Credo Technology Group Holding Ltd

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 11 on your push button phone. I would now like to turn the conference over to Dan O'Neill. Please go ahead, sir.

Good afternoon, and thank you all for joining us on our fiscal 2024 Second Quarter Earnings Call. Today I am joined by Credo's Chief Executive Officer, Bill Brennan, and Chief Financial Officer, Dan Fleming. I'd like to remind everyone that certain comments made in this call today may include forward-looking statements regarding expected future financial results, strategies and plans, future operations, the markets in which we operate, and other areas of discussion. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. It'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 to conform these statements to actual results or to changes in the company's expectations, except as required by law. Also during this call, we will refer to certain non-GAAP financial measures which we consider to be important measures of the company's performance. These non-GAAP financial measures are provided in addition to, and not as a substitute for, or superior to, financial performance prepared in accordance with U.S. GAAP. A discussion of why we use non-GAAP financial measures and how reconciliations between our GAAP and non-GAAP financial measures is available in the earnings release we issued today, which can be accessed using the investor relations portion of our website. I will now turn the call over to our CEO, Bill.

Thank you, Dan. Welcome to everyone joining our Q2 fiscal 24 earnings call. I'll start with an overview of our fiscal Q2 results. I'll then discuss our views on our outlook. After my remarks, our CFO, Dan Fleming, will provide a detailed review of our Q2 financial results and share the outlook for the third fiscal quarter. We will then be happy to take questions. For the second quarter, Credo reported revenue of $44 million and non-GAAP gross margin of 59.9%. Our Q2 results and our future growth expectations are driven by the accelerating market opportunity for high-speed and energy-efficient connectivity solutions. We target port speeds up to 1.6 terabits per second with solutions including active electrical cables or AECs, optical DSPs, laser drivers and TIAs, line cart PHYs, SERDES chiplets, and SERDES IP licensing, enabling us to address a broad spectrum of connectivity needs throughout the digital infrastructure market. Each of these solutions leverage our core SERDES technology and our unique customer-focused design approach. As a result, Credo delivers application-specific, high-speed solutions with optimized energy efficiency and system costs. And our advantage expands as the market moves to 100 gig per lane speeds. Within the data center market today, we've seen a dramatically increasing demand for higher bandwidth, higher density, and more energy efficient networking. This demand is driven by the proliferation of generative AI applications. For the past several years, Credo has been collaborating with our customers on leading edge AI platforms that are now in various stages of ramping production. In fact, the majority of Credo revenue will be driven by AI applications for the foreseeable future. Now, I'll review our overall business in more detail. First, I'll discuss our optical business. I'm pleased with the traction we've been gaining in this market. In the quarter, we continued shipping to multiple global hyperscale end customers, and we're making progress in positioning Credo to add additional hyperscale end customers in the upcoming quarters. targeting 400-gig and 800-gig applications. Credo also has optical design movements in various stages with module customers and networking OEMs for the fiber channel market and with service providers for 5G infrastructure deployments. Credo plays a disruptive role in the optical DSP market. Our fundamental CERTI's technology is leveraged to provide a compelling combination of performance, energy efficiency, and system costs Additionally, we focus on solving our customers' problems and market challenges through engineering innovation. At the OFC Optical Conference in March of this year, there was an important call to action to address the unsustainable power and cost increases for optical modules in the 800 gig and 1.6T generations. Much industry discussion has ensued this year, especially related to the plausibility of the linear pluggable optics architecture or LPO, also sometimes referred to as linear direct drive. The LPO architecture is based on eliminating all optical DSP functionality. The industry has widely concluded that the LPO architecture will not be feasible for a material percentage of the optical module market, and that DSP functionality is critical to maintaining industry standards and interoperability, as well as achieving the bit error rate performance necessary for high yields in volume production. However, this does not mean that the industry call to action will be unanswered. Credo's response following OFC was to look at innovative ways to drastically reduce DSP power and subsequently cost through architectural innovation. Today, Credo issued a press release introducing our linear receive optical, or LRO DSPs. Our LRO DSP products provide optimized DSP capability in the optical transmit path only, and eliminate the DSP functionality in the optical receive path. This innovative architecture, as optimized by Credo, effectively reduces the optical DSP power by up to 50%, and at the same time lowers cost by eliminating unneeded circuitry. Our LRO products address the pitfalls of the LPO architecture by maintaining standards and enabling interoperability among many components of an optical system. And the DSP functionality maintains the equalization performance that's critical to high yields and volume production. We've already shipped our Dove 850 800 gig LRO DSP device and evaluation boards to our lead optical and hyperscale end customers for their development and testing. While any revenue ramp will be a ways out, I view this innovation as the latest example of Credo pioneering a new product category that directly addresses the energy and system cost challenges faced by the hyperscalers, especially for AI deployments. Regarding our AEC solutions, Credo continues to be an AEC market leader. While our initial success in our AEC business has been connecting front-end data center networks for general compute and AI appliances, We have seen an expansion in our AEC opportunity in the back-end networks that are fundamental to AI cluster deployments. Due to the sheer bandwidth required by back-end networks, an acceleration in single-lane speeds and networking density is driving the need for AECs, given the significant benefits compared to both passive copper cables and to active optical cables or AOCs for in-rack connectivity. we continue to make progress with our first two hyperscale customers for both front-end and back-end networks. And we're especially encouraged to see Credo AECs prominently featured in the leading edge deployments introduced at their respective conferences in November. Years in the making, we continue to maintain strong and close working relationships with our customers. And I'm pleased to say that in Q2, we made our initial shipments of 800 gig production AECs and industry first. And again, we've demonstrated our market leadership. We also continue to expand our hyperscale customer base with one in qual with 400 gig AEC solutions and another in development with 800 gig AEC solutions. Additionally, we've seen the increased need for 400 gig and 800 gig AECs among Tier 2 data center operators and service providers. As a group, these customers contribute meaningful revenue to Credo. I'll also highlight one of Credo's announcements at the recent Open Compute Conference in October. Credo announced the P3, Plugable Patch Panel System, a multi-tool that enables service providers and hyperscalers the freedom, by using the P3 and AECs, to decouple pluggable optics from core switching and routing hardware. The combination of the P3 and AECs enable network architects to optimize for power distribution and system cost, as well as to bridge varying speeds between switching and optical ports. We're engaged with several customers and believe the efforts will result in meaningful revenue in the future. To sum up, we remain confident that the increasing demand for greater networking bandwidth driven by AI applications, combined with the extraordinary value proposition of our AEC solutions, will drive continued AEC market expansion. Now, regarding our LineCard 5 business, Credo is an established market leader with our LineCard 5 solutions, which include retimers, gearboxes, and MACsec 5s for data encryption. Our overall value proposition becomes even more compelling as the market is now accelerating to 100 gig per lane deployments. According to our customer base, Credo's competitive advantage in this market segment derives from the common thread across all of our product lines, which is leading performance and signal integrity that is optimized for energy efficiency and system cost. We're building momentum and winning design commitments for our Screaming Eagle 1.6 T5s, and for our customer-sponsored next-generation 1.6T MaxSec PHY. We remain excited about the prospects for this business with networking OEMs and hyperscale customers. Regarding our SERTI's IP licensing and SERTI's chiplet businesses, Credo's SERTI's IP licensing business remains a strategically important part of our business. We have a complete portfolio of SERTI's IP solutions that span a range of speeds reach distances, and applications with process nodes from 28 nanometer to 4 nanometer. And our initial 3 nanometer series IP for 112 gig and 224 gig is in FAB now. During Q2, we secured several licensing wins across networking data center applications. Our wins include new and recurring customers, a testament to our team's execution in contributing to our customers' success. We're also enthusiastic about the prospects for our chiplet solutions. During Q2, we secured a next-generation 112-gig, 4-nanometer CERTI chiplet win that includes customer sponsorship. Credo is aligned with industry expectations that chiplets will play an important role in the highest performance designs in the future. In conclusion, Credo delivered strong fiscal Q2 results. We remain enthusiastic about our business given the market demand for dramatically increasing bandwidth. This plays directly to Credo's strengths, and we're one of the few companies that can provide the necessary breadth of connectivity solutions at the highest speeds, while also optimizing for energy efficiency and system cost. As we embark on second half fiscal 24, we expect continued growth that supports a more diversified customer base across a diversified range of connectivity solutions. Lastly, I'm pleased to announce that yesterday Credo published our first ESG report, which can be found on our website. As reiterated several times today in my comments, energy efficiency is built into our DNA and is a key part of our report. We aspire to be leaders across the ESG spectrum, and we strive to help enable our customers to be leaders as well. I'm very pleased with how Credo is pursuing our goals, and we look forward to continuing our positive ESG efforts. At this time, Dan Fleming, our CFO, will provide additional financial details. Thank you.