Credo Technology Group Holding Ltd

leading pilot, debug, and telemetry platform has allowed us to forge deep strategic partnerships. Let me now walk through our business in detail, starting with our active electrical cables. The AEC product line remains the fastest-growing segment in the company. This step function improvement in reliability and power efficiency that's driving the expansion of the AEC TAM into 100 gig and now 200 gig per lane generations. And we expect that trend to continue as customers densify racks and push cluster scale to new levels. Next, our IC business, which includes retimers and optical DSPs, also continued with strong performance. We expect significant optical DSP growth in fiscal 26, driven by 50 gig and 100 gig per lane deployments, with longer-term growth driven by our 200 gig per lane solutions. Live demonstrations last quarter of our 200 gig per lane Bluebird optical DSP drew significant interest and extremely positive feedback. Ethernet re-timers remain important in both traditional switching fabrics and the fast-growing AI server segment, where features like MACSEC encryption, Gearbox functionality, and rich software programmability are highly valued. Our PCIe retimer and AUC families are also progressing on plan. Customer silicon evaluations have consistently highlighted our best-in-class combination of reach, latency, and power efficiency, a rare trifecta enabled by our unique purpose-built service architecture. We remain on track for PCIE design wins in fiscal 26, followed by meaningful production revenue in fiscal 27. Our existing AEC and IC businesses both address multi-billion dollar market opportunities with excellent visibility for continued growth. But the truly exciting part of this quarter is that we've added three entirely new growth pillars, each representing distinct multibillion-dollar market opportunities that significantly expand our total addressable market and extend the reach and depth of our connectivity leadership. The first new growth pillar is zero-flap optics, the first laser-based optical connectivity family that delivers AEC class network reliability. enabled by a customized optical DSP that is tightly coupled with our pilot software and integrated with a switch level SDK. Our zero flap optics integrate with our customer's network software. Link health telemetry data on each optical link enables autonomous detection and mitigation of conditions that cause link flaps before they bring down the cluster. This enables a step function improvement in network reliability. We're currently in live data center trials with our lead partner, and we expect to begin sampling a second U.S. hyperscaler later this fiscal year. Our ZF Optics solutions expand our addressable market to any length of connection within the data center. We anticipate initial revenue in fiscal 27, and long-term, a market that will be a multi-billion dollar opportunity. The second new pillar of growth was announced in September. Credo has combined forces with Ottawa-based Hyperloom, a team of experts specializing in high-performance micro-LED technology. Credo has been investing in micro-LED innovation over the past 18 months with the intent of developing a new class of connectivity solutions. Uniting with the Hyperloom team will accelerate our time to market. As a first product, we'll develop and bring to market a pluggable optical solution that utilizes micro LEDs as the light source. Our same three-tiered innovation playbook will be the catalyst to pioneering this entirely new connectivity category we call active LED cables, or ALCs. ALCs will deliver the same reliability and power profile as an AEC, but in a thin gauge cable that can reach up to 30 meters and is ideal for row scale, scale of networks. Customer reaction has been very positive. We plan to sample the first ALC products to lead customers during our fiscal 27, with initial revenue ramping in fiscal 28. We believe the ALC TAM will ultimately be more than double the size of the AEC TAM. Finally, we announced the third new pillar of long-term revenue growth, OmniConnect Gearboxes. a family of products that will enable a disaggregated and optimized approach to XPU connectivity. In November, together with our lead customer, we unveiled the first gearbox that will address the memory wall by redefining memory to compute connectivity, a solution we call Weaver. Today's on-package high bandwidth memory is capacity and throughput limited, as well as expensive and supply chain constrained. Weaver allows designers to move to commodity DDR memory and achieve up to 30 times more memory capacity and eight times the bandwidth. The key enabler for the OmniConnect family is Credo's purpose-built 112-gig VSR series that enables a 10x improvement in beachfront IO density and has a reach of up to 10 inches. The Weaver gearbox from 112-gig VSR to DDR effectively overcomes the physical and logical limitation of current memory-to-compute connectivity solutions. Our first customer for Weaver announced their plan to deliver an XPU targeted for inference with two terabytes of memory capacity, a complete game changer for workloads such as real-time AI video generation and full self-driving, where memory capacity and bandwidth are the primary gating factors. Industry forecasters project the memory to compute connectivity market to be a multi-billion dollar market by the end of the decade. We anticipate initial revenue in our fiscal 28 with significant scaling thereafter. The next OmniConnect gearboxes to be introduced will provide a future enabled path to scale out, scale up, and near package optics connectivity with XPUs. In summary, We now have five distinct high-growth connectivity pillars, AECs, IC solutions, including re-timers and optical DSPs, zero-flap optics, ALCs, and OmniConnect gearbox solutions. Together, they'll give Credo a combined total market opportunity that we believe will exceed $10 billion in the coming years, more than triple where we stood just 18 months ago. Looking forward, we couldn't be more excited about the combination of continued growth in our core AEC and IC businesses, plus the upcoming ramps of zero-flap optics, ALCs, and Omniconnect gearboxes. We believe this combination gives us a strong outlook into continued revenue growth through fiscal 26 and well beyond. Team Credo continues to execute at an elite level, delivering record results quarter after quarter, while simultaneously pioneering and launching new multibillion-dollar product categories. I'm proud of our world-class operational excellence and innovation. With that, I'll turn the call over to Dan Fleming for a detailed financial review and our Q3 guidance.

Thank you, Bill, and good afternoon. I will first review our Q2 results and then discuss our outlook for Q3 of fiscal year 26. In Q2, we reported revenue of $268 million, up 20% sequentially, and up 272% year over year, and well above the high end of our guidance range. Our product business generated $261.3 million of revenue in Q2, up 20% sequentially, and up 278% year over year. Notably, our AEC product line again grew healthy double digits sequentially to achieve new record revenue levels once again, based on substantial year-over-year growth across four domestic hyperscale customers. Our top four end customers were each greater than 10% of revenue in Q2. 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 to more significant volumes and as we expect to begin to ramp an additional hyperscale customer in the coming quarters. Our team delivered Q2 non-GAAP gross margin of 67.7% above the high end of our guidance range. and up 11 basis points sequentially. Our product non-GAAP gross margin was 66.8% in the quarter, up 18 basis points sequentially, and up 469 basis points year over year. Total non-GAAP operating expenses in the second quarter were $57.3 million, slightly above the midpoint of our guidance range and up 5% sequentially. Our non-GAAP operating income was $124.1 million in Q2, compared to non-GAAP operating income of $96.2 million in Q1, up demonstrably due to the leverage attained by achieving more than 20% sequential topline growth, while OpEx growth was in the mid single digits. Our non-GAAP operating margin was 46.3% in the quarter, compared to a non-GAAP operating margin of 43.1% in the prior quarter, a sequential increase of 319 basis points. Our bottom line once again demonstrated the substantial leverage we are delivering in the business. Our non-GAAP net income was $127.8 million in the quarter, a record high, and a 30% sequential increase compared to non-GAAP net income of $98.3 million in Q1. And our non-GAAP net margin was 47.7% in the quarter as we drove significant leverage in the business. Cash flow from operations in the second quarter was $61.7 million, up $7.5 million sequentially. CapEx was $23.2 million in the quarter, driven largely by purchases of production mask sets. And free cash flow was $38.5 million, down from $51.3 million from the first quarter due to higher CapEx investments. We ended the quarter with cash and equivalents of $813.6 million, an increase of $333.9 million from the first quarter, up largely from the proceeds of our ATM offering, which began in October. We remain well capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer. Our Q2 ending inventory was $150.2 million, up $33.5 million sequentially. Now turning to our guidance, we currently expect revenue in Q3 of fiscal 26 to be between $335 million and $345 million. up 27% sequentially at the midpoint. We expect Q3 non-GAAP gross margin to be within a range of 64% to 66%. We expect Q3 non-GAAP operating expenses to be between $68 million and $72 million. We expect Q3 diluted weighted average share count to be approximately 194 million shares. These expectations are based on the current tariff regime, which remains fluid. As we look toward the end of fiscal year 26 and into fiscal 27, we expect sequential revenue growth in the mid single digits, leading to more than 170% year-over-year growth in the current fiscal year. We expect each of our top four customers from Q2 to grow significantly year-over-year in fiscal year 26. We also expect revenue diversification to strengthen further with our fourth customer surpassing the 10% revenue threshold for this fiscal year. We expect non-GAAP operating expenses to increase year over year by approximately 50% in fiscal year 26. As a result, we expect our non-GAAP net margin to be approximately 45% for fiscal year 26. This should translate to net income more than quadrupling year over year. And with that, I will open it up for questions.

Thank you. I'd like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. We'll pause just for a moment to compile the Q&A roster. And your first question comes from the line of Tom O'Malley with Barclays. Your line is open.