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. And at that time, if you have a question, you will need to press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. I would now like to turn the conference over to Dan O'Neill. Please go ahead, sir.

Good afternoon. Thank you for joining our earnings call for the first quarter of fiscal 2026. Today, I am joined by Bill Brennan, Credo's Chief Executive Officer, and Dan Fleming, Credo's 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. 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 accessed using the investor relations portion of our website. I will now turn the call over to our CEO, Bill.

Thanks, Dan, and thanks, everyone, for joining our earnings call for the first quarter of fiscal 26. I'll begin with an overview of our first quarter results and then discuss our forward outlook. After my comments, our Chief Financial Officer, Dan Fleming, will provide financial details for Q1 and our guidance for the second quarter. In the first quarter, we delivered revenue of $223 million, an increase of 31% sequentially, and an increase of 274% year over year. Our non-GAAP gross margin was 67.6%. and we achieved nearly $100 million of non-GAAP net income. Demand for Credo's reliable and power efficient high-speed connectivity solutions continues to ramp as hyperscalers and data center operators accelerate investments in AI-driven infrastructure. We provide state-of-the-art solutions for the most demanding connectivity needs, supporting data rates up to 1.6 terabits per second across a range of industry protocols. Beto's growth has been fueled by strategic partnerships with hyperscalers and key customers built on our ability to tackle their most complex connectivity challenges. We achieved this by delivering optimized solutions that span the design, development, qualification, and production across our entire product line. Our three-tiered innovation framework, comprising of purpose-built SERDES technology, advanced integrated circuit design, and system-level development approach integrates seamlessly with our pilot software and firmware platform, empowering customers to streamline system development and achieve peak performance, yield, and reliability. Our innovative system-level approach has driven our leadership in pioneering the active electrical cable, or AEC market, And looking ahead, we are applying this proven strategy to pursue additional system-level opportunities driven by the demand for better reliability, energy efficiency, and performance. We expect our approach will lead to continued diversification in terms of customers, protocols, and applications. We look forward to announcements over the next several months, including at upcoming trade shows. I'll now discuss our business in more detail. First, regarding ADCs, our ADC product line continued its robust growth, driven by an increasingly diverse customer base. Three hyperscalers each contributed over 10% of our revenue, and we expect our customer diversification to continue to broaden over the upcoming quarters. Based on customer forecasts, we anticipate significant year-over-year growth. While shipment timing may lead to nonlinear growth patterns at a customer level, we see every data center partner scaling their deployments. We're making strong progress with new customers as well, highlighted by the first material revenue contribution from a fourth hyperscaler in Q1. We anticipate this revenue to grow throughout the fiscal year, further strengthening our market position. The adoption of AECs continues to gain traction across the industry. AECs offer an unequaled combination of reliability, signal integrity, power efficiency, and system cost, all critical to building and scaling leading-edge AI clusters. We've seen AEC adoption at data rates of 50 gig and 100 gig per lane, and we see this continuing for 200 gig per lane, 1.6 terabit per second solutions as next-generation architectures ramp. We also see the trend towards GPU and cluster densification to continue to be a catalyst for an expanding AEC TAM. Over the past year, we've seen customer interest for AECs expand from intra-rack solutions to rack-to-rack solutions. Advances in liquid cooling and power sourcing have driven a quadrupling of GPU density with one customer, which enabled them to architect their entire scale-up network with AECs up to seven meters in length. Reliability and power efficiency led to choosing AECs over optical solutions, as they are up to 1,000 times more reliable and consume half the power. AECs virtually eliminate link flaps, which are intermittent losses of connection, boosting cluster reliability and productivity while reducing power consumption. Our system-level approach drives innovation, accelerates time to market, and delivers a distinct competitive edge. By owning and delivering the entire solution stack, including series IP, retimer ICs, system level design, qualification, and production, Credo has forged strong customer relationships and solidified its position as the leader in the AEC market. Moving forward, we'll continue driving innovation. with PCIE AECs and other advanced products coming to market in the near future. Let me now turn to the optical market. During the first quarter, we sustained strong momentum in our optical business, positioning us as on track to achieve our goal of again doubling optical revenue in fiscal 26. We're delivering cutting edge DSP solutions to an expanding roster of optical module customers and their hyperscale end users. With our expertise in optical DSPs, we're meeting the rigorous connectivity demands next generation applications. Our collaborative approach with customers helps ensure solutions that enhance performance, scalability, and power efficiency, further building on our position in the market. We provide customers with a leading edge portfolio of innovative, full DSP, and linear receive optical or LRO solutions, supporting port speeds up to 1.6 terabits per second. For several years, the industry has debated the shift from copper to optical connectivity solutions. While consensus holds that copper will remain prevalent in the foreseeable future, Credo is strategically prioritizing optical solutions as a cornerstone of our product roadmap. Credo sees an expanding TAM for both copper and optical connectivity solutions, and we're excited by the opportunity to bring our system-level expertise to bear in the optical market, further diversifying our position. We look forward to discussing these innovations in the coming months. And now regarding our retimer business. In Q1 fiscal 26, our Ethernet retimer business achieved strong results. Our retimers are recognized for their exceptional performance and energy efficiency, featuring advanced MACSEC encryption and gearbox functionality. The Ethernet retimer market encompasses traditional switching applications and the emerging category of AI appliances. Our recently launched PCIe retimer family is gaining significant traction, driven by robust customer engagements. Leveraging the expertise of our world-class series design team, our PCI solutions deliver an unparalleled combination of maximum reach and minimal latency, a rare achievement as these attributes are typically a trade-off. Our engineering team's innovative design approach has resulted in a truly differentiated solution. Our top-tier devices, coupled with our award-winning pilot debug and telemetry tools, to power customers to integrate our solutions with faster time to market and better reliability. We are on track to secure PCI design wins in calendar 25 with production revenue expected in calendar 26. Our expansion into PCIe based solutions for AI scale of networks significantly broadens our TAM and we are well positioned to capitalize on the industry shift to 200 gig per lane scale of solutions in the future. ensuring sustained growth and competitiveness. To summarize, during the first quarter of fiscal 26, Credo reported its highest quarterly revenue and profitability to date, reflecting exceptional operational execution to meet customer demand. Over the past several quarters, Credo has achieved extraordinary growth fueled by the surging demand for AI infrastructure. Credo is poised for continued success with a clear path for growth through fiscal 26 and beyond. Over the medium and long term, we anticipate multiple waves of growth opportunities fueled by the evolving scale-out and scale-up networks and next-generation training and inference architectures. We expect that each of these waves will drive growing demand for innovative connectivity solutions, spanning diverse fiscal mediums, distances, and protocols. Credo occupies a unique position in the industry as one of the few companies worldwide capable of delivering cutting-edge SERDES technology at the advanced speeds we're currently qualifying. By combining this core SERDES differentiation, central to our competitive edge, with our integrated circuit expertise and system-level design approach, we deliver solutions optimized to meet each customer's needs. Cato has become a high-value partner in the unprecedented build-out of hyperscale infrastructure. I believe our strong results today demonstrate our potential, and I'm increasingly optimistic about the opportunities that lie ahead. Our Chief Financial Officer, Dan Fleming, will now provide additional details on our financial results.

Thank you, Bill, and good afternoon. I will first review our Q1 results and then discuss our outlook for Q2 of fiscal year 26. In Q1, we reported revenue of $223.1 million, up 31% sequentially and up 274% year over year, and well above the high end of our guidance range. Our product business generated $217.1 million of revenue in Q1, up 31% sequentially and up 279% 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 Q1. As a reminder, customer mix will vary from quarter to quarter, and we continue to make progress in diversifying our customer base. We can 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 to more significant volumes. and as we expect to begin to ramp two new hyperscale customers in fiscal year 26. Our team delivered Q1 non-GAAP gross margin of 67.6% above the high end of our guidance range and up 20 basis points sequentially. Our product non-GAAP gross margin was 66.7% in the quarter, up 12 basis points sequentially, and up 517 basis points year over year. primarily due to increasing scale. Total non-GAAP operating expenses in the first quarter were $54.5 million at the low end of our guidance range and up 5% sequentially. Our non-GAAP operating income was $96.2 million in Q1 compared to non-GAAP operating income of $62.5 million in Q4, up demonstrably due to the leverage attained by achieving 31% sequential top line growth, while OpEx growth was in the mid single digits. Our non-GAAP operating margin was 43.1% in the quarter, compared to a non-GAAP operating margin of 36.8% in the prior quarter, a sequential increase of 635 basis points. Perhaps nowhere does our performance show more clearly than at our bottom line. Our non-GAAP net income was $98.3 million in the quarter, a record high, and a 51% sequential increase compared to non-GAAP net income of $65.3 million in Q4. And our non-GAAP net margin was 44.1% in the quarter as we drove significant leverage in the business. Cash flow from operations in the first quarter was $54.2 million. down $3.7 million sequentially, due largely to increases in working capital. CapEx was $2.8 million in the quarter, driven largely by purchases of production equipment. And free cash flow was $51.3 million, down slightly from $54.2 million from the fourth quarter. We ended the quarter with cash in equivalence of $479.6 million, an increase of $48.3 million from the fourth quarter. We remain well capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer. Our Q1 ending inventory was $116.7 million, up $26.6 million sequentially. Now, turning to our guidance, we currently expect revenue in Q2 of fiscal 26 to be between $230 million and $240 million, up 5% sequentially at the midpoint. We expect Q2 non-GAAP gross margin to be within a range of 64% to 66%. We expect Q2 non-GAAP operating expenses to be between $56 million and $58 million. We expect Q2 diluted weighted average share count to be approximately 190 million shares. These expectations are based on the current tariff regime, which remains fluid. As we move forward throughout fiscal year 26, we expect sequential revenue growth in the mid single digits, leading to approximately 120% year over year growth. We expect each of our top three customers from Q1 to grow significantly year over year in fiscal year 26. We also expect revenue diversification to strengthen further with a fourth customer surpassing the 10% revenue threshold for the year. We expect non-GAAP operating expenses to increase year over year by less than 50% in fiscal year 26. As a result, we expect our non-GAAP net margin to be approximately 40% in the coming quarters and for fiscal year 26. And with that, I will open it up for questions.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star and then the number one on your telephone keypad. To be able to take as many questions as possible, we ask that you please limit yourself to one question and one follow-up. And we'll pause for just a moment to compile the Q&A roster. And our first question comes from the line of Carl Ackerman with BNP Paribas. Your line is open.

Yes, thank you. It sounds like you are seeing at least one of the two new hyperscalers adopting AECs this year pull in orders relative to your previous outlook. Could you discuss whether all of these new developments are adopting, across hyperscalers, are adopting 100 gig per lane AECs, and whether you have several programs across each of these hyperscalers that demonstrate the, not only the breadth, but also the depth of your engagements? And I'll have a follow-up.

Yeah, thanks, Carl. I'll confirm that the most recent ramps that we've seen have been at 100 gig per lane. And depending on the customer, you know, we've got multiple programs in flight. Naturally, as we begin a relationship with a new customer, it always starts with a single platform. And then typically what we've seen is it expands from there. But I would say that everything we've seen over the last three months has has been encouraging in a sense that we did see a pull-in from the schedule that we talked about, and we really effectively delivered to the volumes that they wanted.

Helpful. Thank you. When you think about scale-up interconnect opportunities, you know, several of your customers are taking different approaches with some using PCIe-based solutions and some using scale-up Ethernet solutions. Having said that, do you believe AECs offer greater competitive advantages to scale-up Ethernet or PCIe-based applications, such as UA-Link, and therefore the market opportunity of one could be larger than the other? Thank you.

Yes, I would say that the near-term opportunity for us in scale-up is really with the PCIe protocol. As we see the market moving from PCIe Gen 5 to Gen 6, We do see that AECs will represent a really nice opportunity, both for inter-rack as well as rack-to-rack as scale-up goes row scale. The longer-term discussion is around the debate in the industry about the 200 gig per lane protocol. And, of course, we've heard from Broadcom with scale-up Ethernet, UAL is really being driven by AMD and others. Of course, NVIDIA has come forward with NB-Link Fusion, and PCIe is talking about going to PCIe Gen 7 and beyond. For us, we really think the opportunity is one that we're agnostic towards because the products that we're delivering can support any one of the 200 gig per lane protocols. Each one of them uses the same identical IEEE 200 gig CERTIs. And so I think we're going to be in good shape. So, again, it's layer one from the standpoint of an AEC. And so I think that, you know, for us, we'd just like to see the market go faster sooner because the scale-up opportunity represents a significant increase in TAM really over the next two to five years.

Congrats. Thank you.

Thanks.

And our next question comes from the line of Vivek Arya with Bank of America. Your line is open.

Thank you for taking my questions. First set of questions is on the AEC market. If you could quantify how large each of your 10% customers were, if they were the same as you had in the prior quarter, and then Bill, if I zoom out, you know, the market for you is now running closer to a billion dollars or so. How large do you think this market is over time? And do you think this market is cannibalizing traditional copper or do you think at some point it is even cannibalizing optical transceivers?

Hey Vivek, this is Dan. Let me address the 10% customer question that you had. So as we mentioned in our prepared remarks, we had three 10% customers in Q1. They were the same three customers that were 10% customers in Q4. The mix was a little bit different though. Our largest customer was 35% of revenue. Second largest was 33%, and the third largest was 20%. So we were quite pleased with that kind of the customer diversity that we demonstrated within Q1. But having said that, we expect continued diversification, as Bill highlighted, throughout fiscal 26. We do see two additional hyperscalers ramping. one of which, which is our fourth hyperscaler, we mentioned should reach to be a 10% customer for the full year of fiscal 26. And then the last thing I'll mention on customer, you know, our largest customer for fiscal 25 is the largest driver of our growth in fiscal 26 as we stand right now and look forward. So that's an important factor to bear in mind as well as you look at how our year will progress.

Right, and I'll take a shot at answering your question as it relates to the overall TAM. So with all of our customers, we've got additional opportunities. We're not seeing AECs being adopted across all the possible applications. And we've talked about this before that Historically, we've talked about it being an intra-rack kind of de facto solution as we replace passive copper cables. And the catalyst being speed and also functionality. And so we've seen a good transition as the market's gone to 50 gig per lane. And now we're seeing a really good traction as it relates to 100 gig per lane. I still think we're in the early innings from a market sizing standpoint, even for, you know, just breaking out the intra-rack. Again, to reiterate, we see a huge opportunity from NIC to TOR applications, as well as switch rack applications. And that is for front end and really emphasized, you know, much more strongly in back end, both in scale out and scale up. What we've seen recently that we talked about in the prepared comments was that we're seeing a move from inter-rack to rack-to-rack. And traditionally, inter-rack has been passive copper cables or DACs, and we've seen rack-to-rack being more optical solutions because of the distance. But I think with the emphasis on reliability as it relates to clusters, that we see customers really considering using AECs. It's really driven by reliability. I mentioned on the prepared comments that we're up to 1,000 times more reliable, effectively reducing link flaps and having the uptime of the cluster being much more. Again, reiterating that if you have got a single link flap in, say, a 10,000 or 100,000 or a million GPU cluster, it brings the entire cluster down because there's no redundancy from that NIC to TOR connection. And so we're actually seeing the TAM expanding significantly. And I think for the first time in history that you're seeing copper replacing optical connections. So we're quite bullish on the market generally.

All right. And for my follow-up, we'll actually have a question for both you and Dan, which is what is the next big thing for Lido? Is it optical DSP? If yes, how large can it be? for you. And I ask that because, you know, it's great to see that you have this, you know, tremendous operating leverage. You know, you're guiding every quarter sales that up, you know, 15, 20 million and OPEX hardly goes up. So are you investing enough in diversifying beyond AECs? So just what is the next big thing for Credo? And are you investing adequately in that?

Yes, I think that, you know, we've talked about this in the past and I'll you know, speak again about the opportunity generally that we're seeing that's being driven by AI. Really for our company, it's all about connectivity bottlenecks and we see bottlenecks everywhere. We see that at a system level, the opportunity is abundant because really what's being driven in the market is the need for better reliability, better performance, and better power efficiency. And so there's a lot to come as far as the AEC market is concerned, but we also see really big opportunities as we move from an Ethernet protocol to additional protocols in the scale-up network. We believe that there's system-level opportunities in optical, and we're not going to go into too many details here, but you'll see more in the upcoming months as we announce new products. And then even, you know, bottlenecks associated with the connection between GPUs and memory. We see opportunities there that can be quite large. Traditionally, we've seen that the training has really been driving the market, but we see a really big upside in inference as well. And so, again, we see multiple opportunities that will ultimately drive several pillars that we talk about as we maybe fast forward to two to three years from now and we look backwards.

The one thing I'll add to that, Vivek, just from are we investing enough? We are continuing to manage our operating expenses to support these upcoming waves of growth that Bill's talked about. But we're at this point in time right now where our top line is growing at quite a fast clip. I will mention just from a pure R&D standpoint this year, more than half of our OPEX in R&D is tied to optical projects and things that are in these forthcoming pillars of our business. Thank you.

And our next question comes from the line of Tom O'Malley with Barclays. Your line is open.

Hey guys, thanks for taking my question. I wanted to follow up on the optical DSP business. We're getting on the brink of a more material 1.6T transition. Could you talk about what your feelings are about your competitiveness at that node? And maybe give us a little bit of insight into the three nanometer platform, when you'll be in volume, and how you think you're positioned versus the 800G generation.

Regarding our 200 gig per lane solution for the optical DSP, we'll have both a full DSP as well as LRO, the linear receive opticals. And so we moved to three nanometer straight away due to power. We felt like the initial transceivers that were introduced to the market being well over 20 watts, something that was going to take off in high volume. And so we researched, you know, pretty extensively in five nanometers. We made the decision to really jump forward to three, which has been it's a different strategy than we pursued in the past. And it's really been driven by the need for power efficiency. So we feel like we're in great shape from the standpoint of the product that we're going to bring to production in the upcoming months. You know, we think that the market for 1.6 t transceivers is going to take time to develop it's uh it's quite natural that every generation that we see it takes a little bit more time than some of the forecasters talk about but we feel great about the product that we've developed and the fact that we're going to bring it to production shortly helpful and then you spent a lot of time in the preamble talking about pcie retimers

Today, that's the large GPU manufacturer and then also one large hyperscaler who's really started off their efforts there. When you talk about the opportunity in the future, are you thinking that that is concentrated amongst those two customers? Or do you see PCIe proliferation amongst other hyperscalers as well? Thank you.

Yeah, we definitely see it being broader than the two that you mentioned. You know, we think that that is going to be the protocol that most people pursue, most hyperscalers pursue in the near term. So we think the market opportunity is significant. And as things develop over time, I think that's when you're going to see, you know, as the market moves from PCIe Gen 6 into whatever's next, that's when you're going to see you know, different hyperscalers taking an approach that's, you know, pursuing different protocols. But again, for us, it's really something that we're going to be able to serve regardless of the protocol based on the fact that, again, it's the same 200 gig per lane certies for every single one of these protocols.

And our next question comes from the line of Joshua Buckholter with TD Cowan. Your line is open. Hey, guys.

Excuse me. Thank you for taking my question and congrats on the results. Maybe a follow-up to Tom's first one there. I think you've demonstrated LRO at 800 gig with your Dove HFT platform, but it sounds like a lot of the industry research and maybe you guys think 1.6T is more of the catalyst for LRO. Maybe you could speak to the near to medium term, like how we should expect the adoption curve to ramp for the LRO solutions. Thank you.

Yeah, we definitely see that every hyperscaler is kind of an independent market. The industry doesn't move one direction, and that's been for multiple generations now. So we've seen a lot of interest with 800-gig LRO, and I think there's good things coming. For 1.6T, again, power is becoming more and more important, and we've proven that we're able to deliver just rock-solid transceivers with our partners. from a bit error rate standpoint maintaining you know everything that's needed from a from an industry standard perspective as compared to lpo and offering significant power savings so we think that we'll see good success with 800 but but we do feel like 1.6 t it will become more and more popular given the need for power efficiency got it thank you um i just had a question in the prepared remarks you mentioned uh

I think something about your customer is not necessarily ramping linearly. You know, your guidance is obviously very strong and somewhat linear off of the strong one cue. Maybe you could elaborate on those comments in bigger picture, how you feel about the visibility into the ramps as you're expanding customer-based scales. Thank you.

Yeah, we've been pretty consistent in, you know, talking about, at a given customer, we don't necessarily see a linear up into the right ramp. That's just not how things work as customers prepare for next generation ramps. Typically, we see a surge as they are preparing to start a new generation of deployment. And then we see it balancing out. And then ultimately, it trends upward over time until we get to the next product transition. And so nothing new here. It's just if we start tracking quarter to quarter. And, you know, at one point, there was a lot of concern about us having too much concentration. And then the next quarter, we saw a really good, you know, good balance between multiple customers. And some people were concerned about, hey, what was kind of a decrease from the concentration you had. And, you know, long term, I can just tell you that we've been consistent in, you know, the messaging that we're going to see diversification across customers, and we're going to see diversification across mediums, copper and optical. We're going to see diversification across protocols as well. So I think we're right on track with, you know, showing better stability as it relates to having multiple customers in flight. And so we feel good about the fact that we've kind of moved forward from a few quarters ago where there was the concern.

Thank you. Congratulations again.

And our next question comes from the line of Tori Sponberg with Stifel. Your line is open.

Thank you and congratulations on the record results. Bill, I was hoping to get just a little bit more color on the use cases for the AEC business. I think Credo has a pretty unique position, especially in row scale. So, you know, just hoping to get a little bit more color on the size or where we are with row scale networking. I assume it's still early days, but any color you could share with us would be great.

Yes, I think that, you know, as we talk about the market opportunity, you know, the big shift I think in the TAM has been with the recognition that, you know, with the densification of the rows, that the opportunity for AEC is expanding. And the drivers, again, are really clear. It's reliability and it's power efficiency. And third is probably system cost, and that's opposed to optical solutions. And so I could make an argument that the intra-rack market is really still in the early stages, although now you've seen the solution really take off with four of the hyperscalers. We've talked about how we fully expect that all of the hyperscalers will be adopting AECs at some point in the future. And so when we talk about intra-rack, we really talk about server racks, whether those are AI appliances or whether they're general compute. And so Nictator is a big market. And then we've also talked about switch racks. You know, in the market, there's a trend towards disaggregation of chassis. That's been a trend that's been in place for many years. We've seen that part of the market not take off as fast as Nick de Tour, and so it represents a big growth opportunity. When we talk about rack-to-rack, this is really the expanding part of the TAM, really, you know, in both markets from the standpoint of, you know, AI back-end networks as well as switch racks. Switch racks are starting to go to multiple rack architectures. And so, as we talk about the near-term opportunity for rack-to-rack, it's really represented by the scale-out network. But long-term, we see that the scale-up network also represents a really large growth in town, given the fact that we expect the volumes for scale-up to be potentially an order of magnitude larger than the scale-up connections. So I think on several fronts, we can make the argument that we're still in the early stages. And I don't think there's any doubt in the market about, you know, if you can use copper, you will use copper, you know, given the advantages for reliability, power, and cost.

Yeah, that's really helpful. And I had a follow-up question on the customer concentration and drivers for fiscal 26. So I think Dan mentioned that your largest customer will still be a significant growth driver in fiscal 26, but that particular customer I think was sort of, you know, down the last two quarters. So is that customer sort of just pausing to ramp or, you know, are the use cases going to expand with that particular customer in fiscal 26?

I think maybe the answer to both of those questions is probably yes. We, it's, you know, their history, if you look back over time at how they've, you know, purchased inventory from us, it's been not consistently up and to the right, as Bill noted. So, and that's kind of what we believe to be kind of an ordinary purchasing pattern for potentially any of these hyperscalers. But I did, just for clarity, I wanted to make sure that it's understood by everyone that our largest customer from fiscal 25, we expect to be the largest customer in our fiscal 26 by the year end and by far, actually. So it won't be a close second in all likelihood, as we have forecast today from all of these customers.

Well, that's good, Carla. Thank you and congrats again. Thanks.

And our next question comes from the line of Christopher Roland with Susquehanna. Your line is open.

Hey guys, congrats on the results and thanks for the question. And this will probably be for Bill. So I guess first of all, for 1.6 , I believe there are some supply constraints that appear to be emerging. for 1.6P optical and lasers in particular. So I have two questions here. The first one is, do you think this affects your optical DSP outlook? And then secondly, do you think that these optical constraints could actually accelerate your AEC business?

Yes, I think generally speaking for our optical business, I think we're seeing great results. And this is really – we began our big ramp with 400 gig or 50 gig per lane solutions. We're seeing recent success with 800 gig, and we expect to be able to grow for a long period of time with that 100 gig per lane market. I think we've been pretty consistent saying that the transition – in lane speed over time typically takes a lot longer, and it's really driven by each independent customer strategy. So we see big opportunity for 100 gig per lane. We see the same thing that you're seeing from a 1.6T transceiver perspective, that it's going to take more time than the industry analysts have predicted. And so we don't see any slowing of the growth that we're expecting. Based on that delay, it'll be quite good if there's an acceleration. But generally speaking, it doesn't really impact our bullishness as it relates to the optical space.

And might it accelerate your AEC if there are supply constraints?

You know, I think that the AEC TAM is going to stand alone. And people are going to choose to use AECs. You know, based on whether they can or not, I think for sure what we're seeing consistently of our customers can use an AEC, they will use an AEC. And so I don't think supply constraints and optical are going to affect that at all.

Excellent. And for a second question, Bill, you know, I think there's some progress here on your fourth hyperscaler for sure. Any more color on when the fifth could be a 10 percenter? And then I know we're running out of hyperscalers, but any more color on any other engagements, including the big GPU guy? Is there any possibility of landing them for branded cables, or do you think they have their own initiative here?

Yeah, so first of all, I'll talk about, you know, what's upcoming. And I think your question was, you know, maybe one step ahead of where we are. You know, the first thing is we need to get that fifth one in production. We're through qualification, and I think that, you know, from a timing standpoint, no changes to what we've talked about in the past. We expect towards the end of this fiscal year that we'll see first traction. I've mentioned that all of these hyperscalers have the ability to be a 10% customer for us. It's a function of you know, their deployment plans specifically, as well as, you know, where in their network they're planning on using AUCs. There's a lot of interesting things happening. You know, we talked about the NeoCloud market. We've talked about Sovereign. And what we're seeing is that, you know, and I guess, well, prior to the comment, I'll say that finally you talked about the big GPU guy. And what we're seeing even today is that we're connecting with... many GPUs, including the big guy in the market. And so I think there's a recognition that the things we're doing are advantageous to the overall performance and power efficiency of AI clusters. And so we're connecting to plenty of NVIDIA GPUs now as we're in production. And we see opportunities that go beyond hyperscalers as CapEx globally expands with neoclouds as well as sovereign opportunities. So I think that every time you see a new announcement of a gigawatt data center, you can rest assured that we view that as an opportunity as probably everybody else in the market views it.

Thanks for the color, Bill.

And our next question comes from the line of Vijay Rakesh with Mizuho. Your line is open.

Yeah, hi, Bill and Dan. Congratulations on a pretty good quadrant guide here as well. So on the fourth CSP, it looks like a pretty nice graph there. It looks like it's going a lot faster than your prior ramps. Just wondering, is that driven by multiple engagements, multiple cables? What if you have it in there, or are you seeing a nice pickup on ASPs as you go to 100 gig per length?

I apologize, but you broke up as you were asking the question. Do you think you could repeat that?

Yeah, the ramp for the fourth customer seems to be a pretty nice accelerated ramp. Are you seeing, is that driven by a much higher content on 100 gig per lane, or what is driving the pretty accelerated pickup there, I guess?

Yeah, I think that the accelerated pickup was based on our kind of natural position to be a little more conservative with the way that we're guiding. Things came together very quickly with their qualification of this first program that's ramping. And I think you can get a feel for the scale of all of these deployments. I don't think there's any big change from the standpoint of, ASPs or margins, I think it's, you know, right down the middle of the fairway from what we're seeing elsewhere.

Got it. And then on the margin guide, I think, I know you mentioned some impact from that. Is it true that the impact is potentially more from the tenant side or, you know, or is there some product mix in there?

Yeah, it's... Let me just state it this way. You know, we, if you look at Q4 to Q1, we still bore a bit of an impact of the benefit of increasing scale, kind of a very small, you know, 20 basis point sequential increase in gross margin. So we're at the stage or we're at the scale where any fluctuations are probably going to be caused by some product mix issues. So, and all of these things, none of them will ever be linear. We've been very clear in stating that, although we've been very fortunate over the last few months. So I guess the key message to take away is, you know, long-term, we don't see any differences in what we stated in our gross margin model. Even though we're right now,

Got it. Thanks.

And as a reminder, it is star one if you'd like to ask a question. And our next question comes from the line of Quinn Bolton with Needham & Company. Your line is open.

Hey, guys. Thanks for squeezing me. And I guess maybe, Dan and Bill, the first question I had, the fourth hyperscaler, that first program, is that rack-to-rack or is that intra-rack? And do you see, you know, other opportunities at that hyperscaler ramping so that you ultimately will have both infrarack and rack-to-rack programs at that customer, and then I've got a follow-up.

Hey, I appreciate the question and the goal to understand more. I'm not going to be too specific with the exact application, but I will say it's not a single rack architecture.

Okay. And are there multiple programs at that customer you expect to ramp over time?

Yeah, sure. We're right on track with where we would expect to be as we turn on a new relationship. Once there's a very good first experience, it typically leads to next-generation planning. And this is really where we do our best work is as people are looking at architecting, the next generation deployment, we typically get involved very early in architecting the racks even. That's one of the areas where we're able to show several different racking options as we talk about next generation. And so it's really natural from a customer standpoint that after we get the first program kicked off that we're almost invited in as a collaborative partner on the next generation rack and row designs.

James Rattling Leafs- Excellent and second question for me over the last I think month or so you guys have announced to patent lawsuit settlements, I believe, with amphenol and bolex. James Rattling Leafs- I know you can't get into specifics of of either of those agreements, but is there anything you can say about whether you've granted licenses that could generate royalties going forward. And just any thoughts you have now that perhaps you've settled lawsuits with two of the four cable vendors. How do you see competition going forward? Are you effectively enabling greater competition by granting those licenses or signing those patent settlement agreements, you know, with other suppliers now of AECs? Sure.

So I'll keep the comments somewhat high level. I think that if we go back in time, this is a market that we pioneered, and along the way we developed a lot of intellectual property. We think it's reasonable to have the expectation to have our IP be respected in the market. We're very happy that the agreements that we've announced have taken us to the point where we would expect to be. And you'll see that we're pretty active in conversations with others as well. Really nothing in these announcements changes our sense of our place in the market. And when we think about our market share or forecast going forward, we've been really consistent in saying that the market for AECs is going to be very large, really over the next five to 10 years. And it's large enough for multiple winners. And when we get back to how we compete as a supplier to our partners, it's always driven by customer engagement. Our goal is to deliver the next generation of solutions first, achieve qualification first, and ultimately helping our customers ramp successfully. This is what we believe is going to be the big difference maker long term in how market share is ultimately going to play out. So we're trying to do such a good job for our customers that we're difficult to compete with. And I think we've talked about our moat. We've talked about expanding our moat. And we feel quite good about owning all aspects of the product. And we think it's uniquely competitive. Thanks for that perspective, Bill.

And our next question comes from the line of Suji De Silva with Roth Capital. Your line is open.

Hi, Bill, Dan, and Dan. Congrats on the progress here. I'm trying to ask Quinn's question maybe a little different way. I'm just trying to, with the spirit of understanding how broadly inter-rack is being adopted. You have five customers you're working with. Do they all have programs that are going to be inter-rack cables along with three-meter rack solutions? Or is it more of a niche, you know, with specific architectures? Just trying to get a feel for that dynamic, Bill.

Yeah, I wouldn't say it's across the board. I would say that the first step typically is intra rack. So three meter or less connections within the same rack. And this is just recent over the last six to nine months that we've seen traction as our customers start to realize the opportunity to deliver much better cluster reliability and also secondarily better power. And so I would say that, you know, we're at the you know, early stages still of having the market expand into rack-to-rack types of solutions. But I do think there's going to be an acceleration in the way that our customers view and use AECs.

Okay. That's helpful, Colorbill. And then you made a comment earlier about disaggregated architectures being slower to take up than you would have thought. Any color there? Any upcoming catalyst that would shift that transition of market inflection? And most importantly, with that, what kind of credo addressable market multiplier might that create? Sure.

So we're seeing the first part of that market that's taking off is the switch racks that are dedicated to back end networks for AI. When we thought about that market as we were really launching this product family a few years ago, it was really the the leaf and spine within the front-end networks. And that part of the market has moved more slowly to next-generation speeds. So I think speed is going to be a catalyst for it to take off more broadly. But we are seeing the first uptake in 100 gig per lane back-end networks for the switching application specifically.

Okay. Thanks, Bill.

And we have no further questions at this time. Mr. Brennan, I will turn the call back over to you.

Well, thank you, everybody, for the questions. And I really appreciate the ongoing strong interest. So we'll speak quite soon. Thanks.

Ladies and gentlemen, this concludes today's call. And we thank you for your participation. You may now disconnect.