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spk01: Ladies and gentlemen, thank you for standing by. At this time, all participants are on a listen-only mode. Later, we'll conduct a question and answer session. At that time, if you have a question, please press the star button 1 on your touchstone telephone. I will now turn the conference over to your host, Mr. Dan O'Neill. Please go ahead, sir.
spk09: Good afternoon, and thank you all for joining us today for our fiscal 2023 first quarter ending 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 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'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. 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, 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 both can be accessed using the investor relations portion of our website. With that, I'll now turn the call over to our CEO. Bill?
spk02: Thank you, Dan. Good afternoon, and thank you to everybody for joining the call. During this call, I'll review our fiscal Q1 results and then share why we continue to be excited about our progress and our plans moving forward. When I conclude, Dan Fleming, our Chief Financial Officer, will provide a detailed review of our financial results and expectations moving forward. Credo's mission is to deliver high-speed connectivity solutions to break bandwidth barriers on every wired connection in the data infrastructure market. We provide innovative, secure, high-speed solutions that deliver improved power efficiency and cost as data rates and bandwidth requirements increase exponentially. Our connectivity solutions are optimized for both electrical and optical Ethernet applications, including the 100 gigabits per second, 200 gig, 400 gig, and 800 gig port markets. All our products are built with our proprietary CERTIs and DSP technologies. Our product families include integrated circuits, or ICs, active electrical cables, or AECs, and SERDES chiplets. Our intellectual property, or IP solutions, consist primarily of SERDES IP licensing. I'm happy to report that in the July quarter, we continued our strong execution, achieving $46.5 million in revenue, an increase from $37.5 million from the last quarter, up 24% sequentially. Our product revenue, which is a key indicator we track closely, was up 37% sequentially, showing the strong progress we're making ramping our AEC products. I would like to now provide an update on our product and SERTI's IP licensing businesses. Starting with an update on active electrical cables, our AEC solutions represent a new high-speed connectivity product category that Credo pioneered. As connection speeds increase, passive copper cables or DACs become obsolete due to severe signal integrity and size challenges. Optical connections, or AOCs, have prohibitive challenges with power and cost. AECs offer compelling in-rack solutions, achieving half the power, half the cost, with better reliability and a more rugged physical design than AOCs. We continue to gain traction due to our engineering ingenuity and customer-first mindset. To date, we've sold ADCs to more than 30 customers, including solutions for 50 gig, 100 gig, 200 gig, 400 gig, and 800 gig ports. Our target customers include data centers, 5G carriers, networking OEMs and ODMs, as well as others in the Ethernet ecosystem. During Q1, we continued to ramp the first two programs at our first major data center customer. We also had our first revenue shipments to that same customer on a third next-generation program. With regards to our second major data center customer, we continue to make progress, shipping the first pre-production AEC units for qualification prior to their ramp. We remain encouraged by our prospects at this customer given the innovative nature of our AEC solution, and we continue to expect the initial ramp of this customer to happen towards the end of this fiscal year. I'm pleased to share that we've fully recovered from the supply chain shortfall caused by the COVID shutdowns in China last quarter, successfully meeting demand in Q1 while building a buffer inventory that will help to minimize the impact of any supply or manufacturing disruptions in the future. We continue to invest aggressively in our next generation 800 gig ports AEC solutions with our leading 100 gig per lane service technology. We've been working closely with our AEC customers to meet their future needs with innovative solutions to address opportunities for both the server rack and the disaggregated switch rack applications. To this end, We've delivered and verified 800 gig port AEC solutions to multiple data center customers, multiple networking OEMs, as well as additional ecosystem partners. Now, turning to our optical solutions. In this market, we work closely with both optical module manufacturers and data center customers to deliver disruptive solutions for optical DSPs, laser drivers, and TIAs. We are in production with two data center customers through numerous optical module manufacturers in a joint development model, or JDM, where our data center customers specify the key components to be used in their optical modules, such as a Credo optical DSP. We're also engaged with several optical manufacturers across various applications, including 100 gig, 200 gig, and 400 gig Ethernet solutions, and beyond the data center, including PON, 5G, and Fiber Channel. Notably, during Q1, we began production with a leading networking OEM for a 64-gig fiber channel optical module. We recently announced our optical DSP with integrated laser driver solutions for next generation 800-gig and 400-gig optical modules with 100-gig per lane CERDIs technology. Credo is now in a strong position to continue to deliver the same disruptive advantages on the combination of performance, power efficiency, and cost for these next generation 100 gig per lane deployments. With this strong progress, we continue to expect our optical solutions will contribute significantly to our growth in the future. And moving to our line card PHYs, we are very pleased with our progress here as well. Credo has quickly become a leader in MACsec solutions that provide data encryption for the growing number of applications requiring high security. We're happy to report that we are now ramping production directly with a second major data center customer deploying our 400 gig port MACsec solution. We see the market trend towards high security applications growing significantly in the future, and we remain bullish on this business. we continue to make strong progress with our Blackhawk 400 gig port re-timer solution as well. Numerous networking OEM and ODM customers are currently transitioning from qualification to mass production. As the market trends toward higher speeds, we will continue to see increasing demand for re-timer and gearbox solutions. Given the signal integrity challenges at 100 gig per lane, Credo is well positioned on our next generation 800 gig line curve five solutions driven by the same theme of delivering disruptive performance, power efficiency, and cost. Earlier this year, we announced our first-generation 800-gig port line card solutions, and I'm happy to say that Credo has already been adopted by several customers as they develop their next-generation 100-gig per lane platforms. Finally, we had another strong quarter with our Certis IP licensing and Certis chiplet business. This market is very strategic for us, and we had a strong revenue contribution in the quarter, Since our last earnings call, we made two significant announcements on our SERDES IP offerings. We announced the industry's first 40-gig PAM3 SERDES IP, which will be important for next-generation consumer designs. This SERDES IP is leveraged from the work we've done with our lead consumer partner, making our IP a clear choice for next-generation consumer designs. We also recently announced availability of our 112 gig CERTIs IP in TSMC's 5 and 4 nanometer processes. We believe we've set a new industry benchmark for lowest power across a broad range of reach requirements, delivering a comprehensive family of options that span from longest reach LR plus links with more than 40 dB loss to the short XSR links required in multi-chip module SOC designs. Credo is unique compared to other SERDES IP providers in that Credo will develop and deploy this same IP in our next generation 5 and 4 nanometer products for our AEC, optical DSP, and line card buy solutions. This becomes a great benefit to our IP licensing partners since Credo is walking the walk on product deployments right in step with our SERDES IP customer deployments. I will also say that we expect to again deliver the best power and performance combination for all our IP and product solutions in 5 and 4 nanometer. In the past, we've talked about Credo's core advantage of using more mature and less expensive process technology while delivering lower power and smaller die sizes than our competition. We refer to this as an N-1 process advantage. We believe we've extended this N-1 process advantage to 5 and 4 nanometer. and that our competition will need to move to more advanced and expensive processes to be competitive with Credo. Regarding our SERDES chiplet efforts, we were honored to be mentioned by Tesla at TSMC's Technology Symposium in June as their key connectivity partner for their leading edge Dojo supercomputer design, where Credo provided their 112 gig XSR SERDES IP and their 3.2 terabit per second chiplets. Also notable, we recently became a UCIE contributing member, building on the market momentum for our industry-leading XSR30s IP and our two 3.2 terabits per second production chiplets. In summary, we continue to be excited about our progress as we deepen relationships with current customers and as we receive commitments from new customers. We're also encouraged by the prospects of our next generation 100 gig per lane solutions based on strong customer feedback and engagement. Near term, we remain focused on delivering strong results in our fiscal 23 as we continue to expect to achieve at least $200 million in revenue, which would represent an annual growth of more than 88%. Now, I'll turn the call over to our CFO, Dan Fleming, to provide more details on our first quarter and to give guidance on Q2.
spk12: Thank you, Bill, and good afternoon. I will first review our Q1 fiscal 23 results and then discuss our outlook for Q2 of fiscal 23. As a reminder, the following financials will be discussed on a non-GAAP basis, unless otherwise noted. I'm pleased to share with you that in Q1, we achieved another quarter of record revenue at $46.5 million, above the midpoint of our guidance range and up 24% sequentially. Sequential growth was driven by strong revenue growth of our products, which also reached a record of $36.1 million for the quarter, up 37% sequentially. This growth in product revenue was led by a continued wave of AEC adoption that will continue to transition our revenue mix from being IP-focused to product-focused. The fundamental driver of our product growth, a strong HSDC expansion outlook, at the highest speeds remains in place in the face of an uncertain economic and geopolitical landscape. Our IP business generated $10.4 million of revenue in Q1. IP remains 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 vary in any given quarter over time, our revenue mix in Q1 was 22% IP, above our long-term expectation for IP, which is 10 to 15% of revenue. With a strong product result this quarter, we delivered gross margin of 60.5% above the midpoint of our guidance. This was down 316 basis points sequentially, driven principally by revenue mix changes. Our IP gross margin was 91.2% in Q1, and our product gross margin was 51.8% in the quarter, up 326 basis points sequentially and up 11.6 percentage points year over year. This product gross margin expansion is principally due to leverage from our strong product growth. Total operating expenses in the quarter were $22.6 million at the midpoint of our guidance. and up 43% year-over-year as we scaled the organization for growth. We expect to continue to deliver considerable leverage in the business. Our OPEX increase was driven by a 50% year-over-year increase in R&D as we continue to invest in the resources to deliver innovative solutions. Our SG&A was up 33% year-over-year as we continue to build out public company infrastructure. We delivered operating income of $5.7 million in Q1, up 138% sequentially. Our operating margin was 12.2% in the quarter, up 584 basis points quarter over quarter, as we continued to gain operating leverage. We delivered net income of $5.4 million in Q1, up 96% sequentially. Cash flow from operations in the first quarter was negative $12.2 million, a decrease of $14.6 million sequentially, as a large receivable of $11.5 million came in the week after our quarter ended. CapEx was $5.3 million in the quarter, driven by production mask spending, and free cash flow was negative $17.5 million, a decrease of $7.2 million year over year. We ended the quarter with cash in equivalence of $243.8 million, a decrease of $15.5 million from the fourth quarter. This decrease in cash was a result of continued working capital investments to support our top line revenue growth. Our accounts receivable balance increased 86% sequentially to $54.8 million, while day sales outstanding increased to 107 days, up from 72 days in Q4. Our Q1 ending inventory was $37 million, up $9.7 million sequentially as we continue our product ramp while successfully building AEC buffer inventory to minimize the impact of any manufacturing disruptions in the future. Now, turning to our guidance for the second quarter, We currently expect revenue in Q2 fiscal 23 to be between $48.5 million and $52.5 million, up 9% sequentially at the midpoint and 91% year over year. We expect Q2 gross margin to be within a range of 59% to 61%. We expect Q2 operating expenses to be between $23.5 million and $25.5 million. And finally, we expect Q2 weighted average diluted share count to be approximately 159 million shares. As Bill mentioned, we remain on track to achieve at least $200 million of revenue in fiscal year 23. And coupling our strong growth with 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'll open it up for questions. Thank you.
spk01: At this time, I'd like to remind everyone, in order to ask a question, please press star 1-1 on your telephone keypad. We'll pause for just a moment to compile a Q&A. Rasa? Your first question comes from Vivek Araya of Bank of America. Your line is open.
spk03: The fiscal year. Bill, I'm curious, how are you thinking about the mix between AAC, optical, you know, line card files, and IP? now versus what you thought three or six months ago? How has that mix evolved? And have you seen any headwinds or pushbacks at all from a macro perspective that a number of your larger peers have pointed to in their recent earnings calls?
spk02: Thanks for the question. Appreciate that. From the mixed perspective, I think we're right on track with what we expected six to nine months ago. Of course, we've quickly seen our AEC business turn into our largest from a revenue standpoint. Line card follows, and then optical is going to be next. Long-term, we expect that our revenue mix will really match the market TAM in a sense that long-term, we expect AEC to be our largest product business, followed by optical, and then followed by line card. So really no changes there. And then on a macro level, I think we're in a very good position generally. If you look at our engagements with our customers, they're all really on the leading edge for new technology deployments that really deliver the necessary next generation bandwidth that is really forefront in their requirements. you know, if decisions are made by our customers to slow the quantity and rate of deployments, we still see large and ramping volumes for the programs that we're on. So I would say that we're not seeing the same kind of macro level impact to our business, just given our positioning.
spk03: All right. And for my follow-up, Bill, on the topic of AEC and your lead customer, I'm curious, which innings of adoption do you think your product is in? If you look at the total number of high-speed ports being deployed at your large customer and you look at the adoption of your AEC, where are we in that adoption phase? Because I'm trying to determine whether we should be expecting a digestion phase or is it too early in the ramp to expect any kind of digestion phase? Just where are you in the adoption process at your largest customer?
spk02: Sure. Sure, again, thanks for the question. I would say that we're in the middle innings of the first initial ramp. So it's reflected in the fact that we grew so significantly this quarter. And our expectation is that ramp will really continue through the next quarters.
spk03: Do you expect it to grow next year as well?
spk02: Well, generally speaking, the opportunity that we've got really matches the number of servers that are deployed at each one of our hyperscale customers. And so I would say that also we're engaged in multiple programs as they change technology for their network interface card or NICs at the server level. And so ultimately, I believe that the ramp that we've got with our first customer will continue. It's hard for me to say from a volume standpoint, will the volumes continue to increase after we're fully ramped? But then we expect to add more customers to our mix that will be significant in the fiscal 24 timeframe. Thank you.
spk01: Thank you. Our next question comes from Tashia Hari of Goldman Sachs. Your line is open.
spk06: Thank you so much for taking the question. I had two questions as well, one for Bill and one for Dan. I guess in terms of your optical solutions business, Bill, I think you did a great job in talking about your customer engagements qualitatively. I was hoping you could give perhaps some guidance on the quantitative front. You talked about it being a big growth contributor over the next couple of years. How should we think about fiscal 24 and beyond for optical solutions?
spk02: Well, I think the progress that we're making is, I think, very strong. I think we're right on track with where we expect it to be. I would say that the base that we're growing from is small, so we believe that this is going to be the fastest growth from a percentage perspective out of the different products that we're promoting. I will say that there is some surprising trends in the end markets where we see that the 200 gig optical module is much, much higher volume than the forecasters showed going back two or three years ago. 400, we see, is something that's really still increasing, where it was really a small percentage of the market up until the first major hyperscaler rounds. But we see others adopting 400. 800 gig, we see it will not be adopted by every hyperscaler in the market, as some look towards the next generation 1.6T. So in general, we look at every hyperscaler as an independent market, and that's really, you know, how we're pursuing the different opportunities. So we've got many irons in the fire across the industry on many different, you know, port markets, really from, you know, from 100 gig through 800 gig, and even we have, you know, early conversations going on about 1.6T. Got it.
spk06: So just as a follow-up, Bill, is it fair to assume that, you know, some of the commentary that you provided at the time of your IPO still stand today? You're on track to hit kind of the medium to long-term numbers in optical DSP?
spk02: Yes, we believe we're on track.
spk06: Okay, got it. And then as my second question for Dan, you know, product gross margins were up nicely both sequentially and year over year in the quarter. As we think about the next, you know, couple if not several quarters, you know, as you continue to ramp at your largest AEC customer, your second customer comes in, you know, toward the end of the fiscal year. And, you know, from a low base, your DSP business starts to ramp. How should we think about your product gross margins evolving over the next, you know, call it four quarters? Thank you.
spk12: Yeah, thanks. That's a great question. And if you recall, as we had laid out our gross margin kind of trajectory through our discussions over the last quarters, fundamentally nothing has really changed. A couple of things to point out, obviously, just as you're highlighting, Our product gross margin expanded more than 300 basis points from Q4 to Q1. And we've demonstrated throughout all of fiscal year 22 and now starting into fiscal 23 that these product gross margins will expand as we gain scale. So we expect that expansion to continue fundamentally just because of the scale we're attaining over the next three to four quarters. Beyond that, The fiscal year 24 and fiscal year 25 stories are similar to what we had described before. There will be, we believe, some favorable revenue mix trends over those years that will help further increase that or further expand that gross margin. And some of the dynamics in the AEC market will also contribute to that margin expansion when 800 gig ports are kind of the predominant port. So there's a lot of different trends that we've seen that we've described in the past that we believe we expect to see as we've described in the past.
spk06: Very helpful. Thank you.
spk01: Thank you. Our next question comes from Vijay Rasheek of Mizuho Yolanda's Open. Please make sure your phone isn't on mute.
spk04: Thanks for that. Hey, Bill and Dan, just on the 64 gig optical transceiver side, I mean, how many customers would you be engaging with? Are you seeing basically the ramp going with multiple customers, or are you starting with one and then slowly ramping other ones into physical 24, 25?
spk02: Good question. And so our main partner is a large networking OEM. We are shipping these optical DSPs these 64 gigs single lane to multiple optical partners that are fulfilling that demand that comes from the networking OEM that we're working with got it and on the on the supply side I know you guys have been building a buffer inventory etc but can you talk to how
spk04: how you have probably improved your supply chain logistics, et cetera. I saw inventory is up a little bit, but can you talk to what you're doing there in terms of securing your forecast and securing the supply side as well, giving that customer supply assurance at least?
spk02: Sure, sure. Yeah, that's a very good question. I would say from a supply standpoint, we find ourselves in much better shape right now than we were in the past quarter when we had the issue with the shutdowns in China. And so there's different elements of our supply chain that we look at. Of course, we are actively planning wafers with TSMC, and that's a very regular discussion we have with them. We see no issues for the foreseeable future there. Packaging substrates are another very frequent conversation we're having with our partners. We feel very good about our position today with those supply chain partners as well. And then finally, with our AEC supply chain partners, we find ourselves in a much better position now. We did exactly what we said we were going to do on the last call from June 1st. To avoid any kind of near-term disruptions that are caused by COVID in China, we built an inventory, and that's why you see the inventory tick up. So we're not surprised. It's absolutely right on track with where we want it to be. Longer term, we mentioned also that we're going to be working towards having geographic diversity. It's going to take a long time, but we have made progress during the last quarter in starting and making progress with those discussions. So generally, I think we're in good shape from a supply chain partner perspective.
spk04: Thank you.
spk02: Generally, I think we're in good shape from a supply chain partner perspective.
spk04: Thank you.
spk01: Thank you. Our next question comes from Suji De Silva of Roth. Your line is open.
spk07: Maybe asking the cabling question a little differently for the customers that are going to ramp up. Should we expect pricing to trend similar to the initial customer or higher with more features? Just any indication there would be helpful along with the margin discussion you already gave us.
spk02: Sure. That's a good question. I would say that not every one of the AECs that we're building is similar. And so as we develop AECs that are built towards a different specification, there will be some variance in the ASPs. I would say right now with the current AECs that we're shipping, I think there is an opportunity for the ASPs to increase from that point. And it's really based on the type of AECs we'll be shipping as well as we move towards increasing speed. The first products that were shipping were really tethered to the passive cable market. And so there's a real perception that our AECs are a premium over these passive copper solutions. And so we've been a bit tethered, in a sense, when we're having the discussions when it relates to our 100 gig, our 200 gig, our 400 gig AECs. As we start looking at the future, 800 gig, DACs will not be in the, passive copper cables will not be in the conversation. And so this is really where, you know, the solutions that are alternatives to ours, we're going to be in a much, much better position from a pricing and power standpoint. And so, in a sense, we'll be untethered at that point, and we expect that ASPs will naturally rise as a result. So, you know, I would say that Near term, as we look at ramping our second customer and we look at fiscal 24 in particular, that because the cable that we're building is a much more complex cable, the SPs will be a bit higher. And so we'll see it trending up just based on the fact that we're shipping AECs that are more complex to build with a heavier cost content.
spk07: That's very helpful. Appreciate the detailed color there. And then maybe... Dan, on the 5 nanometer, 4 nanometer products coming, can you give us a sense of the timing of when the R&D and CapEx mass cost might come in and whether there would be a bump up there or whether that would be absorbed with the overall budget?
spk12: Yeah, much of that cost, of course, from a production asset perspective, becomes fixed assets for us. And so there will be a consumption of cash, but that's really FY24 and beyond. We've got engineering tape outs before that point in time, but they are not, you know, they're baked into our OPEX forecast, and they're not overly material from that perspective. Okay.
spk07: Thanks, guys.
spk01: Thank you. Our next question comes from Matt Ramsey of Cowan. Your line is open.
spk05: Josh Buckhalter on behalf of Matt. Thanks for taking my question and congrats on the results. I wanted to ask about your data center exposure. There have been some well-documented delays in CPU upgrade cycles that have IO upgrades to DDR5. Is there any line that we should be drawing between your exposure and upgrades at your customers to the CPU upgrades, or is it sort of irrelevant at this standpoint?
spk02: Good question. I would say for the first customer that we've ramped with and that we continue to ramp with, there's really nothing on that front. These are NICs with 25 gig per lane connectivity. As we look at the next generation, there's a series of upgrades that will, from a connectivity standpoint, is really the way we view it. They'll be moving to lanes of 50 gig per lane and then lanes of 100 gig per lane. And so, you know, we are a bit, you know, we're not going to ship AECs until these new NICs and servers are shipping. And so there is some dependence there, and that's why we can't be too specific with the timing of the ramp. It's really based on the best feedback that we're getting as our customers go through their next generation development and planning on their deployments.
spk05: Understood. Thank you. That's very helpful. And then I know you mentioned that the IP license revenue has been running higher than the target, 10 to 15%. How should we, I guess, square that away with the sort of the flat gross margin guidance? Should we expect licensing to remain elevated near term? I don't know how the Tesla Dojo supercomputer is layering in or if there's a consumer piece in there, but Or is it just, you know, licensing is expected down next quarter, but it's going to be made up for by improving product margins as you scale? Thanks, guys.
spk12: Yeah, let me address that. So great question. You know, IP, as Bill mentioned, is considered a very strategic part of our business. And one thing about the revenue recognition process when it comes to license revenue is it can vary quite a bit from quarter to quarter. So as you look at our quarter over quarter results, it's a little bit more challenging to figure out what that overall revenue mix is going to be. Whereas over a full fiscal year, we have a high degree of confidence in the overall revenue mix that we see. So from that standpoint, you see our IP revenue went from about 30% of revenue in our Q4 to 22% in Q1. Long term, we said it'll be 10% to 15%. So over the course of the next few years, we'll get to that range. But there's going to be some variability from quarter to quarter as we get there. Hopefully that's helpful.
spk05: That is. Thank you, guys. I'll hop back in the queue.
spk02: On our end, we're not hearing anything. There's some sort of difficulty.
spk01: Mr. Swabenberg, please make sure your phone isn't on mute.
spk08: Oh, yes, thank you. I didn't hear anything either, but I assume, yeah, this is Tori Swabenberg from CFO. So I had a question on sort of your revenue mix. Obviously, you have a lot of greenfield opportunities and you've got new businesses ramping, but we are obviously hearing selectively about, you know, some softness here and there, even on the data infrastructure side of things. So could you quantify it for us, you know, how much of your business may be subject to, you know, softness on the data infrastructure side?
spk02: Sure. It's a good question. The, you know, if we look at our end customer for Ethernet products, it's really data centers. and supply chain partners of data centers, so networking OEMs and ODMs, as well as optical manufacturers. And so, you know, definitely there is, you know, there is a high dependence on the data center market in general. For us near term, we are not going to be impacted as much by changes that happen, you know, within that, you know, within that group of players, really because we're ramping on new next generation technology deployments that really deliver the necessary bandwidth increases that everybody's planned. And now we expect that our customers are going to ramp new technology as fast as they can. And because we're in an early stage in our company development, many of the programs that we ramp are really the first programs that we're ramping with a given customer. And so although they may decide to spend a little less or spend at a rate that's less than they had originally planned, what we see is ultimately large ramps, large volume ramps, whether they're slightly down compared to what was planned. To us, it views, as you said, a greenfield new ramp. So I don't expect near-term for our business, meaning the next year, two years, that we're going to track with any kind of changes within our customer base since we're really on the new technology end of the spectrum.
spk08: Yeah, thank you, Bill. That's great perspective. My other question is on supply. You did talk about some of the disruptions now being behind you. I know you're also working on further diversifying your supply chain. So I was hoping you could update us with a little bit more details there. And, you know, when would you expect, especially on the AEC side, you know, to have a more diversified supplier base?
spk02: Good question. Good question. So we've been, you know, we've been working very closely with two different partners really over the past several years as we've pioneered this market. We are in production mainly with one of those suppliers now, and the second supplier will ramp really in the near term in the upcoming couple of quarters. So we'll have nice diversity as we look at fiscal 24.
spk08: Great. Just one last question for Dan. Dan, you talked about some of the working capital dynamics and especially the DSOs, you know, that being higher than usual. But, you know, any read of the next few quarters, how the DSO will trend?
spk12: Yeah, we would expect it to come down, certainly. You know, as we mentioned, the timing of AR sometimes is a little bit out of our control. And as we have more customers ramping, Our AR, you know, just specific invoices have become much larger, and we received one particular one, you know, four days after the quarter ended. So when you start calculating balance sheet metrics, that actually has a significant impact on things. So quarter over quarter, you know, we're going to see fluctuations in these working capital items, including payables and some other accruals. But over the long term, it'll smooth out, and we expect DSOs, DPOs, and even days of inventory will normalize over the next year or so.
spk08: Sounds good. Congrats on the results. Thank you. Thank you.
spk01: Thank you. Our next question comes from Trevor Janowski of Needham & Company. Your line is open.
spk10: Hi, this is Trevor on for Quinn Bolton, and thanks for taking my question. I'm wondering, have you seen any competitors begin designing solutions that could compete with your AEC opportunities at the first and second hyperscale customers? Or do you see Credo as the sole supplier through fiscal 24?
spk02: Good question. And so, for sure, we've seen competitors beginning to make investments in this space. And I think that's a great indicator that, at an end customer perspective, that it's of high priority. And that's why anybody would start investing in a new business, really based on customer-driven demand. We haven't really seen competitors begin to deliver products that we would see in the field. But we know that there are several companies that are making large investments. So we feel comfortable with where we are competitively. And I think that as it relates to the first couple of ramps that we'll go through, we never take anything for granted. I'm never going to say that our customer base is comfortable with a single supplier, just like we would be uncomfortable in that same situation. And so I will say that from the standpoint of the demand forecast that we've got, I feel very confident in the demand forecasts. And in the near term, I think we expect it to be quite predictable.
spk10: Thank you. And in your comments, you mentioned being in the middle innings of the ramp with that large customer. Does that mean that your large customer is still providing order forecasts that exceed than past 12 months, or has that visibility come in at all?
spk02: Our relationship with the first customer is one where they frequently give us a 12-month outlook. And I can say that for the 12-month outlook, I think everything makes sense. And every time we get extended another month, to date, there's been no surprises. Our expectation is that this program is going to run through calendar 23 and into 24. But we're well positioned for the next generation programs as well as they would maybe ramp down that given technology deployment and ramp into the next generation one. So that's really the goal that our team has in working with this customer as well as every other customer that we're engaged with.
spk10: Awesome. Thank you.
spk01: Thank you. Our next speaker is Craig Hallam. Your line is open.
spk11: Craig, thanks for taking my question. A quick follow-up from an earlier question regarding supply diversification on AECs. Is this a diversification by supplier, or is it also diversified by geography, meaning out of the Shanghai area or even out of China?
spk02: Good question. The diversification that we'll see near term is with supply partners, so we'll go from you know, having one in production to having two in production. Geographically, that will come a bit later. That will be later in calendar 23. So, you know, and so just as expected, we're right on track. So both suppliers will be building in China short term, and then we'll look to build diversity geographically following that.
spk11: Okay, perfect. Thanks for that, Bill. My follow-up question is on AECs. Can you talk about the applications and the specific products you're referring to? I know that with the first partner, I think they've been first, at least the first two are Nick to tour. And I think maybe your second customer is also a similar approach here. Are you seeing any expansion into your other AAC categories like the switch or the span or anything like that? And if so, when do we start to see that happening?
spk02: Sure. You're right that the first two customers that we've talked about, these are both server rack or NIC to TOR applications. We do also see customers that are looking to adopt our AECs for the switching and routing layer as well. And these are primarily 400 gig, but as we look at 800 gig or 100 gig per lane, I think it's going to be quite common for those customers that choose to go with disaggregated switch racks. But I think near-term, say this year and next fiscal year, predominantly we'll be shipping ADCs that are in a server rack application.
spk11: Okay, perfect. That's a great detail, and that's all from me, Bill. Thank you.
spk01: Thank you. I'm showing no further questions at this time. This does conclude today's conference call. You may now disconnect. Have a great day. Thank you.
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