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. 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 again. I would now like to turn the conference over to Mr. Dan O'Neill. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining our earnings call for the third quarter of fiscal 2026. Today, I am joined by Bill Brennan, CREO'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 at the SEC, which can be found in the investor relations portion 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 adversely and materially from those anticipated, implied, or inferred. The company undertakes no obligation to publicly update forward-looking statements for any reason after the date of this call. 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. I will now turn the call over to our CEO, Bill.

Thanks, Dan, and thank you all for joining our third quarter fiscal 26 earnings call. I'll start by walking through our Q3 results, give an update on our business, and share our view on our long-term opportunities. After my remarks, Dan Fleming, our Chief Financial Officer, will provide a detailed financial review of the third quarter and our guidance for the fourth quarter. We will then open the call for questions. In the third quarter, we delivered record revenue of $407 million, a sequential increase of 52%, and more than 200% from Q3 last year. We delivered non-GAAP gross margin of 68.6%, and generated approximately $209 million of non-GAAP net income. Over the past 18 to 24 months, maximizing network reliability and energy efficiency have been our core mandates as we've built our roadmap and brought new products to market. In AI infrastructure, performance without reliability stalls clusters, and scale without efficiency strains both economics and power envelopes. The strategy is clear. accelerate cluster bring-up, maximize XP utilization, and reduce total cost of ownership, all while providing our customers the highest reliability in the industry. Our recent performance reflects the most accelerated growth phase in Credo's history. From fiscal 24 to fiscal 25, we more than doubled revenue. And from fiscal 25 to current year, fiscal 26, we expect to triple revenue on top of that. That represents greater than six times growth in just two years. Few companies, particularly semiconductors, have scaled at that pace while maintaining consistent execution, healthy margins, and product leadership. Our purpose-built CERTIs and ICs, vertically integrated system model, and deep hyperscaler partnerships win at scale. We established leadership in high reliability copper connectivity and built strong position in optical DSPs and re-timers. Now, our strategy is to lead in reliability, power efficiency, and signal integrity across the full spectrum of AI and data center connectivity, from die-to-die links to chip-to-chip and board-level links to rack and row-scale copper to mid-reach optical and to resilient facility-wide optical solutions. By extending both inward toward the silicon and outward across the data center, We're positioning Credo to encompass the entire connectivity fabric of AI infrastructure. Each layer of connectivity is being fundamentally reshaped by demand for higher bandwidth and faster data rates. AI workloads continue to grow in parameter size, model complexity, and cluster scale, driving sustained transitions from 100 gig to 200 gig per lane and to 400 gig per lane in the upcoming years. At the same time, Architectures are becoming more complex, power envelopes are tightening, and reliability requirements are rising. We believe the industry's persistent push towards higher speed and larger clusters continues to expand our long-term opportunity and our ability to win. I'll now discuss our business in more detail. Our ADC product line once again delivered strong growth, driven by existing customers and new wins, including our fifth hyperscaler. Demand is accelerating across both hyperscalers and emerging neocloud providers. We continue to believe the industry is early in its AEC adoption. As AI clusters scale, reliability and power efficiency have become the primary design constraints. AECs are now the de facto standard for intra-rack and rack-to-rack connectivity up to seven meters, increasingly displacing laser-based optical modules. Their reliability and power advantages are driving broad adoption. Our zero-flap agencies deliver up to 1,000 times better reliability than commodity laser-based optics, while consuming roughly half the power. In XPU clusters, where downtime can cost millions, network reliability matters. We're supporting large-scale deployments at 100 gig per lane today and expect a long-tail deployment at those speeds. We're fully prepared to support strong industry momentum towards 200 gig per lane or 1.6 terabit ports. Our 1.6 terabit ADCs will support Ethernet, UA-Link, and E-Sun protocols. Additionally, our PCIe Gen 6 ADCs are sampling now and will be released to mass production in first half fiscal 27. Our vertically integrated system-level model remains a key competitive advantage. We take end-to-end ownership. from CERTI's leadership in silicon innovation to system design and qualification, deep telemetry, and supply chain execution, positioning us for sustained leadership. I'll now turn to our IT business, including our retimers and optical DSPs. Our IT portfolio spans both optical and copper connectivity across 50 gig, 100 gig, and 200 gig per lane speeds. We expect strong optical DSP growth in fiscal 26, driven by 100 gig per lane deployments, with increasing traction at 200 gig as customers prepare for 1.6T transitions. For Ethernet retimers, we're seeing significant growth with our 100 gig per lane solutions in both traditional switching fabrics and the rapidly expanding AI server segment. Our PCIe Gen 6 retimers remain on track with fiscal 26 design rooms expected to convert to production revenue in fiscal 27. Customer feedback has been consistently stellar. We're delivering an unequaled combination of industry-leading reach, latency, and power efficiency. We're also excited about Blue Heron, our 200 gig per lane retimer that is purpose-built for scale of AI. It leverages our expertise to deliver long reach energy efficiency, and advanced telemetry, with support for UA-Link, Ethernet, and E-Sun protocols. These IC solutions address a large and growing market opportunity. As the industry transitions to 200 gig per lane, we see substantial growth potential across multiple protocols. I'll now discuss our three most recent product families, where we've made meaningful progress since their announcements last year. At a high level, these products significantly expand our total addressable market by extending Credo's reach across the full spectrum of connectivity lengths inside the data center. I'm pleased to report that our progress with ZeroFlap Optics is ahead of schedule. As noted in our recent press release, we began production shipments with our first NeoCloud customer, TensorFlow. In addition, we're in qualification with three additional customers, including hyperscalers and NeoCloud operators. At a high level, data centers today face major challenges with extended cluster bring-up times and uptime degradation created by the inherent link flap instability of commodity laser-based transceivers. Our zero-flap optics were designed to address these challenges directly. Through tightly integrated hardware, optics, firmware, and our pilot software with switch-level SDK integration, Duraflap optics deliver continuous link health telemetry and autonomous detection and mitigation of potential link flap events before they impact the cluster. This enables a step function improvement in network reliability. From a TAM perspective, Duraflap optics allows us to address optical connectivity spanning any length within the data center. Based on strong customer traction, we now expect to see a significant production ramp. beginning in first quarter fiscal 27 and continuing throughout the year. Next, I'll discuss active LED cables, or ALCs. ALCs extend our system-level ADC philosophy into mid-reach optical by combining Credo's connectivity architecture with the micro-LED expertise gained in our HyperLum acquisition. we're creating a new system-level product category that delivers the reliability and power profile of an AEC with a thinner gauge optical cable capable of reaching up to 30 meters. This makes ALCs ideal for row-scale AI networks where copper reach becomes limited and traditional pluggable optics introduce reliability, power, and cost disadvantages. ALCs expand our TAM outward from short-reach copper into mid-reach optical, bridging the gap between ADCs and conventional optical modules. We expect to sample and qualify our first ALC products in fiscal 27 and production ramp in fiscal 28. Finally, our OmniConnect line of products drives our reach inward toward the silicon to further expand our TAM. OmniConnect combines our purpose-built BSR surges with a family of gearboxes for XPU connectivity. Our first product, Weaver, enables up to a 10X improvement in memory beachfront IO density with reach up to 10 inches. By converting DSR to DDR, Weaver overcomes the physical fan-out constraints of traditional memory-to-compute interconnects. Our first OmniConnect customer, Positron, plans to leverage this architecture to deliver an inference XPU with two terabytes of memory capacity. enabling substantial bandwidth gains in memory-intensive workloads, such as real-time AI video generation. We expect the production ramp for the first OmniConnect gearbox to be in fiscal 28. We expect to introduce additional gearboxes over time to enable a composable architecture where the same XPU design can be optimized for inference or training workloads and be future-enabled as speeds or protocols change. We'll also develop and OmniConnect gearbox targeting near-package optics with micro-LED that will address the reliability, serviceability, and availability pitfalls of current CPO solutions, while at the same time reducing power significantly. To wrap up on the business update, we're proud of our record performance and even more energized by the opportunity ahead. With continued growth in ADCs and ICs, and three new multibillion-dollar TAM expansions through zero-flap optics, ALCs, and OmniConnect, we've meaningfully broadened our near- to long-term opportunity. We remain confident in our ability to innovate, scale, and grow in the expanding AI infrastructure landscape through our focus on delivering solutions with best-in-class network reliability and energy efficiency. I want to take a moment to express strong appreciation for our silicon operations and system product operations teams. They have done an outstanding job managing supply, scaling production, and executing flawlessly in the face of significant upside demand from our customers. Their ability to respond quickly and reliably has not only enabled our record performance, but has also become a distinct competitive advantage and truly a reason customers choose Credo. In an environment where execution matters as much as innovation, Operational excellence is a differentiator. And with that, I'll turn it over to Dan Fleming for detailed financial review of our Q3 and our Q4 guidance.

Thank you, Bill, and good afternoon. I will first review our Q3 results and then discuss our outlook for Q4 of fiscal year 26. In Q3, we reported revenue of $407 million, up 52% sequentially and more than tripling year over year. and at the high end of our revised guidance range. Notably, our revenue 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 three end customers were each greater than 10% of revenue in Q3. As a reminder, customer mix will vary from quarter to quarter We continue to expect that three to four customers will be greater than 10% of revenue in the coming quarters and fiscal year. And we continue to make progress in diversifying our customer base across hyperscalers, neoclouds, and other customers. Note that with product revenue representing the vast majority of total revenue, we will no longer break out product and IP as separate line items in our income statement. Our team delivered Q3 non-GAAP gross margin of 68.6% above the high end of our guidance range and up 92 basis points sequentially. Total non-GAAP operating expenses in the third quarter were $77.4 million above the high end of our guidance range due to our strong R&D investment and up 35% sequentially. Our non-GAAP operating income was $201.8 million in Q3, compared to non-GAAP operating income of $124.1 million in Q2, up demonstrably due to the leverage attained by achieving more than 50% sequential topline growth, while OPEX growth was in the mid-30s. Our non-GAAP operating margin was 49.6% in the quarter, compared to a non-GAAP operating margin of 46.3% in the prior quarter, a sequential increase of 327 basis points. Our bottom line once again demonstrated the substantial leverage we are delivering in the business. Our non-GAAP net income was $208.8 million in the quarter, a record high, and a 63% sequential increase compared to non-GAAP net income of $127.8 million in Q2. Our Q3 non-GAAP net income quadrupled from Q3 of last year, which clearly demonstrates the magnitude of our top-line growth, strong gross margins, and our disciplined approach to scaling operating expenses. Our non-GAAP net margin was 51.3% in the quarter. Cash flow from operations in the third quarter was a record $166.2 million, up $104.6 million sequentially. CapEx was $26.5 million in the quarter, driven largely by purchases of production mask sets. And free cash flow was $139.7 million, up more than $100 million from the second quarter. We ended the quarter with cash and equivalents of $1.3 billion, an increase of $487.9 million from the second quarter, driven by the proceeds of our ATM offering, which began in October and ended in December, and our strong free cash flow. We remain well capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer. Our Q3 ending inventory was $208 million, up $57.8 million sequentially. Now, turning to our guidance, we currently expect revenue in Q4 of fiscal 26 to be between $425 million and $435 million. We expect Q4 non-GAAP gross margin to be within a range of 64% to 66%. We expect Q4 non-GAAP operating expenses to be between $76 million and $80 million. And we expect Q4 diluted weighted average share count to be approximately 197 million shares. These expectations are based on the current tariff regime, which remains fluid. As we look ahead to fiscal 27, we expect sequential revenue growth in the mid single digits leading to more than 50% year-over-year growth. And with that, I will open it up for questions.

Thank you, sir. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. You will be limited to one question initially. However, you may rejoin the queue to ask further questions as time permits. Our first question comes from Tom O'Malley, Barclays. Please go ahead.

Hey, guys, thanks for taking my question. Will, you mentioned that you saw a ZF Optics ramp in the first fiscal quarter of next year, and you talked about substantial size. Maybe you could compare what a ZF customer engagement looks like versus an AEC customer engagement. And then longer term, if you see kind of a similar pattern to what you've seen in AEC with the customers that you're mentioning, I think you mentioned three here, all representing some significant size, or do you think there's more variation in the customer set when it comes to ZF Optics?

Yes, I think comparing the customer activity with ADCs, I think it's a good way to look at it. Now, understand that we've been in development on ZF optics for going on two years, and so we are well along the path towards not only developing the solution, and a reminder to everybody, it's the first time anybody has taken an optical transceiver up the stack to deliver real-time telemetry data So you can make real-time decisions identifying and mitigating potential leak flaps before they happen. So basically taking network reliability far beyond what you're able to achieve with commodity lace-based optics. And so I highlight that these products have gone through our own qualification internally where we hardened the solution even prior to sending it to customers for qualification. So it's very similar in a sense that we're delivering a solution to our customers for qualification that's fully vetted. And so moving from providing samples to going right into qualification with the customer is what we're seeing. And so that's why we highlighted the fact that although last quarter we signaled that the ramp would occur in second half fiscal 27, we feel confident now saying that that ramp is gonna start in first quarter, noting that we've already shipped production units. And so we feel great about it. And so we did an announcement with our first customer, TensorWave. It was an announcement on both ADCs as well as ZF Optics. And so it's really great confirmation that the portfolio that we're delivering is really offering kind of next-level overall reliability as our customers build out their clusters. Now, I mentioned also that, you know, we're talking with hyperscalers as well as other neoclubs. We are so early in the process of promoting this product that we couldn't be more excited about the fact that we think this is going to be such a strong grant through our fiscal 27.

Your next question comes from Tori Sonberg from Stifel.

Yes, congratulations on the record results. Bill, maybe you could just level set us a little bit here. You mentioned, you know, we're still in very early stages of AECs. Obviously, there's, you know, a lot of excitement around CPO. So, you know, maybe you could just help us on what's driving some of the use cases for AECs right now. How should we think about those developing, especially in fiscal 27 and fiscal 28? Thank you.

So I think the narrative on AECs is very similar to what has been played out up to this point. There are several areas within the data center network where AECs make a really compelling solution and really almost becoming de facto in a intra-rack as well as now more than ever we're seeing rack-to-rack solutions that are within the reach of seven meters. You know, what's driving it is... it's network reliability and power efficiency. And so I would only say one of our customers were really fully penetrated on all the swim lanes, and those being GPU to host connections in the scale-out network, front-end connections within those same racks, and then disaggregated switch racks. Those are really the swim lanes that we've talked about. And so we see You know, there's really great growth opportunity not only for 100 gig per lane deployments as we see those increasing, but also as we see a shift to 200 gig per lane, it's even a stronger value proposition at those speeds. And so that's going to, you know, help us drive more volume as well as there's an uplift in ASPs. And so, you know, you mentioned the narrative on CPO. And, you know, look, this narrative has been one that's existed before. in different forms for the last decade. It started with MBOM, Midboard Optical Modules, and it moved on to onboard optics. It's moved on to many different acronyms over time. And the bottom line is, just recently, I think there's been a bit of a signal-to-noise ratio issue in the market. And the noise right now is dominating the signal. It's not an either-or situation. type of situation. It's about deploying the right technology at the right reach and the right power envelope. And we see the industry is evolving even more so to a heterogeneous mix of short-reach copper, pluggable optics, near-package optics, and eventually CPO. And so the strong interest we've seen in zero-flat optical is kind of a clear indicator that reliability matters more than ever now. you know, AI networks are the, you know, the bulk of the deployments and as these clusters scale. And so the, you know, the bottom line is that, is that with the way we see it, that until NPO and CPO solutions can deliver bulletproof reliability, deployments are going to be somewhat limited, which is why many of the forecasters show low single digit share in the switching market over the next three years. Our investments are, are heavily focused on reliability. And so when we're talking about technologies that will deliver the higher density reach promised by CPO and NPO, our focus is on delivering the same reliability as ADC and ZF optics. And so hopefully that gives you color based on your CPO comment.

Joseph Cardoso from JP Morgan has the next question.

Hi, thanks for the questions and congrats on the results. Maybe just wanted to get an update on how you're thinking about the composition of the 50% plus growth heading into next year as we think about the AEC opportunity continuing to ramp, but also confluencing with the material ramps of other areas of the portfolio, like the PCIE solutions, optical products, et cetera. Can this be a year where we start to see a more material contribution from the non-AEC offerings in the portfolio and where they can drive a more material portion of the mix as early as fiscal 27? Or is the expectation really that's more of a fiscal 28 story and beyond?

Thanks. I think that it's fair to say that we'll see a different composition between copper and optical in our fiscal 27, specifically as ZF Optics ramps. That's, you know, with that, I'll say that we do expect growth in AECs, we expect growth in ICs, and then the new wave of growth will come with zero flap optics. And within that, IC and AEC will include the PCIE business that we're earning. In fiscal 28, we expect to layer in our active LED cables, our ALCs, and in addition, our first gearbox as part of the Omniconnect family. That's really fiscal 28.

Your next question comes from Vivek Arya from Bank of America.

Thanks. Just a clarification to Dan first on what drove the upside, right, almost 60 million plus upside. Was there a one-off or anything else, right, in your projects in the reported order? And then, Bill, I wanted to get back to this question of how complementary versus competitive uh is AEC uh versus optical solutions because over the last three months we have seen this massive divergence in in the performance of stocks of your optical peers and just this morning we saw Nvidia invest in into of your optical fear so why isn't that um you know a very important um right incredible pushback uh that the market for AEC might be limited. So I just wanted to get your views on where copper versus optical is competitive and where they are more complementary. Thank you.

Hey, Vivek. So let me address your first question regarding what drove that strength. And I'll answer a question that wasn't asked as part of my answer. If you look at our top 10% customers for the quarter, we've just continued to see strength across all of our hyperscale customers. In fact, our top three customers all grew sequentially from Q2 to Q3, so that really drove that growth. And our largest three customers in Q3 were also our largest in Q2, as you would expect, but in a different order. Let me just talk briefly about our largest customer. They were 39% of revenue, And they were also the same customer that was our largest customer in Q1. So that was quite a large increase quarter to quarter for them. The second largest customer was 32%, and they were our largest customer last quarter. And then finally, our third 10% customer was 17% of revenue, and that was the first hyperscaler that we had to ramp.

And relating to the question about the AECs versus optical or actually how they complement each other, really nothing has changed in the narrative. I think you mentioned NVIDIA. I think they've been really outspoken that where you can use copper, you will use copper. And so it's The reasons are very basic why somebody would choose an AEC over, say, a laser-based optical module. And that's really reliability, number one, power efficiency, number two, and ultimately total cost of ownership, number three. That equation is not going to change. As we go towards 200 gig per lane 1.6T deployments, there is an effect that as you go faster, the length of connection is going to decrease slightly, we believe, from seven meters to five meters. And so if you look at our investments over the last couple of years, it's been heavily weighted towards optical, as we've talked about. There is a tremendous demand in the optical space, and that's in addition to the demand in the ADC space as well. Our approach is fundamentally different, and we think – you know, suits us well, which is to focus on delivering bulletproof reliability, again, by going up the stack with real-time continuous telemetry on each link to be able to identify links that are degrading in signal integrity and being able to mitigate by taking those links down in a proactive manner and an orderly manner. I'll also say that, you know, the You know, the work that we're doing on active LED cables, ALCs, we're talking about delivering a different class of optical product, one that is at a base technology level as reliable as copper. You get the same reliability profile, the same energy efficiency profile, the same cost profile. But you get reach initially up to 10 meters, and then next step will be 30 meters. And so that's going to be a really unique new product category as we talk about, you know, the heterogeneous world between copper and different forms of optical.

The next question comes from Quinn Bolton, Needham & Company.

Hey guys, I guess, you know, given all the noise in the market around CPO and optical, I was wondering if you could kind of just discuss in further detail two products. One, your Blue Heron DSP for scale up. AEC connections, are you seeing interest in that? And then sort of a similar question on, Bill, I think in the prepared comments you talked about an OmniConnect gearbox with an ALC CPO solution somewhere down the road. Can you give us any sense on timing when you would have an ALC CPO solution potentially come into market? Thank you.

Sure. So I want to note, first of all, that the bulk of our revenue from AI is really in scale out now. We don't have any revenue for scale up. And in fact, that market is relatively small in comparison today. There's great promise that the scale up market will grow, especially as it goes from rack scale to row scale. And that's driving a lot of these conversations. The Blue Heron product that we introduced and announced our first customer, Upscale AI. This is a 200 gig per lane retimer that supports UA Link, ESON, Ethernet. We will build AECs with this product as well. And so as that scale-out opportunity takes shape, we're going to have a full portfolio of products that we can offer. As it relates to my comments about Omniconnect, Yes, it is a very straightforward path to basically extend the Omniconnect architecture to add a gearbox that converts from VSR to microLED. And so the work we're doing with ALC, that's going to be the proof point. And ultimately, there's going to be a direct line of sight on doing a gearbox that takes that VSR conversion to, say, a pigtail that you can connect micro-LAT with. And so that is going to give a relatively straightforward lower risk path to a near-package optics solution. And again, that solution is going to be delivered with bulletproof reliability, and it's going to be done at a power that's much less than laser-based CPO.

The next question is from Sean O'Loughlin, TD Cowan.

Hey, guys. Thanks for letting me ask a question, and I will add my congrats on a really incredible set of results. A quick clarification. I think last quarter you mentioned that you expected the fourth hyperscale customer to represent greater than 10% of revenues for the full fiscal 26. Obviously, you mentioned three 10% customers this quarter. Is that still your expectation for... the full fiscal year. And then on the OpEx guide, I was a little bit surprised to see that it was, um, you know, almost flat quarter of a quarter, obviously after a big, pretty big step up last quarter, but you know, with all the irons in the fire, including the, you know, the aqua acquisition this morning, um, is there, is there just some constraints around, I don't know whether it's, you know, uh, hiring qualified mixed signal engineers or, Or is there something else going on in OVEX, or am I just overthinking all of this and you're just executing to your roadmap?

Thanks. Yeah, so let me address the first question first. With regard to our fourth hyperscaler that we talked about, we made those comments last quarter. We've obviously experienced a lot of upside, really driven by our largest customer this quarter in the current timeframe. that may make the math, while they're still in line with our expectations from 90 days ago, they may not be a 10% customer for the full quarter, if that makes sense, or for the full year, I mean. Now, with regard to OpEx, a couple of dynamics there to note. One is, it was a large step up this quarter for R&D spend, and one thing to note is that it was off a relatively light spend in Q2. And in addition, I highlighted two things, project related spend and hiring. The project related spend was higher than has been typical related to a lot of these things that we're working on. So if that were to come down, you might have some incremental hiring to, they just happened to kind of offset for the year or for the quarter. So that's kind of the underlying dynamics in our Q3 to Q4 R&D spend, if that helps you out.

Vijay Rakesh from Mizuho is up next.

Yeah, hi, Bill and Dan. Just a question on the 1.60 RAM. I think as you go to 1.60, most of the big hyperscalers still have not talked much about CPO. So is your assumption that as 1.60 ramps into CPO, 227, 228, that will be predominantly copper. And as you mentioned, the ASP bump, that should drive a pretty nice upside there between the adoption of copper and ASP.

Yeah, for the 200 gig lane per market, we very much see that that market is going to be addressed by AECs and then a combination of laser-based modules. We'll have the ALCs that ramp into that market as well. But that would be, you know, what I would consider the new product category. I think CPO is still, you know, sometime in the future beyond that. We see our customers ramping 200 gig programs really at very different schedules. You know, of course, NVIDIA is going to lead the charge with Vera Rubin, but many other customers will follow on a slower timeline. So we do expect to see very strong business in all three categories that I just mentioned. So we'll have ZF optics that are going to be delivered in that timeframe. I will say from an optical DSP standpoint, we're getting a lot of uplift right now for LRO. Power is becoming a much, much more important thing as our customers go to 200 gig per lane. So I think we have a really nice position. You mentioned ASPs, and that's right. There is going to be an uplift from 800 gig to 1.60 across the board, across the entire portfolio. So we feel great about the way we're positioned there.

Your next question is from Quinn Bolton, Needham & Company.

Egan, since we're in the follow-up, just wanted to ask, you guys announced the Comira acquisition this morning. Looks like that's kind of more Layer 2 stuff, right? Mac, PCS, MacSec Security. Are you buying that just to kind of enhance the IC product that you've done historically, or is this a move to try to get into more Layer 2 solutions down the road? Thank you.

Yeah, appreciate the question. We didn't have a chance to get it in the prepared remarks given the fact that it's closed basically right at the same time. But we feel great about the combination of bringing Comira into Credo. We've been collaborating with Comira as an IP partner since 2022. And Comira has a really strong reputation in protocol IP, error correction, as well as security IP technologies. So we view this as a strengthening of our ability to deliver complete system-level connectivity solutions. And you alluded to maybe going up. Yes, absolutely. That's, you know, that's part of the opportunity. And so we're, you know, we feel great strategically about this. And the fact that they'll be dedicated to create our projects now, it'll accelerate our end-to-end connectivity roadmap and expanding the overall platform. Thank you.

The next question is from Sebastian Nagy from William Blair.

Yeah, thank you for taking the question. There's been a lot of focus lately on supply chain constraints, including the high cost of memory. I guess, what type of supply chain risks are you seeing for Credo, if any? And is there anything in the supply chain that could emerge as maybe a gating factor to your growth in some of the coming quarters?

Yes, I think we got a little bit out in front on this topic last quarter. I feel great about our supply chain. for Credo, and that includes wafers in all of the different product categories that we've talked about. And that encompasses 12 nanometers, seven, five, and three. So we did a lot of work over the last quarter to make sure that we were aligned with our supply chain partners, not only on the wafer level, but also the packaging level. So I think it's clear that we're gonna be able to support you know, our plan as well as upside that we expect. In the market, we are, you know, absolutely in, you know, kind of uncharted territory where I think supply chain is going to become more and more of a differentiator. And as it relates to the supply chain issues that are outside of our normal IC builds, I would say from a system level, there's no issues from a supply chain standpoint there. I will say at an industry-wide level, memory has all of a sudden been a concern. And if anything, we can look at the first OmniConnect product, Weaver, as almost a solution to some of the pain points where we enabled the use of DDR over HBM, which I think is probably the tightest area within the memory market right now. Outside of that, there's been a lot of conversation about lasers, but, you know, from a ZF optics perspective, we feel that we've more than underpinned our demand for 27 and really beyond.

The next question today comes from Jim Schneider, Goldman Sachs.

Good afternoon. Thanks for taking my question. Bill, it was helpful to hear sort of the – you lay out the progression of your various product lines, especially optical products over the next couple of years. I was wondering if you could maybe just to give us a sense of how we should be modeling the strength of those optical products, a sense of where we might end fiscal 27 in terms of their contribution. Are these something that could be sort of 15% to 20% of total revenues? of the company at an exit rate, or should we be modeling something a lot less than that? Thank you.

Yeah, we haven't been too specific in that, but if you just look at where we are this year based on how we've guided Q4, you'll end up just north of $1.3 billion. The 50% growth gets you to nearly $2 billion for next year. Bill did kind of mention that we expect AEC to continue to grow, fiscal 26 to fiscal 27. So there will be a significant, we think it will be a material component of our fiscal 27 for specifically ZF Optics. But as that progresses and as our customer engagement continues with that product line, We'll give you an update as we enter the new fiscal year next quarter.

Your next question is from Suji De Silva, Roth Capital.

Hi, Bill. Hi, Dan. Congrats on the progress here. Just quickly, how many customers do you expect to be ramping ZF Optics across in the coming fiscal year? And just a longer-term question on the gearbox. You talked about being able to handle training and inference in the same architecture. I was curious on if you could elaborate on that opportunity. It sounds interesting.

Sure, absolutely. You got me confused with the second question. What was the first again?

The zero flap optics. How many customers think you'll be wrapping it across fiscal 27?

My expectation is throughout fiscal 27. We're a bit early talking about fiscal 27, but my strong expectation is that we'll wrap more than four. We've got four in qual now, and so I expect to add to that list. And I should reiterate that It's a combination of hyperscalers as well as neoclouds. And the second part of your question was on Omniconnect. And so if you can imagine, the key enabler for Omniconnect is really our VSR30s that sits on the XPU side of the connection. And gearboxes are put together that mirror that VSR30s and then gearbox it to something else. And so I think it's pretty clear from memory that a first DDR gearbox would be for 5. And you can imagine as the market shifts to LPDDR6 that all you'd have to do, you wouldn't have to re-tape out an XPU. You could just simply change the gearbox. And then you'd have that inference capability with that next generation memory. And so you can also imagine, say, building a scale-up gearbox. And the first gearbox might be a Gen 7 and Gen 6 combo to where that XPU's got that same VSR30s, and the gearbox would take those 100-gig lanes and gearbox them to either Gen 7 or Gen 6 PCIe. You can imagine when 200 gig per lane is really ready for that given customer, you could just simply drop in a new gearbox. that would support 200 gig per lane with any of the protocols we've talked about being Ethernet or UAL or ESUN. And you can extend that case to scale out as well. You could have a gearbox that would improve, say, the first one that might be 200 gig per lane. As soon as 400 gig per lane was ready, you could simply drop in a new gearbox with gearbox lanes at 100 up to 400 gig per lane so you're talking about you know having the ability to build an xpu that becomes composable based on different markets and it becomes composable you know based on based on the future enabled aspect of you know just being able to upgrade the gearbox to either the next speed or different protocols

The next question comes from Christopher Roland, Susquehanna.

Hey, guys, thanks for the question. I guess the first one is probably to you, Bill, just about AEC applications and kind of where this may be moving around. If you could talk about, you know, where you think you're being used in terms of front end versus scale out, scale up or like traditional cloud where you're being used today and what this looks like over the next couple of years in terms of changes.

Yeah, so I'd say the part of the network that's probably where we're strongest is on scale-out. And so this is where we really see the full benefit of AECs. as we're talking about leading at speeds and we're talking about in the part of the network where reliability really means, you know, faster time to cluster stability as well as, you know, continuous uptime. And so we do very, very well in scale out. Front end kind of comes along with it. And then we're also seeing a couple of customers now that are deploying in, you know, switch tracks or disaggregated chassis. So it's really across the board, but I would say our real strength is in scale-out.

Next up is Carl Ackerman, BNP Paribas.

Yes, thank you. Bill, perhaps a follow-on to that question earlier. You indicated much of your AI revenue for AAC products is for scale-out networks, but how should we think about the $5 billion TAM for AACs but between front-end versus back-end links between a server NICs networking switches. And Dan, could you speak to why gross margins are guided down roughly 360 basis points at midpoint in your outlook? Is it just conservatism? Is it near-term product mix? Anything around that would be helpful. Thank you.

Yeah, let me address the gross margin question first. So... You know, overall, as you mentioned in Q3, gross margin at 68.6%, up 92 basis points sequentially. We've really, over the last, say, seven to eight quarters, really seen a significant benefit to increasing scale. But we've also been very persistent in saying that the gross margin expansion will always be linear as we continue to increase scale. There will always be differences from quarter to quarter in product mix and We are conservative in the way we forecast. We believe that, you know, we have not changed our long-term expectation in the 63% to 65% range for gross margin, and we've clearly entered this phase where we're at or above that high end of that long-term expectation. So it's really just a function of how we view the world and how we forecast our gross margin, and it's a very conservative forecast.

Right. You asked about the AEC TAM and the $5 billion number. So we're not the group that really focuses too much on the top-down forecast. We leave that to the market forecasters. But I can give you my perspective on the market opportunity. And I think largely the market opportunity that we see is scale-up networks. I think that will transition into some share of the scale-up networks as they become deployed. And then, of course, front-end is going to be smaller than scale-out, probably on the order of, it'll probably be 20% to 25% of the total scale-out market as we see it. And then the disaggregated switch market, that one's yet to be seen, but that could be a significant TAM if we see that kind of architecture deployed broadly, which there's a good case to be made for.

Tory Fanberg from Stifel, your line is now open.

Yeah, thanks. I just had a follow-up. So this pull-in of the ZF optics business bill, I mean, is that just mainly because of certain technical milestones or other market dynamics? And the reason I'm asking the question is because obviously there's concerns about the availability of commodity lasers. So, you know, just try to understand exactly what's driving that pull-in by a few quarters.

Well, the pull-in is being driven by customers pulling it. You know, I mean, this is a real indicator that, you know, as we've said many times regarding AECs, that reliability is really critical, again, from the standpoint of, you you know, the uptime that you can expect after that point of stability. And so it's a direct improvement in productivity. And, you know, and so, you know, as AECs have been, you know, much more popular as a result of people getting it, right, the minute that we, you know, talk to our customers about ZF and we talk about, you know, extending that reliability into the optical space, it's – it's very rare that somebody would say, yeah, I really don't want that. So it's been really customer pull that's caused us to feel more confident in articulating that we expect the ramp to happen early in 27, early next quarter. And so from a supply chain standpoint, understand, we've been working on this for two years. And so we've had the mindset that we would carry the model from AECs into CF optics. And so we've been out there underpinning supply along the way. We've made firm commitments to supply chain partners, and we feel very confident about our ability to ramp, even though we've pulled in six months.

And everyone, there are no further questions at this time. Mr. Brennan, I'll hand the call back to you for any additional or closing remarks.

Yeah, thank you. I really appreciate the ongoing interest and support in Credo. We'll talk to you all very soon. So again, thank you very much.

Once again, ladies and gentlemen, this does conclude today.