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spk09: Ladies and gentlemen, thank you for standing by at this time. All participants are in a listen-only mode. Later, we will conduct a question-and-answer session. At that time, if you have a question, you will need to press star 1 on your push-button phone. I would like to turn the conference over to Dan O'Neill.
spk00: Please go ahead, sir.
spk06: Good afternoon, and thank you all for joining us today for our fiscal 2022 fourth quarter and year-end earnings call. Joining me today from Credo are Bill Brennan, our Chief Executive Officer, and Dan Fleming, our Chief Financial Officer. I'd like to remind everyone that certain comments made in this call today may include forward-looking statements regarding expected future results, strategies and plans, future operations, 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's not possible for the company's management to predict all risks, nor can the company assess the impact of all factors on its business, or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statement. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed during this call may not occur, and actual results could differ materially and adversely from those anticipated or implied. The company undertakes no obligation to publicly update forward-looking statements for any reason after the date of this call to conform these statements to actual results or to changes in the company's expectations, except as required by law. Also, during this call, we will refer to certain non-GAAP financial measures which we consider to be an important measure of the company's performance. These non-GAAP financial measures are provided in addition to and not as a substitute for or superior to financial performance prepared in accordance with U.S. GAAP. A discussion of why we use non-GAAP financial measures and reconciliations between our GAAP and non-GAAP financial measures is available in the earnings release we issued today, as well as in our SEC filings. which can all be accessed using the investor relations portion of our website. With that, I'll now turn the call over to our CEO. Bill?
spk02: Thanks, Dan, and thank you all for joining our call. During this call, I'll provide an overview of our Q4 and Fiscal 22 accomplishments and then share why we're optimistic about continued strong growth in Fiscal 23. After my remarks, our Chief Financial Officer, Dan Fleming, will provide a more in-depth review of our fourth quarter and full year results, and we'll then be happy to take questions. While we faced some challenges in April, fiscal 22 was, in total, another great year for Credo. Notably, due to the tremendous work of our team and partners, we became a public company on January 27th. Our IPO has provided us with more than ample capital to support the investments required to deliver the leading products our fast-growing markets demand. Our IPO not only bolstered our liquidity, but solidified our path as an independent company, both of which enhanced our relationships with our customers and supply chain partners. During fiscal 22, we achieved record revenue of $106.5 million. up more than 80% from the prior year. That total included product growth of 120%. We achieved revenue growth in all our Ethernet product lines, including AECs, optical VSPs, line card PHYs, and SERDES chiplets. And we also achieved growth in our IP licensing business. This success is a testament to the hard work of our team and the trust they've earned with our customers. Customers choose Credo Solutions for several reasons, but at its heart, we differentiate ourselves with our architectural approach. Our advantage truly lies in our engineering. We optimize analog and DSP architectures to deliver low power and very small die sizes. Also, our N-1 process node approach provides an advantage on development cost as well as our wafer cost. These factors combined with our purpose-built mentality where we optimize solutions for the many different links we serve, enable us to provide tremendous value to our customers across the entire range of their connectivity applications. Our dedication to engineering optimal system solutions translates to innovations across our product lines, and nowhere is this more evident than our active electrical cable, or AEC, solutions. We've worked closely with hyperscaler customers to understand their core needs, and through engineering ingenuity and a customer-first mindset, we've been successful in delivering leading-edge AEC system solutions, and effectively, we've pioneered a new high-speed connectivity category. Let me share some of our accomplishments and highlights from the past year across our Ethernet connectivity solutions. Within our AEC solutions, we began ramping at our first hyperscale data center customer. We also deepened our engagements with additional customers, including hyperscalers and several Tier 2 data center operators. Our customer progress has validated the AEC market, and we continue to expect it to grow rapidly. Fiscal 22 also included notable achievements for the solutions we provide to optical module manufacturers and their end customers. We developed and deepened engagements with several optical module manufacturers and are working closely with them to proliferate our solutions into their data center, 5G carrier, and OEM customers. During fiscal 22, we ramped initial production with several optical module customers. And in March, our team attended OFC to meet with customers and partners. It was a great opportunity to meet in person, and it was also a great opportunity to see the strong interest in our optical offerings. Next, let me discuss our LANGcard PHYs. Data security continues to become more and more important, and we've continued to see a strong adoption of our MACsec solutions that provide data encryption. We also gained traction with our Retimer and Gearbox solutions, and this was based on our leading power efficiency and cost effectiveness. During fiscal 22, we ramped our Line Card 5 solutions at several new customers, including hyper-stayers and leading network OEMs. Lastly, customers continued to seek out our IP for licensing and our Surge chiplets for ASIC solutions with multi-chip module packaging. While we are clearly transitioning to a product company, These solutions remain a strategic part of our overall business. In the past year, we had wins with several new and existing IP customers, and we continued to recognize revenue from our IP contract backlog. We also achieved volume production with the first two of our Certis chiplet customers. From a supply chain perspective, we've been navigating the challenges facing the entire electronics industry. As we announced in our 8K on April 13th, one of our key supply chain partners in China was shut down due to COVID lockdown mandates. While we did not face any other supply chain issues, this lockdown limited our ability to deliver to the customer demand we had in Q4, and it impacted our revenue in the quarter. Going forward, we will add geographic diversity to our supply chain strategy, and given the fact that we have good forecast visibility, we will also judiciously build inventory. In fact, with many of our large customers, we have firm backlog that extends to 52 weeks. Despite the supply complexity experience in April, we delivered record quarterly revenue of $37.5 million, an increase of 18% from last quarter and 90% year over year. Given we had strong relative performance on the IP side of our business, we also achieved very good gross margins. There were several key drivers to our record-setting quarter, which included the continued ramp of a NIC to TOR AEC solution at a leading hyperscaler, as well as multiple new IP license wins and IP revenue recognition from backlog with an industry leader in the consumer market. We're encouraged as we move into fiscal 23 as we see increasing strength and demand for our solutions as we deepen our customer engagements with industry leaders, including hyperscalers, optical module manufacturers, and networking OEMs and ODMs. As we previously mentioned, we're addressing a large and fast-growing TAM within the high end of the Ethernet connectivity market. Based on industry reports, we believe our overall TAM will exceed $5 billion in the upcoming years. We also believe our emerging solutions for new target markets such as USB and PCIe will add and incremental $3 billion to our TAM. Our team has been working very hard to meet and drive customer demand through continued customer engagement and innovation. The hard work has been paying off, and we have many reasons to be excited about our prospects in fiscal 23 and beyond. Within AEC, we expect to launch a third major program at our first hyperscaler customer during fiscal 23. which is indicative of our strong execution on the first engagements, and it's also indicative of the credibility Credo has earned to be trusted with a third key program. Also, we continue to make progress in our AEC engagement with a second hyperscaler customer, and we expect to begin ramping that program in fiscal 23. We're also bullish on the opportunity for 800 gig ports in the future, having already sampled 800 gig AEC solutions to several leading partners. We continue to strongly believe at 800 gig, DAC is dead. Based on customer traction, we also expect a continued ramp of our optical DSP solutions. We continue to work jointly with customers across a variety of applications targeting various hyperscalers. While hyperscalers will remain the most significant customers for optical DSPs, we're encouraged by our products for applications for the 5G infrastructure, PON, and fiber channel markets. We're one of the few established leaders in the LAN card PHY market, and we've been very pleased with the growth of this product line, which was driven by the expansion of our customer base of hyperscalers and networking OEMs and ODMs. Going forward, we believe that we will continue our market leadership for MACSEC solutions that provide encryption for the growing number of applications requiring high security. And we expect our retimers and gearbox solutions to continue to gain momentum based on our ability to deliver more power-efficient and cost-effective solutions. Lastly, some thoughts on our 30s IP and chiplets, which remain a highly strategic part of our overall business. While our IP business is variable on a quarter-to-quarter basis, we continue to build backlog and maintain a robust pipeline of new opportunities for fiscal 23 and beyond. We're certainly excited to further deepening our relationships with Ethernet customers, as well as further engaging leading USB customers. Credo's diverse portfolio of low-power Certis IP offers our customers optimal solutions for their needs. Looking forward, our engineering teams are working aggressively on next-generation 800-gig and 1.6T Ethernet solutions across all of our product and IP offerings. And our expectation is that we will be very well positioned to continue to deliver the same compelling advantages to our customers as these cutting-edge markets ramp in the upcoming years. Fortunately, customer demand for our solutions continues to look very robust. We had growth in every part of our business in fiscal 22, and we expect the same in fiscal 23. Given the breadth of our solutions, our technical innovation, our operational capabilities, the favorable market trends, and ultimately the strong demand from customers, we look forward to another record-setting year in fiscal 23, where we expect to achieve at least $200 million in revenue, which would represent growth of more than 88%. With that, I'd now like to turn the call over to Dan Fleming, our CFO, to provide more details on our fourth quarter and full fiscal year results, as well as to get guidance moving forward.
spk07: Thank you, Bill, and good afternoon. I will first provide a financial summary of our fiscal year 22, then review our Q4 fiscal 22 results, and finally discuss our outlook for Q1 of fiscal 23. As a reminder, The following financials will be discussed on a non-GAAP basis unless otherwise noted. As Bill mentioned, this past year has been truly transformative for Credo. We have scaled our business considerably and expanded our TAM thanks to the strong progress made with our AEC product. In addition, we are well capitalized. to continue investing in our strong growth trajectory while maintaining a substantial cash buffer in this volatile environment. I'm pleased to share with you that revenue for fiscal year 22 was a record at $106.5 million, up 81% year over year, driven by product revenue that grew by 120%. Gross margin for the year was 60.6% as we continued to gain scale. Our operating margin improved by 11% even as we dramatically grew our product revenue mix from 63% in fiscal year 21 to 77% in fiscal year 22. This illustrates the leverage we can deliver with our strong top line growth. While product will continue to drive substantial top-line growth, IP remains strategically important to us, and this source of high margin revenue grew 16 percent for the year, which translated into a $4.1 million improvement in gross profit. In Q4, we achieved another quarter of record revenue at $37.5 million, up 18 percent sequentially and up 90 percent year-over-year. Our sequential growth was largely driven by strong revenue growth of our IP. Our product revenue was $26.4 million for the quarter. While it was flat sequentially, product revenue grew 104 percent year-over-year. While our Q4 revenue represented strong year-over-year top-line growth, this result was at the low end of our guidance range. As we previously disclosed, the product revenue was limited by government COVID lockdown mandates in China, which caused certain disruptions in the manufacturing of some of our products in the fourth quarter. With the lockdown impacting our supplier, we were simply not able to fulfill all demand. As Bill mentioned, we were taking mitigating actions to ensure we're better positioned to deliver to demand should we encounter similar issues in the future. Most importantly, we continue to see extraordinary demand across all of our product lines. In fact, we saw each product category, line card fi, optical, and AEC, grow for the quarter and full year. Additionally, we're pleased to share that we expect this to occur again in fiscal 23, with our product growth being led by a wave of AEC adoption. The fundamental driver, a strong HSDC expansion outlook at the highest speeds, remains in place in the face of an uncertain economic and geopolitical landscape. So we're thrilled to be well positioned with a leading set of products. Our first large AEC customer was, again, much greater than 10% of our revenue and was 30% of revenue for the full year. We expect this customer to remain a large portion of our revenue in the coming quarters as their AEC ramp continues. Our IP business generated $11.1 million of revenue in Q4, up 64% year over year. IP will remain a strategic part of our business, but as a reminder, our IP results may vary from quarter to quarter, driven largely by specific deliverables to pre-existing contracts. While the mix of IP and product revenue will fluctuate in any given quarter over time, our revenue mix in Q4 was 30% IP due to strong IP execution. This is above our long-term expectation for IP, which is 10 to 15% of revenue. With a strong IP result this quarter, we delivered gross margin of 63.7% above the high end of our guidance. This was up 292 basis points sequentially. Our IP gross margin generally hovers near 100%, and our product gross margin was 48.5% in Q4, down 495 basis points sequentially due to a sequential decline in our product engineering services, a high margin contributor to our product gross margin. Total operating expenses in the fourth quarter were $21.6 million at the low end of our guidance and up 50% year over year as we scaled the organization for growth. Now, I think it's important to note that this is considerably below our 90% year over year revenue growth. We expect to continue to deliver considerable leverage in the business. Our OPEX increase was driven by a 59% increase in R&D as we continue to invest in the resources to deliver leading solutions. Our SG&A, conversely, was up 40 percent as we built out public company infrastructure. We delivered net income of $2.8 million in Q4, an increase of $.4 million sequentially, and $5.1 million year over year. Cash flow from operations in the fourth quarter was $2.4 million, an increase of $.6 million sequentially, and $13.9 million year-over-year. CapEx was $9.6 million in the quarter, driven by production mask sets, and free cash flow was negative $7.3 million, an improvement of $3.7 million year-over-year. We ended the quarter with cash and equivalents of $259.3 million, an increase of $18.8 million over the third quarter. This increase in cash came from the net proceeds of a green shoe offering in connection with our successful IPO completed in January. Our accounts receivable balance increased 36% sequentially to $29.5 million. while day sales outstanding increased slightly to 72 days, up from 71 days in Q3. Our Q4 ending inventory was $27.3 million, up $1.2 million sequentially, as we continue our product ramp. Now, turning to guidance for the first quarter, we currently expect revenue in Q1 fiscal 23 to be between $43.5 million and $47.5 million, up 21 percent sequentially at the midpoint and 324 percent year-over-year. We expect Q1 gross margin to be within a range of 59 to 61 percent. We expect Q1 operating expenses to be between $21.5 million and $23.5 million. And finally, we expect Q1 weighted average diluted share count to be approximately 161 million shares. As Bill mentioned, we expect to achieve at least $200 million of revenue in fiscal 23. Coupling our strong growth and our fiscal discipline, we will continue to generate leverage in the business and expect to deliver a double-digit operating margin for the full year. And with that, I will open it up for questions. Thank you.
spk09: At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Once again, that's star one for questions. Our first question will come from the line of Tushiya Hari from Goldman Sachs. Your line is open.
spk01: Hi, good afternoon. Thank you so much for taking the question. I had two, if I may. First one, Bill, just on kind of the supply dynamic, curious how significant or how meaningful the hit was to revenue in the April quarter. And if you can kind of share with us how your partner is doing today, again, from a supply or operations perspective, that would be helpful. And will you be caught up from a supply perspective exiting this quarter? I've got a quick follow-up. Thank you.
spk02: Sure. I appreciate the question. So let me give some color. If we look at the disruption we had, it really began in the first half of April and And we were back up in production by the end of April, or the last week in April. The reason we did the 8K was because we were trying to be as transparent as possible with investors. Being a Newly Public Company with significant interest from many investors, we were actually having many investor meetings the same week we received the news on the mandate from our supply chain partner. So we were trying to lean towards being as transparent as possible. And so we managed to make the low end of our guidance for the quarter, and we're happy about that. We've been in a growth mode across all of our products and IP, and so we were still able to perform very well in the quarter, even given the impact that we had from the production shortfall in April. To answer your question about going forward, we expect to make it up in Q1. Sorry, yeah, in Q1.
spk01: Got it. And then as my follow-up, you talked about a fiscal year 23 revenue outlook of at least $200 million, or I think, Bill, you said up 88%. I was hoping you could give a little bit more color or differentiate between your product business and your IP business and More importantly, within your product business, I'm guessing the vast majority of that growth is going to be coming from AEC. But how are you thinking about, you know, line card 5s, optical DSPs? And then within AEC, if you can kind of differentiate between your largest customer and your second largest customer, that would be super helpful. Thank you.
spk02: Sure. So, again, I appreciate the question. Okay. You know, the way that the growth is going to break down, I think it's going to be consistent in a sense that we see growth across all of our businesses. If I were to, you know, kind of summarize by product line, I think, you know, line card will be very steady growth as we've seen over the last several years. AEC will, I think, make up the majority of the absolute growth. But if we look at from a percentage growth standpoint, I think Optical will be growing the fastest from a percentage standpoint, although it's from a smaller base. From an IP perspective, you know, Dan's given guidance that we expect, you know, long-term to be on the order of 10% to 15%. We think for the year that we will probably exceed that expectation. And so hopefully that gives you an idea about, you know, the growth that we see in the upcoming year.
spk01: And, Bill, sorry, within AEC, your largest customer and the second customer, which you expect to ramp in fiscal 23, should we expect – the majority of the growth still come from your largest customer? Could your number two customer be as impactful in fiscal 23?
spk02: Well, as far as the second hyperscaler that we're working with, we expect the ramp to begin in fiscal 23. And so with that said, you know, it's sometimes hard to pinpoint exactly when the ramp is going to happen because there's, you know, tremendous complexities around the exact deployment schedule of our end customers. We'll be ready to ramp in the first half of our fiscal year, but we're kind of giving guidance that, you know, that says that, you know, the ramp will probably happen, the initial ramp will happen towards the end of the year. And so to answer your question more directly, we don't think it's going to be a – you know, a huge amount of revenue coming within FY23 from that second hyperscaler. We would expect to have very high growth in the following year.
spk09: Thank you. Our next question comes from the line of Vivek Arya from Bank of America. Your line is open.
spk04: Thanks for taking my question. I actually had a question on the Q1 outlook and then for fiscal 23. So when I look at your Q1 outlook, right, and assume, you know, let's say 80% is going to come from product and 20% from, you know, IP or so, that's just a very strong sequential growth in your product segment. So I just wanted to make sure you have the inventory to support that kind of product ramp. I imagine part of it is just the swing from the prior quarter that you were not able to deliver. So just kind of the confidence and the support to deliver on this kind of sequential product ramp going into Q1.
spk07: Yeah, thanks, Vivek. That's a great question. Let me address that. So you're exactly correct in terms of there was some catch-up from the delays that we experienced in Q4, and We are – our factory in Kunshan is back up and running, so we expect to fulfill the demand, the gap that we had the previous quarter. And from an inventory standpoint, also bear in mind that, as Bill mentioned, we are experiencing strength across our entire product line, and we have been building inventory across our entire product line, and you can see that in our balance sheet in Q4 as well. So we are highly confident that we can achieve what we've set out to achieve in Q1.
spk04: All right. And then on fiscal 23, Bill, you gave this very strong outlook of $200 million plus. Can you give us a sense of backlog to support that view? You know, just given a lot of the macro concerns about spending slowdowns and whatnot, I understand that, you know, a lot of your growth is very company-specific and product cycles. but it's still a very strong outlook for next year. So maybe a sense of backlog. And, you know, part B of that is how are you thinking, Dan, about the gross margins that can go with the mix that you have in mind for next year?
spk02: Yeah, thanks for the question. So I think that, you know, let me first comment on the fact that The unprecedented tightness in the supply chain has really caused a change in behavior and demand planning with our customers, and it's caused a demand planning change for us as well. So it's how we work with our supply chain partners, and it's how our customers work with us. And so many of the customers are going to great measures to ensure the flow of product over the next year, you know, out 52 weeks. You know, and so... it's hard to put a label on exactly how that firm demand comes. So there is backlog. There is binding forecasts and other forms of commitment. Generally speaking, I think as we look out through the next year, I think we feel comfortable that we're close with our key customers. And I feel like there is confidence as we come into the year that You know, that demand look that we're getting is a consistent 52-week look, and it's rolling every single month. So I feel like as we head into the year now, I do feel confident with the end demand from our customers.
spk07: And, Vivek, let me address your gross margin question. The first thing to bear in mind is, as we've discussed previously, our IP revenue can vary quarter to quarter. So that does have an impact on our quarter-to-quarter gross margin percentage, obviously. But in terms of our margin expansion opportunities over the course of time, especially in the long term, everything is exactly as we had expected it to be over the last few quarters as we've been discussing with you. So what that really means is in FY23, you know, there is a relatively large mix of products that we have. but margins will continue to expand for our products as we continue to achieve scale. And then beyond that, actually kind of going beyond fiscal 23 even, we believe these market fundamentals are out there that will enable margin expansion, specifically with our AEC product line. As Bill mentioned, we believe DAC is dead at 800 gig ports. But the other thing in FY23 and 24 is our product mix will be shifting a bit where optical will become a significant contributor in 23 and then even more so in 24. That obviously has an impact on margin expansion opportunities as well. But let me just reiterate, from a long-term perspective, our total corporate gross margin expectation still remains 63 to 65 percent. And as Bill just mentioned a moment ago, our IP will make up 10 to 15 percent of that revenue mix. So if you were to isolate on product margins, You know, you can back solve that. It's around 60% of the product margin itself, you know, excluding IP. So hopefully that gives you some color on our margin expectations.
spk09: Thank you. Our next question will come from the line of Tor Sandberg from Stifel. Your line is open.
spk08: Yes, congratulations on the continuous strong execution. Bill, you talked about a third program ramping with your largest customer for AAC here in fiscal 23. Could you just elaborate a little bit more on the magnitude of that third program? I mean, obviously, you can't discuss too much, but, you know, any metric that you could perhaps share with us just so we understand the magnitude of the third program versus the previous two?
spk02: Sure. Sure. So let me first, you know, give some color on the first two programs. The first two programs were both NIC to TOR AECs. The first was a 50 gig AEC solution that was two lanes of 25. The second one was a next generation 100 gig or four lanes of 25 NIC to TOR solution. And so I can't provide too many details about this third program, but it's in the same NIC to TOR space. And it does have the potential to be significant. although we don't have details on the specifics related to the volume expectations. But from our perspective, we think that this can be the third significant program that we've engaged on.
spk08: That's fair. And as my follow-up, could you also elaborate a little bit on the diversification strategy of your supply chain? Obviously, you were impacted by the China lockdown this quarter. But help us understand a little bit, you know, how difficult is it to diversify? You know, how long will it take? You know, just so we can get a sense for how quickly you can have multiple suppliers, you know, to alleviate the current issues.
spk02: Sure. Sure. You know, it's a great question. And since April, it's become, you know, kind of top of mind for us. There's really, you know, two different approaches here. One is a mid- to long-term approach, which is to gain geographic diversity. You know, we've got, you know, a very large volume established, a very large volume capability established in Kuchon with the supply partners that we've got there. Both of these supply partners are large global corporations. But generally speaking, as we think about, you know, becoming more geographically diverse in You know, we're now, you know, kind of actively looking at different locations globally and the kind of timeframe that it would, you know, really be for us to bring up production in a significant way. One of the challenges that, you know, we're faced with is that, you know, we're still in the very early stages of RAMP, and so we've had, you know, a relatively large investment with our partners with the current locations. So this would be in addition to that. In any case, we don't expect that in the near term we're going to be able to establish this geographic diversity. And that's why we've talked about judiciously building inventory. We expect in this quarter that we'll establish a significant buffer of inventory so that we have future impacts that are force majeure type of impacts that we'll be able to navigate it much more smoothly than we did in April. And so that's, you know, that is, you know, really something that we've decided to do because of the strength of the forecast and the backlog and the binding forecast commitments that we've got. We feel comfortable with making that investment. So really a short term is, you know, let's address it by, you know, building some inventory in a smart way. And then long term, of course, you'll see us, you know, bring up production outside of Kunshan.
spk08: That's a great perspective. Congrats again. Thank you.
spk09: Thank you. Our next question will come from Quinn Bolton from Needham. Your line is open.
spk10: Thanks, guys, and congratulations on the results and outlook. I wanted to follow up on Tori's question just sort of around the current supply chain in Kunshan. You mentioned the suppliers, I think, are now back up and running, but we've heard stories that many factories may only be at 50% of labor, you know, labor staff given, you know, the effects of the lockdowns. Is your supplier backup sort of running full steam and, you know, are both suppliers providing you with AECs in the first quarter?
spk02: I can say that the feedback that you're getting from your, you know, from your contacts is accurate, that coming back, there's really phases towards coming back. And the first phase is basically reestablishing production with a smaller group of employees that were maintained at the facility. And so our partners are now hiring again and increasing capacity. We're not quite back to the full capacity where we have been running. But I think in the next couple of weeks or next few weeks, we're on a good path to achieve, you know, what we consider full capacity at this point. And so, yes, you know, both of our partners will be back up and shipping.
spk10: Great. The second question is you mentioned sampling the 800 gig AECs to multiple vendors. Just wondering, it sounds like 800 gig modules may be starting to be deployed soon. for sort of AI cluster applications. Wondering if you could give us some sense, when do you think you've missed the 800 gig AECs going into volume productions, whether it's AI clusters or whether it's the distributed disaggregated chassis application?
spk02: Yes, great question. And, you know, I'll start by saying that, you know, we do see a lot of 100 gigabits per second per lane silicon applications. 800 gig for switches, 400 gig for four lanes of 100 for high-end servers, we see a lot of silicon that is sampling and in development with leading hyperscalers and switch OEMs. And so we're seeing a lot of activity right now on 100 gig per lane AECs, really as a result of our solution being readily available. And customers need to source some form of 800 gig connectivity solution for their development. And so from a timing standpoint on deployment, this is a really hard one for us to have a great opinion on. We'd like to see it sooner than later, as everybody in the industry would. But in reality, we think that it's going to be probably in the you know, 12 to 18-month timeframe from now before we see it in volume. Great. Thank you. I will say that, you know, again, we'll be ready for production, I think, far in advance of when actual production deployments begin. So I think we're in great position. And we think, you know, just to reiterate, at 800 gig or 100 gigabits per second per lane, we see across the board that we don't see any customers that are really trying to make DACs work. And so now it's really a function of deploying with AECs for short connections and deploying with optical solutions for longer solutions. So we think that that's more and more firming up as we kind of move through the last several months.
spk09: Thank you. As a reminder, it's star one for questions. Our next question will come from Vijay Rakesh from Mizuho. Your line is open.
spk03: Yeah, hi, Bill and Dan. Great quadrant guide. Just a quick question on the mix of revenues on the product side. When you look at the 4Q and 1Q, if you can use the split of AEC versus optical and line card.
spk07: Yeah, thanks, Vijay. So we don't, unfortunately, we don't disclose specifics when it comes to our product line mix. But from a long-term perspective, the expectations that we've set out where we're trending toward those amounts, which, you know, longer term, we would expect AEC to be nearly half of our revenue. Again, IP. Right now, we're not quite at the long-term model, of course, so we're slightly above the 10 to 15 percent. And then the line card business has been a very, very strong business for us, and it continues its strength and is growing. Longer term, it'll probably be in the 15 percent range. And then the balance, you know, optical will be a significant contributor this year, especially towards the end of the year, and then even more so next year. So hopefully that gives you just kind of broad strokes the direction that we're headed.
spk03: Got it. And on the AEC side, I know you guys have a pretty broad portfolio of Maxic and PhaseShift and SpeedShift and Nictator, et cetera. I'm just wondering, when you look at the competitive landscape, given your broad breadth of portfolio and you're qualified at many of the enterprise hyperscale guys, What is the competitive mode? I mean, you guys think you have a 12 to 24 month or even longer lead time when you look at the competition who I would say most of them are still trying to get their product in place, but if you can give some color around how you look at that space.
spk02: Yeah, great question. I think that, you know, first of all, I'll say that, you know, we're very happy that... you know, we see competitors validating the AEC product category. We feel like we do have a significant lead in a sense that we've been working on this product category for, you know, going on four years. The approach that we've taken, I think, is unique in a sense that we have built an organization internally at Credo that's responsible for the design, the development, and ultimately the delivery of the AEC system solutions. That means that at the end of the day, we're responsible for the entire ADC system solution. We're the single throat that choke, in a sense, when we're dealing with customers. Our manufacturing partners do a great job in what they do well. We had started by thinking that we could – sell chips to copper-cabled companies, and it just simply was very clear very quickly that our approach is going to be more effective if we own the entire system design from the firmware to the hose from the firmware on the copper, you know, to the test program development, to the actual tester design and development. We felt that that was, you know, a... you know, a much stronger approach than trying to rely on others to put all of this together. So I do think that as we look at our business now, it's really taken shape in a sense that it's different than, you know, our original thinking, which was, hey, we'll just put together, you know, a 400 gig on each end of the cable, 400 gig connector on each end of the cable. The solutions we're delivering in volume right now are unique. You know, these are truly system-level solutions. solutions that are, you know, I think could be classified as the most advanced connectivity solution, cable connectivity solution ever delivered to the data center. If you think about what we're shipping currently to our first hyperscaler, they were successful in deploying a dual Tor architecture in a single rack because the intelligence in our cable, we've got the ability to sense when the Tor port is failing, our cable makes the decisions to switch the data flow to the second port. So this is a level of intelligence in the cable that has never been delivered as a DAC, never been delivered as an AOC or other optical connection. And so this is the direction that our business has taken as a result of us owning and really building the capability internally. I can tell you that the second solution that we're developing is also very unique. It's not just a straight cable. And so we expect, you know, that more and more innovation will be requested by our customer base as they see this is now a category where they can think about system solutions that they haven't even thought of before. There will be business, especially in the switching and routing layer, that is, you know, leading edge 800 gig ports. where you have 800 gig connectors on each end of the cable, that's going to be a robust business as well. But generally, we think that the approach we took is paying off right now, as you see us taking off as a clear leader in the space. But I will say that, you know, having competition is always a great thing. So, you know, we appreciate that multiple people are now investing and that it seems that the market is accepting. AEC is really a de facto solution for short connections, meaning three meters and less.
spk03: Yeah. No, got it. I know you guys have talked about maxi cables and others. The other question I had was, given that you guys are at that N-1 node on the so the chip side, does that, uh, allow you, uh, more, uh, you know, capacity at the foundry side, given that you're not competing for the leading edge. I know you kind of guys is all the cable side of the supply chain, but on a chip side, is it fair to assume that the capacity is, uh, is you're able to negotiate better capacity there?
spk02: Yeah, absolutely. So you're, you're, you're right on with that. And so the, the, um, The strategy that we've taken with our process choices is really based on the fact that connectivity solutions are a primary decision for us. We're not being driven to advanced processes due to memory or large amounts of logic. And so we can choose a process that's the most suitable for our design. And so we've always had this mentality, if we can use a more mature process and achieve, you know, best-in-class power, best-in-class performance, and best-in-class price size, of course that's the approach we're going to take because we can, you know, in turn, you know, become the disruptor in the market. That strategy has turned into a supply chain advantage for us. Because we are in an N-1, you know, 12 nanometer is really our workhorse. We've, you know, had a lot of success. We've really never been limited from a capacity standpoint. And I will say on top of that, if you, you know, look at our die sizes, we, you know, our demand for wafers is less because our die sizes are smaller. And so it's turned into a big advantage from a supply perspective as well. And that really wasn't intended when, you know, when we made the decision. But it sure is a strength that we've got going into this year.
spk09: Thank you. And our next question was from Suji De Silva from Roth Capital. Your line is open.
spk05: Hi, Bill. Hi, Dan. Congratulations on the execution here. A question on AEC and then a bigger picture question. On AEC, the customer going from one to three wins, can you give a sense how big that denominator is, how many opportunities there are to a given customer like this? And then are those sole sourced or are they dual sourced? Just remind us that. Thanks.
spk02: Yeah, I think that, you know, we view every hyperscaler as kind of an independent market. We also view that, you know, the work that they're doing, you know, at a NIC to TOR level as well as the work that they're doing in the switching and routing layers. We view all these things as, you know, kind of separate markets as it relates to a given hyperscaler. We view that the opportunities that we'll see for AECs for the NIC to TOR space within each one of, you know, these hyperscalers there will be an AEC opportunity for every server deployed. As we look at the switching and routing layer, there's different strategies, different deployment strategies, different port speed strategies that we see. No hyperscaler is the same as another. And so we think that AEC is a unique solution because it puts us in the architectural discussion, you know, with the hyperscalers we're engaged with. And long term, I expect all of the hyperscalers. And so I can't, I don't think there's any nice bow that I can put on it other than to say that we believe that the opportunity is going to be, you know, it's going to track the server shipments and it's going to be based on, at the switching and routing layer, based on architectural decisions on disaggregation versus chassis. Okay.
spk05: And Bill, are those sole sourced? Just to follow up there.
spk02: You know, I think that where we may be sole source today, we expect long-term that we'll be in a dual source environment. And that's really driven by, you know, the desires that, you know, that hyperscalers have. They live in a world where dual sourcing is an absolute requirement. So we expect that we're going to be living in that world for sure. We may be sole source for some period of time. And, you know, we're in a mode of, If we can be the partner that moves quickly and delivers successfully, we'll maintain a large market share.
spk05: Okay. Another follow-up to the big picture, giving we're able to guide ahead for fiscal 23 and the visibility you have. I'm curious, you know, various cloud vendors, you know, have seen kind of buy and pause cycles, maybe the processor guys. Can you tell me if it feels like you're more immune to that sort of cycle or whether that could be a factor in your forward visibility, any colors that would be helpful.
spk02: I don't think that we would ever say that we're immune to the cycles that we've seen in the past. I will say that we've got discussions ongoing with our customers that are really discussions where we're trying to outline the at going out 52 weeks, very specific demand and very specific commitments so that we can go and source and build to those schedules. So I feel comfortable. Even with that, we do apply some conservatism. And so I do feel confident as we go into the year with the demand outlook that we've got But I will never say that we're going to be immune to big changes if unforeseen things are possibly coming. I will say also that the deployments that we're on right now are adding significant efficiency improvements. And so if we look at deploying a dual-tour server rack, That's opposed to deploying two racks side by side. So there's an enormous savings in cost and enormous savings in power. And there is the opportunity to have better equipment utilization. And so I will say that even with unforeseen things, this is the type of investment that we think that customers will continue to make because the benefit is just so compelling. And that's why it has been a strategic imperative for our first customer as they've ramped.
spk05: Okay, thanks, Bill. Appreciate all the color. Thanks, guys.
spk09: Thank you. If there are no further questions at this time, Bill, I'll turn the call over to you.
spk02: Great. Well, let me thank you all for attending the call. I really appreciate the great questions, and I also appreciate the strong interest that you've gotten, Credio. So we'll look forward to talking with you in the future. Thank you very much.
spk09: This concludes today's conference call. You may now disconnect. Everyone have a great day.
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