Credo Technology Group Holding Ltd

I am joined by Bill Brennan, Credo's chief executive officer, and Dan Fleming, our chief financial officer. During this call, we will make certain forward-looking statements. These forward-looking statements are subject to risks and uncertainties discussed in detail in our documents filed with the SEC, which can be found in the investor relations section of the company's website. It is 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 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. With that, I will now turn the call over to our CEO, Bill.

Thanks, Dan. And thank you for joining our earnings for the third quarter of fiscal 25. I'll start with an overview of our third quarter results and then discuss our outlook. Following my comments, our CFO, Dan Fleming, will provide Q3 financial details and our guidance for the fiscal fourth quarter. For the third quarter, Credo reported revenue of $135 million, up 87% sequentially, and up 154% year over year. Credo's non-GAAP gross margin was 63.8%. Credo achieved record revenue in Q3, as we saw the expected inflection point in our business. This ramp was led by our largest hyperscale customer, as they scaled production of AI platforms. Additionally, we received solidified forecasts and saw increased design activity for our products with additional hyperscalers and other customers as the performance, reliability, and power benefits of our connectivity solutions have become increasingly clear throughout the industry. In a world where data drives everything, The demand for faster, more reliable, and energy-efficient connectivity continues to expand rapidly. Key to Credo's competitive advantage is our multi-tiered innovation, which enables us to deliver a broad set of optimized solutions that are tuned at every level. The first tier of innovation is in our Certis technology. Our Certis technology is purpose-built to tackle the toughest bandwidth challenges, balancing speeds up to 200 gig per lane with exceptional performance and power efficiency. By leveraging advanced signal processing and a programmable design, we've created a flexible architecture that adapts to the unique needs of AI workloads, whether it's long reach data center links or ultra short connections in dense compute environments. The second tier of innovation is in our integrated circuit design. Our IC designs including retimers, DSPs, and chiplets, are engineered to deliver the best combination of performance, power, and cost for a given application. Our LRO DSP is a great example of innovation on the customer's behalf to deliver a compelling IC solution optimized for power efficiency and optical links. The third tier of innovation is our system-level approach. We don't stop at chips. Our best example of system level innovation is Credo pioneering the active electrical cable market. By taking accountability for the system level solution, we raised the bar to deliver end-to-end connectivity solutions that go beyond industry standards to deliver unique functionality and best-in-class reliability. We see this system level approach creating a larger opportunity for Credo with the emergence of AI clusters. due to the intense demand for reliability and power efficiency. Finally, wrapped around each tier of innovation is our development and diagnostics software and firmware platform to deliver predictive signal integrity, link optimization, and tuning. From the 30s to the system level, this software platform helps our customers navigate system development to achieve best performance, yields, and reliability. As we look forward, we'll expand our solutions to the PCIe protocol with the same ingenuity that creates our differentiated Ethernet solutions. With the introduction of a full suite of PCIe products on the near-term horizon, Credo will soon be addressing a larger connectivity opportunity with AI scale-out and scale-up networks, substantially expanding our overall TAM. Now I'll discuss our business in more detail. Regarding our AEC product line, as expected, our revenue surged in the third quarter, driven by our largest hyperscale customer. Compared to alternatives, the benefits of AECs have become clearer. More than ever, data centers are highly focused on backend network reliability. With billions of hours operating in the field, AECs have become the de facto standard for intra-rack connections for NIC-to-TOR and switch-to-switch applications. However, we are now seeing a new expansion of AEC usage. Our zero-flap AECs deliver more than 100 times better reliability than laser-based optical solutions. And as a result, we're seeing AECs replacing optics for rack-to-rack solutions for lengths up to seven meters. We continue to make significant progress with additional hyperscalers for our Ethernet AEC solutions. We've achieved volume production with three hyperscalers, and we're in qualification with two additional hyperscalers, expecting production in fiscal 26. With broad traction, we feel confident we'll continue to see increasing diversification of our revenue base across more customers in the coming quarters and years. Additionally, Credo continues to make progress with our PCIe AEC solutions. Our Gen6 64-gig PAM4 AECs will deliver the same compelling benefits for AI scale-up networks as deployments move to rack-scale architectures. Credo will demonstrate our PCIe AECs at NVIDIA's GTC show later this month. We expect customer design engagements and qualifications for our PCIE AECs in the upcoming quarters, with a significant revenue opportunity in the upcoming years. For our AEC business in total, we expect continued revenue growth based on customer forecasts, new qualifications, new design engagements, and TAM expansion. Now I'll turn to our optical business. Our optical DSP business is on track to achieve the growth objectives we set out at the beginning of fiscal 25. We have opportunities across the global customer base with revenue currently driven by 50 gig and 100 gig per lane designs for AOC and transceiver applications at port speeds up to 800 gig. Credo is actively engaged in opportunities with more than 10 transceiver vendors for multiple hyperscale end users. We work with our optical transceiver partners to provide full DSP and LRO options to meet a wide range of networking architectures. We see a large and growing market for these offerings, as well as for 1.6T port deployments in the future. With our recent three nanometer tape out, Credo is well positioned for these leading edge opportunities with our 200 gig per lane DSPs. where we expect to again have a compelling combination of performance, power, and features. We see the market opportunity for optical connectivity continuing to be very dynamic as reliability and energy efficiency become more important. As a result, we see an increasing opportunity for Credo to deliver system-level advantages to our partners, activating Credo's third tier of innovation I outlined earlier. Next month at the OFC conference in San Francisco, we'll demonstrate a full suite of optical solutions, including 200 gig per lane, in conjunction with our optical module partners. Based on all of our progress, the breadth of customer engagements, and the expanding market opportunity, we remain excited about the increasing revenue prospects given our role as an innovator in the optical connectivity market. Now, Regarding our retimer business, Credo continued to gain momentum with our retimer business in the third quarter. Over the past several years, Credo has established leadership in the Ethernet retimer market, delivering advanced capabilities such as max-second encryption, gearboxing, and other software-enabled functionality. Existing customer wins and future opportunities here include 100 gig and 200 gig per lane applications, for both traditional switching and increasingly for AI servers requiring re-timers for scale-out networks. This year, Credo has entered the market for PCIe re-timers used in scale-up networks. Our strategy is in alignment with our three-tier innovation approach. We believe Credo's PCIe 30s IP will establish new benchmarks for the combination of latency, reach performance, and power. and that our implementation of the Toucan PCIe retimer will deliver compelling advantages to our customers. In February, Credo participated in the PCIe SIG compliance workshop in Taipei, and we are pleased that our Toucan retimer achieved full PCIe compliance. It is notable that Credo is only the second vendor to achieve this level of compliance certification for PCIe Gen 5. This significant milestone demonstrates our capability to bring best-in-class PCIe products to market. Credo will be added to the PCIe SIG integrators list in the coming weeks. During Q3, we engaged with key customers who evaluated our PCIe silicon. I'm pleased to say that the feedback was very encouraging, and we received our first platform commitment from a large AI server ODM. we are on track for production revenue in calendar year 2026. Market forecasters believe the TAM for PCIe retimers will exceed $1 billion by 2027, and Credo is very well positioned to compete for material market share. In summary, I'd like to first comment about our team's incredible execution over the past quarter. To successfully navigate a ramp of this magnitude requires extremely tight operational control, supply chain coordination, and customer communication. Just as Credo works tirelessly with customers to innovate on solving their pressing connectivity needs, the Credo team is clearly rising to the occasion to deliver on the significant demand ramp we're experiencing. As we more broadly ramp customers across our products, we will continue to closely manage our execution. I remain enthusiastic about the expanding market opportunity for high-speed connectivity, driven by the promise of AI and the investment it's spurring. Credo's tiered approach to innovation has and will continue to be an advantage as we serve our customers. Based on our progress with customers and the increasing demand for leading-edge connectivity solutions, Credo remains on track for continued scaling of revenue and profit. I'll now turn the call over to our CFO, Dan Fleming, who will provide more detail.

Thank you, Bill, and good afternoon. I'll first review our Q3 results and then discuss our outlook for Q4 of fiscal year 25. In Q3, we reported revenue of $135 million, up 87% sequentially and up 154% year over year, and well above the high end of our guidance range. Our product business generated $132 million of revenue in Q3, up 91% sequentially and up 155% year over year. Notably, our AEC product line grew strong triple digits sequentially to achieve new record revenue levels. Our product business, excluding product engineering services, generated another record at $129.4 million of revenue in Q3, 101% higher than our previous product record in the prior quarter. Our IP business generated $3 million of revenue in Q3. As demonstrated by our product revenue ramp, we are seeing substantial opportunities with customer programs on the product side, which we are prioritizing. This prioritization does not impact our long-term model for company-wide non-GAAP gross margin of 63% to 65%. Our largest end customer was 86% of revenue in Q3. As a reminder, customer mix will vary from quarter to quarter, and we continue to make progress in diversifying our customer base. As we shared last quarter, we had seven customers that contributed more than 5% of revenue. And going forward, we expect that three to four customers will be greater than 10% of revenue in the coming quarters and fiscal year, as additional hyperscalers ramp to more significant volumes, as Bill described. Our team delivered Q3 non-GAAP gross margin of 63.8%, above the high end of our guidance range, and up 17 basis points sequentially. Our product non-GAAP gross margin was 63% in the quarter, up 85 basis points sequentially, and up 152 basis points year over year. Our product non-GAAP gross margin, excluding product engineering services, was 62.4% in the quarter. up 229 basis points sequentially and up 934 basis points year over year, primarily due to increasing scale. Total non-GAAP operating expenses in the third quarter were $43.8 million within our guidance range and up 16% sequentially due primarily to higher headcount. Our non-GAAP operating income was $42.4 million in Q3, compared to non-GAAP operating income of $8.3 million in Q2, up demonstrably due to the leverage attained by achieving 87% sequential topline growth. Our non-GAAP operating margin was 31.4% in the quarter, compared to a non-GAAP operating margin of 11.5% in the prior quarter, a sequential increase of nearly 20 percentage points. Our non-GAAP net income was $45.4 million in Q3, compared to non-GAAP net income of $12.3 million in Q2. And our non-GAAP net margin was 33.6% in the quarter, above the high end of our long-term net margin model of 28 to 33%. Cash flow from operations in the third quarter was $4.2 million, down sequentially due to working capital increases driven by the significant sequential product ramp. CapEx was $4.6 million in the quarter, driven largely by purchases of production equipment. And free cash flow was negative $0.4 million, an improvement of $11.3 million from the second quarter. We ended the quarter with cash in equivalence of $379.2 million, a decrease of $3.7 million from the second quarter. We remain well capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer. Our Q3 ending inventory was $53.2 million, up $16.9 million sequentially. Now, turning to our guidance, we currently expect revenue in Q4 of fiscal 25 to be between $155 million and $165 million, up 19% sequentially at the midpoint. We expect Q4 non-GAAP gross margin to be within a range of 63% to 65%. We expect Q4 non-GAAP operating expenses to be between $50 million and $52 million. We expect Q4 diluted weighted average share count to be approximately 188 million shares. As we approach the start of fiscal year 26, we expect revenue growth from fiscal year 25 to fiscal year 26 to be greater than 50%. And we expect non-GAAP operating expenses to grow at half the rate of revenue from fiscal year 25 to fiscal year 26. As a result, we look forward to continue driving operating leverage while expanding our net margin throughout the year. And with that, I will open it up for questions.