Credo Technology Group Holding Ltd

Good afternoon. Thank you for joining our earnings call for the fourth quarter of fiscal 2025. Today, I'm joined by Bill Brandon, 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 this 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 assessed using the investor relations portion of our website. With that, I will turn the call over to our CEO. Bill?

Thanks, Dan. Thank you for joining our earnings call for the fourth quarter of fiscal 25. I'll begin with a review of our results, and then I'll provide highlights for our outlook into fiscal 26. Dan Fleming, our CFO, will follow with a detailed discussion of our Q4 and fiscal year 25 results, and then provide our outlook for the first quarter. In the fourth quarter, we delivered revenue of $170 million. a 26% sequential increase and up 180% year over year. Our non-GAAP gross margin was 67.4%. For fiscal 25, Credo achieved revenue of $437 million for growth of 126% year over year. Our non-GAAP gross margin from fiscal 25 was 65%. I'm proud of Credo's achievements in fiscal 25. Record-breaking revenue and profitability were fueled by surging demand for our innovative, reliable, and energy-efficient high-performance connectivity solutions. Our long-term commitment to customer-driven innovation paid off significantly in fiscal 25. Quarterly revenue nearly tripled from Q1 to Q4, validating our foresight and our ability to capitalize on a predicted inflection point. Our agile approach strengthened partnerships with hyperscalers. amid a rapidly evolving AI landscape. As a pure-play high-speed connectivity leader, Credo delivers a growing portfolio of differentiated solutions for global data center operators, currently supporting port speeds from 100 gigabits per second to 1.6 terabits per second. Our innovation spans three tiers, advanced series technology, cutting-edge integrated circuit design, and comprehensive system-level solutions. These innovations are seamlessly integrated with our PILOT software platform. PILOT is an acronym for predictive integrity, link optimization, and telemetry. PILOT offers an industry-leading user interface, robust debugging tools, and advanced telemetry, tailored for large-scale deployments. This holistic innovation strategy enables Credo to deliver copper and optical connectivity solutions that surpass industry standards. providing unmatched functionality, reliability, and energy efficiency. While achieving a remarkable revenue ramp in fiscal 25, we continue to build the foundation for sustained growth. Looking ahead, we anticipate increasing customer diversification across copper and optical connectivity for Ethernet, PCIe, UA-Link, and other emerging applications in both scale-out and scale-up AI networks. Following this significant revenue inflection in fiscal 25, we're energized by the expanding opportunities and total addressable market that lie ahead. I'll now review our business in more detail. Regarding our active electrical cable product line in Q4, our AEC revenue maintained a steep growth trajectory. As anticipated, our customer base diversified, with three hyper-sailors each contributing over 10% of our revenue, strengthening our market position. When we pioneered the AEC market years ago, we recognized the compelling advantages over both traditional direct-attached cables, or DACs, and laser-based optical solutions, especially at data rates of 50 gig per lane or higher. AECs have extended the viability of copper connectivity, becoming the de facto standard for inter-rack applications. Compared to DACs, AECs deliver superior signal integrity, advanced features, and a more versatile form factor. Now, AECs are gaining traction as a robust rack-to-rack solution for distances up to seven meters, offering over 100 times greater reliability than laser-based optical modules, virtually eliminating link lapse and significantly improving energy efficiency, which are both key enablers for best-in-class AI deployments. Credo's system-level approach has driven substantial competitive advantages by owning the entire solution stack, series IP, retimer ICs, system level design, qualification, and production. Our approach positions Credo for significant innovation and time to market advantages. As data center architectures evolve rapidly, we foresee a continued shift towards curated system level solutions. We're enthusiastic about the ongoing expansion of the AEC market. For instance, our recently demonstrated PCIe Gen 6 AECs at GTC promise the same compelling benefits for AI scale-up networks as deployments transition to rack-scale architectures. Our growing traction with hyperscalers is evident. With strong customer forecasts and new design wins in qualification, we're confident in sustained AEC revenue growth. I'll now discuss our progress in the optical market. Fiscal 25 was a standout year for Credo's optical business. We closed the year with strong momentum, expanding customer diversity across lane rates, port speeds, and applications. We achieved our revenue growth targets, delivering 50 gig and 100 gig per lane optical DSPs to a broad base of optical module customers. In Q4, we secured a significant DSP win. for an 800-gig transceiver, with initial deployments expected at a U.S. hyperscaler in fiscal 26. At the OFC conference in San Francisco last month, Credo's latest optical innovations drew widespread attention from industry leaders. We unveiled our ultra-low-power, 100-gig-per-lane optical DSPs, built on 5-nanometer technology. This family, including full DSP and linear receive optics, or LRO variants, sets new industry benchmarks for power efficiency. In collaboration with an optical module partner, Credo demonstrated an industry-first 800-gig optical module with total power consumption of roughly 9 watts. Powered by our LARC LRO DSP and single-boat objects, we achieved error rates comparable to full DSP solutions, earning significant interest from hyperscalers prioritizing power efficiency for AI deployments. We also showcased our three nanometer, 200 gig per lane optical DSP, supporting port speeds up to 1.6 terabits per second. With leading signal integrity and power efficiency, this solution positions Credo to drive the industry's transition to 200 gig lane speeds in the coming years. Looking ahead, we see a dynamic and growing market for optical connectivity, where reliability and energy efficiency are increasingly critical. Credo is poised to deliver system-level innovations that provide substantial advantages to our partners. Credo's optical business demonstrated robust execution in fiscal 25. With our growing differentiation and an expanding system-level market opportunity, we anticipate accelerated revenue growth in the years ahead. Turning to our retimer business, in Q4 and fiscal 25, our retimer business delivered robust results, reinforcing our leadership. Retimer revenue growth was fueled by our 50-gig and 100-gig-per-lane Ethernet solutions, offering advanced features like MaxTech encryption, gearboxing, and software-enabled functionality tailored to diverse customer requirements. Our customer base now includes leading AI server vendors alongside traditional switching clients, reflecting the growing adoption of our solutions in AI-driven architectures. For fiscal 26, we anticipate strong growth driven by the continued shift to 100 gig per lane solutions and increasing demand for system-level expertise and software capabilities to address hyperscalers' complex, AI-optimized architectures. Our recently launched PCIe Gen 6 retimer family, led by the Toucan Retimer, achieved full compliance at the PCIe CA workshop, showcasing superior performance and interoperability Demonstrations at GTC, OFC, and most recently at Computex, with two leading ODM partners, further validated our capabilities. Customer momentum for our PCIe retimers is accelerating, positioning Credo to secure design wins in calendar 25, with production revenue expected in calendar 26. Our competitive edge lies in leveraging core service technology, a customer-centric approach, and system-level innovation, to deliver differentiated latency, reach, and power efficiency. Additionally, our pilot development telemetry software platform drives faster time to market, improved yields, and enhanced system monitoring, providing clear advantages based on market feedback. In summary, fiscal 25 marked a pivotal year for Credo, achieving record revenue, profit, and market adoption of our innovative connectivity solutions, hitting the inflection point we anticipated. Our operational and customer-facing teams executed flawlessly to deliver these results. Credo pioneered a market that transformed how hyperscalers connect switches and servers. We continue to innovate with recent product announcements reflecting customer-driven solutions. These advancements position us to capture significant opportunities in the global AI infrastructure investment wave, fueling our next phase of growth. Reflecting on our journey, Credo has navigated successes and challenges with relentless focus on delivering world-class products. This resilience defines our DNA and is our greatest strength. Thank you Team Credo for your dedication. I'm excited for what lies ahead. We see growing demand for high-speed connectivity solutions across our hyperscaler customers to power advanced AI services, a trend we anticipate continuing for the foreseeable future. Customers require reliable, power-efficient, high-performance, and tailored solutions to support their diverse architectures. Credo meets this demand with a differentiated portfolio of copper and optical connectivity solutions customized for customers, built on our core service IP, tiered innovation strategy, and system-level approach. With that, Dan Fleming, our CFO, will now provide additional details, and we'll then take questions.

Thank you, Bill, and good afternoon. I will first provide a financial summary of our fiscal year 25, then review our Q4 results, and finally discuss our outlook for Q1 and provide some color on our expectations for fiscal year 26. Revenue for fiscal year 25 was a record at $436.8 million, up 126% year over year, driven by product revenue that grew by 157%. Gross margin for the year was 65%, up 257 basis points year over year. Our operating margin improved by 2,500 basis points as we continued to generate considerable top line leverage driven by growth in our products while growing operating expenses considerably slower than revenue. That step up in profitability flowed through to the bottom line as we reported earnings per share of 70 cents for the year. a $0.62 improvement over the prior year. In fiscal year 25, Credo not only delivered the dramatic product growth which we had forecast, but we also demonstrated the earnings power in our business model. Moving on to the fourth quarter, in Q4, we reported revenue of $170 million, up 26% sequentially, and up 180% year over year, and well above the high end of our guidance range. Our product business generated $165.9 million of revenue in Q4, up 26% sequentially and up 276% year over year. Notably, our AEC product line again grew healthy double digits sequentially to achieve new record revenue levels once again. Our top three end customers were each greater than 10% of revenue in Q4. As a reminder, customer mix will vary from quarter to quarter. and we continue to make progress in diversifying our customer base. We continue to expect that three to four customers will be greater than 10% of revenue in the coming quarters and fiscal year, as hyperscale customers continue to ramp more significant volumes, and as we expect to begin to ramp two new hyperscale customers in the second half of fiscal year 26. Our team delivered Q4 non-GAAP gross margin of 67.4% above the high end of our guidance range and up 355 basis points sequentially. Our product non-GAAP gross margin was 66.5% in the quarter, up 354 basis points sequentially and up 1,289 basis points year over year, primarily due to increasing scale. Total non-GAAP operating expenses in the fourth quarter were $52 million at the high end of our guidance range and up 19% sequentially, primarily driven by headcount. Our non-GAAP operating income was $62.5 million in Q4, compared to non-GAAP operating income of $42.4 million in Q3, up demonstrably due to the leverage attained by achieving 26% sequential topline growth. Our non-GAAP operating margin was 36.8% in the quarter, compared to a non-GAAP operating margin of 31.4% in the prior quarter, a sequential increase of 538 basis points. Our non-GAAP net income was $65.3 million in the quarter, a record high compared to non-GAAP net income of $45.4 million in Q3. And our non-GAAP net margin was 38.4% in the quarter, well above the high end of our long-term net margin model of 28 to 33%. Cash flow from operations in the fourth quarter was $57.8 million, up $53.6 million sequentially due to cash collection driven by the significant sequential product ramp. CapEx was $3.7 million in the quarter, driven largely by purchases of production equipment. And free cash flow was $54.2 million, an improvement of $54.6 million from the third quarter. We ended the quarter with cash in equivalence of $431.3 million, an increase of $52.1 million from the third quarter. We remain well capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer. Our Q4 ending inventory was $90 million, up $36.8 million sequentially. Now, turning to our guidance, we currently expect revenue in Q1 of fiscal 26 to be between $185 million and $195 million. up 12% sequentially at the midpoint. We expect Q1 non-GAAP gross margin to be within a range of 64% to 66%. We expect Q1 non-GAAP operating expenses to be between $54 million and $56 million. We expect Q1 diluted weighted average share count to be approximately 188 million shares. These expectations are based on the current tariff regime, which remains fluid. We were pleased to see fiscal year 25 play out as we expected. The rapid shift to AI workloads continued to drive new broad-based customer engagement and we executed well to deliver the sequential growth we had forecast throughout the year. As we begin fiscal year 26, we expect revenue to exceed $800 million for year-over-year growth in excess of 85%. We expect non-GAAP operating expenses to grow at less than half the rate of revenue from fiscal year 25 to fiscal year 26. And as a result, we expect our non-GAAP net margin to approach 40%. And with that, I will open it up for questions.