solutions, it tends to become almost an automatic decision. This is based on the fact that you cannot manage signal integrity or basic physical size with passive copper, and optical presents a different equation with double the power and cost. Hence, it becomes an easy decision. A recent announcement that we made involved our collaboration with Intel on their Habana Gaudi2 cluster; that's a great example of a customer that made a quick decision to employ AECs for intra-rack and rack-to-rack connections. A video demonstration of this collaboration can be found on our website. This is one example, but we continue to work with what you'd consider hyperscalers and are making incremental progress. We are at various stages of evaluation and development, but we are not at the point where I can report adding that third large customer.

Suji Desilva, Analyst

Okay. That's definitely helpful, thanks. And then just to clarify the landscape you're selling into where some - there is Ethernet and there is certainly some - there is certainly some InfiniBand out there. I mean, just the notion that you guys might at some point serve the InfiniBand market or that wouldn't be a future opportunity, and you expect Ethernet to take share versus InfiniBand. Just color here - some basic color would definitely help us. Thanks.

Dan Fleming, CFO

Yes, I think that NVIDIA has executed a fantastic strategy, and I’m not sure if you've noticed their impressive back-to-back quarters. Without a doubt, the near-term InfiniBand market is experiencing great success within NVIDIA clusters. With that said, we're involved in many AI next-generation deployments, all of which utilize Ethernet. Industry forecasters indicate a clear coexistence between InfiniBand and Ethernet long term, as you can measure by dollars and it’s expected that the number of Ethernet ports will exceed InfiniBand ports in the coming years. We remain very optimistic about Ethernet's role in AI clusters, and there’s a significant increase in activity. There is no doubt about the fact that the market is not going to settle for a sole source provider. That said, we have no limitations in executing in the InfiniBand space. We collaborate with companies that develop both Ethernet and InfiniBand solutions. Regarding the AEC standard, it would not be a huge leap for us to produce those cables; we see market opportunity.

Operator, Operator

And thank you. One moment for our next question. And our next question comes from Tore Svanberg from Stifel. Your line is now open.

Tore Svanberg, Analyst

Yes, thank you, and congratulations on the 400 DSP win. Bill, on that topic. It's kind of interesting, right, because the 400-gig market is still in its early days, but we keep hearing from the industry that 800 gig is now ramping. Could you discuss your design wins and your ramps in that area? I mean obviously, now you've secured this one win in 400 gig that's going to ramp. But what about 800, when would that start to contribute more meaningfully to revenues?

Dan Fleming, CFO

So I think we need to assess the overall opportunity and break it down between front-end and back-end networks. From a front-end network perspective, slower port speeds will remain quite popular for a while. Regarding back-end networks in AI clusters transitioning to 100-gig lane rates, we view the 800-gig opportunity to likely be an FY '25 type of chance.

Tore Svanberg, Analyst

Great. And I just had a follow-up on the question about caution for the second half of fiscal '24. Obviously, there's a lot of irons in the fire here, and I'm just wondering whether that caution is more tied to how these ramps go. I'm especially thinking about your second largest AEC customer. Are you concerned that it’s going to grow significantly for the next few quarters and then experience a digestion period? Any additional color would be appreciated. Thanks.

Bill Brennan, CEO

Yes, I smile thinking about the expectation we've set regarding cautiousness because if we look at the quarter-to-quarter growth rates, I believe they are exceptional as we approach levels equal to or larger than those we experienced prior to the significant reset. At the start of the year, we faced important challenges to maintain high growth rates, and I feel encouraged by how we appear now. I am confident that as we conclude this year, we will be better diversified not only in terms of the customer base but also across product lines; thus, my cautious nature is coupled with an incredible story of rapid growth from quarter to quarter.

Tore Svanberg, Analyst

Great. And then on the second AEC customer ramps. I think you mentioned it's already in production. Is the main part of the ramp occurring now, or does that come a little bit later?

Bill Brennan, CEO

It comes a little bit later. These programs progress through various stages: qualification, early production, pilot production, and then significant ramp. As we've indicated, we have been somewhat measured with what we've included in this year, and it appears that it's going to shape up as a much larger ramp in FY '25.

Operator, Operator

And thank you. One moment for our next question. And our next question comes from Brett Simpson from Arete Research. Your line is now open.

Brett Simpson, Analyst

Yes, thanks very much. Bill, I wanted to ask about SerDes Chiplets. Can you explain how you view the landscape here over the next couple of years? I think you indicated that Tesla is your initial launch customer for SerDes chiplets. They've been discussing publicly about installing 100 additional flops clusters over the next five to six quarters. Could you elaborate on what specifically Credo is doing within this project and more broadly, how you foresee chiplet IO for Credo now that TSMC is looking more involved in SOIC and evaluating AI customers here? Thank you.

Bill Brennan, CEO

We’re pleased with our partnership with Tesla. We have worked collaboratively over the years. Initially, they licensed our 100-gig per lane SerDes IP, and now integrated 576 of those 100-gig lanes into each one of their D1 chips. This translates into a total throughput of 57.6 terabits per second for each one of their D1 ASICs. This is precisely why we were so enthusiastic about engaging in something so advanced, even years ago. When we tout 51.2 terabits per second switches, we note that their development is not yet expected. Thus, it is crucial from a SerDes IP standpoint; this is an exemplary case that showcases our ability to foster collaboration with leading-edge design teams. Their tile design incorporates 25 of the D1 ASICs arranged in a five-by-five matrix, surrounding the tile with 40 of our chiplets. These chiplets also deliver 3.2 terabits per second, corresponding to 100-gig per lane on each side: one side for XSR to manage dotted icon activity and off-chip for longer reach. They have made public commitments about ramping, and this is where we expect meaningful revenue. We also partnered with Intel for their 12.8T switch, which is now in production, featuring chiplet design that also delivers 3.2 terabits per second, although it uses a different interconnect between dies. Overall, we’re observing heightened customer interest. In terms of the chiplet business, there are many types of chiplets, but we primarily specialize in connectivity. Therefore, we generally expect the chiplet opportunity to be quite large. One of the opportunities we previously discussed is our efforts on PCIe Gen 6, which is well underway. We see a substantial opportunity in servers, be it compute or AI. Within the internal network, PCIe standards are invariably managed to address the burgeoning bandwidth requirements. Hence, we identify a considerable opportunity for PCIe retimers and chiplets; the discussions around UCIe standards facilitate die-to-die interconnectivity-off package and we will certainly be found within that space in the long run.

Brett Simpson, Analyst

And just one follow-up on this. A lot of chipmakers discuss next architectures for AI where they physically separate the IO from their main compute accelerator. Can you talk about what this means for Credo? How are you positioning for these next-gen architectures, and are you currently engaging in any of these projects? Thank you.

Bill Brennan, CEO

Yes, my understanding is that we're discussing the UCIe standard which is being driven by Intel. We are part of that initiative. This standard will define interconnections between chips, and we’ll have to effectively manage off-chip connectivity in various ways. We aim to provide the same advantages for that opportunity as we have brought to all of our projects; facilitating faster connectivity with improved power efficiency. This is how I view it.

Dan Fleming, CFO

No, that's all kind of beyond the fiscal year - the current fiscal year. We haven't provided guidance on that yet.

Brett Simpson, Analyst

Okay, thank you.

Operator, Operator

Thank you. And one moment for our next question. And our next question comes from Vijay Rakesh from Mizuho. Your line is now open.

Vijay Rakesh, Analyst

Yes, hi. Thanks, Bill, and Dan. Just a question on the AI side. Just wondering, I know you talked about maybe bigger ramps in '24, '25, but you also mentioned that five times content could yield 20 servers per rack as you go to high. Any thought on what percent of your cables now go into AI applications? Looking ahead, is the ramp conditioned solely on Habana or do you see opportunities in the AMD MI300 and others?

Bill Brennan, CEO

The opportunity is broad for us; anything that involves Ethernet presents a significant chance. Concerning your question about overall percentage right now, we're truly in high-volume production with one customer, and we have a second customer at the early stages of ramp. It is challenging for me to project without specific forecasts, but I expect both customers will ultimately procure our solutions for their AI platforms in significant quantities. Thus, I would say general compute will remain substantial for us, but I believe AI will eventually become the primary area where you'll see most of our cables operating at 100-gig lane rates in the near future.

Vijay Rakesh, Analyst

Got it. And good to see you guys diversifying 3%, 10% customers now, but I had a question on the optical. I see the DSP side. I think most models probably had a flat calendar '24 and a big ramp in '25; is that how we should look at it, or do you see, given the level of engagement on the optical IC side, things moving smoothly that a ramp could get pulled in?

Bill Brennan, CEO

Yes, I think we're comfortable with what we've previously discussed. I think the activity we're currently engaged in is substantial and leading to production commitments. Ramps are underway, but I wouldn't adjust the expectation; I believe that FY '25 is where we anticipate achieving the production momentum necessary to meet the milestone I previously discussed, which is for our DSP component to represent 10% of our overall revenue.

Vijay Rakesh, Analyst

Got it. Great. Thanks a lot.

Operator, Operator

And thank you. And one moment for our next question. And our next question comes from Richard Shannon from Craig-Hallum Capital Group. Your line is now open.

Richard Shannon, Analyst

Well, great, guys. Thanks for taking my question. I guess both of my questions probably focus on the DSP optical side here. You've talked about the early stage ramp here with a single hyperscaler. I have two questions; what sense do you get of your share position here? Are you a leader or fast follower? And to what degree are we seeing follow along with either additional designs with that customer or additional hyperscalers ramping there?

Dan O'Neil, CEO

Yes. For this first hyperscaler, I would say that we are one of their partners for the optical DSP. It's difficult to determine the share we will have at this hyperscaler, but I believe it will be significant. We have a lot of activity across the board for both front-end and back-end networks. I think we will be in a position in the future to provide more detailed information on this.

Richard Shannon, Analyst

Okay, fair enough. I'll follow up on another question on DSPs topic as well. I believe it was Tore's question about 800-gig DSP. I think your response indicated that revenue is anticipated in fiscal '25. What does that imply in terms of having firmer visibility on wins there? Should updates come in the next quarter or two, or are they expected to come more into calendar '24 before we hear anything?

Dan O'Neil, CEO

Yes, I believe we'll provide updates when significant developments occur. I know that is appreciated when we provide greater context, but I really want to ensure that we are locked in on details and we have many, many opportunities we are currently working on.

Richard Shannon, Analyst

Okay, fair enough. Look forward to those updates. That's all from me, Bill. Thanks.

Operator, Operator

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

Bill Brennan, CEO

Thank you very much for the questions. We really appreciate the participation and we look forward to following up on the call backs. Thank you.

Operator, Operator

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