Okay, great. All right. So welcome to the Credo Fireside Chat. My name is Mark Lopatis. I'm the Senior Semiconductor Analyst at Evercore ISI. And so we're very excited to have Credo join us. This is one of the fastest growing semiconductor companies with exposure to AI connectivity. activity. So today we have the CEO, Bill Brennan, and the CFO, Dan Fleming, and so we'll just go through some Q&A, and if we have some time at the end, we'll open it up to the floor for questions. So, Bill and Dan, welcome. Thanks for joining and welcome. So, you know, you just had an earnings report, so I think that's 20, 36 hours old or something like this so um why don't you share some thoughts what what are the messages that investors should
take away from that earnings report sure i do want to note though that we did it on a monday so we could be okay great thank you all right appreciate that every year the way things line up so thanks for having us yes we had our our fourth quarter and our full fiscal year call on monday and couldn't be happier about the accomplishment of the team really over the last year, even the last several years. Just to put things in perspective, in fiscal 24, we finished at about 195 million dollars in revenue. We more than doubled in fiscal 25 to about 437-ish. And then this year, we just announced greater than 1.3 billion. So more than a double and then more than a triple. So we've gone through a tremendous transformation as a company. And really driven by AI connectivity. One notable comment that I made on the call was that our revenue for the quarter exiting the year was 437. That it was actually slightly higher than the entire fiscal year of 25. So we're on this incredible growth curve. Right now, mainly driven by the success of the AEC product family. And looking back, we've been working on that and on pioneering that product category really for the last six or seven years and and so it's really you know taken off um we view it as a multi-billion dollar really long-term growth engine for the company we expect continued growth this year continued growth in in fiscal 28 and so it's a very solid part of the portfolio but i think I think as we look at Credo going forward, I think we've basically filled in all of the pieces of the puzzle that makes us a full-spectrum connectivity company. We're on the verge of launching what we're calling ZF Optics, which is a transceiver that we've developed. It's a new connectivity category that we're pioneering, just like we did with AECs. We're developing micro-emitter technology, micro-LED technology as a different light source, and we can talk about that. And we're also going, you know, not just across the data center in length, but also inward towards the dye, and we can talk about the dye-to-dye connectivity that we're pioneering. So we couldn't feel better about the accomplishments of the year, and we couldn't feel better about, you know, how we look going forward.
mm-hmm okay great all right so and I think I I think it's helpful just to level set you know to understand like how you think about the company and the vision for the company when we talk about your your AEC products these are systems and so normally when you think about a company like you think of oh you're gonna sell a chip but you're really selling a system can you just talk about like that kind of realization what led you to the realization that that that's the approach that you had to take because that was a non-consensus view at the time that you did that sure sure so one of the one of the things
that I'm proud of around our team is that we don't draw bright lines about you know the value that we're gonna bring to the market the idea of a semiconductor company building a cable when you say it that way it sounds like a pretty bad idea even when I told my mother she was concerned it's not intuitive to most investors right so my board looked at me they thought I was completely nuts but what we discovered in pursuing the concept of extending the life of copper by making it an active solution what we discovered it's a really tough problem. It's not so easy as selling a retimer to a copper cable company. It's a much, much more difficult process that you have to go through. Huge amount of innovation that has to happen and did happen. And so we've built this incredible engine over the last several years where we can quickly bring products to market. Now you're talking about a vertically integrated stack from the 30s, which is ultimately like the most critical building block from a technology standpoint to semiconductor design so component level expertise talking about system level design the actual system the AEC system talking about firmware we're talking about software that sits in the stack qualifying products you think about how does that happen the first time we put a product into a thermal chamber at quanta it failed with within an hour and it was a bulletproof design we thought and so here we sit today with with with more than 20 thermal chambers in our facility in Taiwan, I call it our little shop of horrors because the goal is to break the link. We get customers switches, we get customers nicks, we run traffic at high speed, and the goal is to find weakness in the link, whether it sits on the switch side or the nick side. The goal of the team is to harden the solution. So we improve bid air rates by two to three orders of magnitude, meaning that when we go into qualification, we don't fail. and and so when we when we talk about qualification acceleration as being part of part of the stack and we talk about owning the Supply chain, I've got a silicon operations team of course, but I've also got a systems Solutions operations team, so you know, we're the ones driving the relationships of the supply chain We're the ones making commitments to our supply chain partners on volume We're the ones investing and so that's why we've been able to really deliver flawlessly as we've ramped like incredibly I couldn't be prouder of both the silicon operations and the systems operations team turns out you know the first and the second and and it's typical now that that we were targeting an IEEE spec let's say 400 gig or 800 gig but when customers ask you hey can you add telemetry can you add special features and you own the entire vertical stack you can be open to that and at first i was thinking standard you know standard solutions but that quickly changed when i realized we could actually innovate where there has been no innovation previously and so that that has taken us to the point where i think we're a trusted partner with five of six hyperscalers and a growing list of neoclouds we look at from an application space and of course there's different networks in the data center where aecs make a lot of sense our Our first success was in the front-end network, connecting general compute to TORS. As AI emerged, the back-end network is now the large majority of our business, the scale-out network. But there's also disaggregated switch tracks. So we see our products fitting all over the data center. It is the best solution, the preferred solution, for connections that are seven meters or less. And the reason is because it's got bulletproof for liability at a core technology level it's got a lower power profile and and uh and it's got a
better cost profile as well can you take can you take that example just with just one layer deeper when you talk about you you're you're in a thermal chamber and and there's an error like i appreciate surdees is an incredible incredibly important part of the solution uh but like but what else Like, what knobs are you turning in order to take that part that failed and make it a part that, you know, is bulletproof for your customers? And, you know, I guess another way to ask the question, aside from the CERTES, like, what else is a, you know, part of the moat for you guys?
So having the ability to have our CERTES engineers right next to our silicon engineers, right next to our system-level engineers, right next to our firmware team Diagnosing you know capturing a failure and diagnosing it is the first step and then it could be Any any number of ways that you can you overcome that that one weakness that you found and it might be You know as you cycle temperature from very low to very high quickly as you cycle Voltage from the low part of the spec to max as you power cycle you might find a different condition and maybe they're all corners but they all matter when you're in the data center and and failures can you know can shut down an entire cluster so there's not any one thing I can point to but it's the combination of all of these people working together to diagnose and then figure out how to how to make the link more robust so it doesn't fail under that specific condition as we qualify product we can go through the cycle iteratively for a couple of months until we can't make the cable fail anymore I I'm not aware of any other team in the industry that is going to that length. You've got to do it. But if you're not one company doing it, I'm not sure how we would do it if we were trying to take a group of companies out and act as one.
So did you convince your mother that this was a good idea?
Yeah.
She texted me when we hit an all-time high. Great. so you have um so in the aec this is what you know 1.3 billion dollars in revenues and fiscal 26 just ended that is up 20x over five years uh and and um and i i would say this is a pretty very i would agree it's an impressive feat so how do we think about you know the you know the duration and magnitude of you know from your peak aec revenues and in your estimation like what where Where does this, where does this business unit go from here, what were the key drivers of the expansion?
Well, it's hard for me to call a peak because I don't see a peak. I see the market that we're growing into is, you know, really it's all about larger numbers of GPUs, larger clusters, it's all about faster speed, and there's emerging applications. So, we talk about training, obviously, drove the first wave, inference is, we think, all of us think inference is going to be much bigger. Now we're talking about agencic. All of these applications drive more connections and drive high-speed connections. And so, you know, from our perspective, we see this. When I think about the market generally, I think about maybe let's call it the pluggable And when we talk about pluggable optics in a minute, I think everybody is well aware that that market is just growing by leaps and bounds from a volume standpoint. Short connections, AECs are pluggables. They're short connections, a meter to seven meters. They coexist in the same market. So the same drivers that will drive growth in optical transceivers drive the growth in AECs. It's very well known that I think every CEO that talks about copper and optical, they're going to coexist. We're going to live in a heterogeneous world. And we're talking about Jensen, we're talking about Hawk, we're talking about Matt Murphy. Everybody's in agreement that this whole conversation about optical and copper is one of coexistence. And if you believe the pluggable market is going to grow, like we're seeing clearly that is growing rapidly aec is part of that growth we can talk about mpo and cpo in a moment as well but
generally speaking we don't see a peak and is the you know we think about your four largest cust aec customers to what extent is the growth you're seeing new capacity installations versus further penetration into those existing footprints it's a combination
We're not fully penetrated at any one of our large customers today. But I will say at the same time, we're adding new customers. So our potential to add significant customers is growing. I mentioned on the call that we're deeply engaged with five of six hyperscalers. But also there's an emerging group of neoclouds that we'll do very well with over time. Because especially for the neoclouds, reliability is going to drive their cluster performance. It's going to drive their compute yield. If you talk to any one of those CEOs, all of them that I've talked to, so they've got to put the best possible cluster out there for their customers. The highest performance, highest compute yield, most reliable network. and so this is a very you know easy you know easy discussion where we could say we can you know we can help you from a time to stability you buy all buy billions of dollars of gear and if it takes you a week to get them up to the point where they're revenue generating or if it takes you two months you know clearly you know AECs are preferred ZF optics by the way offer the same thing and I will say so generally speaking one of the one of the things one of the takeaways from today that I hope we can establish is that two or three years ago reliability, network reliability became our North Star. So I think about us as a full-spectrum connectivity company with this huge emphasis on delivering reliable connections.
How many like hundred million dollar scale AEC customers could, you know, would you see on the horizon?
like how big can that number be greater than six okay that's for sure the neoclads are deploying you know a large large number of gpus they're building very large clusters and so we i expect
definitely more than six and you i mean you created this this category um how uh you know you know it's hard very hard to sustain a hundred percent share right like sure how do we how do you suggest investors think about like what what is a sustainable number like what you know I know you don't want to give anything up but like what's reasonable
sure we never had the goal of having a hundred percent market share that's you know highly unrealistic it's a large market and you know clearly large markets attract lots of competition when I think about how credo competes I I think about how we engage with our customers. If we do a very good job with our customers, and I'm talking about understanding their challenges, understanding the things they are trying to deliver to their customers, and understanding the things that are problematic for them, we can have a closer relationship and ultimately design a product that meets their needs. The way we're organized, our goal is to deliver it first. I want to be first to deliver the next generation I want to be first to be qualified in in their test clusters in their full qualification I want to be first to ramp and once you become first to ramp it becomes you know a question about you know what what drives us what what drives a need for a second source and is it risk reduction because if you're in high volume and and you've You've got a highly predictable supply chain that never misses. You might be adding a little more risk into the scenario if you're trying to, say, take a part of the cluster, take a part of the volume, and rely on somebody new. Generally speaking, my team is, the way we compete is to try to do a better job, to try to deliver the right solutions first, get qualified first, ramp first, and ultimately deliver in a way that's flawless. and and you know that's the way you maintain market share in a competitive environment that's I'm not I'm not worried about somebody offering a lower cost or something this isn't these are not the dynamics my customers are looking for trusted partners that can deliver on bringing clusters up quickly
and keeping them at maximum uptime mm-hmm and how do we think about as you go from 200 gig to 400 to 800 solutions how do we think about the ASPs so the
ASPs are gonna vary based on a lot of things so the the length of connection the number of connectors you know we've got we've got solutions with eight with eight connectors eight modules five four three you know many number we've got lengths up to seven meters from one meter to seven meter but speed helps so So anytime you've got an increased lane rate, along with that comes, there's cost increase as well. And so building a 3 nanometer chip for a 1.6T cable is more expensive than building a 12 nanometer chip for an 800 gig cable. So you have to charge more. Sure. So we're going to charge based on a combination of things. But to get to the point I think you're making is that there will be a content increase as we go from 800 to 1.6 T.
Is that like the speed doubles, so the ASP doubles? Is that a good framework, or is that not the right framework?
That's probably a little too aggressive. But I would say that as this 1.6 T market takes off, I can look at two different ways to deliver the 1.6 T of bandwidth. So when you think about a new GPU, That requires that bandwidth don't think in terms of you know that that you need one One transceiver or one AEC that does eight lanes of 200 Today in production many many of the sled designs have two physical ports So you can have is safer an 800 gig port to two physical ports You can have four lanes of 100 and four lanes of 100 Or you get eight lanes of 50 and eight lanes of 50 in each one of the ports A lot of the sled designs that we're working on with partners, they have two physical ports. So you can either do eight lanes of 100 in each port, or you can do four lanes of 200 in each port. In either case, we're going to see a content increase. And so either a doubling of the 800 gig. And why would somebody do that? There's a tremendous amount of work that has to go into maturing all of the links in the ecosystem. Some customers will say, let me take the, you know, let me take the GPU first, I'll de-risk the connections, and then I'll move to the 1.6T when it makes sense from a, you know, from a maturity perspective and a cost perspective and power as well.
Fair enough. All right, let's shift to optics. So you recently updated your fiscal 27 optical revenue target from 500 million to 600 million. you highlighted optical dsp silicon photonics picks as zero flapped optics all could represent 100 million dollars uh so that's that's three segments at 100 so that's that's about half of that 600 million dollar bogey so how to you know how should we think about the rest of this and what what should investors know about you know what you're doing with zf optics sure all three of
of those markets that we talked about represent multi-billion dollar opportunities long-term. If we look out to 2030, I think the Silica Photonic pick market despite itself is forecasted to be $5 billion market. DSP, we all know that's a multi-billion dollar market as well. And ZF Optics could be the largest of the three markets if we look at the customer traction that we're getting and we expect over the next several years. I mentioned that they're all growing all three segments are growing faster than what Dan guided for the year Which was greater than a he didn't guide to 80% he got it greater than 80% and I can tell you that all three of those segments that that we talked about for optical are going to grow more than 80% and and you know Even I think more than the company's growth, so I think Maybe to get a little bit close to the answer that you're looking for ZF optics has the ability to ramp very quickly and become the largest segment
For optical portfolio and and I think you mentioned, you know, potentially Doubling or tripling of that business in fiscal 28 You know is that How do you get there? Is this like where are you in the qualification process and you know design one process?
Right. So go back to what I said about AECs. Go back to about the capability that we've already built as a company to bring system-level solutions to market. Our ZF Optics products have already gone through our little shop of horrors in Taiwan. We've already hardened the solutions. We've got interoperability with many switches in the market, many nicks in the market as well. So we're well along the way to ramp, being able to ramp that. i mentioned on the call 90 days ago that we were engaged deeply with two hyperscalers and two neoclouds what i'll say today is that that has broadened in in the last 90 days and so i feel very good about the customer discussions that we're having i understand what we're delivering here is not a commodity solution what we're delivering with zf optics it follows directly you know in in the path that we went down with aecs we had a customer come to us and say look link flaps are killing us in a sense that it's taking us two months to get our clusters up to the point where they can be revenue producing the term they use was time to stability and you know we're struggling and we can't re-architect we can't go seven meters or less like xai did and then long term we we're losing you know a significant percentage of uptime Because link flap these intermittent connection and disconnection This can actually shut down an entire cluster And so we kind of looked at this problem said how would we attack it and we had done a huge amount of telemetry work with our AEC family First product we ramp we're able to detect when a tor port the signal integrity was was declining and before it failed You know switch the data to a second door. This is a pretty smart smart cable So that the challenge there was to to say how how do we do the same across a large number of GPUs large And the connection we're really targeting is the nick to the tor there's no redundancy So you lose you lose those links in a link flap manner. You could shut the whole cluster down And so the idea was okay during bring up Could we design a system that was smart enough to be able to determine is there ESD damage slight ESD damage? Okay, when you turn a rack and when you fire up a rack You have to be very careful as you're installing them. It's very easy to damage But if you don't damage it enough and it actually works for a while You've got a latent failure that's sitting in your network So we can determine we designed a system that we can self-diagnose to ESD damage We can also diagnose if there's dust in in the in the signal path whether it's on the fiber plant or on the transceiver side multi-path interference multi-path interference is killer as a So, as they're turning on their clusters, this enables them to get to a point of stability within a week. And then, as far as in production, or in, you know, you know, long-term running the cluster, being able to sense with, in a real-time basis, when any given link is crossing a threshold that's set, typically, by the customer on link health. So a link that's declining being able to say let's proactively take that link down So it doesn't crash the cluster. We'll take that GPU out put it on a list for maintenance We can capture exactly what the failure mechanism Was that caused the link help to decline? You know and so we're delivering a product that's never been designed before We're delivering a solution. That's got so much better so many features that go beyond commodity that that it's a very easy discussion for people to become interested. These are things that the entire industry are fighting. And so when it comes to manufacturing these solutions, so yes, we're through the qualification process. We've been working on the supply chain for more than a year now, knowing that we're going to be able to generate a huge amount of demand, but if we're not able to deliver, those two pieces come together. they have to come together for you to be able to build a business, but much, much more so for ZF Optics than it was for AECs. So there's so many different components that we've got to go, you know, lock in supply on. We've got three partners that we've got to lock in, you know, volumes on for assembly. So we're well down that path and we'll be at a point this year, exiting the year, where we're talking about monthly volumes measured in hundreds of thousands of units, and then doubling and tripling that the following year, and in doing it the following year as well. So I feel very confident. This is not the first rodeo for my systems operations team. So I feel very confident about delivering the volumes to the market and delivering on the promise of more reliability.
You also mentioned near-package optics. What are the most unique elements of dust photonics in near-package optics pick?
reduction in lasers and That applies to pluggables that applies to NPO that applies to CPO. They've got a design that we think is best in class in the industry, but the key the key takeaway is 75% reduction in lasers required And so that that that's an obvious one when the whole world is talking about You know, how you're gonna get the lasers if you need fewer lasers, not only does it give you an easier you know easier path to supplying but it gives you you know power advantage gives you a cost advantage it gives you a reliability events as well mm-hmm and
what kind of visibility do you have for that for the ZF optics yeah visibility
on what sense on the supply side or on the on the demand side demand side I'm more worried I'm more worried about selling out than I am about not being
able to to generate the demand it's going very well um i want to shift to micro leds unless there's something on optical that we didn't cover that you want to make sure we hit there's lots of
things we can talk about right we got 11 minutes and 32 seconds let's talk about i think it's an
important conversation hopefully hope we can get to omni connect as well yes um on micro leds uh So, the micro aluminum acquisition, what do investors need to know about this, the micro LED market opportunity?
Right. So, following the North Star, the North Star of reliability. So, micro LED, a different light source than lasers. At a core technology level, think wide and slow, and we're talking about equivalent reliability to AECs. think about the length being extended from 7 meters to 30 and think about the form factor being much more friendly a fraction of the of the diameter of an AEC at any given length so we think that that becomes an important part of our portfolio because it offers customers the same kind of dynamics with AECs bulletproof reliability lower power and and potentially better cost structure And a friendlier form factor and a longer connection. So we think that market is quite large And and I mentioned earlier that we think at a minimum. It's double the AEC market
Okay That's a pretty big statement. I would say we're looking forward to seeing that play out All right, let's shift to Omni connect So this is an ultra-efficient 112g very short-reach 30s What are the starting use cases? How do we think about this?
So think about think about the the omni connect concept as Being able to make late binding decisions on any kind of IO that you're building. So like a composable XPU First application is memory but next application could be any kind of Connections either scale out or scale up or even NPO for that matter. So We'll we will build gearboxes that will interface with our customers Composable XPU and so our first customers company that is I Think getting great recognition in the market because of things that they've announced They're building the highest performance inference engine that we're aware of and it's really memory So where other inference designs are limited to say 128 gigabytes of LPDDR They announced the system with two terabytes. So we're talking about frontier models that can all be in DRAM super high performance for for given inference applications like real-time AI generated video, which is going to be a huge market. So the way that we do that there's two physical Limitations if you look at other designs in the dive photos and the system photos that are out there if you're looking at an LPDDR 30s or phi and you're trying to connect just 128 gigabytes the photos you can find on online 75 of the beachfront is is occupied by the fives to connect just 128 gig so the beachfront density is terrible it's it is what it is it's not good compared to what we're doing orders of magnitude better with the approach we're taking and so from a a beachfront throughput or You know just the terabytes per second that we can move in and off the The XPU orders of magnitude better The other thing is with those 30s or 5s you can only get about 25 millimeters or an inch away from the die That's the reach so our solution. We have 10 inches So you look at these these photos and 128 surrounds There's no more room. Okay, so when you can get far away from that that XP you die Then you can start talking about, we can design with a partner up to, I think, six terabytes. So two terabytes is first up. So we've completely blown the lid off of both physical limitations, beachfront as well as distance, the reach from the main die. Now, that in of itself is a big opportunity, and also when we think about even other designs, like designs that would be maybe more for training the way they you do that is you got to buy co you got a source co-ops you've got to buy HBM and we're providing a path around that you can do it with LPDDR now both from a performance standpoint and and a memory size standpoint and we avoid the expense of HBM and co-ops so we're working with several customers now globally on on solving these challenges whether they're for inference or training and I and I think
If if I got it correct Initially you thought of the use case you're thinking about you know two to three thousand dollars per accelerator Is that is that like how we should be thinking about this sure?
Yeah, so you can run the numbers I know that positrons got much bigger targets than a hundred thousand units, but if you think about hundred thousand unit increments
these are numbers that really move the dial okay gotcha all right um dan i don't want to let dan off the hook here uh dan as you um you know what are your updated views on the gross margin evolution as you ramp these new uh product categories um and you mix over time how should we think about uh you know you have a target i think of 63 65 percent um how do how do all these new
products impact this model yeah one thing we've said is that all of these different products that bill has talked about we expect to fit within a very similar gross margin profile now one important update that we gave this week was you know if i go back five years as we're preparing to go public we came up with a kind of a long-term model which was very instructive gross margin 63 to 65 percent operating margin 30 to 35 net margin 28 to 33. in fiscal 26 you know this was a story of scale we were certainly subscale five years ago as we were preparing to go public and fiscal 26 was a really transformative year for us where we exceeded all of those long-term targets and in fact we haven't talked about a long-term net or operating margin for quite some time you know 28 to 33 percent net margin we we were you know we were in excess of 50 percent in our q4 and we we gave guidance that we would be around 50 percent for fiscal 27. similarly with gross margin we said that for fiscal 27 we expect to be broadly consistent with fiscal 26 which was 68 percent so not really talking about a long-term model anymore we'll give you know updated guidance as we see things play out on the horizon but the most important takeaway is all of these different products that bill talked about we expect to be
of a very similar gross margin profile well what about the opex side because bill just talked about a million products that you guys are working how how should we model r d expense the uh again that's
another thing where our long-term model we've you know we're below that in terms of percentage of revenue for for sure and the thing that really um stands out or to to bear in mind some of these things sound very different but our core you know technology our 30s technology is what really drives our innovation and that is used across the spectrum of all of our product portfolio so it's a highly leveraged R&D model that we have sure we have a you know very strong and big team focusing on AECs and all of these other areas now but fundamentally it's a it's a very leveraged operating model that we have and you've seen that leverage play out over the course of the year The last point I'll mention, while we mentioned that 80% top-line growth or greater from fiscal 26 to 27, from an OPEX standpoint, I mentioned about 50%. So top-line growing greater than 150% versus the OPEX. So there will continue to be operating leverage over the horizon.
All right, good stuff. We only have a couple minutes left. As you guys talk to, I know you talk to a lot of investors, what do you think is the biggest disconnect between, you know, your kind of perception of the opportunity and your fundamentals and the investment community?
Three years ago, I think we were viewed as the emerging AEC category creator. And it is true that last year the large majority of our revenue was driven by success in bringing that product to a, you know, preferred category for short connections. I think a lot of times we get classified as a copper company. And I think that perception is going to change pretty quickly. and with the announcement of the acquisition of dust and bringing that silicon photonics PIC capability in-house, we also decided to maybe talk a little bit more about the other parts of the portfolio. And so I think that the perception over the next three years is gonna change, and I think it's gonna change to, and by the way, I don't wanna, you know, there are other waves coming with ALCs and OmniConnect, And so I think the takeaway, the change in perception, should be that we're really a full-spectrum connectivity company that is delivering the highest reliability in the industry, from die to die, all the way to any length within the data center. I think the story is unique, and I think that within that three-year period of time, you'll see us be very balanced between copper and optical. And I think we're gonna be talking about driving revenue at a very fast pace, even, you know, we're not talking about, you know, I mean, as a small company, reaching a billion dollars in revenue is a big thing. You know, we flew by the milestones, right, from achieving $500 million run rate to a billion dollar run rate. Now we're on a more than a billion and a half dollar run rate as we look backwards. So we're focused on 5 billion and beyond. You call it 5 billion and then 10 billion. And I think we're addressing the kind of markets that will take us there, and take us there within the decade.
Good stuff. I think we're at time. That'll have to be the last word. Bill, Dan, thanks for joining and sharing your insights. Yeah, thanks so much.