Credo Technology Group Holding Ltd

Good day, and thank you for standing by. Welcome to the Credo Fiscal 2024 Q3 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Dan O'Neill, please go ahead.

Good afternoon. Thank you for joining us on our fiscal 2024 third quarter earnings call. Today I'm joined by Bill Brennan, Credo's chief executive officer, and Dan Fleming, our chief financial officer. As a reminder, during the call, we will make certain forward-looking statements. These forward-looking statements are subject to risks and uncertainties that are discussed in detail in documents filed with the SEC, which can be found in the investor relations section of the company's website. 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. The discussion of why we use non-GAAP financial measures and reconciliations between our GAAP and non-GAAP financial measures is available in the earnings release we issued today, which can be assessed using the investor relations portion of our website. I will now turn the call over to our CEO. Bill?

Thank you, Dan. I'll begin by providing an overview of our fiscal Q3 results and our outlook for the future. Our CFO, Dan Fleming, will then provide a detailed review of our Q3 financial results and share expectations for fiscal Q4. For Q3, Credo reported revenue of $53.1 million and non-GAAP gross margin of 62.2%. These results and our future growth expectations continue to be driven by the accelerating opportunity for high-speed and energy-efficient connectivity solutions throughout the data infrastructure market. Our connectivity solutions include active electrical cables, or AECs, optical DSPs, laser drivers, and TIAs, line card vise, SERDES chiplets, and SERDES IP licensing, each leveraging our SERDES technology. Core to Credo's success is our SERDES technology, which is the fundamental connectivity building block of all of our solutions. Credo continues to invest deeply in SERDES architectures that enable application-specific solutions optimized for speed, reach performance, energy efficiency, and cost. Our 100 gig per lane SERDES portfolio spans process geometries from 12 nanometer to 3 nanometer with optimized reach performance from the longest reach links to the most power sensitive die to die links for chiplets. CREDA will continue our innovation for 200 gig per lane series as the opportunity to differentiate increases specifically related to the optimization of trade offs between process geometry, DSP architecture, performance, and energy efficiency. Credo's service technology expertise combined with our system-level, customer-focused design approach has led to our success with a diverse and growing set of industry-leading customers. In 2023, the technology industry experienced an inflection point driven by generative AI applications. The acceleration in the deployment of AI clusters has put high-speed connectivity on center stage, given the fundamental need for higher bandwidth. For Credo, This need for higher bandwidth translates to the demand for higher speed, higher density, and more energy-efficient connectivity solutions. This plays directly to Credo's strength and underpins our growth expectations. I'll now provide more detail of our overall business. First, I'll discuss our AEC business, where Credo continued to build momentum during the third quarter. We believe our AEC leadership derives from our comprehensive systems-level approach to the AEC market. We've built this from the ground up over many years, and as a result, we now have the ability to quickly innovate to support the diverse AEC needs of our customers. Given increasing single-lane speeds and the shortcomings of both passive copper cables and active optical cables and transceivers, we foresee continuing adoption of AECs for in-rack connectivity. We expect U.S. hyperscalers to remain the majority portion of AEC demand in the foreseeable future. Many of these customers have distinct architectural requirements that demand innovation and tight collaboration between the engineering teams at Credo and the customer. We're engaged at different stages with the five U.S. hyperscalers, as well as other global hyperscalers and Tier 2 data center operators. We've delivered a range of products with non-standard optimized hardware and firmware features to meet our customers' needs for port speeds from 100 gig to 800 gig, depending on the customer application. Credo continues to work closely with our first two hyperscale customers, delivering AEC solutions for both front-end and back-end Ethernet networks, as each publicly highlighted during their conferences last quarter. We're gaining better visibility with these customers into their near-term product ramps, and we're also engaged in a range of ABC solutions to address longer-term roadmaps. While advanced programs of this nature take time to achieve material deployment rates, we continue to expect an inflection point in the second half of our fiscal 25. Credo is also working with additional U.S. and global hyperscalers, to develop 400 gig and 800 gig AEC solutions that we expect will yield significant revenue for Credo in the future as next-generation network architectures transition to AEC solutions. Additionally, we see broader acceptance of AEC solutions among service providers and Tier 2 data centers. As a group, these customers represent a meaningful and growing revenue opportunity. Last quarter, we discussed the introduction of our P3 pluggable patch panel solution, developed in collaboration with a lead service provider. Over the past quarter, we've been encouraged by customer feedback that the combination of the P3 and the AECs can help overcome multiple networking challenges related to power and thermal distribution, lane speed disparities, and the trade-offs of operational efficiency, latency, and power. We expect to generate meaningful future revenue as the P3 enables AECs to be easily utilized in a more broad set of opportunities, thereby expanding our addressable market. In summary, we were very pleased with our AEC progress in Q3, and due to our expanding customer base and focus on innovation, we expect further progress in Q4, fiscal 25, and beyond. Now, regarding our optical solutions, Credo continues to gain traction in the optical DSP market. During the third quarter, we continued production shipments of optical DSPs to multiple global hyperscale end customers for a variety of applications across numerous port speeds. We closely target the combination of optical module partners and hyperscale end customers, and we're making progress on optical DSPs for 400 gig and 800 gig optical transceiver, and AOC opportunities. Enabled by our SERTI's design approach, Credo wins by delivering a compelling combination of performance, energy efficiency, and value, as well as focusing on innovative ways to solve complex customer needs. Last quarter, we talked extensively about the industry call for action for better power efficiency for 800 gig and 1.6T optical solutions. As we discussed, We believe eliminating the DSP with the linear pluggable optics or LPO architecture is simply too far a leap, especially for 1.6T. Credo quickly responded with our innovative linear receive optics or LRO DSP architecture that directly addresses the power challenge while delivering better signal integrity, maintaining industry standards, IEEE compliance and interoperability, and extending to 1.6T solutions. Since our discussion last quarter, we've made meaningful progress. Our first 800 gig LRO DSP partner has built and tested 800 gig optical modules, and the results are exactly as expected, successfully delivering on the promise of much reduced power and great signal integrity while overcoming the shortfalls of the aspirational LTO architecture. Next month at OFC in San Diego, we'll be demonstrating both 800 gig LRO DSP and full DSP solutions, highlighting our progress. We'll be demonstrating 800 gig solutions with five different optical module partners. Our 1.6T roadmap includes both LRO DSP and full DSP solutions with 200 gig per lane speeds, with our top priorities being energy efficiency and signal integrity, which are both critical to achieve robust 1.6T optical solutions. We believe the growth in our optical business will be primarily driven by U.S. hyperscaler end customers, with further contributions from global hyperscalers. I'll now discuss our LineCard 5 business, which delivered another solid quarter in Q3. In this segment, our customers include networking OEMs and hyperscalers, and our products include retimers, gearboxes, and MACSEC 5s for data encryption. Our customers are the leaders in the space, We have close working relationships, and our design wins typically have long life cycles once they ramp to production, contributing nicely to our overall results. In the upcoming months, we'll tape out our customer-sponsored 5-nanometer 1.6T MaxSec PHY and our power-optimized 1.6T retimers and gearboxes. Credo is among the industry leaders for 50 gig and 100 gig per lane line card PHY applications, We have many customers that have deployed our 50-gig-per-lane solutions in production, and we count more than 10 customers designing in our 100-gig-per-lane Screening Eagle line cart vise. And now turning to our IP and chiplet business. Our Certi's IP and Certi's chiplet businesses continue to be a strategic component of our overall business. These solutions enable our partners to address the ASIC market for next-generation solutions. Due to revenue recognition rules, our Certi's IP revenue can vary meaningfully from quarter to quarter, which is what we saw in Q3 and we'll likely see in the upcoming quarters. Our funnel for Certi licensing opportunities remains strong, bolstered by the increased opportunity on ASICs with high-speed Certis for data center applications. We have a comprehensive portfolio of Certis IP for our ASIC customers, including 100 gig per lane Certis across the broadest range of process geometries, from 12 nanometer to 3 nanometer, and the broadest range of reach performance, from long reach to die-to-die reach. Our Certi's IP offering enables our ASIC partners to optimize their solutions for process geometry, reach, and power. Last quarter, our chiplet business was highlighted by a win with significant NRE at one of our leading customers for a next-generation 5 nanometer chiplet solution, which speaks loudly regarding our differentiated Certi's portfolio. When complete, Credo will be able to market and sell this chiplet to the broad market. Overall, we remain optimistic about the prospects of the chiplet category, given our results to date and due to our belief that chiplets will be a key enabler in the most advanced system solutions. In summary, we're pleased with our results for fiscal Q3 and we're optimistic about the increasing market demand for high-speed connectivity. Credo's competitive advantage is driven by our focus and execution, on our core service technology. And that leads Credo to being one of the few companies capable of delivering the necessary breadth of connectivity solutions at the highest speeds while optimizing for energy efficiency and system cost. For these reasons, we expect continued long-term growth across a diversified customer base and a diversified set of connectivity applications. I'll now turn the call over to our CFO, Dan Fleming. Dan will provide additional financial detail And then we'll be happy to take questions. Thank you.