Credo Technology Group Aktie

Okay. Good morning, everybody. Welcome to the Goldman Sachs Communacopia Technology Conference. My name is Jim Schneider. I'm the semiconductor analyst here at Goldman Sachs. It's my pleasure to welcome Credo Technology's CEO, Bill Brennan; and CFO, Dan Fleming. Welcome, guys, to the stage.

Thank you.

For investors who may be new to the Credo story, how would you describe your positioning in the AI infrastructure layer? And what are your biggest and most defendable competitive advantages?

Sure. So Credo is a pure-play high-speed connectivity solutions company. The role we play in AI infrastructure is moving data reliably and efficiently across the network. And specifically, our business has really taken off as AI clusters have taken off. Given the fact that we connect GPU to GPU, GPU to switches, switches to switches, we play that role. We help customers optimize the valuable compute resources.

So our North Star is really reliability and power efficiency. And if we can deliver solutions that can help customers get clusters up more quickly in days versus weeks, there's a compelling financial impact of that. And if we can keep clusters up at 99.9% availability, there's also a huge return on that. We focus on a broad range of solutions from millimeter length all the way to kilometer length.

Our flagship product is really a system-level solution where if you think about us as a semiconductor company, we have very unique and differentiated leading-edge SerDes IP. With that platform, we build semiconductor solutions. But beyond that, we have gone to the system level, designing complete connectivity solutions. And you'll see that more and more as we develop as a company. One of the things that for the new people to the story, incredible story during the last 3 to 4 years. If we go back to our IPO, we were sub-$200 million in revenue.

And over the past 2 years, we've more than doubled and then more than tripled. We actually had 6 quarters in a row where we achieved more than 20% sequential growth over that period of time. And that puts us at a base going into fiscal '27 at more than $1.3 billion. We've indicated that we're going to grow at a 10% or greater sequential level quarterly throughout the year.

And I think as we look at the markets that we address now, you can measure those markets, that market opportunity in tens of billions of dollars. And so I think the growth story, although we've had an incredible run so far, we're still at the early stages of the growth story.

Yes. Fair enough. Now there's been a lot of investor debate around this kind of like the idea of copper versus optical. I realize that's oversimplifying things here a lot, but how would you frame it for people in terms of the time line for the transition between the 2? And at what point do you think copper starts to hit these physical limitations?

Yes. I think I've been in this role 13 years. And the first time I got that question was about 12 years ago. As I talked about Credo being a company that was going to develop connectivity solutions for both copper and optical. At that point, the number of copper connections in a data center was greater than 95%.

And today, the same ratio exists. With that said, we've been very successful extending the life of copper over the last 5 or 6 years. We've grown into what is going to be a multibillion-dollar revenue company. But our investments over the last couple of years have been almost exclusively from a real innovation and disruption standpoint in the optical area.

Customers will decide on what type of connectivity solution they use based on the requirements of that connection. For short connections where copper can be used, the debate is over. Copper will be used because it's fundamentally more reliable, more power efficient and a lot of times lower cost. When you've got connections that are longer than you can achieve with copper, of course, optical is the default choice. With that comes opportunity because with laser-based solutions, there's a fundamental reliability challenge as compared to copper, which is probably 100 or 1,000x more reliable.

And with reliability becoming much more important as AI clusters become a much bigger part of the market and considering that the connection between the GPU or NIC and that first switching layer that there's no redundancy and now you've got tens of thousands of GPUs all interconnected together and dependent on each other, there's an increasing requirement for better reliability.

And so -- and that's our North Star, right? That's our differentiation, and we'll get into that more. But as it relates to the debate, I think we believe it's going to be heterogeneous. We've got a complete portfolio of solutions from millimeter to kilometer from copper to optical. And even with optical, we've got different flavors of light sources, micro emitters as well as laser based. So we're agnostic to the conversation, although some people identify us as a copper company. We self-identify as a connectivity company that is agnostic to the medium.

Yes. And to make to that point, if we are a backup stat again in 5 years, what is the thing that you think investors can be surprised at looking back?

Well, I think there will be a very strong understanding at that point that we're a broad-based connectivity company that just as I emphasized, you'll see us doing very well with products that are laser-based, reliability differentiated. You'll see us with different light sources. You'll see us with copper solutions as well. You'll see us as a company that is not only addressing the pluggable market broadly, you'll see us playing a role in a big way in scale-up networks.

And you'll see us being a company that's helping to break the memory wall, the fan-out, the physical fan-out issues that exist and will become a more popular topic in the upcoming years. I think 5 years from now, I think people will be surprised that although we scaled tremendously over the last 3 or 4 years, that's really the beginning of the story in that 5 years from now, I expect to be a much larger company.

More shorter term, if you look at investor expectations for your business heading into 2027 or calendar '27, whichever fiscal calendar, if you were to outperform, what would be the key areas of upside for the business as you see it? And maybe talk about the 1 or 2 operational kind of key drivers for the company that you're using to kind of execute or you're driving the company towards.

Yes. I would say number one is execution. And if you look at the path that we've been on the last few years, execution is by far the most important thing. Scaling like we have as a company and broadening our portfolio and making sure that we deliver the same level of quality, reliability, responsiveness to customers, it's really an execution game. And in the upcoming years, that's going to continue as the #1 key priority.

The -- I would say the ramp of our optical portfolio is probably next on the list. We're in the very early stages. Of course, we've had an optical DSP component supplier for quite some time, and that business is going very well. We acquired a team, DustPhotonics that focuses on leading silicon photonics PICs. That will broaden our components portfolio, but also, we're going to be in the module business.

We're going to build ZeroFlap optics, which are a very differentiated optical transceiver solution that addresses that reliability challenge. So I think that I guess the question was about outperforming?

Yes.

Yes. So I think I wouldn't be surprised if we were to outperform, I think you could see contributions from expanding our footprint with our core business today, which is AECs, expanding in the application area on the customer front as well, deepening existing partnerships, expanding in the Neocloud area.

I think a faster ramp, and we got to be careful about the time frame we talk about, but I think there's a great opportunity to look at what we're doing in the optical front and see outperformance over a given period of time. And really with the new efforts that we've got with microemitter technology with ALCs as well as the memory wall, in the fiscal '28 time frame, we're going to see those products take off, and there's a great opportunity to outperform there as well.

Yes. Okay. Maybe let's talk about the optical business for a second then, which you just raised. What is driving the customer adoption of your ZeroFlap optical products today? How is that customer aperture broadened over the like last few quarters? And how do you expect the customer base to sort of broaden further across hyperscalers, Neoclouds and enterprises over the next year or so?

Sure. So maybe a bit -- a little bit of background on how we landed on this idea. And this is all public information that we've talked about. So xAI was a customer that we paid a lot of attention to before they actually started changing the competitive dynamics in the industry as they are today. And they were building in another data center at the time, and they were struggling mightily with link flaps.

And link flaps is a case where you've got a connection that doesn't hard fail, but it disconnects and reconnects in effect, flaps. And it really screws things up from a data standpoint because you get bad data that's propagated across the cluster, needing to bring the cluster down and reset it. So they were complaining about their ability to bring a cluster up quickly.

They were complaining about keeping that utilization or that availability above even 90%. They weren't able to achieve that. And so they came to us said, look, we're moving into our own data center. It's going to be liquid cooled. We're going to source tons of power to the racks. It's completely different scenario than the air-cooled kind of small power sourcing that they were dealing with. And what we want you to do is extend your AEC family from 3 meters to 7 meters because if you can do 7 meters, we can cover every connection in the row, and we can build a ZeroFlap cluster.

And so in this case, back to the litigation about copper and optical, the only transition between the 2 has been copper replacing optical for lengths up to 7 meters. And so the bottom line is I visited Memphis over the summer. And even the folks that I was meeting with, they were talking about they can bring a cluster up in 5 days. If you can do that versus 6 to 8 weeks, we all know what the value of a month of this compute is worth.

You can measure a month in a $1 billion increment from a revenue standpoint. So it's compelling, but they were saying they've achieved that. They've achieved 99.9% uptime. After we made this transition, Oracle came to us and said, look, I mean, we'd love to address these problems as well. But our connections between the NIC and the first switch are longer than 7 meters, and we can't redesign. We've got what we've got.

And so we went to work with them thinking about how could we identify link instabilities early and then mitigate in an orderly way by taking likely link flaps out of the cluster, take that link down in an orderly fashion, so it didn't disrupt the whole cluster.

And so some of the work that we've done with Microsoft, maybe going back 5 years ago, where we designed a cable that was smart enough to be able to identify when a ToR port was likely to fail and when it was likely to fail, transitioning -- basically changing the data flow to a redundant ToR and help them build a single rack architecture that achieved five nines reliability.

What was involved with that was a huge amount of effort on designing a device that was capable of doing the telemetry required to sense and make decisions and act in a cable solution, really, really smart solution. So we kind of leveraged that background. And we started thinking about, well, if we did design a custom DSP that could light up telemetry on a continuous real-time basis for each link between a GPU and a switch, which there's actually 6. There's 3 in 1 direction and 3 in the other. To do that, it was a very special DSP design.

And along with that, we had to develop a software platform. And the types of things that we're measuring on a continuous basis are very deep technical measurements related to the SerDes, right? So going back to that being an expertise of ours. So things like eye height, SNR, post-FEC bit error rates, histograms, all of these things are what we're able to do and ultimately creating a yellow almost check engine light for the link, where previously we've been green or red.

Basically, it's either good or it's failing. In addition to that, they said, hey, we're bringing a cluster up, it's tough for us to sense dust on the fiber plant. Is there something we can do to identify multipath interference? Because you've got a particle dust, light will actually bounce back the other direction and create this signal integrity degradation.

And so being able to identify which links need to be addressed, even ESD damage, not the type that would actually fail a transceiver, but would become a latent defect that would become a problem later. And so we actually went way beyond what the original ideas were. And so now they -- we brought a product to market that not only can bring clusters up in the same kind of time period days versus weeks, it's not playing the cat and mouse game of trying to identify which connections are failing.

But really, we've accomplished the goal of being able to identify instabilities and mitigate proactively. That's the reason that the conversation is a rich conversation with every customer that we talk to. And I think that, if anything, the number of conversations are expanding, and we've given an indication about the very fast ramp that we expect this fiscal year. And I think that's just the beginning of the ramp.

Yes. Okay. Then maybe ALCs, talk about that as a driver for you. What feedback have you been hearing from customers on that front? And sort of are deployments kind of moving from evaluation phase to production faster than you expected? And maybe talk about the kinds of customers you're seeing the strongest demand signals from.

Yes. So why are we doing this? It's interesting because if you just consider the reason that people love copper, it's just bulletproof reliability at a core technology level and very power efficient. Microemitter technology, we've been looking at working in the space for 3 years now because at a core level technology, wide and slow can get that base level bulletproof reliability and have much better power efficiency than laser-based optics.

And so that was really the reason that we started investing 3 years ago. And I will say that what's compelling about the technology is also that it will reach 30 meters. So we're going from, say, a 7-meter reach with AECs, extending from 7 to 30 with an equal level of reliability and power efficiency. That's the promise of the technology. And again, I think it speaks to the fact that we're agnostic on medium, we're agnostic on light source.

What we're trying to do is give our customers optionality and let them choose. So the conversation is quite easy with customers, especially another benefit you get from the technology is an actual cable that's 75% smaller from a total volume if you look volumetrically. So it's a much more elegant solution. If you look at these 7-meter AECs, they're pretty bulky at the speeds at 200 gig per lane.

And so the conversation is quite easy. If you talk about the promise of the technology and the customers know that we're going to put these products, these system-level products these cable solutions through the same rigor that we've put our AECs through and that we put our ZF Optics through. We're talking about a rigor that we've built a qualification capability where we take our customers' switches, we take our customers' NICs and we run live traffic and we vary over every corner imaginable.

And the whole goal of that process is to break the link and then strengthen the link through firmware. When we deliver the solution to customers, they will simply plug it in and qualify it. And so the interest in the product is very high. And we'll -- not to get too ahead of the announcements, but we'll be demonstrating at OCP next month. And from there, we expect to go through qualification and then be in production in FY '28.

Okay. Excellent. Then if you sort of roll up all the things we talked about with optical together, based on customer engagements, your visibility, how do you encourage investors to think about the growth rate, specifically for optics as we progress through fiscal '27 and into '28?

So my expectation that I would like investors to have is that it's going to be a very fast growth rate. I've indicated previously that by the end of this fiscal year, we'll be producing hundreds of thousands of units per month. And then we will increase that production rate to double and then even triple by the end of fiscal year '28. So the ramp is going to be quite fast. It's going to be quite significant. And we expect to even go beyond that in fiscal '29. Yes.

Okay. Maybe talk about AECs for a second, so the core bread and butter business. What are you seeing in terms of the near-term AEC demand across customers? Are kind of the deployment time lines, purchasing patterns and visibility changing in any way as sort of your customers move to larger and larger scale infrastructure builds?

Yes. So it's -- the AEC business in general, the way that we look at the market is it is the short segment, the 7-meter and below segment of the pluggable market. We believe the market is growing. I think there's no debate in the industry about 7-meter and longer being optical modules or optical transceivers, growing at great growth rates from 60 million units this year to what the forecast that I saw was 175 million units by 2030.

It makes sense for us that the shorter reach segment of that market is going to grow as well. And I've talked about the different growth drivers. If we look at kind of a micro level like a given quarter, it's important to understand that each one of our customers is kind of a market in and of themselves. They are not customers that buy product and ship it like a customer like Cisco or Arista. They're consuming internally.

They're selling services. And so they're all marching to a different drumbeat. And you've seen if you analyze our financials and you look at our 10% customers, you've seen great variations quarter-to-quarter in customers surging and then pausing. And so it's a little bit -- I think it can be a little confusing if you take too short a period of time and you overanalyze it. But I think we see AECs as a market and our business growing over the next several years.

Yes. And so I guess how long do you expect AEC connectivity to be a meaningful growth driver for the company at the corporate level? And as AI cluster sizes continue to scale, what gives you confidence in the durability of that product demand over like a 3- to 5-year period?

Yes. So there's trends in the market towards densification that really play to -- in favor of AECs and copper. But I think generally, for us, we're looking more at the broad portfolio that we're bringing to market. I -- we can definitely focus on. We can just drill down on AECs, and I can build a great case for a continued expansion of that, especially as we go to 1.6T and with this trend towards densification.

But what we're focused on is building a much larger business based on giving customers choices. And so there's a lot of different networking decisions that will be made if they've got products that can deliver on what they're trying to achieve at a very high level regarding reliability as well as power efficiency. So I think it's fair to focus on AECs because that's the bulk of our business right now. But I think over the next several quarters, the conversation will shift to what part of your portfolio is also growing even at a much, much faster rate.

Right, right. I wanted to just ask a couple of questions on competition and competitive landscape for a second. First of all, on AECs, how is that competitive landscape evolving? I think more players have entered the market. I haven't heard a lot of evidence of them getting large traction yet, but are you seeing competition intensify in any way, pricing, technology, ecosystem relationships or anything like that?

So we respect all of the competitors. That's for sure. The -- I think it's a great indicator of -- it's another indicator of what the expectation is for market size. I think it's all quite good. The approach that we've taken in building the business is fundamentally different in a sense that we've decided to own the entire system solution.

And that means from a SerDes level to an IC level to a system design perspective, from a firmware perspective, qualification. And ultimately, we manage our supply chain. We're the single throat to choke when it comes to delivering the SKUs that our customer wants, the qualification. We never failed qualification because we do a more rigorous qualification before we even ship cables to our customers and being flawless in the way that we deliver, we take complete ownership of that.

I think that's unique in the market, and I think that's probably our biggest competitive moat. My expectation long term is that the way that we're focusing competitively is to be absolute -- be the first to deliver the next-generation solutions. And you do that by being in the room with your customers, being first to qualify, being first to ramp and delivering flawlessly.

That's the way that we've built the market share, and that's the way we're going to maintain market share in this space. It's the same conversation as it relates to the other products we're bringing to market. It's not only an AEC discussion. That's the way we approach relationships with customers. Yes.

Okay. Then in your transceiver business, I think most investors kind of think about that business as being somewhat more commoditized in some ways because there's just more competitors there. How do you describe your competitive moat in that area specifically? And maybe kind of share your confidence level in keeping those kind of near corporate average gross margins for that business over time?

Sure. So I think it's 2 basic things. The product that we're delivering to market is not a product that's targeting the commodity space, the IEEE standard, say, 1.6T transceiver. That wasn't the objective, and that was never the goal. The features that we're delivering and the better reliability that we're offering for the parts of the network that we're really targeting, very, very easy to monetize those features. And so the ASP is one factor. So when we think about your margin question, we think about 2 things.

We think about what ASP can we achieve, what value can we achieve in the market as opposed to maybe a commodity style competition. The other thing is COGS. So cost of goods sold, we're the only vertically integrated player in the market. So we build our own DSP. We build our own silicon photonics PIC, look for us to maybe make more investments, either make versus buy investments on other components on the vertical stack. But those 2 things, it's not a hard exercise to run when you consider ASPs and COGS widening the gross margin. And I think it will play itself out as we ramp that business.

Okay. Fair enough. Dan, you've been waiting patiently in the stage for quite a while now. So I'm going to bring to the conversation and ask a couple of financial questions. You just reported last week, you took up your fiscal '27 guidance to growth of 85% while maintaining the outlook for -- sorry, $600 million in optics revenue. How are you thinking about the shape of the rest of this year in terms of the growth rate in Q3 and in Q4? And as you exit the year, what does that higher growth rate sort of imply about sort of the run rate growth you expect into 2028?

Yes. As Bill alluded to in his earlier comments, this year, from a sequential growth standpoint, has been and will be 10% plus each quarter sequentially. We guided about 11% sequentially into Q2. And if you look at the way we've discussed things for the back half of the year, it's really an accelerating growth rate, call it, 20% into Q3, 30% into Q4. That sets you up where $1 billion quarter is within our sights within early fiscal '28. So a lot of exciting growth in our future for sure. Yes.

Okay. As optics becomes a bigger part of the mix, how should investors think about the long-term margins in your business? Like Bill, you sort of alluded to some of these answers before, but maybe optics overall tailwind, headwind or kind of like just overall, you can say where you are at?

Yes. It's -- the way we look at it right now, it's straight down the fairway. So we guided our gross margin in fiscal '27 to be broadly consistent with last year. I think this was the -- 5 years of being a public company, this was the first quarter where I didn't get a gross margin question on the earnings call because we were right at 68%, which is what we had alluded to. We guided to 68% in Q2.

And as ZF Optics ramp, Bill kind of went through the logic as to why we expect that to be in that neighborhood. But our other areas, ALCs, OmniConnect, these are highly differentiated products in the market that we're bringing to market. So our expectation now as we sit here is we should be able to maintain our margin profile as we proceed forward.

Great. OpEx, you've historically said 2:1 revenue growth, OpEx growth, obviously investing heavily in optical today. You talked about OpEx increasing 55% for your fiscal year. Once you get sort of past this and the acquisition effects, do you get back to that 2:1 leverage?

We may -- we haven't been too specific in our guidance or specific at all in fiscal '28. This year, the way it's looking is our top line is growing about 50% faster than our OpEx. So we're continuing to expand or benefit from that operating leverage. And as we accelerate in the back half of the year, you may see us get back to a 2:1 ratio as we enter fiscal '28.

Yes. Great. And maybe last question. Relative to M&A, you've obviously done a little bit more on the M&A side recently with Dust. Maybe talk about sort of the overall appetite for M&A, both in terms of kind of deepening your portfolio in optical, but then potentially diversifying the company further into other areas of connectivity or something else entirely?

Yes. I think we've really enjoyed the acquisitions that we've made thus far, all 3. The first one was a group in Canada that was focusing on microLED technology. We have been working on microLED technology for a couple of years, and we decided that instead of working with start-ups, we should bring a team in-house. And it's been exceptionally beneficial to have those experts combined with the signal processing experts within Credo. That worked very well.

CoMira helped us with protocol and security. The acquisition of Dust, I think, got the most attention because it added leading-edge PIC technology to the stack that we're building internally, not only from a components perspective, but also from a system solution perspective. We'll continue down that path from the standpoint of identifying great engineering teams, great technology that is additive to what we're trying to build. As far as adjacencies, we're addressing a very large market right now, and there's things that we can do to enhance our position.

But if we were to look outside of core connectivity, it would have to be related to a very differentiated system-level solution that we'd be able to offer the market. So we're very open-minded. One of the things that's made us successful is that they don't draw bright lines around what we do and what we don't do. A lot of people were confused as a semiconductor company going up the stack. There's another really big green company that did that really successfully. But think about us as not being bounded. We'll go to where there's value with our customers.

Yes. Very good. I think with that, we're almost on time. Thank you very much, Bill and Dan, for being here with us. We appreciate it.

Thanks so much.

Thank you.

Thanks.

Ladies and gentlemen, thank you for standing by. [Operator Instructions]

I would now like to turn the conference over to Dan O'Neil, Treasurer and VP of Investor Relations. Please go ahead, sir.

Good afternoon. Thank you all for joining our First Quarter Fiscal 2027 Earnings Call. 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. These documents 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 statements.

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, implied or inferred. 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 changes in the company's expectations or to actual results, 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 the website.

I will now turn the call over to our CEO. Bill?

Thanks, Dan, and thank you, everyone, for joining our first quarter fiscal '27 earnings call. The first quarter was another strong quarter for Credo. Revenue reached a record $479 million, increasing 10% sequentially and more than doubling year-over-year. Non-GAAP gross margin was 68%, and non-GAAP net income exceeded $236 million, up 140% year-over-year.

Credo has been growing at a pace that very few semiconductor companies have achieved, all while expanding profitability. At the heart of the growth is 7 consecutive quarters of triple-digit year-over-year growth. We continue to see outsized growth in fiscal '27, with our optical business growing at the fastest pace. AI infrastructure investment continues to grow rapidly. Cluster sizes are increasing, data rates are moving higher, and connectivity requirements are becoming more challenging as these systems scale connectivity is about much more than bandwidth, reliability, power efficiency, signal integrity, telemetry and serviceability all matter. We also believe AI infrastructure will become increasingly heterogeneous. There will not be 1 architecture, 1 protocol or 1 physical medium that is chosen for every connection. Future AI systems will combine optical and copper interconnects across different reaches, protocols and topologies with customers choosing the right technology to optimize their architecture.

This is where Credo shines. While network reliability remains Credo's North Star, our ability to innovate, execute, qualify and deploy across the wide range of customers' needs is core to our differentiation.

Our focus is on helping customers bring clusters up faster, maximize processor utilization and maintain reliable operation at scale. Our portfolio now spans connectivity from millimeters to kilometers, with solutions across optics and copper.

Let me walk through each of these areas in more detail. Starting with AECs. AECs remain our largest business and continues to grow. We now have deep relationships with 5 hyperscalers and our engagement with neo cloud customers continues to expand. Within our existing customers, we continue to see increased AEC penetration as deployment scale. Higher data rates provide another growth vector with the transition to 200 gig per lane 1.6T ports ahead. AECs have always been a system-level product for Credo. We provide the complete solution and optimize the silicon firmware, manufacturing test and system qualifications together.

Our system-level approach has been fundamental to our differentiation since we created the category. As AI clusters get larger, the value proposition remains straightforward, high reliability and low power for short-reach connectivity were both become increasingly important at scale. We continue to see a healthy growth trajectory for AECs, driven by deeper penetration with existing and new customers and with increasing bandwidth in next-generation clusters.

Now turning to optics. Our optical business is progressing very well and includes optical DSPs, silicon photonics PICs and 0 flat optical transceivers. Our optical DSP business delivered record revenue in Q1. Revenue included deployments across our 50-gig and 100-gig per lane solutions. We see a long tail for 800 gig ports even as we begin the transition to 1.6T solutions. At 200 gig per lane, customer engagement with our 1.6T DSP is strong across both fully retimed and LRO solutions. Our first 1.6T DSP revenue remain on track for later this fiscal year.

During the quarter, we also recognized our first silicon photonics PIC revenue following the DustPhotonics acquisition. Our initial wins are in 800 gig and 1.6T optical transceivers, and we expect these products to ramp throughout the year. More importantly, silicon photonics PICs add another important technology to our optical platform. We now optimize the DSP and PIC together and combine them with our firmware, telemetry and pilot software. This level of integration creates opportunities to improve reliability, power, signal integrity and diagnostics. It also positions us well as scale-up architectures move toward near package optics. We're seeing increasing customer activity around NPO for scale-up networks, with confirmed design wins expected to begin ramping in our fiscal 2018.

As part of the open CPX MSA consortium, we'll bring many of the advantages of today's pluggable ecosystem including telemetry, interoperability and serviceability.

Our opportunity here includes both optical components and complete system-level solutions. This is an important evolution for Credo. We've historically been very successful solving connectivity problems at the semiconductor and the AEC system level. We're now applying that same approach to optics.

Our ZeroFlap optics business continues to progress. ZeroFlap Optics combines optimized optical hardware, pilot software and switch level STK integration to continuously monitor Link health and identify and mitigate when Link instabilities become likely. The objective is to improve cluster break-up time and long-term network availability, both of which deliver significant financial advantages and end customer outcomes. Production shipments are underway, and we expect additional customer ramps during fiscal '27 across both 800 gig and with both hyperscalers and neo clouds.

With DSPs, PICs and ZeroFlap optics, we now address much more of the optical link. That changes the opportunity for Credo. We sell components where that's preferred by customers. But more importantly, we also integrate those components with hardware, firmware and software to deliver a complete optical transceiver with unprecedented system-level reliability.

Taken together, the momentum across DSPs, PICs and ZeroFlap optics keeps us firmly on track to deliver more than $600 million of optical revenue in fiscal '27.

Now turning to retimers. Our retailer business also delivered record revenue in Q1. Growth was primarily driven by scale-up deployments using our Screaming Eagle retimer at 100-gig per lane and with our Blue Heron retimer beginning to contribute a 200 gig per lane. We continue to see opportunities for the Toucan retimer as PCIe Gen 6 adoption increases and for Screaming Eagle and Blue Heron across Ethernet and UA Link.

Scale-up architectures are developing quickly with customers making different choices around protocols, topology and connectivity. And our ability to support multiple protocols allows us to successfully participate across these architectures.

Now I'll discuss 2 important emerging growth areas. We also continue to make progress with both active LED cables or ALCs and our Omni Connect gearbox solutions. Our ALC solutions use micro emitters to combine many of the reliability and power advantages of copper with reach of up to 30 meters. Customer engagement continues to increase, and we plan to demonstrate ALC solutions at OCP in October. We remain on target for initial revenue in fiscal '28.

We're also seeing strong engagement around our OmniConnect innovation. Our OmniConnect SerDes and Weaver gearboxes address the fan-out issues that come with increasing memory bandwidth and capacity requirements of next-generation AI architectures. This is especially relevant for inference for memory capacity, bandwidth, packaging and costs are becoming increasingly important architectural constraints. We believe OmniConnect solutions can represent thousands of dollars of credo content per GPU with revenue beginning in fiscal '28.

In conclusion, Q1 was another strong quarter for Credo, and customer engagement across the business remains very strong. AECs continue to grow as we expand with existing customers, add new customers and move to higher data rates. Our retimer and optical DSP businesses also delivered record revenue. At the same time, the scope of our optical business is expanding. We believe that the system level approach will become increasingly important as AI networks move to 1.6T and 3.2T solutions and a scale-up architectures drive greater use of near package optics. AEC has helped take Credo to the scale we've achieved today, and we continue to see growth ahead for that business. What's different today is that we're adding optics as another major growth engine from a much larger base and as an established player in the industry. Our optical opportunity now extends from DSPs and silicon photonic PIC to complete ZeroFlap optics and NPO solutions. Our content opportunity expands significantly as we solve a broader set of challenges for our customers. AECs continue to grow. Optics is growing faster. And based on the customer engagements and ramps underway across the portfolio, we remain confident in the outsized growth we expect to deliver in fiscal '27. The common thread across all these products remains reliability. As AI infrastructure scales, our job is to provide connectivity that works reliably, uses less power, provides visibility into the network and keeps expensive processes operating at high utilization. That's what we're focused on, and we're very excited about what lies ahead.

With that, I'll turn the call over to Dan.

Thank you, Bill, and good afternoon. I will first review our Q1 results and then discuss our outlook for Q2 of fiscal year '27. In Q1, we reported revenue of $479 million, up 10% sequentially and above the high end of our guidance range. Year-over-year, revenue grew 115%. Q1 marks another revenue record driven by substantial year-over-year growth across 4 domestic customers and marks our seventh consecutive quarter of triple-digit revenue growth year-over-year.

Our top 4 end customers each came in at or greater than 10% of revenue in Q4. As a reminder, customer mix will vary from quarter-to-quarter. We continue to expect that 3 to 4 customers will be greater than 10% of revenue in the coming quarters and fiscal year, and we continue to make progress in diversifying our revenue base across hyperscalers, neo clouds and other customers.

Our team delivered Q1 non-GAAP gross margin of 68% at the midpoint of our guidance range. Total non-GAAP operating expenses in the first quarter were $95.2 million, above the high end of our guidance range due to our strong R&D investment and up 16% sequentially. Our non-GAAP operating income was $230.6 million in Q1 compared to non-GAAP operating income of $216.7 million in Q4. Our non-GAAP operating margin was 48.2% in the quarter.

Our bottom line once again demonstrated the substantial leverage we are delivering in the business, even with our continued heavy investment in R&D. Our non-GAAP net income was $236.3 million in the quarter, a record high and a 4% sequential increase compared to non-GAAP net income of $226.7 million in Q4.

Our Q1 non-GAAP net income more than doubled year-over-year clearly demonstrating the magnitude of our top line growth, strong gross margins and disciplined approach to managing operating expenses.

Our non-GAAP net margin was 49.3% in the quarter.

Cash flow from operations in the first quarter was $90.2 million, down $92.0 million sequentially due primarily to changes in working capital.

CapEx was $7.3 million in the quarter and free cash flow was $82.9 million.

We ended the quarter with cash and equivalents of $764.3 million, a decrease of $679 million from the fourth quarter due primarily to the cash outlay for our acquisition of DustPhotonics. We remain well capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer.

Our Q1 ending inventory was $313.1 million, up $62.2 million sequentially.

Now turning to our guidance. We currently expect revenue in Q2 of fiscal '27 to be between $525 million and $535 million. We expect Q2 non-GAAP gross margin to be within a range of 67% to 69%. We expect Q2 non-GAAP operating expenses to be between $100 million and $105 million. And we expect Q2 diluted weighted average share count to be approximately 200 million shares. These expectations are based on the current tariff regime, which remains fluid.

As we move forward through fiscal year '27, we continue to expect an inflection in the second half driven by more than $600 million in optical revenue with ZeroFlap optics, silicon photonics PICs and optical DSPs, each contributing more than $100 million, resulting in more than 85% year-over-year total revenue growth for the full year. We expect non-GAAP gross margin in fiscal year '27 to be broadly consistent with fiscal year '26 levels. We expect non-GAAP operating expenses to increase approximately 55% year-over-year, well below our revenue growth rate as we continue to invest in R&D to support the new product development and address the significant growth opportunities ahead. As a result, we expect our non-GAAP net margin to be in the vicinity of 50%.

And with that, I will open it up for questions.

[Operator Instructions] Your first question comes from the line of Tore Svanberg.

Congrats on the record quarter. Bill, I was hoping you could unpack a little bit the position in optical right now. You did reiterate the $600 million plus, but now you also talked about NPL and maybe even doing some system-level NPL. So as we think about that $600 million both in fiscal '27 and fiscal '28, how should we expect the mix to look like in terms of all the various different components?

Sure. I think we feel great about the broadening portfolio that we're bringing to market. As we've indicated, the optical DSP business for us is doing quite well at a component level. The team that came in to Credo from Dust brought a lot of momentum. And in fact, after just a few months, the momentum has picked up, and we're happy to be able to say that we've got design wins with 2 major players for next-generation ramps that will occur in fiscal '28, and maybe starting in the late part of this fiscal year.

ZF optics, we continue to make progress. We're engaged with multiple customers, both hyperscalers and neo clouds. And we feel good about the way that the year is shaping up.

I think -- as I think about the overall optical opportunity, and you did mention CPX, and I think you may have all seen the press release earlier that we have joined the consortium, and we plan on pursuing solutions for the scale up market that's developing, really across the board, CPX is, I think, an important development in the industry. That's 1 way of solving the challenge of going to 10x more density than what you're seeing in scale-out. And we'll pursue this market the same way. We'll pursue component sales where that makes sense with customers, and we'll also pursue system-level solutions that we'll talk about over time.

But you bring it up at important point. Fiscal '27, I think, is just a stepping stone for where we're going with our optical business. And if we think about the market forecasters, specifically the ones that are focused on the optical transceiver pluggable market, just that piece alone is expected to grow from 60 million units in '26 to 175 million units by 2030. This is an amazing growth for this portion of the industry and then add growth on top of that for what happens in scale up. And so we think that with our broad portfolio of solutions that we're going to experience continued outsized growth through the 2030 time frame. And it's going to have contributions from not just our optical portfolio but also AECs as well as our other copper solutions.

So I'd probably give you a little more color than you asked in that question. So hopefully, that gives you what you're looking for.

Your next question comes from the line of Quinn Bolton with Needham.

Bill, I guess a question just on the follow-up to Tore's question. Just really wanted more color on the importance of Credo joining the Open CPX consortium, what types of solutions you may be providing? Is it more PIC-based? Would you be supplying the full optical engines? I assume these are all laser-based rather than microLED-based. But maybe just a little bit more detail on this new opportunity that's opening up for you in the NPO scale-up segment?

Sure. So as we all think about the scale-up opportunity, we're thinking about changing of form factors. When we look at front end and we look at scale out, there's no real catalyst to change from the pluggable form factor. But for scale up networks, there's a fundamental need to have more dense form factors. And we've talked as there's been an ongoing industry conversation about things like XPO CPX, how that fits in with NPO and then ultimately, CPO. All of these solutions address the need for a 10x density improvement. And the way that we're approaching the market is somewhat agnostic. We will basically look at what our customers are asking us and what our customers are driving towards. And so we've, I think, done a very good job of being agnostic as it relates to the solutions that we're bringing to market. We're going to continue to do that. And so of course, with all of the NPO solutions, including PX we'll lead with the silicon photonics PIC, but we'll also look at doing the complete optical engine long term as we add more functionality to our portfolio.

Your next question comes from the line of Tom O'Malley with Barclays.

So mine relates to the ZF optic side as well. So like when you look at the forecast that you have kind of over the next year and then the year after that as well, like a lot of the volume in terms of revenue is driven by the ZF optics forecast in. Like it's unique. You imagine that you're going to use a contract manufacturer for this and you're hearing about supply issues, raising prices in the foundry world. Like can you talk about the challenges that you're facing in scaling today and what gives you the confidence that you're able to kind of hit the metrics that you gave us some color on the last earnings call. But like what gives you the confidence that you're able to hit those really big revenue numbers in the near term?

And just maybe a little bit of a pulse check on conversations with customers today, particularly those who in the media have potentially been spending a little bit more money and the forecast is raised on the ZF optics side.

Yes, you point out something that's lots of fun. We're in a very dynamic market right now. And you're right, from the supply side, it has been important that we have spent so much time even going back 18 to 24 months ago, and we knew that this was a direction that we're heading. And so you can see from Dan's update, that working capital is increasing. We're leaning in from a supply chain standpoint. I feel great about our ability to supply increasing volumes in our second half and then throughout the next couple of fiscal years.

The other half of that is driving demand. And so I see that over the past year, we've been very successful in marketing and really engaging with customers. And so all of this has got to come together. But again, I'll point out that we're really playing the long game here. And of course, there's -- there should be, and there is a lot of emphasis on the very fast ramp that we've set expectations on. But I think more importantly, looking at the big picture, this involves an opportunity that takes us to a different scale as a company. And so this is very much an important part of our growth strategy and our scale as a company.

Your next question comes from the line of Sean O'Loughlin TD Cowen.

Congrats on the solid results and momentum. Maybe we could just get some blocking and tackling on the -- Dan, you mentioned the 3 to 4 customers, will be greater than 10%, and you're continuing to diversify. I wanted to ask specifically, maybe if you could do the rundown of what the stats were on those 3 to 4 in the quarter. But then also when we think about customer concentration, there's also platform concentration? And are you diversifying your product portfolio across those customers as well?

Yes, sure. Let me start with just the percentages of those 10% plus customers. So our largest customer was 1/3 of our revenue at 3% and second largest 28 and then followed by 13 and 10. Those top 3 customers were similar to or the same 3 as in the prior quarter in a slightly different order. One thing to note, our fourth 10% customer, right at 10%, was different from our 10%'s 4 customer last quarter. They have been a 10% customer in the past.

Now in terms of diversification of product line within those for sure, there is a strengthening and broadening across the board. It isn't just AECs that these hyperscalers are consuming evolves.

Your next question comes from the line of Blayne Curtis with Jefferies.

On the AEC side, I just wanted to ask you, timing on 1.6 terabit, but also just the design traction if you compare that versus the 800 gig, you've been talking about neo clouds. I think some of your existing customers are moving to faster speeds. Can you just give us a perspective of how those designs are laid out in the timing?

Sure. We expect that our AEC portfolio will ramp in a similar kind of time frame as the rest of the market. And for that matter, our ZF optics products. I want to step back and give some perspective on the way we view the AEC market. There's been a lot of conversation about copper and optical and just the trade-off there. And the way that we view the AEC market, it is part of the pluggable transceiver market. So when we talk about forecasts for specifically optical transceivers going from 60 to 175 over the next 4 years, there's not really a breakout for the AEC market, but the AEC market really represents the 1-meter to 7-meter segment of that market. And so it just makes sense that, that segment is going to grow as well. And we see that really being long term. We see that in a big way, in 800-gig category, what we saw was copper replacing optical. And it was replacing optical -- laser-based optical transceivers because of the need for higher reliability and secondarily, lower power as it relates to that first connection in the network from GPUs to that first switch. And so the bottom line is that we see the pluggable transceiver market for all of the public transceivers from copper to laser-based optical. And ultimately, we'll talk about ALC as being another pluggable transceiver option within the spectrum, and that's going up to 30 meters. And so as it relates to what I think the setup looks like for 1.6T, we're quite bullish about the AEC opportunity. And as we showed going back 6 months ago at OFC, many of the next-generation deployments that have been discussed in the industry, we showed a very elegant solutions, all connected with AECs. And we'll deliver up to 6.5 meters in that category. So we think it takes shape towards the end of -- or there will be some contribution in our second half fiscal '27 and then fiscal '28, it comes in, in a much bigger way.

Your next question comes from the line of Joseph Cardoso with JPMorgan.

This is [ MP ] on behalf of Joseph Cardoso. So I just wanted to ask on the overall opportunity. Until most of the opportunity has -- and the focus has been on training, but we are seeing incremental development around inferencing as well now. So I just wanted to check how does Credo is positioned in terms of addressing the inferencing opportunity and which part of the portfolio particularly stands out? And how does the overall opportunity compare relative to training?

I appreciate that question. I'd like to maybe talk a little bit about our OmniConnect solutions that we are bringing to market now and that we expect to contribute revenue in our fiscal '28. Specifically related to inference, as these solutions continue to gain momentum, one universal issue is around memory fan-out. The memory fan-out issue is limiting bandwidth and also total memory deployment of memory capacity, both of which are critical to achieving high-performance inference. And so with our OmniConnect solutions, there's kind of a 2-piece story to the offering. First thing is we license a highly optimized high-speed SerDes that's got a very small form factor, very low power, and that's got reach of up to 10 inches. So effectively addressing the fanout issue that exists on the XPU beach front as well as the distance that you can get the distance you can achieve between the GPU and memory.

So the second piece is a the gearboxes that we're developing. The first gearbox that we're developing is a solution that we call Weaver. And it is a gearbox that interfaces between that embedded SerDes on the XPU. So it's up to tenants reach and interfaces with that same exact series. And then it becomes an LPDDR interface. And it's important to note that our first product will be LPDDR5 and there will be a second product we do for LPDR6. And so in a sense, this architecture is future enabled because when the memory market shifts from 5 to 6, there isn't going to be a need for our XPU partners to do another tape out, another design, just simply change the gearbox.

And so our first customer, Positron is doing really great things. When we look at memory limitations and the opportunity that if you can increase memory capacity up to 2 terabytes, which is their first announced product, just the performance with Frontier model run your models, basically, you can fit everything in memory and your performance is goes off the charts. And so they're redefining what is competitive in that space. And if we look even from a bandwidth standpoint, we've got a road map that will achieve very comparable bandwidth even HBM 5. And that's while expanding on memory size and eliminating the reliability issues of packaging XPUs and HBM in the same package.

But related specifically to inference, we're really excited about how this is really going to change the game for many frontier model applications.

Your next question comes from the line of Vivek Arya with Bank of America.

Bill, I wanted to go back on the AEC growth in the second half and then longer term. If I take your 85% growth outlook for the year, suggest about $500 million of incremental growth in the second half. But if optics is going to be the bulk of it, and that $600 million, that suggests kind of more conservative assumptions about AEC growth. I'm sure that I'm probably mistaken about how much OpEx was in the first half or so. So I was just hoping if you could kind of give us some more details on the optics versus the segmentation in the first half versus second half and what that implies for AEC growth in the second half? And then how should we model AEC growth longer term?

Sure. I think that as we look at the entire year and we look at the growth across each 1 of the products that we're bringing to market, we see growth across the board. Now of course, with our optical solutions, this is really the first year that we're ramping and it makes a lot of sense based on what we're bringing to market that we'll be able to achieve a really fast-paced growth. I think AECs will continue to grow. You've got to consider where we've grown from AECs have driven growth over the last 2 fiscal years, more than doubling from '24 to '25, and then more than tripling from '25 to '26. And so I think that as we look at our opportunities in AEC, we continue to see expanding opportunities. But in a sense, I think we're looking at clearly a slower growth overall compared to the fact that we're growing into such a large market with optics. And so it makes sense that optics will grow faster because we're growing from a smaller base.

But long term, I think you'll see AECs grow. And as we continue to scale as a company, I think you'll see balance a really nice balance between copper solutions and optical.

Your next question comes from the line of Sebastien Naji with William Blair.

I just wanted to maybe ask a little bit about pilot and some of the telemetry data that your solutions are picking up. As your installed base grows, are you accumulating enough link level telemetry that the data itself has become giving a bit of a competitive advantage for example, allowing you to identify failure modes or optimize future DSP designs. And is that extending your moat at all? Just any thoughts on that?

Sure. The pilot software platform is a really important part of the total ZF optics offering. And when we look at what we've done, we basically had to start with a custom DSP design, 1 that would enable telemetry to be lit up on every link between an XPU and a switch. And when I say every length, there's really 6 in total. There's 3 in 1 direction and 3 in the other. And this is completely different than the telemetry that has been discussed up to this point in the industry. And so what we're able to sense on a real-time continuous basis is really rich telemetry data that looks on indicators of link stability, even going down to the SerDes level because that, of course, is core to our platform on everything we do. But we're looking at a real-time measurement of height and post effect histograms, really rich telemetry data even down to that level. And so when we are sensing this continuously, we can sense when the Link integrity is decreasing. And so you can think of it as right now in the industry would exist as a green light when you've got a connection and a red light when there's a failure. What we're adding is like a check engine like a yellow light that says, okay, you've identified something and then the mitigation piece of it is about acting. And so there's different approaches that are enabled by pilot. You can make the decision on a transceiver by transceiver basis to take that transceiver that looks likely to have a link flat and in an orderly way to take that GPU out of the cluster. We've got other customers that are looking at a network level, more of a centralized approach. And the ultimate outcome is the same from a reliability standpoint. But in this case, both opportunities allow you to collect a tremendous amount of data because as you're taking link down, you've got a snapshot of exactly what was happening within that transceiver and what's happening within the network. And so you're right that the data set that we're starting to gather and that we will gather over time, will lead to better solutions. It will lead to next-generation solutions being optimized even more so for the types of failures that we're detecting early.

I will say we're doing other things that are really interesting, and that's related to conversations with customers. We had a customer ask us, can you sense even the slightest ESD damage on a transceiver because that will become a latent defect. And so we've figured out a way to sense even the slightest ESD damage, not the type of damage that would cause a transceiver to fail, but the type of damage that over time would result in a failure in that connection. And so now when we've got customers lighting up racks, they can determine immediately if a transceiver was mishandled and needs to be replaced.

Other things that we're sensing is dust on the fiber plan. This is really, really important because even the smallest speck of dust can have light bouncing back in the other direction, causing a multipath interference situation. And so what we're doing is far beyond.

Now pilot allows us to integrate within the network of our customers. And that really just changes the game on giving our customers tools to be active in identifying and mitigating. And look, the goal here is twofold. It's really to deliver the fastest time to revenue. So bringing a cluster up in 5 or 6 days versus 6 to 8 weeks. I think we've seen the contracts that have been reported in the market. You can measure a month on the order of hundreds of millions or even $1 billion of advantage when you've got that really expensive gear that could be generating revenue, but it's sitting idle because we're trying to bring in a cluster up and on the order of weeks versus days.

The other big 1 is uptime after deployment and driving to a 99% uptime or even higher is the objective here. And that just delivers a better fabric, better product for the end customers. And so it's a huge differentiator, I think, at a cluster level. But yes, pilot is critical to enabling that. It's a combination of the custom hardware, but the interface within the network is really the critical piece.

Your next question comes from the line of Karl Ackerman with BNP.

Great. DSPs and PICs, aren't direct hyperscaler sales growing as a portion of your mix versus optical module suppliers? And how does that improve your customer visibility and stickiness with your data center customer base?

Karl, I apologize. You -- the first part of your question, we didn't hear. So I just want to make sure I've got the right perspective.

Sure. Yes. As we think about the opportunity for your discrete DSPs and PICs of that $600 million, also growing over time. Isn't the customer mix moving more toward direct hyperscaler sales who are making their own custom transceivers? And as they do that, how does that improve your customer visibility and stickiness with that customer base?

When -- so in looking at our optical components business, this is really an important part of our business short term and long term. And ultimately, it's the path where we're going to pursue that pluggable optical transceiver market that is based on mainstream standards. And -- the combination of having an optical DSP and a PIC and being able to offer that system level even within a component offering, that will help our customers deliver what we see as the most competitive combination of system performance power and yield. Many times, our module customers are working directly with hyperscalers. And the hyperscalers are active in basically pointing to the components that they want to be put together within the modules that our module customers offer. And so the hyperscalers play a big role in both the component sale part of our business to our modular customers as well as our ZF optics modules that we're building ourselves.

Long term, I think that is going to be a balance that we see that will continue to where we're going to see that -- in fact, our component sales and our module sales will be complementary in the sense that the broad part of the market will be addressed by components and a very specific part of the market that really, really is focused on reliability will be kind of a new product that's offered in that transceiver space.

Your next question comes from the line of Vijay Rakesh with Mizuho.

Just a quick question. You mentioned -- just taking a step back, you mentioned 2027 is a stepping stone, and you're already growing like 85% year-on-year. As you look out to fiscal '28, can you give us some perspective on how to look at it? Obviously, AEC is growing might be like 50% this year. You have ZF optics ramping, [indiscernible] $600 million for fiscal '27, which kind of annualizes like $1 billion plus run rate. And as you mentioned, active cables as well. As you have all these 4 segments ramping, can you us some perspective on how to look at fiscal '28?

Appreciate that. The conversation about fiscal '28 and '29 and '30 is something very active conversation within our leadership team at Credo. Let me first touch on ALC as a part of our portfolio. I think this is -- the product that we're bringing to market first is using micro LED technology. And the promise of this technology is really to deliver the same reliability and the same power efficiencies at a core technology level as AECs. Key difference there is will extend the length of 30 meters. And so it's going to -- ALCs will represent our third differentiated pluggable transceiver solution. So different things we first did kind of created the product category with AECs followed by ZF Optics, again, creating a new product category. ALCs will be the third leg of that stool.

The bottom line is, I look at that pluggable transceiver market, and I think that's just step 1 for ALCs and the micrometer technology. A next natural step forward on that is to apply that to what comes with the scale-up opportunity because, again, in scale up, this is another technology alternative, but the promise there is that at a core technology level, we'd be addressing some of the problems that have prohibited that market from taking off with solutions specifically related to reliability, availability and serviceability. And so we view ALC as a big multibillion-dollar opportunity, followed by as big of an opportunity with scale up and is highly complementary to the suite of technologies that we brought to market.

So the way that I think about the future, more specifically to answer your question, is that we're trying to put ourselves in several multibillion-dollar TAM opportunities. You can just analyze our portfolio across the pluggable space. And you can see that it's really tens of billions of dollars of opportunity that we're now going to be addressing in our fiscal '28 time line given the fact that ALCs will be part of the portfolio. And so we're trying to put ourselves in a position to address a very large market. Our growth as a company will follow based on our success in executing with every customer. I think we're quite bullish on the opportunity. And that's without even talking about the massive opportunity that the entire industry has in front of us will scale up. Even think about OmniConnect, we've articulated in the past that that's a multibillion-dollar opportunity annually as well. So I think that as we think about fiscal 28, you're right, we think about outsized growth again for another year, but we think that will continue for the years to follow as well.

Your next question comes from the line of Mark Lipacis with Evercore ISI.

Bill, I think for you, optics is growing faster. It's a newer market. Can you contrast how you are prosecuting the optics market compared to how you prosecuted the AEC market. I have to mention there's some differences given you effectively created the AEC market. And maybe as part of that, what are the implications on the business model as OpEx becomes larger. And to the extent that you can talk about like where you get leverage between these businesses on development and the supply chain and with your customers and where you need to build capabilities?

There is a pretty interesting contrast between the efforts that we pursued with AECs and some of the leverage and how it looks different this time with ZF optics. With AECs, we imagine this product as being an extension to copper, basically addressing some of the issues that our customers are facing as they were going to faster speeds, and they were having issues with tax. We were surprised when we had customers pursuing us talking about really interesting innovations at a feature level, things like telemetry, things like other system-related rec level innovations. And we really opened that door to the customer base on feature set innovation. Our first customer, Microsoft, the reason that they converted to AECs was really the functionality that we offered. We developed a solution that was smart enough to sense when a tour port was failing or about to fail and then switching the data to a redundant tour in a hitless manner, really, really smart solution in a cable format. Over time, the momentum built, and this is over years, momentum built because as speeds increased, it was clear that tax weren't going to cut it from a signal integrity but also from a form factor standpoint with the copper wires needed to become much, much thicker. So from a form factor standpoint and a signal integrity standpoint, many of the customers started looking. And then, again, I mean, if we look at our solutions today, many of them have really innovative feature set solutions. And so the growth happened over -- a product category creation happened over several years. As part of developing our solution and having it be a complete solution and taking ownership of it, we developed a really differentiated way of coming to market from a qualification standpoint, the rigor that we put our solutions through is sometimes far beyond what our customer calls look like. And that includes having our customer switches, our customers' mix running at speed as we're hammering the length, the entire link, not our AEC but the entire link from NIC to switch. And the objective is to harden the solution, finding link weaknesses and then hardening that through firmware modifications. So that was definitely something that we're leveraging now as we bring ZF optics to market. But the difference in ZF Optics was that AI happened. And AI networks were fundamentally different than say, front-end networks, where there was kind of a built-in redundancy within the different tiers of the network. And so we've had link flaps for a long time, but they just haven't surfaced as a major concern because there wasn't any massive hit to the network. But now that we've got AI clusters, you've got tens of thousands, if not hundreds of thousands of links that are all interdependent that if you start getting flaps on some of those lengths can affect the entire cluster to the point where customers have talked about losing utilization on the order of greater than 10% or even approaching 20%. So there's a -- with this new application, it was a perfect fit for following the playbook on AECs and doing interesting things, very innovative things in an area where innovation had not happened for many years, working closely with customers and basically charting the path to at a system level, be able to improve reliability of the network. That was really the difference. And it took some time to develop the hardware and the software solution. But we're seeing that the market is taking off a lot faster than AECs because we're addressing a pain point that exists, clearly exists already. So this is welcomed every time we have a conversation with the technical networking teams within the customer base.

Your next question comes from the line of Suji Desilva with ROTH Capital.

Congrats on the progress in the margins. You've given us a lot of color on the optical and kind of dug into how you're approaching it. It might be a good time timely to revisit the competitive landscape and how you think competitors approaching the markets you're approaching, whether you're approaching it differently? Or are they going to be able to approach the future driven approach the way you are? Or any other elements that are key to kind of how you're doing it that really allow you to separate from the group because a lot of people are talking about the same opportunities.

Sure. I think it's -- I think there is a case to be made here about our go-to-market strategy and the fact that we are owning the entire stack. And I think when we look at the opportunity, just at a transceiver level, starting with the SerDes and then looking at it from a DSP and now a PIC perspective, being vertically integrated gives huge advantage on your ability to deliver the best possible system solution, but it also gives you an advantage on COGS.

Then you think about going to market with a solution that's differentiated and the challenge is what are those features worth. And so I think we expect an advantage at a COGS level, but we also expect an advantage on an ASP level as we compare our solution to more standards-based solutions in the market. I do think that long term, we are now the pacesetter on innovation in the optical space. The market needs it. And we're being pretty open with working with the standards groups on standardizing around some of the things that we're doing. And the challenge there is how can we innovate faster than the rest of the competition, the rest of the market. And I think we feel comfortable, given the fact that we own the entire stack that that's going to lead to the same kind of success that we've had with AECs.

Your next question and final question comes from the line of Christopher Rolland with Susquehanna.

Thanks for the question squeezing me in. And Bill, I will bite on your DSP plus PIC integration that you've mentioned quite a few times. I guess, first of all, if you could talk maybe a little bit more about your 2 dust wins. Do they include DSP integration? And if you could remind us kind of the economics for this part for this market and what it means to you guys, that would be great.

Appreciate the question. The world we live in at a component level is quite competitive. And so just by proper protocol, we're not able to talk too specifically about exactly which of the major players that we're engaged with. I will say that these first 2 major design wins that we're talking about do not include the DSP. So there's upside potential with that as we look at really co-marketing the DSP and the PIC, long term. Right now, it's -- the Dust team was really doing a great job with engaging deeply with major players in the industry, amazing that a small team like that had such great traction. And I think it's evidence of the fact that their technical solution is absolutely leading edge in the market.

Long term, I think there's going to be a great opportunity for us to look at these 2 components and really bring a lot of benefits to the customer base. So I look at this as a great development in our overall portfolio and going to be really promising long term for us.

So I guess with that, we'll wrap up the call. So I really appreciate you all attending. And thanks for the thoughtful questions. We look forward to the follow-up. Thanks so much.

This concludes today's call. Thank you for attending. You may now disconnect.

BofA semiconductor semi-cap equipment research team. I'm really delighted to have the team from Credo Technology with us today. Bill Brennan, President and CEO; and Dan Fleming, the Chief Financial Officer. And as usual, I'll go through my questions, but please feel free to raise your hand if you would like to bring something up. Really delighted to see you, Bill and Dan.

Happy to be here.

Thanks for joining us. I know Bill we'll get into the nitty-gritty of the quarter and what's happening here and now, but I was really hoping you could kind of step back, zoom out and give us kind of what is your 5-year strategic vision? Because it feels like people think of Credo as a copper company. And if optics is the end goal, then copper doesn't have a long life. And that seems to me like such a subjective and perhaps incomplete way of describing, right, what your opportunity set is. So I think it would help to hear from you what your 5-year vision is.

Sure. But let me first maybe address the debate between copper and optical. I kind of view it as there's companies on stage maybe having the debate, if I imagine it that way. NVIDIA, Broadcom, Marvell, Astera, Credo. And I think the debaters have stopped talking. Debate is over. It's going to be a heterogeneous world. I think all of the companies have communicated that. It's not one or the other. It's in different parts of the network, how do you solve for reliability and signal integrity and power efficiency and reach. These types of things will drive the decisions that our customers make as to which connectivity solution will be used for different parts of the network.

I think we all see the pluggable market. When we think about pluggable, we think about optical. And we see that pluggable market growing extremely quickly. I view our AEC products as part of the pluggable market. It's just the short reach pluggable. And so if you believe that optical is growing, which we all see it growing at leaps and bounds, that's what you're going to see in AEC as well. The pluggable market will grow, both will grow together. If we talk about scale up, that's where it gets interesting, and we can talk more about that. So let me zoom out a bit and talk about where we've been and where we're going. So I feel incredibly great about our earnings call on Monday of this week.

We just announced our fiscal '26. And to put things in perspective, if we go back 2 years ago to fiscal '24, we were sub $200 million in revenue. Fiscal '24 to fiscal '25, we more than doubled to $437 million. This year that we just reported, we more than tripled. So there's an acceleration in our revenue from less than $200 million to greater than $1.3 billion. And the trajectory I expect to continue, as Dan alluded to a greater than 80% number, not 80%, but greater than 80%. And there's a lot of numbers that are greater than 80%, 81% is, and there's a lot of numbers that are also larger.

So I feel great about just the transformation of the company. If you zoom in on that, we're really recognized as the pioneer of the AEC market. A lot of people didn't believe the market was a large market. Now we see competition confirming they're coming to the market because the market is growing. I see that market growing for the foreseeable future. I was asked the question yesterday, when do you see the peak? And I don't see the peak. So I see our AEC business continues to grow over the next 5 years. I will say that to frame it at a high level, what we've been working on the last 2 years, everything that we've been working on investing in and bringing to market, reliability has been our North Star.

Reliability is becoming much, much more important in clusters because the connections between NICs and the first switch, the TOR, there's no redundancy. And in a cluster of say, 10,000 GPUs or 100 or 1 million, all of these first links from GPU to switch, no redundancy. If you do have link instabilities, it can literally bring the entire cluster down. We learned this from our customers. We learned it first with AECs because we had customers that were converting their rack architecture from -- or a row architecture from connections that were longer than 7 meters.

That's why we did 7-meter cables was because xAI, in particular, asked us because they were going to re-architect with liquid cooling so they could connect all of their GPUs, switches with AECs, which are fundamentally bulletproof from a reliability perspective, 1,000x more reliable than laser-based optics. So fast forward to the discussion about ZF Optics, which we'll get into and just describing that product was designed for that link or eliminating link instabilities between GPUs and switches, not at a core technology level, but by going up the stack. So designing a custom DSP that was capable of lighting up rich telemetry on every link. It's not -- you go -- there's 6 links between a GPU and a switch.

So there's one to the switch and one from the switch to the NIC. And so there's one link to the module, module to module and then module to switch. So lighting up rich telemetry on all of those links so that we can predict when a link instability is going to happen because we're monitoring signal integrity continuously across the entire cluster where ZF Optics are deployed. So basically bringing up a cluster quickly time to stability, which is dollars. If you buy billions of dollars of gear and it takes you 8 weeks or 12 weeks to bring the cluster up to a stable point so you can start generating revenue, that is hugely expensive compared to bringing it up in a week and then keeping it at near 100% uptime.

Again, that's a financial return for the company. So generally speaking, the ZF Optics part of our business, we're now addressing the complete pluggable TAM. And it's not as if we're competing with commodity optics. What we're doing is we're offering an upgrade to something that's much more rich from a feature standpoint to address that portion of the market. And so I think that market is -- can be a very large market. And so when we think about the profile of just those 2 pieces of business for us, imagine AEC is growing over the next 5 years. And then add to that an even faster-growing ZF Optics portion of our business, not going to be one in lieu of the other. It's going to be additive.

And so I feel great about both of those core businesses for us growing. And then we think, okay, what else are we doing, right? And so we're going to be viewed much more than an AEC company because in reality, we're bringing the full spectrum of connectivity products across the entire data center from short copper links all the way to facility-wide optical links. But also we're going closer to the die. So there's a lot of die-to-die innovation that we're doing. We call that effort OmniConnect, and it leverages our position with very, very optimized SerDes and also gearboxes to enable GPU makers to do a composable design.

The first thing we're attacking is the memory wall on inference, and we're really unlocking the fan-out problem that you have physically on a die edge area as well as how far you can get the memory away from the main die. So our first customer, Positron, is really turning a lot of heads because they've introduced an inference engine that has 2 terabytes of memory. That compares to 128 gig for other solutions in the market. So AI-generated real-time video is now going to be super high performance, and that's a huge market. It's one of the markets they're addressing. But when we think about ourselves, we think of ourselves as a full spectrum company from die-to-die to facility-wide with reliability as our North Star.

Got it. Absolutely. Before I go into -- as I was coming in, one investor actually asked me, does Credo have a role in these new agentic CPU clusters that are seen as kind of an incremental or that is not an addressable market for you?

Yes. Short answer is absolutely. Those servers need to be connected to the TOR. So it looks like a front-end connection. So if you see a surge in CPU demand driven by agentic, you can count on the fact that all of those will need to be connected. So AECs will play a role.

It's kind of just a similar application expanded.

Right. So when we think about the AI connectivity market in general, I don't think we've ever been in a better place. The cluster sizes are increasing, but applications are becoming more diverse. Training, a lot has been talked about with inference even being larger than training and now agentic is like the third leg of the stool. So all of those opportunities make the AI connectivity opportunity at large much, much better, much more exciting.

Got it. You mentioned the $1.3 billion in sales last year and the growth rate, which, by the way, if I'm right, is actually faster than the growth rate of any optical company, right, that I cover. So that first principle shows, right, that you're not -- you're actually gaining share in the connectivity market, right, not losing share. Yes. But if you look at the next 5 years, what is the right way, Bill, to size how large the AEC market? Like is there a first principles way of doing how large that market would be? Because -- and is there a point at which the per lane speed gets to a point, I don't know whether it's at the 200 gigabit per lane generation or the 400 gigabit per lane generation where even AECs cannot keep up.

Well, I think to address the speed question first, the 200-gig per lane horse is out of the barn, right? We showed 6-meter solutions at OFC. And we showed every next-generation potential rack and row deployment, all connected with AECs for the scale-out network. For 400, we're going to be developing solutions across the entire portfolio. And there's a new product that we're developing that's based on wide and slow that has the equal reliability to copper. And so we believe copper absolutely will exist for 400, but we'll also have an alternative product with micro LED as the light source that's wide and slow that delivers same reliability, same power efficiency and a longer connection up to 30 meters. So I think from a standpoint of the pluggable portfolio, that 400-gig question is already answered from our perspective. There will be heterogeneous solutions even...

There's no...

Wide and slow optical. Yes. And so when we talk about what the potential size of the market is, there are certain forecasters that put it out at the $10 billion level. I'd like to think about it from the standpoint of there's so many reasons why that market is going to grow along with the rest of the connectivity market. So it's hard for me to say where is the peak, but I definitely agree that it's going to be in that ZIP code.

Got it. Okay. Now you have also invested a lot in expanding the optical part of the portfolio, right, whether it's through silicon photonics, right, whether it's through your DSP. So maybe walk us through how large is the optical part of the business as part of the $1.3 billion? And I think you gave some forecast, right, for what the growth might be in fiscal '27, I believe.

So maybe it's a little known because of our revenue profile, but we've been investing in optical DSPs for many years. And so we have absolutely best-in-class DSP solutions that are ramping. So that -- the comment that I made about the optical DSPs, SiPho PICs and ZF Optics that all of them will grow to more than $100 million, and all of them are growing faster than the company is growing. Interesting point. Gave a total of greater than $600 million.

$600 million.

All 3 of those markets are multibillion-dollar markets. And so we're emerging as a DSP supplier at the same time Dust was emerging as a SiPho PIC company and at the same time that ZF is going to ramp. The -- I think the collective market there is -- it's the largest addressable opportunity that we've got when we think about selling components to the commodity market and doing feature-rich solutions that are reliability first with ZF Optics. So I think that we're going to see that be a very fast-growing part of our business that layers in on top of a growing AEC business.

Got it. On the competitive landscape, and $600 million, just to put that in context, based on what was said about next year would be almost 1/4 of the business, right? So it's not small anymore, right?

It's definitely not small. And the market opportunity is not small. And it's important to point out that you have to have the right products with the right customer engagements at the right time and you have to match supply with that demand. And so it's important to point out, especially on ZF Optics as we look to take responsibility for the entire transceiver. We've been in the demand generation mode for probably 6 months or so since OCP last year. But we've been in a mode of locking in supply for more than 12 months. And so leaning in with 3 partners that will assemble these transceivers, locking in supply of lasers, locking in supply of every component and the overall capacity.

I mentioned on the call that exiting this year, we'll be producing numbers that are measured in 100,000 unit increments monthly, and then we're going to be doubling and tripling that in the following year. So we're going to have the supply to match the demand that we're generating. And you can do the numbers on that and the numbers can be quite large. So I think it's going to be a much faster-growing part of our business than well, a much faster growth to say, $1 billion in revenue than we achieved with AECs because we're going into a market -- the market exists and the market needs like more and more reliability is the answer to the challenges that the customer base is having. That's why it can grow quite quickly.

Got it. So on the competitive landscape, it's interesting that in the AEC market, you are the incumbent. And you have folks such as Marvell or Astera, other, right, talking about their AEC products. In DSP, Marvell is the incumbent, and you're talking about, right, the potential for, right, and you know Marvell quite well. So how do you look at the competitive landscape? Like is there a certain market share where the leader says, you know what, this is good enough for me, and it is okay to have others come in. And then the same thing as on the -- similar question on the DSP side. What is your sort of, I don't know, natural market share, right, is a phrase.

Yes. I will say that I don't think Marvell is going to ship cables.

Right. They're only approaching a part of the market.

And I say that in a way that really highlights the fact that we're a different business model. And the reason we ended up here taking ownership of the entire system solution, we're not that smart, right? We originally thought we could sell DSPs to copper cable companies. But what we found out was that the challenge is much, much more difficult than it appears, just add a chip to a cable and you're good to go. It's really -- it's -- there's challenges across like the entire development cycle from SerDes to silicon development to system-level design to firmware to the software, to qualification to owning the supply chain.

We have learned so much in the last 5 years that there's really no other way that we can imagine doing it. And so we've got a team that I have more than 20 SKUs in flight -- new SKUs in flight at any given time based on any one of our customers asking and when they ask for innovation, we'll do special things that are above any kind of IEEE spec. We've got the ability to qualify those internally in parallel at the same time. We've got more than 20 thermal chambers down in Taiwan, where I take my customers' switches, my customers' NICs, we run traffic at full speed, and we do crazy things like varying temperature, varying voltage from high to low, power cycling.

The whole goal is to break the link. When you break the link, you quickly diagnose what failed and then you come up with a strategy to make the solution more robust so the link doesn't fail in those conditions. You do that iteratively until the link doesn't fail anymore. You add 2 to 3 orders of magnitude of error rate improvement. And then when we go into qualification with our customer, we never fail. And they know that because we're providing all of this qualification data to them. To my knowledge, we're the only company that is going this deep and you can talk about competitive advantage.

I also believe that being completely responsible for the supply chain, not just handing off a DSP and hoping, handing off and hoping is really not a great strategy on satisfying the likes of these hyperscalers. And so the depth of relationship that we've got with our entire supply chain is one where we have ramped an incredibly large capacity very quickly and flawlessly. Everybody has -- we've never stood in the way of a cluster deployment. And so in a way, becoming a trusted partner from a design, development, qualification and production, I think that's the competitive playing field.

It's no longer just saying, I've got a DSP and I'm going to take market share. It's natural that we're not going to have 100% market share. We've never aspired to that. The way that we compete is each customer delivering first, qualifying first, ramping first and being flawless with delivery. And so that's how I think we can maintain high market share.

Got it. As many of your large customers make the move towards Vera Rubin, right, and other NVIDIA, there is a perception that NVIDIA is able to bundle a lot of products as part of that cluster, right? Because if you look at just how they plan to monetize per gigawatt, it shows as if it's a lot of their content. So when it comes to the decision on this front of rack, NIC-to-TOR connection, who makes that decision? Is it somebody like an NVIDIA who's providing the whole cluster? Or is it the hyperscaler who is making that decision?

We feel definitely it's the hyperscaler, but more and more, it's the neocloud as well. So when we talk about the customers we're working with, I mentioned that we're deeply engaged with 5 of 6 of the hyperscalers. But more and more, we see the neocloud category is raising a lot of money. The CapEx numbers are growing. The size of clusters are growing. And everybody's got the same challenge. Even for the neoclouds, it's more than the hyperscalers. How do you stand up a cluster quickly and how do you keep it up? And so it's a combination of either AECs or ZF Optics. And more and more, we're seeing that the end customer is making the decision.

Got it. Anything from a supply constraint? I mean, doubling, tripling every year, I imagine, brings a lot of its own, right, set of good problems to have challenges in terms of ramping supply. So any place where you are seeing constraints that can hold back the kind of growth rates that you're aspiring to for next year?

So we've got 2 operations team. We've got our silicon operations team, and we've got our system solution operations team. And the -- let's talk about silicon first because that's a hot topic today. And let's talk specifically about 1.6T because everybody sees that's where the market is going. Every solution that we're aware of that does 200 gig per lane, 1.6T, 8 lanes of 200 is done at 3-nanometer. So there's -- I don't think there's any 5-nanometer that are going to go to volume production because power is simply too high.

So you're talking about a potential real crunch in 3-nanometer capacity. It's been discussed at an industry level for several months now. And there's an indicator from TSMC, they're bringing on huge capacity in Taiwan and Japan and Arizona, but that's really a '28 kind of time frame. This is what they're signaling. And so I'll talk about it from a Credo perspective first. I feel comfortable that we've underpinned through '27 based on our growth trajectory. Now you've got to understand that we're not building big GPUs. We're not building NICs, and we're not building switches. And so the challenge from a wafer capacity standpoint is a much less of a challenge than these other larger chips.

So -- and by the way, TSMC fully understands that these small complementary connectivity chips are needed to deploy clusters. If you take this small amount of wafers and you short those, you're basically locking in disruption in the entire deployment. So I feel confident that we'll have our needs underpinned. But I will say, generally, I think it's going to cap 200-gig per lane deployments. If people aren't as thoughtful as they can be. And one of the things I said on the call was that from a connectivity standpoint, there's a way to get 1.6T of bandwidth without necessarily doing 200 gig per lane.

A lot of these sleds are designed with 2 physical ports. And if you populate those 2 physical ports with either 4 lanes of 200, totaling 8 lanes of 200, you can get there that way or you can get there by doing 8x100 and 8x100. So just that in itself can ease the 3-nanometer supply chain crunch. And -- but I would say that even with that said, I think there's going to be tremendous growth in the next year for the industry.

Got it. What proportion of your product is on 200 right now and as -- or if you have it for 50, 100 and 200? And then I imagine that every time you make a jump to the next higher port speed that there is a content expansion opportunity.

Yes. So right now, 200 gig per lane is not taking off in high volume. We're ready. Our portfolio is ready across the board from copper to optical. But I see that really that transition in deployments happening maybe towards the end of this year.

That's still more in scale-out aggregation layers.

Yes, absolutely. There's always going to be a content increase as you go to faster lane speeds and higher bandwidth. So that is a -- that's a tailwind for the connectivity market for sure. So you'll see -- you saw an uplift from 400 to 800. You'll see an uplift from 800 to 1.6T. And it's regardless if there's 2 ports of 100-gig solutions or a single port of 200 gig.

Got it. Okay. Maybe if I could bring Dan into the conversation on margins. So one thing that has been fascinating is that despite the growth that you have had, you've kept a very tight lid on expenses. And I know every time I get on the call, I always ask you the question, are you investing enough? Like how much more leverage is in the model? So Dan, maybe just walk us through how you are kind of allocating capital, right? Are you investing enough in the business? And can margins still go up from here?

Yes, we certainly believe that we're investing enough. And just to reiterate some of the points that we made on Monday, in terms of OpEx and revenue growth. So as Bill mentioned, 80% plus year-over-year revenue growth in our fiscal '27 is our expectation. And on the OpEx side, 50% year-over-year growth, which is meaningful investment in additional R&D resources. Key note from an operating leverage standpoint is the growth rate of revenue was 1.5x that of OpEx. So there's continuing leverage in the model.

But what's most important, of course, is that we are investing appropriately in the future. We've laid out over the last few quarters, a large multiyear roadmap. But bear in mind that at the very core of all of our products is our core SerDes technology. So that's highly leverageable across everything. So that's maybe the key point not to overlook. While we go into some new markets, silicon photonics was a new addition of course. So there's investment there. But many of these things that we've laid out from a roadmap perspective are really core SerDes-based products.

Got it. I think you peeked at my next question because that was going to be the next one on SerDes. And that's -- I think the other thing to actually call out, right, about Credo that unlike some of your peers, you actually do own your own SerDes. And the question to you, Bill, is that do you think that is leverageable in products that we have just not heard about? Are there areas where you can even collaborate, participate, even license your IP like switches you mentioned, right? I mean that's a critical part. I mean the one thing that has made the largest switch company what it is, is SerDes, right? So how do you think about leveraging your SerDes capability?

I don't want to be too outspoken, but I'm sure happy that as I sit here talking about the connectivity market and knowing that from our perspective, the SerDes unlocked the entire opportunity and created the differentiation that has put us in business and has caused us to be able to accelerate our growth so much. We think it's absolutely critical to be able to make optimized application-specific core technology. It's all about reach, power, size. When you have the ability to deliver that at a core level, and that ultimately leads to your silicon product that ultimately leads to your system-level product. And then you can wrap it with firmware as well as this telemetry software now that we're doing, we think it's just absolutely critical.

Right. So no new products to announce right now.

I mean when we look at the amount of innovation that's going to happen as the world goes to NPO solution and CPO, that SerDes capability to be on both sides of the connection or just looking at the entire connectivity piece, I think it becomes critical to have the ability to be on the leading edge of innovation. It gives you that fundamental tool that we think is necessary.

Got it. And then just maybe last question. Your decision to invest in silicon photonics, the DustPhotonics acquisition, walk us through how it fits into your strategy? And what is the synergy with your pipeline today and what it can be going forward?

Yes. So we work closely with the Dust team on several optical module designs for our DSP customers. So we knew the technology was absolutely leading edge. It's very unique in a sense that there's a reduction in the number of lasers needed with the solution, where typically you would need 8 lasers. They require only 2. So a 75% reduction.

So SiPho plus CW gets you.

Yes. So it's really a great solution. And that leads to better reliability, better power, better cost. It leads to all of the things that the market is looking for. And so from a component standpoint, they bring with them a lot of momentum. And that's momentum for 800 gig, 1.6 and 3.2. So they're pretty deeply engaged with a wide group of players. As it relates to our ZF Optics business, it means that we can do a tighter integration. We can do better from a telemetry standpoint. We can do better from a diagnostic standpoint. We can make the overall system solution better.

And it also is good from Dan's perspective because when you're coming in at cost as you build up your BOM and you're not buying an $80 DSP, you're buying -- we basically got something that's a fraction of that going into your cost. Same with the PIC, that's the second most expensive component. So you're coming in at cost on that. It really enhances your margin profile to have that be something that you're vertically integrated with. And you could think about other components and we worked on other components in the past. You can think about us adding to that vertical stack in the future.

Okay. With that, thank you so much, Bill. Thank you, Dan. Really appreciate you taking the time.

Ladies and gentlemen, thank you for standing by. [Operator Instructions] I would now like to turn the conference over to Dan O'Neil. Please go ahead, sir.

Good afternoon. Thank you all for joining our Fourth Quarter Fiscal 2026 earnings call. 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. These documents 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 this business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statement. Given these risks, uncertainties and assumptions, the forward-looking events discussed during this call may not occur, and actual results could differ materially and adversely from those anticipated, implied or inferred. 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 changes in the company's expectations or to actual results, 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 discussed 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 fourth quarter and full fiscal year 2016 earnings call. I'll begin with a review of our fiscal '26 performance, discuss the major developments across our business and share our perspective on the opportunities ahead. Dan Fleming, our Chief Financial Officer, will then provide additional detail on our Q4 and fiscal year '26 results, along with guidance for the first quarter of our fiscal '27. We'll then open the call for questions.

Fiscal '26 marked another defining year for Credo. Revenue exceeded $1.3 billion, more than tripling year-over-year. While non-GAAP net income increased more than 5x to $662 million. Very few semiconductor companies have scaled at this pace while sustaining product leadership strong margins and operational execution.

In the fourth quarter of fiscal '26, revenue reached a record $437 million. Notably, our revenue in the quarter exceeded our entire fiscal '25 revenue.

Q4 non-GAAP gross margin was 68.3%. Non-GAAP net income grew to $227 million and was more than 30% greater than our revenue in the year ago quarter. Producing these results required incredible effort and expertise, and I want to sincerely thank Team Credo for their continued stellar performance. These results reflect Credo's ability to capitalize on a fundamental shift occurring across AI infrastructure. As AI clusters scale from tens of thousands to hundreds of thousands of GPUs, connectivity is no longer just about bandwidth, reliability, power efficiency, signal integrity and telemetry have become critical architectural requirements.

Today's AI infrastructure is increasingly constrained not by compute but by the reliability and efficiency of the connectivity fabric tying these systems together. Over the past several years, AI network reliability has become Credo's North Star, our road map our product investments, our software architecture and our system-level approach have all been built around helping customers accelerate cluster bring up, maximize GPU utilization and maintain stable operation at unprecedented scale.

Credo was purpose-built for this transition. Our strategy is centered on delivering connectivity solutions across the full spectrum of AI infrastructure from die-to-die and chip-to-chip connectivity to multi-rack scale copper and to road scale and facility-wide optical interconnect. By extending both inward toward the silicon and outwork across the data center, we've positioned Credo to become a foundational network architecture partner for our customers.

Importantly, hyperscale and neocloud operators increasingly want partners capable of delivering multiple generations of connectivity solutions with deep system-level integration. This is where Credo differentiates itself through our vertically integrated approach, spanning core serves technology, silicon and system level solutions, firmware and telemetry software and operational execution.

I'll now discuss our businesses in more detail. First, regarding active electrical cables. Our AEC business remains a core growth engine for the company, and we continue to see substantial long-term opportunity ahead. As AI clusters scale, reliability of power efficiency have become primary design constraints. AECs have become the preferred solution for NRA connectivity and for many multi-rack deployments up to 7 meters.

Credo flat AECs deliver up to 1,000x greater reliability than commodity laser-based optical modules while consuming much less power. In environments where cluster downtime can cost millions of dollars and delay AI deployment schedules, network reliability matters more than ever. We continue to see strong customer adoption across hyperscaler and neocloud operators, both at 100 gig per lane and emerging 200 gig per lane deployments. Our vertically integrated model positions us well for continued leadership as both lane speeds and cluster complexity increase.

We also remain on track with our PCIe Gen 6 AEC family, or customer engagement and design activity continue to strengthen.

Now turning to optics. We believe fiscal '27 represents an inflection point for Credo's Optical business. First, at an optical DSP component level, we see momentum in both design wins and revenue contribution. We're looking forward to continued growth in this product family, and we've received excellent customer feedback on the solutions we announced last quarter, both Robin, a highly optimized DSP at 100-gig per lane, and Cardinal, a leading-edge DSP at 200 gig per lane.

Next, the acquisition of DustPhotonics, which closed last week, significantly expands our optics position with highly differentiated silicon photonics PIC technology, thus brings strong design win momentum and a portfolio spanning 800-gig and 1.6T solutions along with a road map to 3.2 terabits per second and beyond.

Importantly, their architecture enables simplified optical designs with substantially fewer lasers. In addition to enabling better reliability, power efficiency and cost, laser count reduction can ease the industry supply chain limitations.

The Dust silicon photonics road map also provides a direct path to CPO and NPL architectures, allowing us to address a broad range of customer requirements as AI deployments evolved in the scale of network domain. Based on current customer engagements, initial revenue for CPO and NPO designs is expected in our fiscal '28.

Finally, our ZeroFlap optics platform continues to gain strong traction as customers increasingly prioritize network reliability. With the addition of CycloPic technology to our ZeroFlap Optics platform,, we can now control a significantly larger portion of the optical staff, extending visibility deeper into optical link behavior and performance. The tighter DSP to PIC integration enables richer telemetry, enhanced diagnostics and more intelligent system-level optimization. By combining optimized hardware and our pilot software with switch level SDK integration, ZeroFlap Optics continuously monitor link health and autonomously detect and mitigate linked instability conditions before impacting the cluster. Results have shown a meaningful improvement in network reliability, time-to-cluster stability and long-term uptime.

In summary, we're very enthusiastic about the prospects of our optical portfolio. In fiscal '27, we expect our optical DSPs, SICO PICs and ZeroFlap optics will each contribute more than $100 million of revenue. And in total, more than $600 million of revenue with this expected ramp accelerating in the second half of the year. Based on customer and market feedback, we believe this portfolio will deliver sustaining rapid growth in future years.

Now regarding retimers. Our retimer business also continues to gain momentum. We're seeing strong growth for retimers at 100 gig and 200 gigabits per second per lane as well as increasing traction for our PCIe Gen6 retimers. Our Blue Heron 200 gig per lane retimer was purpose-built for scale-out and emerging scale-up networks. We're seeing increased interest and demand as the device combines support for the broad range of 200 gig per lane protocols, including Ethernet, UALink and ESUN. As AI infrastructure becomes increasingly complex and protocol diversity expands, we believe our system-level expertise and software integration capabilities position us well for continued share gains.

Now moving to our emerging growth categories. We also continue to make strong progress across our newer growth vectors, including active LED cables and OmniConnect. Our ALC solutions will extend the reliability and power profile of AECs into [indiscernible] scale optical connectivity by replacing traditional lasers with micro LED technology. This creates a highly differentiated connectivity category capable of delivering AEC class reliability with optical reach of up to 30 meters.

Our OmniConnect family expands our solutions inward towards the silicon. Our first gearbox solution, Weaver will address growing memory bandwidth and density challenges by enabling substantially higher memory I/O density and more flexible architectures.

Customer engagement remains strong, especially around next-generation inference designs. We continue to expect production ramps for both AEC and OmniConnect solutions beginning in our fiscal '28.

And in conclusion, the data center connectivity market continues to evolve. As AI scales toward gigawatt class deployments and increasingly dense architectures, network reliability becomes even more critical, even isolated Link instabilities can impact cluster brand times GPU, utilization and overall system availability. That's why reliability has been Credo's North Star over the past several years. It drives our system-level philosophy, our telemetry-first software architecture and the investments across the full spectrum of our solutions.

Fiscal '26 was another transformative year for Credo and yet we believe we are still in the early innings of the opportunity ahead.

With that, I'll turn the call over to Dan Fleming for a detailed financial review and our outlook for Q1 fiscal '27.

Thank you, Bill, and good afternoon. I will first provide a financial summary of our fiscal year '26, then review our Q4 results and finally discuss our outlook for Q1 and provide some color on our expectations for fiscal year '27.

Revenue for fiscal year '26 was another record at $1.3 billion, up 206% year-over-year. Gross margin for the year was 68.1%, up 310 basis points year-over-year.

Our operating margin improved by 2,144 basis points as we continued to generate considerable top line leverage, driven by growth in our products while growing operating expenses considerably slower than revenue. That step-up in profitability flowed through to the bottom line as we reported earnings per share of $3.46 for the year, a $2.76 improvement or up 392% over the prior year.

In fiscal year '26, Credo not only delivered the dramatic growth which we had forecast, but we also demonstrated the considerable earnings power in our business model.

Moving on to the fourth quarter. In Q4, we reported revenue of $437 million, up 7% sequentially and above the high end of our guidance range. Year-over-year, revenue grew 157% and notably, Q4 alone exceeded our total fiscal year '25 revenue. Q4 marks another revenue record driven by substantial year-over-year growth across 4 domestic customers.

Our top 4 end customers each came in at or greater than 10% of revenue in Q4. As a reminder, customer mix will vary from quarter-to-quarter. We continue to expect that 3 to 4 customers will be greater than 10% of revenue in the coming quarters and fiscal year, and we continue to make progress in diversifying our revenue base across hyperscalers, neoclouds and other customers.

Our team delivered Q4 non-GAAP gross margin of 68.3% above the high end of our guidance range.

Total non-GAAP operating expenses in the fourth quarter were $81.7 million, above the high end of our guidance range due to our strong R&D investment and up 6% sequentially.

Our non-GAAP operating income was $216.7 million in Q4 compared to non-GAAP operating income of $201.8 million in Q3. Our non-GAAP operating margin was 49.6% in the quarter, flat sequentially.

Our bottom line once again demonstrated the substantial leverage we are delivering in the business. Our non-GAAP net income was $226.7 million in the quarter, a record high and a 9% sequential increase compared to non-GAAP net income of $208.8 million in Q3.

Our Q4 non-GAAP net income more than tripled year-over-year and was 33% higher than our revenue in the fourth quarter of last year, which most clearly demonstrates the magnitude of our top line growth, strong gross margins and disciplined approach to managing operating expenses.

Our non-GAAP net margin was 51.9% in the quarter. Cash flow from operations in the fourth quarter was a record $182.2 million, up $16 million sequentially.

CapEx was $4.8 million in the quarter and free cash flow was $177.5 million, up more than $37.8 million from the third quarter.

We ended the quarter with cash and equivalents of $1.4 billion, an increase of $141.8 million from the third quarter, driven by our strong free cash flow. We remain well capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer. Our Q4 ending inventory was $250.8 million, up $42.9 million sequentially.

now turning to our guidance. We currently expect revenue in Q1 of fiscal '27 to be between $465 million and $475 million. We expect Q1 non-GAAP gross margin to be within a range of 67% to 69%. We expect Q1 non-GAAP operating expenses to be between $86 million and $90 million. And we expect Q1 diluted weighted average share count to be approximately 199 million shares. These expectations are based on the current tariff regime, which remains fluid.

We were pleased to see fiscal year '26 play out better than we had expected. The rapid shift to AI workloads continue to drive new and broad-based customer engagement, and we executed well to grow at more than twice the rate we expected at the beginning of the year.

As we begin fiscal year '27, we expect mid-single-digit sequential growth in the first half with an inflection beginning in the second half. That inflection is bolstered by more than $600 million in optical revenue, with ZeroFlap optics, silicon photonics, PICs and optical DSPs, each contributing more than $100 million, driving more than 80% year-over-year total revenue growth for the full year.

We expect non-GAAP gross margin in fiscal year '27 to be broadly consistent with fiscal year '26 levels. We expect non-GAAP operating expenses to increase approximately 50% year-over-year, well below our revenue growth rate as we continue to invest in R&D to support the new product development and address the significant growth opportunities ahead. As a result, we expect our non-GAAP net margin to be in the vicinity of 50%.

And with that, I will open it up for questions.

[Operator Instructions] Your first question comes from the line of Tom O'Malley with Barclays.

I just wanted to dive into the guidance. Is there any optical revenue, ZF optics or DustPhotonics in that guidance? And if so, how much?

And then, you mentioned $100 million across a couple of different vectors in the optics business for this year. One of them was over $100 million in DSPs. Have you seen a change in the attitude of the market with procuring discrete DSPs? I assume you mean discrete DSP sales versus data module. And just that change over the last couple of months, if you see that accelerating and just clarify if those are being sold to customers directly or inside of modules?

Yes, Tom, we -- for the full year outlook that we provided, which is revenue growing at 80% plus year-over-year, a component of that is our entire optical portfolio, which we described 3 different legs of which we expect to each be over $100 million. So as you say, it's the discrete optical DSP over $100 million in the year and ZF Optics over $100 million in the year, and the silicon photonics ticks over $100 million per year. So it is in the overall yearly guidance. And if you kind of break that down or dive into that a little bit deeper, what you'll see is based on that guidance, if you look at absolute dollars year-over-year expectation for fiscal, about half of that growth in absolute dollars is coming from our optical portfolio and about half of that is coming from our existing copper portfolio, predominantly AECs but also retimers.

Just to be clear, Tom, the 3 categories that Dan just described, in total, we are expecting more than $600 million of revenue contribution. So each one will each contribute more than $100 million but in total, it will be more than $600 million.

Your next question comes from the line of Tore Svanberg with Stifel. Please go ahead.

Congratulations on another record. Maybe to follow up on the optical revenue for fiscal '27. So Bill, I mean, I get it, right? I mean $100 million plus, but you are guiding to $600 million total plus. So which one within the 3 segments skews higher because obviously, one of them is going to have to be significantly more than $100 million?

I think the important message there is that we're going to see growth broadly across the 3 segments. You're right that there will be one that has the largest revenue, but I think that we can clearly state that all 3 categories are growing very quickly, in fact, more than the growth that Dan guided for, for the whole year, right? So each one of these categories independently is going to grow more than 80% year-over-year.

Your next question comes from the line of Joseph Cardoso with JPMorgan, please go ahead.

Maybe another one on the guidance, but thinking about it from a first half versus second half dynamic. How should we think about the largest contribution of growth from a portfolio perspective from a half-over-half basis, including AEC, the optical solutions, et cetera as we progress into the second half? And then as a second part of that question, like how should we be thinking about the implications to margins as these inflect into the back half?

So similar to how I described the absolute dollar contribution of growth, in the first half of the year, we guided mid-single digits between our Q1 guide, and you could expect something similar in our Q2 guide when that comes. That's largely driven by increases in our current portfolio that has ramped substantially, which is AEC predominance. But in the second half, as we described, a lot of that inflection is being driven by our optical portfolio, which is, again, just to reiterate, the ZeroFlap Optics ramp plus silicon photonics ramp, plus our existing optical DSP portfolio gaining significant traction this year versus fiscal '26.

[Operator Instructions] Your next question comes from the line of Sean O'Loughlin with TD Cowen.

Congrats on the results on the guidance. I wanted to ask about the supply side of things. I think it's required that at least one of us asked about supply on every earnings call now. Back at [indiscernible], we had talked about some of the work you were doing to secure some of the supply for the ZF optics ramp. Maybe if you could just talk about any updates there? And then if there's anything notable as well on the AEC side would be great to hear about the supply situation there.

Generally speaking, I think that supply chain discussions are going to become or stay popular throughout the next year or even longer. There is a significant tightness in the supply chain. And that's why it's important to understand the -- just the capability and the depth that we've got both on the silicon operations team as well as our systems operations team, and that includes AEC's and ZF optics.

So starting with ZF optics, owning the entire bill of materials basically and being responsible for sourcing that and being able to lean in and basically get capacity commitments based on us leaning forward, leaning in to making an investment in each area. We feel confident that we're going to achieve a very aggressive ramp in the second half of our fiscal year. And even more than double or triple that the following year. So we feel very good about the commitments that we've got in place across the board from the supply chain that contributes to the optics. And of course, that's beyond the silicon that we're building.

Now from a silicon side, we have a very diverse set of products from a perspective of process geometry. Right now, 12-nanometer is a workhorse. A lot of the AECs that we're shipping are using 12-nanometer for all the 100-gig per lane. We also are transitioning for optical DSPs into 7-nanometer for 100-gig per lane. And we've got a program in flight in 5-nanometer that will be significant volume. And then for all of our 200-gig per line products across the portfolio, we're using 3 nanometer. And I can say that's probably pretty consistent throughout the industry that if we talk about the 1.6T market that I don't think we're going to see anybody in 5-nanometer, we'll see the bulk of the production happen in 3 and possibly a shift to 2 over time to respond to the need for lower power. For us, we're going to deliver very low power in 3-nanometer, as you would expect.

Now there's been a lot of discussion about 3-nanometer overall capacity and supply chain issues. We've got an extremely close relationship with our supply chain partners. And I think there's a strong understanding that clusters don't get built without the small complementary connectivity chips that we build and that we embed into our system-level products as well. So I feel quite good. I mentioned on the last call that I feel good about our position. And it's really based on the fact that this is something that over the last 5 years, we've invested heavily and not just in resources, but also dollars in making sure our supply chain partners understand our commitment.

Your next question comes from the line of Quinn Bolton with Needham.

I just wanted to ask maybe cut the revenue a different way. Do you guys expect any meaningful revenue in fiscal '27 from scale up? Or do you expect the vast, vast majority still to be scaled out? And if scale up is beyond '27, when would you think scale up becomes potentially meaningful contributor to revenue?

I would say fiscal '27, there is scale-up revenue, but it is going to represent the beginning of the round. I think we see fiscal '28 as being more substantial, but it really boils down to the different architectures that are being considered. It boils down to each customer and their own individual strategy around how do they solve that bandwidth opportunity or that bandwidth challenge for scale-up. And so we very much view that all of the hyperscale and neoclouds for that really represent their own individual markets. And so we're very focused customer by customer, and our portfolio is going to be deployed differently for each one.

Your next question comes from the line of Karl Ackerman with BNP Paribas.

Great. Bill, I was hoping you could think about the demand opportunity for CPU-based AI servers for inferencing tasks. Should we assume a similar [indiscernible] attach rate for custom ASICs and agentic CPU servers relative to the GPU-based service you address today?

I think from an expectation standpoint, when we talk about training and we've talked about inference and now we're talking about agentic, all of them are deployed in different ways, and all of them represents a great connectivity opportunity for us. I think from the standpoint of agentic, I think is really a great opportunity from the standpoint of more front-end connections. And depending on architectures, it could go beyond that as well.

Your next question comes from the line of Sebastien Naji with William Blair.

You guys have announced a number of partnerships with smaller neoclouds. It seems like Credo is diversifying even beyond your core 5 hyperscale customers. So could you maybe help frame for investors how big an opportunity these Tier 2 cloud customers could be for Credo? Could they represent 10% or even 20% of total revenue over the next few years? Or is that too aggressive just given how strong hyperscaler demand is? Any color there would be great.

Absolutely. This is one of the biggest trends that we're encouraged by the emergence of the neocloud ecosystem. So historically, as you mentioned, a lot of the AI infrastructure investment was concentrated within 5 and now 6 hyperscalers. We're seeing a great growth in the number of neocloud providers that are building AI infrastructure platforms to support a broad range of applications from model developers to enterprises to sovereign AI and inference workloads even agentic.

These operators are maybe the perfect customer for Credo in a sense that they move very quickly. They are deploying very optimized architectures. And they put a huge emphasis on network performance reliability and also time to deployment. All of these things make them financially more successful if they could do a good job of it. So we think that the neoclouds are going to represent growing and more meaningful opportunity for Credo over the coming years. And I do think you're right that we can -- if we looked at that group of customers collectively, I definitely think it could be on the order of 20%.

Your next question comes from the line of Suji Desilva with ROTH Capital.

Congrats on the strong results here. trying to get some understanding of the relative growth maybe of the copper-based products versus optical. Copper is still a large part of the mix, but optical is coming on strong here in the next few years, just want way to ask maybe, would you expect that possibly optical with all the tailwinds can cross over into the kind of half of the revenues to the half-half? Or is that not the right expectation for a multiyear growth path?

I think that eventually, we could see optical and copper products in our portfolio to, eventually we could get to 50-50 for sure. I think if you look at the market size in general, we're doing extremely well in AECs, and there's, as I mentioned earlier, I think there's a long-term growth case to be made, we feel very strongly about where the market is going and our position in the market and the products that we're bringing forward, especially as the market transitions from 800-gig to 1.6T. So it's going to be a lot of great dynamics within the AEC market. But look, if we look at the overall market size, for optical, just with pluggables alone, and we can have that pluggable versus CPO or NPO long-term discussion. But if we look at the long-term market for pluggables, it's significantly larger than the AEC plug market. So yes, I think we can make a case where we will achieve 50-50, and I can make the case just based on market size and penetration with the market that optical could actually achieve copper in the upcoming years.

Your next question comes from the line of Blayne Curtis with Jefferies, go ahead.

I wanted to ask about the four 10% customers. I don't know if you're willing to give the numbers, but maybe just speak to some of the lumpiness that you've seen in the past and whether that will impact the first half of this year. And then if you can also address just those customers moving to the next products and kind of the growth trajectory, you said 3 or 4 would contribute. Just relative confidence on that would be great.

Yes. So as we mentioned in our prepared remarks, we had 4 10% customers in Q4. They ranged from a high of 34% down to 10% and, the 3 largest customers in Q4 were the same customers that were the largest in Q3 as well. So it's 34% for the largest, 27% for the second largest, 16% for the third. And notably, the fourth customer, which was at 10%, they were not previously a 10% customer during fiscal '26. As you mentioned, Blayne, there is some quarter-over-quarter variability with any given customers, this quarter, I would say, it wasn't huge variability that was driven, but there could be some of that going forward. We have seen that certainly in the past. But one of the key takeaways is, we expect increasing diversification in fiscal '27 and it's really based on our current customer engagements, and we continue to diversify with multiple large hyperscale customers. And as Bill just described with neoclouds, they -- we expect them to become an important and sizable contributor in revenue in the upcoming quarters and years.

Your next question comes from the line of Vijay Rakesh with Mizuho.

Good to see a strong continued ramp here in beat. Just a question back on the 1.6T. Obviously, that should drive a good content increase, ASP increase fully with the 200 gig per lane, when do you see that ramping? Is that more like into next year? Can you give some color on that? And on the ZF optics side, do you see that also gaining traction on the 1.6T, if you can give us some color on how many customers in ZF optics now?

So first, on the transition from 800 gig to 1.6T, of course, the timing is going to shift a lot about the deployment of Rubin and really each of the customers' individual strategy, some will be very delayed. Some will be first to deploy, but I think the exact timing of the transition will move somewhat as the platforms evolve. But the underlying bandwidth requirements, I don't think change. It's important to recognize that customers are designing for flexibility in many cases, system architectures that support 1.6T bandwidth when they come to market, typically, we'll see customers building flexibility on the rest of the ecosystem of connectivity. So we see a lot of our customers designing 2 physical ports for each GPU. And in the case of 1.6T, one option would be to deploy in each port 4 lanes of 200 gig signaling.

Another risk-averse way of going to market would be to deploy ports with 8 lanes of 100 gig. And so for us, that allows customers to manage deployment timing while preserving future upgrade paths. So not everything has to come at once. There's a huge trade-off on overall supply chain as well as maturity as it relates to different connectivity products.

For our perspective, we participate in both. We have strong positions on 100-gig per late balloons today, and we can continue supplying that in very high volume. We also invested heavily in 200-gig per line. So we're ready to go from the standpoint of AECs and ZF optics. Now as it relates to optimal DSPs, yes, we've got several customer engagements. And from a cycle pick perspective, same thing. But we don't ultimately control the outcome of when those transceivers go to market.

And so it's hard to talk about the precise timing of the transition, but we're bullish on the long-term opportunity, whether it's 800-giga to 1.6T. The dynamics as we go to 1.6T, as we've talked about, is we'll as the rest of the industry will experience an uplift in DSPs. Hopefully, that answers your question.

If I could just summarize at a high level, I think our fiscal '27 will have relatively light revenue as it relates to 200-gig per lane and that is just a function of the fact that the industry has not seem to get there quite yet. And there's always a rumor about delays.

If we are going to make a shift and the industry is ready, we're ready right now. We're absolutely confirmed from the standpoint of being ready for production on all of our copper as well as optical system-level products as well as component level products.

Your next question comes from the line of Janco Venter with Aerte Research.

James, you're very well capitalized right now, as you presented in the prepared remarks, you've undergone strategic investments with DustPhotonics. You've added [indiscernible] the portfolio being integrated into your optics portfolio as well as being a stand-alone opportunity, which we're putting to work in the coming fiscal year. So can you perhaps help us understand how you're thinking about putting the capital on the balance sheet to work and how you will be approaching further strategic investments.

Yes. Let me first state that we have no current plans to raise any capital, additional capital at this point nor do we plan to do a share buyback. It goes without saying. And one of our goals that we've laid out in the past, particularly when we did an ATM a couple of quarters ago is that we want to maximize our strategic flexibility for things such as now we've done 3 acquisitions. And just to note that the DustPhotonics acquisition closed last week, as I'm sure you saw the net cash amount that you'll see in Q1 that went out the door in Q1 was about $750 million. And of course, we ended Q4 with $1.4 billion in cash. But that's against the backdrop of being in a very strong cash flow position where cash flow from operations is approaching $200 million per quarter now. So as we exit Q1, we're very comfortable in our cash position. And we expect there will be times where there will be opportunistic acquisitions that we may entertain from this point forward but nothing immediately that we're looking at.

[Operator Instructions] Our next question comes from the line of Tore Svanberg with Stifel. Please go ahead.

Just a follow-up, Bill. So if you think about the 3 optical businesses in fiscal '27, I mean, tow of them, the PIC and the DSP, they have been sort of, I mean, they've been ramping but ramping over time, whereas ZF optics obviously, is more of a hockey stick ramp, at least that's the way I would position it. When you think about Weaver and AEC starting to ramp in fiscal '28, how should we think about those ramps in relation to the other three? Just to sort of get a feel for the trajectory of both those new product categories in fiscal '28?

Sure. I will say that to give a little more color on the first question earlier. The ASPs on the discrete components, optical DSPs and Cyclic those ASPs are typically 2-digit ASPs. On the ZF optics, we're going to see 3-digit ASPs. And so I didn't mean to be a bit elusive or not answer your question. But I think the math clearly says that as we ramp ZF optics, that's going to be clearly our largest revenue contributor for our optical portfolio. Just the potential there is great and what we're delivering is a solution to network reliability, which is something that is absolutely higher and higher priority with the customers that we work with.

Now as it -- no, of course, I forgot the rest of the question. Fill me in.

Yes. On the AEC and how should we think about those [indiscernible]?

Yes, yes, Yes. I get too focused on the near term. Sorry about that. let me put things in perspective for ALC. So that is a system-level pluggable product, just like an AEC or just like a ZF optic. What it does is it brings the same AEC dynamics of our efficiency, cost efficiency. It's got a better form factor than AECs, and it's got a much longer length. And so for certain customers, that's going to be a really natural product to get from a design and beginning of production. So the dynamic there could be very much similar to AECs in ZF optics in the sense that we can see large revenue quickly.

Now as it relates to Weaver,let's use our first customer positon as an example, they are redefining memory attachment and bandwidth for inference. So they've announced their first product with a total memory LPDDR size, 2 terabytes. So that's more than 10x any other inference engine that's been announced in the market. So game changing from the standpoint of performance.

Now if 2 terabytes are deployed, that requires many, many Weaver chips. And what I've said in the past is that the revenue contribution per GPU can be between $2,000 and $3,000 a, and so you can see that, that product category will ramp very quickly as well as we've got customers that go into volume with their inference GPUs that utilize that solution.

Your next question comes from the line of Jim Schneider with Goldman Sachs.

Given the accelerating growth you expect sequentially in the back half of this year, presumably driven by the optical portfolio,, can you talk about any kind of changes you're expecting to see in terms of how your customers deploy AECs in environments? Or is that growth just going to remain very strong off of an elevated base?

From the standpoint of, say, AEC customer diversity or growth, we're definitely seeing that AEC adoption is broadening across the industry. And we very much feel like we're in the early innings or stages of penetration. So we're seeing a broad breadth of adoption we mentioned neoclouds as a new customer category. It's really a perfect solution for those players that have architectures that will enable in rack and multi-rack deployments. There is a trend towards more density. So there is definitely a trend towards more neoclouds being able to use AECs.

But I think that as we talk about that category growing. I think we can definitely say neoclouds will be growing for the foreseeable future. Also, if we look at the hyperscalers, of course, we've mentioned we're deployed, and we're high volume of 5 of 6 now. And I think that with all of them, we've still got the ability to penetrate further into their networks. I don't think we can point to one where we're fully deployed other than AI. And so we see a great growth opportunity for both hyperscalers and neoclouds. And I think it's really going to be a long-term growth that we expect. I don't think it's going to be as fast growth from a percentage standpoint as what we're going to see in optical, but it's going to be a continued growth driver for the company.

There are no further questions at this time. Mr. Brennan, I turn the call back over to you.

Thanks so much for the questions. I really appreciate the ongoing interest and support and look forward to the next time we talk.

This concludes today's conference call. You may now disconnect.

Ladies and gentlemen, thank you for standing by.

[Operator Instructions]

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

Good morning, everyone. Thank you for joining our call in connection with our announcement that we have entered into a definitive agreement to acquire DustPhotonics. Today, I'm 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 press release and our documents filed with 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 statements.

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 to conform these statements to actual results or to changes in the company's expectations except as required by law.

With that, I will now turn the call over to Bill.

Thanks, Dan. Yesterday, we announced that Credo has entered into a definitive agreement to acquire DustPhotonics, a leader in Silicon Photonics PIC technology. This is a meaningful step forward for Credo. It expands our optical portfolio and strengthens our position across the full connectivity stack for AI infrastructure, from copper to optical and across front-end scale-out and scale-up networks.

Over the last few years, we've built a strong foundation in high-speed connectivity by combining SerDes, DSP and System-Level Design. As AI clusters scale, the requirements around reliability, power and performance are only getting tighter. This move is about staying ahead of those demands. By combining forces with DustPhotonics, we bring together our technology with their Silicon Photonics PICs to create a more complete connectivity platform.

There is a clear near-term revenue opportunity. DustPhotonics Has strong stand-alone PIC business with design wins at leading hyperscalers. Their technology simplifies architectures, reduces laser counts and supports higher speeds with a roadmap to 3.2 terabits per second. This becomes an additional growth driver for us, starting in fiscal '27.

At the same time, this strengthens our ZeroFlap optics platform. By owning both the DSP and the PIC, we can deliver a more optimized system level design, move faster on product development and improve margins. DustPhotonics also adds a complementary roadmap in laser-based CPO and NPO, alongside our micro LED initiatives. Having both approaches allows us to meet a broader set of customer requirements as architectures evolve.

From a financial standpoint, we continue to see strong growth in our AEC business through fiscal '27 and beyond. Combining DustPhotonics with our broader optical portfolio, we now believe this marks an inflection point, with combined optical revenue expected to exceed $500 million in fiscal '27. This is a natural extension of how we deliver value at Credo. We've taken a system-level approach and focused on owning more of the stack to create better solutions.

DustPhotonics brings world-class expertise. And together, we're in a stronger position to deliver reliable, energy-efficient connectivity at the scale our customers need. We expect to close in the second quarter of calendar '26, and we look forward to sharing more at that time.

Thanks for joining us. We'll now open it up for questions.

[Operator Instructions]

Your first question comes from the line of Quinn Bolton with Needham & Company.

Congratulations on the acquisition, makes sense strategically. I guess, Bill, I guess a big question for me. You're talking about now, $500 million of optical product revenue in fiscal '27. Is there any breakdown you can give us, how much of that comes from ZeroFlap optics? How much might come from the optical DSPs? And how much comes from the stand-alone PICs that DustPhotonics is selling into either direct into the hyperscalers or module vendors to the hyperscalers?

We're not going to break it down, but I can tell you that we've got strong momentum in optical DSPs, ZF optics, and with Dust, we'll add to that momentum. So it's going to be a combination of all 3.

Your next question comes from the line of Tore Svanberg with Stifel.

Congratulations on the deal. Bill, I was hoping if you could elaborate a little bit more on this system-level approach in the optical space. So obviously, now you got the DSP, you got the PIC, I do know there's a few other components out there. But -- just was hoping you could elaborate a little bit on that? And was that sort of a push from customers? Or is this basically for leveraging the success that you already had in AECs to creating more of a vertical business model to the optical space as well?

Sure. We are absolutely building on the system level approach that we've taken with AEC. So within AEC, of course, there's really one key component, and that's the DSP. For optical transceivers for ZF optics, of course, the optical DSP is important, but there's other components like the PIC that are really critical to building out an optimized system level design. That will enable us to build a better system-level product. And ultimately, it will allow us to improve margins as well because we're eliminating a component where there would be margin stack if we're buying it in the open market.

But I will say we're excited about the large market opportunity in the stand-alone SiPho PIC market. Analysts expect this to be a multibillion-dollar opportunity in the upcoming years. And when we add this component to our optical DSPs, we think it's highly complementary. And it really allows us to offer our transceiver customers a more complete solution as well.

Your next question comes from the line of Tom O'Malley with Barclays.

I had a question kind of on the dual roadmap that you're now going to be running. So Dust obviously uses laser-based technology for their NPO-CPO roadmap. You guys have shared historically just around your LED intersection with that technology trend. Could you maybe talk about customer traction that Dust may have in CPO today? Maybe where they're manufacturing the PIC today? And then just in the future, why you think you need those 2 kind of avenues to address the technology?

Sure. So we see the opportunity for CPO and NPO, something that's very much developing. I think there's going to be different approaches. And the micro LED effort that we've got -- this is a solution that at a fundamental technology level, addresses the reliability issues with laser-based solutions. And so we're very much going to continue to invest heavily in that area.

As it relates to Silicon Photonics PICs, if you look at the work that we've done with ZF optics, as we look at the telemetry information and managing impairments that come with laser-based optics, there's an added layer with the DustPhotonics PIC, their sensors in their solution, and that's really going to enhance our telemetry capabilities. So when we look at NPO and CPO, we definitely see a diversity of solutions that will exist in the market. And our goal is to really cover the -- any approach that our customers want to take.

Your next question comes from the line of Vivek Arya with Bank of America.

I had questions on some of the financials that you described. So first, on the $500 million in sales, I understand this is more kind of vertical integration at this point. But -- and I'm wondering how that $500 million, how does it compare to what you thought before the deal or how you thought about that a few months ago, so i.e., how much of it is incremental to the way, right, we all think about the company's current growth trajectory?

And then secondly, maybe if you could give us a sense for how the margin structure will evolve as hardware, right, or transceivers become a greater part of the mix, are you expecting them to come at the same gross and operating margins as your core business? Will there be a shift? And longer term, is there a certain business mix that you are heading towards in terms of what you do with AECs versus optics?

This is Dan Fleming. So let me answer that question. So first, with regard to the $500 million that Bill referenced. So it is above what we had previously guided. Our fiscal '27 revenue is now expected to grow in excess of 75% year-over-year, and that's with a mid-single-digit sequential growth through the first half of the year and the second half inflection driven by that ramp of our optical portfolio, which is optical DSP, ZF optics and now, our silicon photonics platform.

So from a margin perspective, everything that we've announced so far is within our expectation of our long-term model. On ZF optics, in particular, as we integrate Silicon Photonics, our own solution into our ZFOptics, that is accretive to the overall ZFOptics story. And we've previously stated that ZFOptics, as we expect, is within that long-term gross margin model, good 60s percent as well.

Your next question comes from the line of Joseph Cardoso with JPMorgan.

Bill, you touched on it briefly in your prepared remarks, but I'm curious if you could flesh it out a little bit more for us that are less familiar with Dust and kind of what they bring to the table. And specifically, I wanted to see if you can elaborate about how their PIC or other technologies are differentiated relative to other solutions or similar solutions in the market today? And then beyond the obvious benefits of owning another piece of the technology stack, like what specific value does their technology deliver for Credo to become more competitive in the market as it relates to their -- to your guys' optical portfolio?

The Silicon Photonics PIC really brings an added complement to the system-level solution that we're building. And as I mentioned before, the -- our ability now to sell a more complete portfolio at a component level is really additive as well. When we look at -- there's different ways of building optical modules. Silicon Photonics is a more simple, lower-cost solution than, say, EM Lasers that have dominated the data center optics in the past.

And so we think that again, this is a really critical component to build on, both at the system level as well as the component level. And when we think about what the future brings for NPO and CPO, this will absolutely give us a clear path on that front as well.

Your next question comes from the line of Sean O'Loughlin with TD Cowen.

Congrats on the acquisition and the momentum. Sort of building on Joe's question, I was wondering if you could talk about the motivations for why it was -- why you felt the need to bring this asset in-house rather than just source PICs from them on the merchant market? I understand the portfolio expansion aspect, for sure. But is there something specific that maybe you can bring to help them scale? Or is it really just about the additional incorporation of their technology into the transceiver, both margin and portfolio?

Well, first, we see a large market opportunity in the stand-alone PIC market. I mentioned earlier that it's a multibillion-dollar market per analysts, and that's really in the very near term. By 2030, some analysts call it a $6 billion market.

So there's a very large market opportunity. The technology that Dust has developed is leading edge. And just that as a stand-alone business that's additive to what we're doing is very meaningful. But maybe more importantly, our ability to build the most optimized ZeroFlap optics platform is going to be enhanced by having this PIC as another key component to the optical DSP. I mentioned earlier that that from the standpoint of moving faster on product development and improving margins, this is all part of a system-level approach that we're taking.

When we look at the opportunity for both front-end and scale-out, we see pluggable transceivers, both optical and copper, really a long-term solution. There is no catalyst to go to a different form factor. As we look at the scale-up opportunity, network density is going to be driving the need for more dense form factors on connectivity. When we see that market, we see a 10x number of connections. And that is going to be the catalyst for moving to different form factors. And so with this, really, the third leg here is it positions us very well in owning this technology as we develop CPO and NPO solutions for customers in the future.

Your next question comes from the line of Sebastien Naji with William Blair.

Congrats on the acquisition. This seems like a more sizable acquisition in the past. It sounds like DustPhotonics already had a little bit of scale, some engagement. So maybe, could you talk a little bit about how you expect this acquisition to impact your OpEx or even your CapEx in fiscal 2027?

Yes. We haven't given guidance yet overall for our fiscal '27. So stay tuned in the next -- in the upcoming earnings announcement. We'll talk about that a bit more than we can at the moment. I will mention, though, that we expect this deal to be accretive in fiscal '27 and beyond.

Your next question comes from the line of Jim Schneider with Goldman Sachs.

Can you maybe just talk a little bit about how your customer pipeline has evolved for the ZFOptical transceivers, given sort of that you've mentioned expanding adoption across the hyperscaler deployments, and thus already seems to be at multiple hyperscalers today? How does that -- what does it mean for the kind of the aperture of customer engagements?

We've been making great progress on customer traction for ZFOptics. And we'll update on that more in the future when we do our upcoming call in June. The traction that Dust has is great. When we look at the customers that they're engaged with, both at a hyperscaler level as well as at a module manufacturing customer level, it's really quite good, and it's very complementary to what we've already done. And so over the next year, we will be integrating the Dust technology within the ZFOptics platform. And so we see near term that the traction that they've got with their stand-alone PIC business will be a great driver for us. And then longer term, it will be very complementary as we look at ZF.

Your next question comes from the line of Richard Shannon with Craig-Hallum.

Maybe just a quick one for you, Bill. The press release for the deal mentioned the contingency earn out here. Maybe you can describe what that -- what the nature of that is, over what timeframe? That would be great.

Dan, why don't you take that one?

Yes. So Richard, it's over a 2-year timeframe. And it's based on a mix of financial metrics that we expect them to achieve.

Your next question comes from the line of Christopher Rolland with Susquehanna.

You can hear me. Okay. So I guess, first, a housekeeping. How much revenue does Dust do today? And then secondly, my question, as I talk to people in the optical supply chain, they suggest that PICs might be more of like a foundry opportunity and less of a merchant opportunity as it just might be high -- harder to get a good margin on that chip.

And I know, Dan, you already addressed that. And you talked a little bit about the tech differentiators, but what do you think might allow you to get a sustainable margin on the PIC? You had on your website, I think an integrated laser technology within this PIC. Is that part of it? Anything you can speak to specifically that would differ from a design coming out of a foundry, for example, would be great.

Well, let me -- go ahead, Bill.

Yes. I think you hit on a couple of key points. We're not going to break out the revenue for Dust, but I will say that their backlog is quite healthy, and it's growing throughout fiscal '27.

As it relates to the margin question, there's great opportunity for scale, the scale that we can bring as we combine forces with Dust. So I think from a margin standpoint, I don't think there's any shift in any of the messaging that we've given in the past.

Your next question comes from the line of Michael Genovese with Rosenblatt Securities.

Guys, the $500 million target for optics in fiscal '27, which is basically calendar '26, I mean, that's a good start. I think it would give you about 2% market share in transceivers. So my question is, longer term, do you have any goals in this market to become a very large player? Is there anything you could say about market share goals kind of beyond this year? Or do we think about it as a niche product or something that will become more of a mass market product eventually?

I think the question was related to our ZFOptics transceivers. And we see this as a critical solution for customers that have architectures where their GPU or NIC to ToR or first switch connection is longer than what we can service with our AEC business. So there are several customers that have an architecture where they're looking for longer NIC to ToR connections. That's really the market and I think it can be quite sizable.

The reason that our solution is unique is because we're able to utilize really deep, real-time continuous telemetry data to be able to proactively identify and mitigate potential link flaps. As you know, clusters, tens of thousands, even 100,000 GPUs tied together. The key element related to reliability is they're all working as one cluster. And if you've got link flaps, you can shut down the entire cluster. And so this is one of the reasons that AEC is so popular and really a de facto standard for that NIC to ToR connection in a cluster where it can be used based on the length of the connection.

With ZFOptics, we're offering that bulletproof reliability. And we're doing that through going up the stack. We're not looking so much at the overall transceiver market and what percentage it might be, but it absolutely will be a multibillion-dollar opportunity that we're growing into. And that's really over the next several years.

Your next question comes from the line of David Liu with Mizuho.

On for Vijay here. Congrats on this deal. My question is, when do you see Dust's roadmap to 3.2 starting to ramp? And maybe a timeline for when Credo's integration of Dust's technology solution might start to ramp? And how does that feed into your view of the mix of SiPho versus the EML market share at 3.2? Thanks.

Dust has made lots of progress, even at this point on 448 or 3.2 terabits per second. I think they're very much ahead of the market and will be an enabler for that next-generation point of speed. I do think it's going to take some time before that market develops. But the great news is that the combination of the Dust PIC as well as the Credo optical DSP and SerDes, we're going to be right there as that market really develops. And so we're talking about solutions that exist already with Dust.

Your next question comes from the line of Crawford Clarke with Jefferies.

Crawford Clarke on for Blayne Curtis with Jefferies. Congrats on the pending acquisition. I wanted to better understand whether you're already working with Dust to supply PICs for ZFOptics? And I'm really just -- I'm really trying to get at, essentially, is there any risk to the qualifications that you have in progress for ZFOptics given that decision to in-source?

The great thing about both being suppliers to the optical transceiver market in general is that we've got great experience working with Dust. And that's on designs that we're both involved in for optical transceiver customers of ours. So we've got great confirmation on the technology in general.

As it relates to ZF, there's really no change in what we're expecting from a ramp perspective. The integration of Dust within our platform will take place over the course of about a year, and couldn't feel better about it.

Your next question comes from the line of Quinn Bolton with Needham & Company.

Bill, I guess I just wanted to ask, the stand-alone PIC business that you have or Dust has today with other module vendors, as you bring Dust in-house, do you see any conflict or any risks to that business going to other PIC suppliers? Or do you think because ZeroFlap optics is sort of a premium transceiver product, that it doesn't really compete with the other modules than your customers have Dust? And then I've got a quick follow-up for Dan.

We don't really see a conflict at this point. What we're doing on ZF is completely different from the standpoint of looking at, say, the commodity transceiver market. So we believe we're going to be able to manage our component business in parallel with our ZFOptics.

There are no further questions at this time. Mr. Brennan, I turn the call back over to you.

Well, I appreciate everybody getting on the call. We're excited about the opportunity in front of us, and we look forward to updating you further on our progress in the near future.

This concludes today's conference call. You may now disconnect.

Ladies and gentlemen, thank you for standing by. [Operator Instructions]

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

Good afternoon, everyone. Thank you for joining our earnings call for the third quarter of fiscal 2026. Today, I'm joined by Bill Brennan, Credo's Chief Executive Officer; and Dan Fleming, our Chief Financial Officer.

During this call, we will make certain forward-looking statements. These forward-looking statements are subject to risks and uncertainties discussed in detail in our documents filed with the SEC, which can be found in the Investor Relations portion of the company's website. It is not possible for the company's management to correct 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 statements. 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 to conform these statements to actual results order 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 built our road map 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 XPU 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 for fiscal '25 to current year fiscal '26, we expect to triple revenue on top of that. That represents greater than 6x growth in just 2 years. Few companies, particularly in semiconductors have scaled at that pace while maintaining consistent execution, healthy margins and product leadership.

Our purpose-built SerDes MICs 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 retailers. 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 towards 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 the 400 gig per line 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 rec and rec to rec connectivity up to 7 meters, increasingly displacing laser-based optical modules.

Their reliability and power advantages are driving broad adoption. Our 0 flat ACCs deliver up to 1,000x better reliability than commodity laser-based optics, while consuming roughly half the power. In XPlusters 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 ESA protocols. Additionally, our PCIE Gen6 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 leadership in silicon innovation to system design and qualification, beat telemetry and supply chain execution, positioning us for sustained leadership.

I'll now turn to our IC business, including our retimers and optical DSPs. Our IC 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 1.6 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 Gen6 retimers remain on track with fiscal 26 design wins 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 SerDes expertise to deliver long reach, energy efficiency and advanced telemetry with support for UALink, 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 3 most recent product panties, where we've made meaningful progress since their announcement 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 links inside the data center. I'm pleased to report that our progress with Zero Flap Optics is ahead of schedule. As noted in our recent press release, we began production shipments with our first Neocloud customer Tensor Way. In addition, we're in qualification with 3 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 flat instability of commodity laser-based transceivers. Our zero flat optics were designed to address these challenges directly. Through tightly integrated hardware, optics, firmware and our pilot software with switch level SBK integration, Zero Flat optics delivered continuous like flat telemetry and autonomous detection and mitigation of potential link flat events before they impact the cluster. This enables a step function improvement in network reliability.

From a TAM perspective, Zero Flab 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 of 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 Hyperloom acquisition. We're creating a new system-level product that delivers the reliability of power profile of an ADC with a thinner gauge optical cable capable of reaching it to 30 meters. This makes ALC's ideal for Roscale AI networks, where copper reach becomes limiting, and traditional pluggable optics introduced 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 2018.

Finally, our Omni connect line of products drives our reach inward towards the silicon to further expand our TAM. Omni Connect 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 I/O density which reach up to 10 inches. By converting DSR to DDR, Wever overcomes the physical fan-out constraints of traditional memory to compute interconnects.

Our first Omni Connect customer, Pozitron, plans to leverage this architecture to deliver an inference XPU with 2 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 entrants or training workloads and be future enabled as speeds or protocols change. We'll also develop an Omniconnect gearbox targeting mere 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 3 new multibillion-dollar TAM expansions through Zero Flat 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 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 a 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 and RECONNECT to achieve new record revenue levels once again a substantial year-over-year growth across 4 domestic hyperscale customers. Our top 3 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 3 to 4 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 top line 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.

[Operator Instructions] Our first question comes from Tom O'Malley, Barclays.

Bill, 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 3 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 the -- comparing the customer activity with ADCs, I think it's a good way to look at it. Now I understand that we've been in development on ZF Optics for going on 2 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 on identifying and mitigating potential like claps before they happen. So basically taking network reliability far beyond what you're able to achieve with commodity laser-based optics.

And so I highlight that these products have gone through our own qualification internally, where we harden 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 customers, 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 going to 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, Tensor Wave. It was 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 we're talking with hyperscalers as well as other neophytes. 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 ramp throughout fiscal '27.

Your next question comes from Tore Svanberg from Stifel.

Congratulations on the record results. Bill, maybe you could just level set us a little bit here. You mentioned we're still in very early stages of AECs. Obviously, there's a lot of pipe in around CPO. So 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?

Yes. So I think the narrative on AEC 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 an interact as well as now more than ever, we're seeing rec-to-rec solutions that are within the reach of 7 meters. 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 this aggregate in Swiss rack. Those are really the swim lanes that we've talked about. And so we see 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 help us drive more volume as well as there's an uplift in ASPs.

And so you mentioned the narrative on CPO. And look, this narrative has been one that's existed in different forms for the last decade, started with mid-bord, optical modules that have 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. So it's not an either/or type of situation. It's about deploying the right technology at the right reach and the right power head below. 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 a kind of a clear indicator that reliability matters more than ever now as AI networks are the bulk of the deployments and as these clusters scale. And so the bottom line is that the way we see it that until NPO and TPO solutions can deliver bulletproof for liability, 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 3 years.

Our investments 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 JPMorgan has the next question.

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?

I think that it's fair to say that we'll see a different composition between copper and optical in fiscal '27 specifically as ZF Optics round. That's -- with that, I'll say that we do expect growth in AEC. We expect growth in ICs and then the new wave of growth will come with Zero Flat optics. And within that, and will include the PCIe business that we're earning. In fiscal '28, we expect to layer in our active LED cables or ALCs and in addition, our first gearbox as part of the Omnicam family. That's really fiscal '28.

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

Just a clarification to Dan first on what drove the upside? Almost $60 million plus upside was there a one-off or anything else right in your projects in the reported quarter? And then, Bill, I wanted to get back to this question of how complementary versus competitive is AEC versus optical solutions because over the last 3 months, we have seen this massive divergence in the performance of stocks of your optical peers and this morning, we saw NVIDIA invest in 2 of your optical peers. So why isn't that a very important right incredible pushback 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?

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 customers for the quarter, we've just continued to see strength across all of our hyperscale customers. In fact, our top 3 customers all grew sequentially from Q2 to Q3. So that really drove that growth. And our largest 3 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 related to the question about the AEC 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 reason is 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 1.60 deployments, there is an effect that as you go faster. The length of connection is going to decrease slightly, we believe, from 7 meters to 5 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 suits us well, which is to focus on delivering bullet-proof 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 single integrity and being able to mitigate by taking those links down in a proactive manner in an orderly manner.

I'll also say that the work that we're doing on active LED cables, ALC -- 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 the heterogeneous world between copper and different forms of optical.

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

I guess given all the noise in the market around CPO and optical, I was wondering if you could kind of just discuss some further detailed 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 in Omniconnect gearbox with an ALC-CTO solution somewhere down the road. Can you give us any sense on timing when you would have a ALC-CPO solution potentially coming to market?

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 of marketable growth, especially if it goes from rack scale to Roscale, and that's driving a lot of these conversations. The Blue Heron product that we introduced -- announced our first customer, upscale AI. This is a 200 gig per lane retire that supports UALink, E.SUN, 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 Omni Connect, yes, it is a very straightforward path to basically extend the Omni connect architecture to add a gearbox that converts from VSR to micro LED. 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 pig tail that you can connect micro LED 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 Cowen.

And I will add my congrats on a really incredible set of results. I had 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 3% to 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 almost flat quarter-over-quarter, obviously after a pretty big step up last quarter. But with all the irons in the fire, including the acquisition this morning. Is there just some constraints around I don't know whether it's hiring qualified mixed-signal engineers? Or is there something else going on in OpEx? Or am I just overthinking all of this and you're just executing to your road map?

Yes. 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 time frame. So 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 -- 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 happen 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.

Just a question on the 1.6 ramp. I think as you go to 1.6, most of the big hyperscalers still seem -- have not talked much about CPO. So is your assumption that as 1.6 ramps into '27, '28 that it 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?

Yes. For the 200-gig lane per market, we very much see that, that market is going to be addressed by ADCs. And then a combination of laser-based models, we'll have the ALCs that ramp into that market as well. But that would be what I would consider the new product category. I think CPO is still sometime in the future beyond that. We see our customers ramping 200-gig programs really at very different schedules. Of course, NVIDIA is going to lead the charge with verirubin, but many other customers will follow on a slower time line. So we do expect to see very strong business in all 3 categories that I just mentioned. So we'll have ZF optics that are going to be delivered in that time frame. 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 1.6 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.

The follow-up, I just wanted to ask you guys announced the Chimera acquisition this morning. It looks like that's kind of more layer 2 stuff, right, Mac, -- Maxtec 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?

Yes, I 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 Chimera into Credo. We've been collaborating with Chimera as an IP partner since 2022. And Chimera 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 part of the opportunity. And so we're -- we feel great strategically about this and the fact that they'll be dedicated to Credo projects now, it will accelerate our end-to-end connectivity road map and expanding the overall platform.

The next question is from Sebastien Naji from William Blair.

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 can emerge as maybe a gating factor to your growth in some of the coming quarters?

Yes. So 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-nanometer, 7, 5 and 3. So we did a lot of work over the last quarter to make sure that we are 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 going to be able to support our plan as well as upside that we expect.

In the market, we are absolutely in 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, as all of a sudden, been a concern. And if anything, we can look at the first Omniconnect product ever as almost a solution to some of the pain points where we enable 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 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.

Bill, it was helpful to hear sort of the -- you lay out the progression of your various product lines, especially the optical products over the next couple of years. I was wondering if you could maybe just 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 kind of 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?

Yes, 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, we're just -- 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 Desilva, ROTH Capital.

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. Sure. Absolutely. You got to be confused with the second question. What was the first again?

Zero Flap Optics, how many customers you think you'll be ramping 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 run more than -- we've got 4 in 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 VSR SerDes that sits on the XPU side of the connection. And gearboxes are put together that mirror that VSR SerDes and then gearbox it to something else. And so I think it's pretty clear for memory that a first DDR gearbox would be for 5. And you can imagine as the market shifts to LPDDR 6, that all you have to do, you wouldn't have to retake out an -- it could just simply change the gearbox. And then you have that inference capability with that next-generation memory. And so you can also imagine, say, building a scale-up gearbox. And at first -- the first gearbox might be a Gen7 and Gen6 combo to where that XPU has got that same VSR SerDes and the gearbox would take those 100 gig lanes and Gearbox to either Gen7 or Gen6 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 E.SUN. And you can extend that case to scale out as well. You could have a gearbox that would, say, improve, say, the first one that might be 200 gig per lane. As soon as 400-gig land was ready, you could simply drop in a new gearbox, that would gearbox lanes of 100 up to 400 gig per land. So you're talking about having the ability to build an XPU that becomes composable based on different markets and it becomes composable based on the future enabled aspect of just being able to upgrade the gearbox to either the next speed or different protocol.

The next question comes from Christopher Rolland, Susquehanna.

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 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?

Yes. 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 edge speeds, and we're talking about in the part of the network where reliability really means faster time to cluster stability as well as continuous uptime. And so we do very, very well 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 switch racks or disaggregated chassis. So it's really across the board, but I would say our real strength is in scale-out.

Next up is Karl Ackerman, BNP Parabas.

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

Yes. Let me address the gross margin question first. So overall, as you mentioned in Q3, gross margin at 68.6%, up 92 basis points sequentially. We've really, over the last, say, 7 to 8 quarters, really seeing 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 we have not changed our long-term expectation in the 63% to 65% range for gross margin. 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. On the -- you asked about the AUC 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. And -- but I can give you my perspective on the market opportunity. And I think largely, the market opportunity that we see is scale-out 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 will probably be 20% to 25% of the total scale-out market as we see it. And then this aggregate and switch market, that one is 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.

Tore Svanberg from Stifel.

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

Well, the pull-in is being driven by customers pulling it. I mean, this is a real indicator that as we've said many times regarding AECs, that reliability is really critical, again, from the standpoint of the time to bring up a cluster and the uptime that you can expect after that point of stability. And so it's a direct improvement in productivity. And so -- as AECs have been much more popular as a result of people getting it, right? The minute that we talked to our customers about ZF and we talk about extending that reliability into the optical space, it's very rare that somebody would say, yes, 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, really next quarter. And so the -- from a supply chain standpoint, I understand, we've been working on this for 2 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 pulled in 6 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.

Yes. 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's conference call. You may now disconnect.

Thank you. All right. Welcome back to the Barclays Global Tech Conference. I'm Tom O'Malley, semi and semi-cap equipment analyst. We have Bill Brennan and Dan Fleming from Credo. Thank you for joining.

Thanks for having us.

It's always an interesting conversation because I feel like every year, we're up here talking about different things, which is really good, right? So new innovation, the market looking different, but maybe like a step back to start, which is you're seeing $3 trillion plus of announced spend. Are we in the early innings of this AI investment cycle? You've been very clear in the past about how you guys are going to enable that, but I'd love for maybe you guys to start by sharing that where are the blockades in these deployments that you guys kind of enable? And what sort of products are you guys talking about most recently?

You know the answer.

I know the answer, but it's not for me.

Anywhere are we innings wise, it's always early innings, and if you say middle innings, you're in trouble.

Oh, no.

That's a general statement. All kidding aside, yes, it's tremendous to see the energy, the continued energy in the build-out of AI infrastructure. I think -- personally, I think this is one of these pivotal points, we can point back over time. This is going to be unlike any that we've seen. So I think this is -- we're looking at a decade plus megatrend that will come in clarity. Of course, there's going to be ups and downs. But I think for sure, it's -- the world 5 years from now, it's going to look completely different. It will be reshaped completely. And to the tune of more infrastructure and more applications and more benefit, more productivity.

For us, the big change over the last 12 to 18 months in our focus at a product level is really focusing on reliability. And specifically related to the AI cluster, the nature of the cluster is 100,000 GPUs, 1 million GPUs, all connected together, all acting in unison as one big supercomputer. The key link from the GPU to the first switch unlike other networks within traditional data centers or T1, T2, there is no redundancy. And so if you lose the link between one GPU and that switch, you have the probability that the entire cluster comes down, that you'll lose the training run that you're on that you'll have to go back to the last checkpoint. And so poor reliability ultimately equates to a loss of productivity and a loss of revenue or profitability.

And so we learned that through the conversations that we had with xAI going back 18, 20 months ago when they came to us, very frustrated because they were building an 18 rack, not very dense row that was connected with optics, laser-based optics. And they came to us and said, look, we're going to a liquid cooled facility where we're going to compress that row from 18 to 6. And now if you can build 7-meter cables and there's -- it's very well known that copper solutions are rock solid from a reliability standpoint. They said if you could build 7-meter cables, we can build a ZeroFlap cluster. And the term ZeroFlap really resonated. And at that point, our team really started focusing on reliability, especially for that first hosted T0 link. And all of the developments, all of the products that we've come out with recently, they're differentiated along the lines of reliability.

So that's really the big movement for us as a team and the barriers that we're overcoming.

So I want to go through all the verticals that you talked about most recently on your earnings call outside of AECs eventually, but I do want to start with the bread and butter of the business, which is these AECs. So you started with one large customer that became two and then the second customer became the largest, and now you've added a host of customers across the board. As you progress here, it seems like every time you add customer diversification, you get increasing questions on the sustainability of one customer or another customer. And people tear open boxes, look at certain deployments and say, look, Credo has already seen its day in the sun. We're seeing more competition here. I'd love you to spend some time talking around your road maps with these customers, why you feel like you're well positioned with your largest several? And then why you guys would be able to kind of maintain the position that you have today?

Sure. Yes, I think we're unique in a sense that we pioneered the market. And the approach that we took initially, it didn't work because we weren't thinking about taking ownership of the complete system. And so at one point, 7 or 8 years ago, we realized that if we didn't take complete ownership of the system, maybe the product category doesn't exist. You have to go all the way up the stack, be accountable for every aspect of the product from the design of the product to the quality of the product to the supply chain management for the product. And ultimately, when it's in production, be accountable for any issues that come up.

And so that's been the real differentiator. And my belief is that at a competitive level, what we're focused on is being first to deliver, first to qualify, first to ramp and doing a flawless job, being incredibly flexible on upsides. And I think over the past year, we've shown that as we've seen many of our customers absolutely accelerate, having the ability as one company to respond to that. And we've proven that is possible. I can't imagine if I was a chip company, and I was like hoping that a cable company could respond, if I wasn't taking control of it.

There's moats along the way there. Having all of the engineers under one roof, including the engineers that design the actual physical cable, having an internal qualification where we're taking ownership of the link, not just our cable, but our customers' switches, our customers' GPUs and hardening, adding orders of magnitude better bit error rate prior to going in the call with our data center partners. And yes, I feel great about our competitive position. And maybe it's just -- I think it's like -- I think the world kind of underthinks the system-level difficulty of what we're doing. We even have competitors completely changing their business model to try to respond to what we already do well.

Yes, I was going to comment. We had a competitor in the space talk about Golden cables this week. And is that evangelizing the ecosystem to kind of work together like oh, this is a chip solution. We need others to kind of hop on board with us to have more success. Is this kind of going after the same approach as you guys? Like how did you read that from a competitor?

So going from copper to gold, it's expensive.

I think it's a color. I had enough color nonsense with the guys.

I understand. So I don't -- I didn't really read too much about it, but I understand it is a shift to try to enable maybe a more predictable supply chain or ecosystem, something that we have already achieved. So yes, again, very comfortable with where we are competitively. And ultimately, for me, it's about focusing on our customers, being intensely focused on delivering differentiated solutions. This is not a commodity space that we're in. This is not like designing IEEE standard, 1.6T ports. This is going above and beyond special features and special hardware SKUs with 2, 3, 4, 5, 8 different connectors. It's a really dynamic space if you allow your customers to innovate.

Got it. So if I rewind the clock, Microsoft in the early days, front-end applications Amazon, you moved to more back-end applications. You talked xAI. You just spoke about an instance where you worked with them on a row-scale type of architecture. When you are adding these customers, can you talk maybe some of the solutions or some of the problems that you're solving with your solutions? Is it always kind of the same Y, X cable in the back end? Is it just all straight cables, like what -- can you maybe -- I think people struggle with, oh, this is the same thing over and over again. That's why you can't scale. Can you maybe give people some perspective on what problems you're solving with these different customers? And why it's not just the same thing over and over again?

When you say scale, do you mean revenue?

Revenue.

I think if you look at our revenue scale, we've kind of proven that we're able to scale. And I think we've guided to the fact that we should be continuing that scale. So I know -- I'm not sure how that could be easy to say. But generally, right, there's different places in the data center where AECs apply. And I can tell you that in addition to having many different ways to solve problems, these connectivity issues, whether it's in the back-end network scale up, scale out switch racks, front-end connections. There's a lot of opportunity to pursue innovation that goes beyond what you would consider standard. And so I think that you can expect that you'll see a lot of innovation in the AEC space, especially from our team.

When you think about future generations with customers and early designs, and I hate to go down this road, but it is a reason why the stock has reacted as it has in recent days.

I haven't checked.

Yes. So essentially, you open boxes you say, I can count the number of cables in there that are Credo's because of certain color. Is it fair to always assume that the cables that you see in certain boxes are always purple and they're Credo's. And if you move to higher speeds, is the opening of the first box always going to be with all those boxes look like at that customer. I ask this on stage because I've heard this answer from you before, but I'd love for you to clarify it.

So I'll break a little news. We don't build only purple cables. So like -- so some customers really feel like it's an advantage to have the folks in the data center know exactly what the cable is. And color is a good differentiator. So if I had 4 generations of purple cables for that particular customer, there might be confusion as to the difference. And so early on, they asked us to put different colored jackets on the cables. And of course, that's within what we think is reasonable to ask.

So I know that every time one of our customers has a show where they kind of showed next-generation technology that there's a lot of assumptions that are made that go along with what's shown. And there's a lot of math that's done and a lot of conclusions that are drawn, and I can just say the first time that I went to a show, I looked at something that was pretty exciting. It was purple. It took a couple of years for that to actually come to fruition and it actually came to fruition in a different configuration than ones shown as future technology.

But the bottom line is it's about your customer relationships and making sure that you're right there with them solving problems. I have very strong confidence with all 4 of our 10% customers that we're doing that work. And we get 12 months of visibility that's in a lot of cases, binding. I've got one customer that's going out 2 years and another customer going out 3 years to make sure that I understand exactly what they need. So that's reassuring. And so I think from our perspective, no concerns.

Another area just on the AEC front that I get a lot of questions on is just co-package optics, both from a scale-out ecosystem and then a scale-up ecosystem. I think that generally, the industry knows that we're heading in that direction, but the timing of when it gets here is, I think, very debated. Maybe talk about, does your solution bridge that gap ultimately to getting to co-package optics? Do you think that with the hyperlume acquisition, which you've talked about like 20 to 30 meters, you will have some capability to do some scale-up optics eventually? Like what's your view on timing and then your ability to address CPO?

Yes, very -- it's an all-encompassing question. And I think that as we talk about -- the first part of it was CPO. And exactly 0 times I've heard now that CPO is in production, how do you feel? Nobody's ever asked me that question. For many, many years, I've been asked about CPO. And there is -- there are things that you can point to that may be promising if you hit a wall, the way that the current ecosystem works today. And so for me, I think -- I don't necessarily think that people will say, I need CPO because of the inability to do it the same way we've been doing it for 10 years. There's nothing that stands out. You can't point to cost for sure, it's going to be more expensive. You can't say reliability because it's going to be far less reliable, given the fact that it's laser-based. You're not going to be able to say it's the lowest power of anything of any of the technologies being discussed.

So I think that the pitfalls have kept it from going into production. I think the energy around it, it's fine. It's great. Innovation is great. But I think the ecosystem has strongly stated over the last 5 to 10 years as it's been discussed that we'll find a path with the kind of the existing ecosystem that's being deployed today. And so as it relates to our -- when the industry does hit a wall, maybe it's speed where the wall is hit, and that's in particular for copper distances of, say, more than 2 meters or something. The micro LED effort that we're putting into ALC, there's a direct application for near package optics that's 1/3 the power of CPO. And it doesn't come with such exotic switch design as you see today, when you see at conferences.

And so we think we've got a path that's much better when the industry finally gets there. But let me answer the question about scale-up. That was a different part of the question. And so scale-up is a network that started within the appliance, networking the GPUs within a box. So it was an inside-the-box network. And what we're seeing is that NVIDIA and others are now doing rack-scale, scale-up architectures. There is a big, big performance benefit to going to row-scale. And so when we talk about row-scale scale-up, we're talking about a huge number of new connections. So this is a new TAM that is going to be available in the market.

You can make those connections with copper. You can make those connections with other mediums as well. Reliability is really the key thing still for scale up. And so I think we're talking about scale up, this network as being some sort of different network than exists elsewhere. It's going to be a more dense network. And so routing density is a challenge. But if we look at the systems that are being deployed today, they're pretty dense. The new -- the next generation predates you can easily make those connections with copper. But when we get to the point where routing densities are so intense that you can't achieve it physically with copper. That's where ALCs come in it for us. And I will mention that reliability being kind of one of the key points.

ALCs have equal reliability, fundamental core technology level, equal reliability to copper. And so equal power efficiency, which is another thing, half the power of laser-based optics and equal from a cost profile perspective. And so we think that is the right technology. It looks and feels the connectors are all the same. Basically, it's an extension of the existing ecosystem. So we feel great about that. I know there's a lot of people talking about competing technologies, and that's why we have so much fun competing.

Okay. So it's two verticals. You've got AECs, you've got ALCs, ZF optics. So recent conferences, you were shown with a lead customer on stage or at least a partner for today. And I think it's interesting, you speak about reliability so frequently. And the way that you've ensured reliability in the past is move from a chip-based solution to a cable solution, right, handling the entirety of the solution. This seems to be moved from an optical DSP to an entire module. What economics or what benefits can you get from a performance perspective moving to a full module in optics that you could get in electrical as well? And why would you choose to do this full solution? And why is the customer like it?

Yes. So ZF optics, ZeroFlap optics, so the ZeroFlap theme is ultimately speaking, to reliability. So we had Oracle approaches about 20 months ago. And they were struggling also with link flap, same as xAI. We say, use AECs, and they saw our links are too long, far longer than 7 meters. And so we're going to have to deal with laser-based optics by definition. And so he said, we'd love to work with you on a solution where we go up the stack together. And the idea is, could you design a system solution where you could provide visibility and telemetry on every single link in the cluster to the point where you could determine the link health on all of the links, so you've got 1 million GPU cluster, could you have a system where all of that telemetry data is being fed real time into the networks of management software so that you could set a threshold and when you saw a link that started declining from a signal integrity standpoint, could you set a threshold where they cross that threshold, could you actively take that link down? Could you take that GPU out of the cluster to avoid the link flap?

And so the whole goal was to design a system-level solution to be able to recognize potential link flaps before they flap and to mitigate by taking them out of the cluster, taking the link down. And so it started with us having to redesign a custom optical DSP with the ability to talk between the DSPs in band. So while we're transferring high-speed traffic, could we talk back and forth between DSPs and enable this telemetry data.

The next thing was taking our pilot software and tightly coupling it so that we could basically take this raw data and turned it into telemetry data. And then it was linking with an SDK through a switch SDK to be able to integrate within the customer's network. And so now we're able to give them real information real time continuously on iHeight-S&R prefect bit error rates, post-tech histograms. We're able to recognize if there's ESD damage. This is a super common source of failure that while they're installing the racks, if you mishandle a transceiver, you can slightly damage it with ESD, we can recognize and they can replace that proactively as they're turning on the rack the first time. We can recognize that there's dust on the fiber.

So you'll get multipath interference because if you got dust, the light will bounce the other direction, which causes havoc single integrity standpoint. So far beyond any kind of system solution for laser-based optics module. And so it's -- we recognized that we would have to go up the stack and we'd have to own the entire solution. We'd have to be accountable for the entire solution. So it started to feel just like AEC in that sense. And so that's the path that we're on. We're not competing for kind of standard modules. This is being designed at the ground up.

I don't expect that we're going to be the only supplier in this space. My expectation is this is delivering such value that we'll have others come and join ZeroFlap optics solutions.

Another vertical that you're saying impacts financials in the near future is PCIe. I was curious. I know you're intersecting the market. Next-gen PCIe, but where do you see your first value prop to the industry? Is it PCIe onboard retimers. Is it PCIe cables? Obviously, the heritage of the company suggests that you may want to go in the direction of the cables first. But today, the market for PCIe onboard retimers is bigger. How do you see your go-to-market approach?

Well, the go-to-market is parallel. It's very straightforward. As we're bringing our retimer market, we're developing the AEC in parallel. I can say that I'm really, really pleased with the results that we're seeing with our silicon. And that will translate into advantages at a retimer level as well as an AEC level. I can't emphasize enough that owning the SerDes gives us an advantage. The results that we're seeing from a reach, we are definitely the longest reach solution in the market for Gen 6. Latency, we're the lowest latency solution. Normally, these two things fight each other. You either give up reach for low latency or vice versa. We've achieved both. And that delivers real value to the customers that are using us in the sense of it's easier to design systems and they can design higher performance systems. So feeling great about our competitive position.

And then moving to the last kind of vertical that we haven't touched on yet is just the Omni Connect portfolio. The last time we spoke to one another, you said, Tom, go watch the video. We'll explain it all to you. I went and watched the video. I'm feeling a little bit better, but I'm not all the way there yet. I've heard a variety of different memory enhancement strategies between CXL, whether it's a pluggable, a chip on board, a card. Maybe just for the audience more broadly, the problem you're trying to solve is bandwidth, right, from either a CPU or accelerator to the memory that's sitting somewhat adjacent. The way in which you do that has varied across multiple different companies and solutions. How are you guys going about doing this?

Yes. So let me first describe that Omni Connect is meant to be a family of gearboxes that we develop over time. The first gearbox and the Omni Connect family is a device we're calling Weaver. And this is an advice to overcome the memory wall, specifically related to inference. And so if we think about -- if we compare Rubin CPX that was announced, I think it will go to production next year, 128 gigabytes of DDR memory. If you look at a die-level analysis of that, about 75% of the beachfront is occupied by the DDR5s or SerDes. And if you look at how the memory -- the 128 gigabytes is laid out around it, you can see that there's a physical limitation because you're going to be about 25 millimeters or an inch away from the GPU.

And so that kind of defines the memory wall as it relates to inference, because in inference, if you can load the entire model into DRAM, you're going to get much higher performance than if you're unable to do that, and you're having a page in and page out of DRAM. And so if we look at emerging applications like AI generated video, these models are enormous, right, far greater than 128 gigabytes. And so how do you design a solution, so you overcome that beachfront limitation as well as that space limitation so that you can deploy terabytes of capacity.

And so for us, it started with the concept of getting the memory further away from the GPU. And how do you get -- instead of 25 millimeters, how do you get 250 millimeters or 10 inches away. Well, you have to address the beachfront challenge first. And so with Tesla, we designed a SerDes for their Dojo. There was very tiny, very low power. The first XSR SerDes prior to the XSR standard even being ratified by IEEE. So we were able to design a SerDes that maintained that size and power. But instead of 50 millimeters that we were able to achieve for Tesla, we extended to 250, so 10 inches.

So from a beachfront density perspective, we completely resolved that issue. It's more than 10x more dense from beachfront density. And so the first partner we're working with, the AI-generated video market now, to do a 15-second clip can take 15 minutes. Like the goal is real time. And you can start looking at achieving that if you can increase the capacity and also the bandwidth. And so the solution that we introduced with our first partner, they introduced an inference platform that has 2 terabytes of memory. This is compared to 128 gigabytes. We could go up to 6.4 terabytes.

And -- you think about that, and the feedback that they're getting in the market is that they've lifted the lid on this. And the bottom line from a content perspective is the gearboxes that we'll sell to interface with all that DDR. This is a content that would be $1,000 or higher per GPU for us. So it's really a breakthrough solution. And there will be other gearboxes that we build that will be equally game-changing on other IO that you typically see in GPUs.

I got it. So the handoff between needing to use higher bandwidth memory that sits closer to the accelerator gets essentially taking in [indiscernible]?

For training, if you wanted to do a training chip, you eliminate the need for HBM. You can buy DDR that's 1/5 the cost and you eliminate the need for co-ops. So it's super game-changing related to training. There is a bit of a trade-off, slight power increase compared to the interface on HBM.

Got it. Something on the gross margin side. Dan, I know this question gets asked every earnings call, but you continue to come ahead of your midpoint of the long-term model on gross margins. Bill, I think you've done a good job explaining just essentially what customer dynamics look like when your gross margins go up, what they have to pay you to make that happen and how that continues through the supply chain. I know we're early days with a lot of customers, but you're also introducing a lot of new products that are very innovative as well. When you look at the portfolio of verticals that you've talked about, how do you see gross margins trending in the long term with these new additions?

Yes. Just a couple of quick comments on that. So all of these different pillars of growth that Bill has described last week and today, we expect all of them to be from a gross margin perspective, right, in our kind of the sweet spot of our long-term gross margin model, which is 63% to 65%. We've not changed that. Since we've gone public, we haven't changed it. That's what we expect long term. And if I look historically, what we've done just over the last year, for instance, our story has been one of increasing scale has really driven expansion to margin and up over 400 basis points year-over-year from Q2 of last year to our recent earnings announcement. And right now, we're clearly in a kind of a pocket of time where we're a bit above that long-term margin model. We guided at the high end. But long term, we certainly expect all of these new exciting opportunities that we're pursuing to be right within that 63% to 65% range.

Well, with that, we're out of time. Thank you so much, Bill and Dan, for joining us. I really appreciate exciting times with Credo. Thank you.

Appreciate all the good questions.

Thank you, guys.

Thanks.

Ladies and gentlemen, thank you for standing by. [Operator Instructions] I'd now like to turn the conference over to Dan O'Neil. Please go ahead, sir.

Good afternoon. Thank you for joining our earnings call for the second quarter of fiscal 2026. Today, I'm 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. The 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's not possible for the company's management to predict all risks nor can the company assess the impact of all factors on this business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statement.

Given these risks, uncertainties and assumptions, the forward-looking events discussed during this call may not occur and actual results could differ materially and adversely from those anticipated or implied. The company undertakes no obligation to publicly update forward-looking statements for any reason after the date of this call to conform these statements to actual results or to changes in the company's expectations except as required by law.

Also, during this call, we will refer to certain non-GAAP financial measures, which we consider to be important measures of the company's performance. These non-GAAP financial measures are provided in addition to and not as a substitute for or superior to potential 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 used in the Investor Relations portion of our website.

I will now turn the call over to our CEO. Bill?

Thanks Dan, and thank you, everyone, for joining our fiscal '26 second quarter earnings call. I'll walk through our Q2 results, highlight the transformative developments we've announced since our last call and then share our forward outlook. After my remarks, our Chief Financial Officer, Dan Fleming, will provide a detailed financial review and our guidance for the third quarter.

In the second quarter, we delivered record revenue of $268 million, representing 20% sequential growth from Q1 and an extraordinary 272% increase year-over-year. Non-GAAP gross margin came in at a robust 67.7%, and we generated approximately $128 million of non-GAAP net income. These are the strongest quarterly results in Credo's history, and they reflect the continued build-out of the world's largest AI training and inference clusters. AI clusters are no longer measured in tens of thousands of GPUs. They're now measured in hundreds thousands and soon millions. The scale density and complexity of these systems are pushing every aspect of interconnect, reliability, power efficiency, signal integrity, latency, reach, and total cost of ownership have all become mission critical. This is the challenge our customers face, and it's where Credo is uniquely positioned to deliver the solutions they need to succeed. Our 3-tiered innovation framework, purpose-built SerDes technology, world-class IC design and a true system-level development approach, all wrapped with our industry-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. AEC revenue again grew strongly, driven by rapidly increasing customer diversity. In Q2, 4 hyperscalers each contributed more than 10% of total revenue. The fourth hyperscaler is now in full volume ramp and the fifth started contributing initial revenue. Customer forecasts have strengthened across the board in the past months. AECs have become the de facto standard for interact connectivity and are now displacing optical rack-to-rack connections up to 7 meters. At 100 gig per lane today and 200 gig per line tomorrow ZeroFlap AECs deliver up to 1,000x better reliability than traditional laser-based optical modules, while consuming roughly half the power. When you're installing a 100,000 GPU cluster, link flaps can delay time to stability and time to revenue. And when you're training a model costing tens of millions of dollars, link flaps can have a significant impact on overall uptime and productivity. It is this step function improvement in reliability and power efficiency that's driving the expansion of the AEC TAM in the 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 retimers 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 AEC families are also progressing on plan. Customers' 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 SerDes 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 multibillion-dollar market opportunities with excellent visibility for continued growth. But the truly exciting part of this quarter is that we've added 3 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 ZeroFlap 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 ZeroFlap optics integrate with our customers' network software. Link [indiscernible] 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 multibillion-dollar opportunity.

The second pillar of growth was announced in September. Credo has combined forces with auto-based Hyperlume, 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 Hyperlume team will accelerate our time to market. As the 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 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 sizes 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 that memory wall by redefining memory to compute connectivity, a solution we call Weaver. Today's on-package high-bandwidth memory in capacity and throughput limited as well as expensive and supply chain constraints. Weaver allows designers to move to commodity DDR memory and achieve up to 30x more memory capacity and 8x the bandwidth. The key enabler for the OmniConnect family is Credo's purpose-built 112-gig VSR SerDes 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 2 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 multibillion 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 5 distinct high-growth connectivity pillars: AECs, IC solutions, including retimers and optical DSPs, ZeroFlap optics, ALCs and OmniConnect gearbox solutions. Together, they'll give Credo 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 ZeroFlap 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 4 domestic hyperscale customers.

Our top 4 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 3 to 4 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 obtained by achieving more than 20% sequential top line 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 4 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.

[Operator Instructions] And your first question comes from the line of Tom O'Malley with Barclays.

So you're seeing an expansion of the AEC market pretty rapidly here with the fourth and then now soon to be the fifth 10% customer kind of rolling on. I found it interesting amidst but it was clearly like a really strong ramp in the AEC market, you're able to say that when you look at the ALC market, you could see that being double the AEC TAM. So talking big numbers, maybe you could spend a little time talking about whether that's unit-driven, whether that's ASP-driven, just surprised given the size -- given how well AECs have done.

So I think it's a combination of both the quantity as well as ASPs. Now when we think about ALCs, it's really an ideal product from the standpoint of delivering the same reliability as AECs, which is really the most critical factor right now with host of tZERO or GPU to switch connections. Also, from a power efficiency standpoint, it's in the same class as AECs. I would say from a system cost perspective, again, in that same class, what it delivers is a thinner wire gauge and longer length. And as we see the scale up networks really going from inter-rack to row-scale, we're talking about a tremendous increase in the number of connections. We estimate that it could be up to 10x that of the number of scale-out connections. And so yes, we are really, really bullish and we're strong believers in micro LED as a technology that's really going to be a game changer for us as well as our customers.

And then just on the timing and the scale of the other customers ramping on, maybe you could give us what the percentages of the top 4 were this quarter? And then any commentary on how large those other customers rolling on will be just to give us a feel for how one is kind of handing off the next over the next couple of quarters would be super helpful.

Sure, Tom. So for Q2, as we mentioned in my prepared remarks, we had 4 10% customers. The largest was 42% of revenue, and that was the customer that we've, in the past, said we expect to be the largest customer this fiscal year. The second largest was 24%, which have to be our first hyperscaler to ramp a few years back. Third largest was 16%, which was our largest customer in Q1. And the fourth was 11%, which is our newest hyperscaler that we've discussed in the past. So when you kind of plot that all out, what you see and what we've been fairly consistent in saying is that the ramp at any given single hyperscaler is never really linear. So we're seeing that with our largest customer from last quarter, taking a bit of a pause this quarter. But our largest customer for this fiscal year, which had been down for the last few quarters is back up again. So there is definitely a give and take that we are managing through. And again, we have 12-month visibility, in some cases, even greater visibility with our customers in order to be able to manage that through the course of time. Hard to predict exactly how things are going to fall quarter-to-quarter longer term. But hopefully, that gives you kind of a flavor as to what we're seeing kind of on the ground right now today.

And your next question comes from the line of Tore Svanberg with Stifel.

Yes. Congratulations on the solid results. Bill, I had a question on your sort of 3 new product lines here, obviously, all in the optical domain. First of all, could you maybe elaborate a little bit on how much you're focusing on the system-level products because obviously, in copper, yes, you have system order products, but the 3 areas in optical, how much of those should we assume or systems? And then I have a follow-up.

Yes. So we've been very consistent in talking about our intent to continue to expand our portfolio at the system level. And I would say that, yes, ALCs as well as ZF optics, those are both optical solutions. But the OmniConnect family will be initially copper-based and then longer term, we'll offer near package optics options with that. And so I think that from the standpoint of delivering value to our customers, we are very much focused on delivering non-commodity [ non-IEEE ] standard well beyond what that standard calls for. And I think ZF optics is a great example of that in a sense that going back 18 to 20 months ago, we really heard strong feedback from multiple customers that reliability was the top priority as people became more familiar with the issues that they were seeing with building out AI clusters. And so with one of the customers that we were on stage at OCP, we've got to work thinking about how do we integrate higher level within the stock, how do we integrate within the network software for that customer within their AI cluster. And so the concept is how do we how do we provide more visibility, more telemetry, how do we make that information available and actionable at a network level. When we think about the opportunity that we're creating for our customer here is it's really creating almost like a check engine light being able to set a threshold on links, all of the links within a cluster enable it to sense real time when those -- any of those links are degrading, being able to set a threshold and once that signal integrity drops below that threshold, being able to action it by in an orderly fashion, taking that GPU out of the cluster before you see a link flap that could potentially take down -- take that cluster in timely. And so that type of value add is completely innovative, and it's defining a new class of optical connectivity, and it's very, very targeted for reliability and that reliability is really with traditional laser-based optical transceivers. So that's a big investment. It had -- we delivered a custom optical DSP. We -- the whole pilot telemetry platform is something that we've been working on for many years, and there's a lot of special development work that was done to tightly couple that optical DSP and then integrating within a switch level SDK. This is -- these are all things at a system level that needed to be done to be able to bring this product to market.

When we think about ALCs, I've talked about that. That's a game changer. It's basically changing the light source to at a ground level, deliver better reliability. And when we think about our first gearbox in the OmniConnect family, it is a copper solution, but it's redefining how memory to compute or memory to XPU connectivity is done. And when we think about the alternative being HBM, all in package, all driving extremely challenging heat dissipation environment. That translates directly to reliability as well. So being able to move the memory up to tenants is away, not only does it lift the logical and physical limitation that you've got by being in a package with a beachfront bio density that's not as dense. It really eliminates the reliability issue that you've got with the heat that's generated by putting so much memory in a single package with XPU. So it's really a combination of both optical and copper. But again, we're agnostic to the medium. We're agnostic to exactly how these solutions are put together with the copper or fiber, it's ultimately delivering a solution to the customers that is just much better than it's in the market today.

That's very helpful. And as my follow-up, and I'm very interested in the 112 gig VSR SerDes technology. I think you mentioned initially, it's going to be copper, but eventually, you're going to have an optical solution as well. I'm just curious, would you have to develop some silicon photonics technology there? Or would that still sort of be a solution in the pure silicon domain?

Yes. So regarding the SerDes that was developed specifically for this application. I love the arguments in the market about who's got the best SerDes and a lot of times in the market, people like to think the longest REIT SerDes is obviously the best. We look at it differently. We really look at it from an application-specific perspective. And so when we think about the idea of giving an customer, a piece of IP to integrate. We think about how do we achieve the smallest footprint, the lowest power. And ultimately, with this VSR SerDes that we developed, on a max radical die, we can fit 1,200 of these startings, creating 120 terabits per second of potential bandwidth, that's unprecedented, that has yet to be achieved, especially when you think about the reach being 10 inches. Other competitive solutions, the reach would be an inch or less. And so basically, forcing there to be a die to die connectivity versus moving a chip outside the package. And so it's a real breakthrough. I would argue that this SerDes is best-in-class, and it's enabling entire family of solutions that range from IO solutions from memory, but also from a scale out or scale-up perspective. And long term, near package optics. And the near package optics will leverage the work that we're doing in micro LED. So first step will be ALCs and then we'll roll that right into some additional game-changing applications like near package optics.

Your next question comes from the line of Vivek Arya with Bank of America.

Bill, which applications are you four customers using AECs for today and which applications are they not yet using AECs for? And as we look into next year, there's a lot of talk of co-packaged optics coming into the mix. And I was hoping you could give us a sense for what impact that might have on the current or future AEC usage by your customers.

So the different applications that we've talked about in the past have been number one, front-end network connections, which, of course, that was the first application to ramp with our first customer years ago. We've also talked about the scale-out opportunity as part of the back-end network of AI clusters. The third application we've talked about is [indiscernible] and that would be as opposed to buying a chassis filled with switches, you would stack those vertically in a rack. And that backplane connection within a chassis would become a short cable connection within the rack. Those are the first 3 applications we've talked about, and we are in production with all 3 of those with different customers. We're definitely not fully penetrated with all of our customers, but we are in production with all 3 of those applications. I would say the one remaining application that will be high volume is with the scale up network as that network goes rack-scale and then ultimately goes row-scale depending on the density and the number of racks that are being deployed.

Now as it relates to co-package optics, this is a -- this has been a long conversation really. For the 12 years, I've been involved in this industry there's been a conversation about moving to a co-package. It's changed names or changed acronyms over time. But I think that before it takes off in a really big way, there's got to be answers to the pitfalls that are very, very well known. Number one, related to reliability, serviceability, maintenance, cost, of course. And we think that there are solutions that are going to be more optimized from a power standpoint, more optimized from a reliability standpoint and we're focused on bringing those solutions to market really maybe even within the same time frame as people talk about co-package optics. So there's been lots of demonstrations, but we don't see a lot of customers moving forward in a big way that would have an impact on us. I think it's safe to say that from that post to tZERO connection perspective, reliability is tough, absolutely top of the list on priorities. So I think we're that's obviously the high-volume part of the market, and we don't see that. We don't see that moving to CPO anytime soon.

And for my follow-up, I'm curious, how does your ASP lift from the 100 to 200 gig per lane compared to the lift that you have seen and are still seeing in the 50 to 100 gig transition? And does the competitive landscape change as you start moving to 200 gig, does that new application create a bigger opportunity for some of your competitors?

The question is a bit more complex than just thinking about moving from one latent speed to faster lane speed. Our ASPs are highly dependent on the number of connectors in the SKU the devices that we're using within those characters and the length of the connections. And so it's it is safe to say that we have had some uplift going from 50 to 100 gig. And I believe there's going to be an uplift going from 100 to 200, but I can't kind of categorize it simply. But I do think that naturally, there will be an advantage as we move to faster lane speeds.

Your next question comes from the line of Quinn Bolton with Needham & Company.

Congratulations on the nice results and outlook. I guess, Bill, I had a question just on the supply side things, I think looking at the 10-K, you guys put out, you list Vislink as sort of your sole provider of AEC cable manufacturing and obviously, the forecast here is getting pretty big pretty quickly. How are you feeling about AEC supply? Are there any constraints you're working through? Anything to call out on the supply front?

I think we're entering a period of time where we will be talking about supply constraints more frequently. Now as it relates to our AEC volumes, I don't see any -- I don't see a concern related to the quantity that we can produce with our partners. I think we've proven that over the last year that we can ramp significantly in a very short period of time. So this is a completely different equation than thinking about a wafer foundry. And so I do -- over the last 2 to 3 months, we've really seen an increase in the conversations around what is the total potential wafer demand in the market for next year and the year beyond and the year beyond that. And I do think that if we look at it from a demand standpoint, the market, in general, is going to kind of quickly get to the point where we're kind of almost self-regulated by foundry capacity. And so I don't want to be too controversial talking about it, but I think from an advanced node perspective, I think it's going to be a more frequent conversation about capacity constraints at a wafer level.

Now as it relates to Credo, I think that a couple of things give us an advantage. And we've talked about -- if you remember, the N-1 process strategy, which is we've always had a strategy to be in older geometry processes than our competition if we can deliver best-in-class power, best-in-class buy sizes and best-in-class performance. And so we've done that successfully over time. So right now, 12-nanometer is our workhorse. And that's not as tight as say, 3-nanometer or 5-nanometer. And so we feel pretty good about about where we are just related to a situation where there's an increasing demand across the board for wafer volume. But I also will say that our foundry partners are very, very well in tune that the connectivity solutions, the relatively small die size connectivity solutions are critical for shipping GPUs. You can't really ship GPUs about connectivity solutions. And so I think for a couple of reasons, I think we're going to be able to manage our way through that.

Now as far as our partners within the AEC product, yes, I mean this is why being vertically integrated like VR gives us an advantage because I've got a system-level supply chain team that is making sure that all of the partners that supply components that go into the AECs that they've got as much visibility and much commitment as they need to go build out what we see it needed in the future. And so I think -- yes, great question. I think it's going to be really topical as we go through calendar '26.

And for my follow-up, Bill, just looking at your top 2 customers, I believe they are still at either 50 gig or 25 gig per lane, but just wondering if you could confirm that at least that still feels like the vast majority of your AEC business is at 50 gig per lane and it sounds like there's an opportunity that is those customers ultimately transition to 100-gig per lane. There's probably some ASP lift you would see with that transition. I won't ask you to comment on specifically when they may transition. But just I don't think it's happened yet. I was hoping you could confirm that the top 2 guys are still either 25 or 50 gig per lane.

I'll confirm that we're in production with 25 gig per lane, 50 gig per lane as well as 100-gig per lane. And we're probably one of the fastest-growing parts of our business has been the shipments of 100-gig for lane solutions. And so the -- yes, you're right that it's not so simple for me to characterize it. I do think that over time, you'll see the entire customer base moving to 100 gig per lane and then making a move towards 200 gig per lane over the next 2 to 3 years. So I think generally, our -- the trend that you're referring to, I think that we can say generally that it's accurate. We'll see uplift as the market migrates towards faster speeds.

Your next question comes from the line of Suji Desilva with ROTH Capital Partners.

Congrats on the progress here. Maybe you could talk about your customers now when your first IPO, you had a handful of customers, now you're gaining with 5 customers here potentially. So the hyperscales that don't kind of use you at a scaled level 10%-plus type levels. I know you're in all of it at some level. What is the difference between the customers you haven't penetrated yet and the ones you're getting to 10-plus percent in various quarters.

We look at every one of the hyperscalers as almost a different market. The -- I'll try to maybe solve the same problem generally, but there's so many different ways to solve those problems. And so network architecture is very much specific to each one of our customers. And I can tell you that the first program that we engaged with, typically, that's led to many other programs within the same customer. And I think that as we think about the customer base right now, we think of 6 hyperscalers in the U.S., and we think of a handful in Asia. But I think we're going to be talking more and more about that next tier of customer because I think it's going to be possible to drive pretty big numbers with that next tier of data centers. .

So generally, I think that as I think about our business, this has been a very significant quarter for us in a sense that we're that we're showing a path to a much more diversified business, not just from a customer base, but from a protocol perspective with PCIe as well as from a just the overall TAM expanding by addressing a much broader market with our system-level solutions. And so if you think about it, we talk about OmniConnect first, and we're really addressing die-to-die or chip-to-chip connections at a system level. And when you think about retimers, those connections can probably be up to a half to 1 meter and typically on an appliance card or a switch card. When we think about AECs up to 7 meters. We think about ALCs up to 30 meters when we think about ZF optics, up to a kilometer or beyond whatever the maximum length is within the data center. And so I think in the past 90 days, this has been probably the most transformative from a news standpoint. We've been working on these things for 18 months or so. But now being able to talk about it, I think it shows that their path to a much more diversified company long term as we think about moving the company from that $1 billion threshold of revenue annually to $5 billion and beyond over the next several years.

Okay. I appreciate how you classify the products there for us. And then my other question is on manufacturing. I know with AECs, you're doing the cable manufacturing and house selling the entire cable solution. Is it the same strategy for ALC? Will it be models versus cables, outsourcing? Any color there be helfpul.

The strategy for ALCs will be very similar to the strategy for AECs. We intend to own the entire stack, take accountability for the entire system solution. And so we'll see as that develops, that will be a very similar model to what we've got today with AECs.

Your next question comes from the line of Vijay Rakesh with Mizuho.

Congratulations here. Just a quick question on the scale up. Do you see those revenues start to ramp in second half calendar '26. And I think you mentioned [indiscernible] was ALC in calendar '27. Is that the way to look at it?

For scale-up specifically, we're going to enter that market with PCIe Gen solutions. Now of course, we'll entertain Gen 5 in the interim. But really, the product is targeted for Gen 6, will bring both retimers and AECs to market simultaneously, and we see a big opportunity for both. If I think long term, that will migrate to faster lane speeds. And PCIe Gen 7 is absolutely a conversation. We'll deliver products to the market to meet that protocol, that Gen 7, 128 gigabits per second per lane protocol. But also, there's a huge conversation about 200 gig per lane. And over time, that the protocol or will settle down and ultimately 1 or 2 or even 3 will be in production. We feel good about that because all of the things being discussed right now at 200 gig per lane use the same IEEE SerDes. And so we've talked about being protocol-agnostic for the 200 gig per lane generation. And I'll say that all of the products that we've talked about we're going to be delivering solutions for scale up with all of those products, including AECs and ALCs. And if the market moves towards longer connections, we will surely move to ZF optics as well. But that's yet to be determined.

Got it. And then longer term, as you're obviously seeing a pretty strong AEC ramp. How should we look at the gross margin profile as optical decrees are trying to ramp as well? Just longer term, how to look at those margins?

Yes. We've been very consistent in saying our long-term expectation for gross margins is in the 63% to 65% range. So we are clearly at a point in time right now where we're a bit above that, but we don't expect that to be the case longer term. If you look at the more medium term, probably we guided to 65% at the midpoint. So we'll be kind of near that high end of that long-term expectation. But just longer term, I expect that to settle down into an area that historically, companies like us haven't been in.

Your next question comes from the line of Sean O'Loughlin with TD Cowen.

And obviously, congrats on the great results. I had a question about the ALC technology and your relationship with Hyperlume, specifically, I think, Bill, you just alluded to having been working on this for the last 18 months or so. And I would assume that, that's kind of how the acquisition came together. And then, so maybe just talk about that. And then if you could address if we're sitting here in 2027, 2028 and ALCs haven't ramped, has it been -- is this because of a technology problem that you guys still need to figure out? Or is it because of a business problem that maybe the market didn't go the direction that you thought it would?

I think it goes back a couple of years ago that we first became very interested in micro LED technology as an option to bring really differentiating products to markets -- to market. First, with ALCs and then the second step is to -- to answer some of the pitfalls of near package optics. The first couple of companies that we engage with were independent companies. And ultimately, we made the decision earlier this year to basically bring the technology in-house, bring the team in-house so that we could have a very predict outcome on time to market. And so at this point, what we've learned over the last 18 months to 2 years is significant. The team that we've combined forces with Hyperlume. -- we feel like, right at this point, it's more of an execution play. It's not really -- so the technology, I think, is well on the path to being developed. Now it's just an execution play, bringing it to market. And so I feel confident about bringing product to market in our fiscal '27 and ramping first initial ramps in fiscal '28.

From the standpoint of our confidence on this as far as this being a product that are -- that's going to resonate with our customers, I think that we've got several years under our belts bringing new products and categories of products to market. The initial conversations with customers, I don't see any major barriers to overcome from the standpoint of customers accepting the product. These are going to be -- these are going to be bookended solutions. So they're going to be delivered in the form of a cable. And the bottom line is when we deliver on the promise of reliability, power efficiency and system cost that's equal to AECs, but you get a thinner wire, and you get longer length. It's really the perfect type of product. So I really, again, view this as more of an execution challenge. And I feel very good about the team we've got in place, the additions that we've got planned over the next 12 months to make sure we get this right.

Yes. And then a quick follow-up on ZF Optics. Understanding that they're a system-level solution, is there a -- is there a line rate or a lane rate that the ZF optics platform is targeting to intersect with? Or is it relatively agnostic, can be leveraged at 50 gig, 100 gig, 200 gig per lane type of applications?

It can be leveraged across the board. The first product that we'll go to production with is 100-gig per lane. It will be 800 gig ports that we're addressing. But there's definitely a path to 1.6T. But if we had a customer that wanted to bring a product to market that was 50 gig per lane, there's no issue with that.

Your next question comes from the line of Christopher Rolland with Susquehanna.

Congrats on the pretty amazing results here. And yes, these are probably going to be for Dan. So you guys, in a very good way, kind of blew up my old model. So I think we've talked -- you guys talked about more than 170% year-over-year growth. Perhaps we can put some brackets or talk about next year obviously will have a deceleration. But do you think that we could grow at a at a rate similar to the Street where it was? Or do you think that needs to come down a little bit, just given the better results for this fiscal year? Just any sort of commentary as to the growth rate for next year would be phenomenal.

Yes. We -- so in my prepared remarks, I specifically said mid-single digits revenue growth sequentially through fiscal '27. So that's the expectation that we've set we set that expectation probably 3 or 4 quarters ago as well as if you go back and look at things, and we've outperformed that. So sure, things could change. But we're not setting any expectation that's different from [indiscernible].

Okay. Okay. I guess I don't know, does that were we at the higher end of middle -- mid-single digits? And do we move lower, just given the better results? And then, my second question, Dan, is around OpEx. So a pretty big guided bump for next quarter. maybe talk about that. Is that just a bunch of engineers coming on? Is that more onetime? And then do we take that bump and then just forecast it across every quarter moving forward? How should we think about that and/or like just what do you think OpEx might grow at a percentage of revenue, if that's easier to discuss, however you would frame it?

Yes. So -- so let me just first state that we're continuing to manage our operating expenses in order to support the revenue growth that we foresee. And as you know, all of these projects, all of these pillars of growth that Bill has talked about, there's a long gestation period for all of them, and you need engineers, engineering talent to be able to execute on that. So we're feel like we're in a great position to do so. Our Q3 OpEx guide was up more than it has been in the last few quarters, up 22% at the midpoint. But as you dig into our Q, you'll see our R&D spend was sequentially down in Q2. So in one way we're kind of making up for that small decline. So long story short, guiding to $70 million at the midpoint, that does set a new base. There's additional project-related spend within that plus additional hiring. We've brought the hyper loom team on board. There's a lot of different factors that go into that number. But if you plug that number into your model and have a small sequential increase you'll kind of end up at a 50% year-over-year OpEx growth from fiscal '25 to fiscal '26, which was also in my prepared remarks. So hopefully, that's helpful.

Your next question comes from the line of Karl Ackerman with BNP Paribas.

I have 2 questions, if I may. First, could you speak to why you are now licensing your active electrical cable IP to third parties? And how this agreement reflects your perceived competitive moat and go-to-market for AECs?

To give background on the case that we filed with the ITC, this is a market, the AEC market that Credo pioneered over the last 7 or 8 years, we spent tens of millions dollars establishing the innovations required to build these products. And it's great to see that the product category is -- has realized what we felt would be a multibillion-dollar market potential. And so, along the way, we've been pretty communicative with others that are in the market are showing intent to enter the market that we've got IP and we're intending to make sure that there's respect for that IP. And so we got to the point where we felt it necessary to file with the ITC because we were getting great respect or great acknowledgment of the fact that the path was pretty well defined by Credo and our engineering team. And so I think we feel really good with where we are. We never thought about this market as being a market that would take off if there was a single supplier. And so our customers all want multiple suppliers. Ultimately, we've landed in a good spot with 3 other conversations that we've had thus far. We've got a couple more in flight or maybe even more than a couple more in flight. This doesn't change anything competitively for us. We've always thought about competition as a challenge of moving more quickly and in a way that delivers what our customers want. And so it's a function of delivering what they want first having it be qualified first, ramping first, delivering flawlessly as they ramp and as they are in high-volume production. That's really our focus as a team, both at an engineering level as well as an operations level. And so I'd say that we're satisfied with where we are competitively and we're satisfied with where we are with the results thus far that we've seen as we've protected our IP.

Got it. That's helpful. Maybe a question for Dan. You noted that you've got 12 months of visibility with several hyperscale customers. I guess the bag of the question. What was the largest delta in your upwardly revised outlook versus your prior outlook of [ 960 ] and change I guess, how much of it was simply the ramp up your -- the fifth hyperscale customer versus just higher order rates of existing programs or even new AEC applications across scale-out and [indiscernible] chassis at some of the other customers?

What I'd say this is more of a general comment, and this is true over the last 3 to 4 quarters. We've seen continuing strengthening of our forecast throughout the quarters as they proceeded, which is how we've gotten into this particular rhythm that we're in right now. So it's not specific to a customer, it's perhaps more of an industry trend, and we've benefited from that. So that's what we're seeing.

And your next question comes from the line of Joseph Cardoso with JPMorgan.

Maybe for my first one, I just wanted to touch again on the entry into the optical transceiver market beyond just DSPs. This is obviously a very large and expanding TAM, but perhaps one where current industry margins are somewhat below your long-term targets. So maybe can you just take a second and just talk about how you're thinking about the margin opportunity here? And also curious whether you're focused on selling the full modules or if there's an opportunity to drive attach at the DSPs, pilot software, et cetera, and sell those building blocks of the ZeroFlap solution to potential customers? And then I have a follow-up.

Yes, we're absolutely thinking about this product in a similar way that we think about the other system-level products. We're going to take full ownership and accountability for the entire system-level solution. So we're not necessarily competing in the current commodity market. If a customer is looking for that step function in reliability that you can get by going up the stack with the solution we're bringing to market. Absolutely. But it's not a conversation about what is the price of a transceiver in the market. This is really a system-level solution. And so it's -- it's a combination of all things. DSP, it's a combination of the software that we're bringing. And it's really most importantly is that the tight interaction that we've got with our customers. And so I think we've been really clear, and I think Dan specifically has been clear in stating that we don't see any change to our long-term gross margin model. .

No. Got it. Very clear, Bill. And then maybe just a quick clarification on the fifth customer in the quarter. And maybe this is anecdotal, but it sounds at least like they're tracking ahead of expectations relative to last quarter with some initial revenue this quarter, but just wanted to clarify if that was the case, and as we think about that customer tracking into the back half of this year, is there any opportunity for this customer to be 10% at least on a quarterly basis now in the half? Or have the denominator just kind of outpaced that opportunity there?

Things take time. And I think if you look at the base that we're talking about, the 10% number has changed pretty drastically from a couple of years ago to today. Things take time to ramp. And so when we think about customer #5, we think about initial revenue this year. There's not a chance that, that will be a 10% customer this fiscal year. And I do think that the customer has the potential of being a 10% customer in -- especially if we think about it at a quarterly level first and then an annual level, secondarily. No question that they've got the type of size to be able to drive that type of number, but it's going to take time.

And your last question comes from Sebastien Naji with William Blair.

Congrats on a nice set of results. I'll ask both my questions together in the interest of time. The first one is Credo is -- has an advantage in that it's agnostic to the underlying compute could be merchant GPU racks, ASIC racks, even CPU servers. So could you maybe talk a little bit about how much of your business is tied to ASIC versus merchant silicon deployments today? And where that share might go over the next year? And then my second question, I just wanted to ask about the timing of purchases from your customers. how aligned are AEC purchases with the GPU or ASIC purchases? And do customers typically purchase ahead or one after the other? And is there any risk of inventory build if they're purchasing ahead of GPU orders?

We're not really able to break out the percentage of GPUs that are, say, internally developed or commercially available in the market. We don't actually track it that way. I can say we're -- the first comment that you made is absolutely accurate that we're agnostic to the type of GPU that's being deployed. I will say that from a deployment standpoint, the second question that you asked, the -- my belief is that everything is ordered in a way that would have all of the necessary components being delivered at the same time. And it's a very, very complex supply chain that our customers are dealing with. But I think they're ordering the connectivity solutions right along with the GPUs. So we have pretty good visibility within the supply chain from delivering our products all the way to having those products deployed. So we get a good sense of the type of inventory that exists within the partners that each one of our customers use to stage inventory. And we feel pretty good about -- we feel pretty good that there's not really a bubble of product that's sitting in inventory right now.

And with no further questions, Mr. Brennan, I turn the call back over to you for closing remarks.

Yes. Thank you. I really appreciate the strong interest in Credo. We'll talk to you all soon. We're a little bit off schedule, so the call back may be a good question and a bit delayed. But again, really appreciate it. Thank you very much.

This concludes today's conference call. You may now disconnect.

Good afternoon, everybody. Welcome to the Goldman Sachs Communacopia Technology Conference. My name is Jim Schneider. I'm a semiconductor analyst here at Goldman Sachs, and it's my pleasure to welcome Credo. We have -- really happy to have CEO, Bill Brennan; and CFO, Dan Fleming with us today. Welcome, guys. Thanks for being here.

Thanks for having us.

You sit in a very hot part of the market right now tied to AI infrastructure within data centers specifically connectivity. So your words, what is the mission and vision of the company? How has the journey been so far? And what problem is Credo trying to solve more efficiently and effectively for everybody else?

Sure. So I've been with the company 12 years now. And when I joined the company, we had this vision that the data center was going to be driving an exponential need for more bandwidth. And it's taken many years, but it's on a super accelerated pace. So the mission has been pretty consistent and it's breaking bandwidth barriers by delivering highly reliable and energy-efficient connectivity solutions. And so that's what we've been at for the past decade for sure, and it's really in hyperdrive right now.

So connectivity, like within the AI space, we all think about GPUs but it's connecting the GPUs, 10,000 or 100,000 or 1 million people are talking about at very high speed with great reliability and with great energy efficiency. That's what makes the magic happen with AI. And just to put reliability in perspective, the connection between the GPU and the first switching layer, there is no redundancy.

And so when you get a single failure in that connection, a link flap is what the industry refers to these failures as, brings the entire cluster down. So the need for more reliability is absolutely a top priority, and that's been a very intense focus of our team, especially over the last 12 to 18 months as we've succeeded with the AEC product family. It's 1,000x more reliable than some of the optical connections that we're replacing.

Yes. One question we get all the time from investors is what is the total available market for AECs? And how do you kind of contextualize that in terms of the overall connectivity TAM for data centers?

I get that question a lot, too. I got that question 9 times today. What is the TAM? So the TAM is big. I think that the TAM is growing, and it's larger than we conceptualized back when we thought about this market. I can talk about the different parts of the TAM. But I think at a high level, it's -- I used to think about the market in terms of say, a $2 billion TAM. Now I think about the market in terms of like, say, a $5 billion to $10 billion TAM. And that's really driven by different parts within the network where AECs make a lot of sense.

We started our business connecting mix TORs in general compute. Then we've talked a lot about switch racks that sit in the higher-level switching tiers within the front-end network. And then AI happened. And then we talk about scale-out network. We talk about the scale-up network. And so we see Ethernet, we're not fully penetrated by any means in these areas.

And then on top of that scale-up is coming, and when we think in terms of volume, the front-end network, give that a 1x relative size. We view the scale-out opportunity as being a 10x size on actual connections, number of connections. And we think scale-up when it goes full rack scale to row scale, that represents another 10x in potential volume. So you can you can follow the analyst to get their view of the top down, but I can definitely make a case it's a large and growing market.

And I don't think there's any kind of questions about is optical going to replace copper anytime soon. I've been fighting that whole conversation for the 12 years I've been here. I was advised don't do anything for copper, you're making a big mistake. And now we're actually replacing optical connections. And so I don't think there's any doubt over the next 5 to 10 years that it's a large market.

Yes. How do you think about what types of connections AECs ultimately displace? Is it optical, conventional copper? What is it?

Yes. So it's -- the product category, you can think about it, we came into a world that everything was connected by passive copper cables, certain lengths. And it got to a certain length where you couldn't make that connection anymore and it became optical. Those are the only 2 options. And so we walked into a marketplace that really fully believe that when passive copper cables kind of ran out of gas, every time you extend the length or you double the speed, you get more loss and less of an ability to do long connections.

And so very much, we started by replacing DAC. Instead of it being optical, we replaced DAC. But now with AI and the priority for our reliability, we are replacing optical now as well. And so limited on length, 7 meters. So if a company were to figure out how to make optical connections 1,000x more reliable, that would be a very good market space to be in because you could offer that same thing at I'd say, a row length, which is probably 15 meters or 20 meters.

Okay. On your AEC business, can you maybe talk to the primary use cases that are being adopted today? What have been the biggest kind of drivers of adoption? What other use cases do you think AECs can be -- can address in the future?

Yes. So there's kind of basic use cases, connecting Nick or whatever that server is an appliance or general compute computing that to the first switching layer. And then within the switching hierarchy. So that Nick to tour is a huge market. You can see it's a huge market, especially because of AI, but it was a huge market even with general compute. Switchbacks basically replace chassis. This is basically a chassis full of switches.

Amazon for many years has been instead of deploying chassis, say, from the big networking companies. they're buying white box switches and stacking them vertically. And so replacing the backplane connection within a chassis with in-rack cables that are 3 meters or less. That's one big opportunity as well. And then when we think about things in terms of scale out and what liquid cooling is doing from the standpoint of how long the connections are, we had 1 customer that had an 18 rack deployment that was lightly pop.

It wasn't very dense because of -- it was air cooled and they didn't -- like the actual rack design couldn't source a lot of power. They redesigned it to compress 18 racks down to 6. And in that case, they had all optical connections. And so this is a different application. This is an expansion of the TAM from less than 3 meters to now row scale 7 meters. So many different spaces within the data center network that can take advantage of AECs.

Yes. And based on your conversations with customers, what kind of pushback are you getting, if any, on the adoption of AEC?

I'd say that once a customer really engages with us, they're pulling the product once the light goes on. There's a lot of inertia with the way things have been done over time. People have struggled with making DACs work for the next generation. they'll do incredibly difficult things to try to fight through the signal integrity and form factor problems. And then a lot of people just think the default is optical. So like we're still in a mode where establishing this as a de facto, but when it turns on when we engage with the customer the first time, the experience is incredibly easy. And we're hitting reliability. We're hitting energy efficiency, we're hitting costs. So these are all great things kind of in that order. I don't get a lot of pushback once the light goes on.

Yes. Yes. There are still customers where like it hasn't gone on?

Sure. That's called selling.

There you go. Our passive optical cables -- or copper cables excuse me, improving in performance at all or providing comparable ROI in any way?

Yes. So one of the things that we've seen is this kind of battle between copper and optical. The copper supply chain is not sitting still. When we had envisioned our 800 gig or 100 gig per lane family of AECs, we thought 3 meters is going to be the maximum length that we would achieve. And that was based on the copper that was available at the time, the characteristics of the copper. And it was also based on our DSP. Through improvements in the DSP and in the raw copper, we're now doing 7 meters. So that supply chain is not standing still. And so I expect that, that supply chain is going to continue to make progress.

And we talk about 200 gig per lane, 1.60 ports, I think that ship has sailed. The ecosystem will look the same. It would be a tremendous TAM for copper and optical. And even talking with some of the copper companies, they believe 400 gig per lane as possible. And so it's -- I think that the future is definitely bright that marketplace or that group of suppliers they're doing amazing things at improving. And so hopefully, that gives you the color.

Yes. Yes. Maybe switching to the business trends a little bit. I think you ramped up your AEC revenue pretty rapidly. And I believe you're set to grow with 2 additional hyperscale customers in the back half of '26. Help us understand the visibility you have into the business the nature of the relationships in terms of forecasts, take-or-pay agreements, prepaid commitments and so on?

So coming out of COVID, one of the best things was that the groups that we work with, the supply chain at our customers, they want us to have 12-month forecast. They want us to know what they're planning. And so we've got a good relationship with all our customers. Now within that 12 months, we don't have any take-or-pay or we don't have that kind of relationship. I don't want to overship. I want to basically match our ships to consumption. That's just a philosophical way of doing business. I don't want to talk about a huge amount of inventory that's in place that shoved in because I had a contract and I was able to do that.

And so there's some fluidity within that 12-month forecast at a given customer and especially when there's new deployments, those 12-month forecast can be not huge accurate. We've been on the right end of fluctuation with 2 of our customers recently. We had an enormous ramp enormous pull in, a surprising amount of product that we were asked to ship in a very short period of time. So when they got their deployment plan together and they hit basically full green light, it was like a real like strong pull into the 12-month forecast.

And then our fourth customer that we talked about, they're actually pulling in. And so on our call recently, Dan articulated that, although we didn't have what we would consider material revenue or we didn't have a 10% level of revenue with this customer, we expect them to be a 10% customer for the year. So going from basically not shipping to 10% within 1 year. And if you think about our growth as a company, that's an amazing amount of product that they're looking for within a short period of time. So that's actually starting in the second quarter.

And the fifth customer we've been engaged with for a long time, and it's a function of basically sorting out their deployment plans. I don't have a solid schedule yet, but that's -- I expect that to start towards the end of the year.

Great. Maybe help us think about how you conceptualize the opportunity for pricing uplift generation to generation on your AEC products?

You want me to talk about increasing pricing in a public forum?

Yes.

I'm kidding. But naturally, we have to say, go from a 400-gig solution to an 800-gig solution to 1.60, fundamentally, it's going to cost more to build. And so first generation, when we're shipping 25 gig per lane, a lot of people were willing to do the work to use DACs. And there's a pretty big gap in pricing between passive copper cables and what we do. I mean it's fundamentally more expensive technology. And so we were kind of tethered on pricing to this very basic jumper cable basically, pass copper cable. There was only so high we could justify if they felt like they could get the job done.

Now that we're really at a point where -- not a lot of people are struggling with DACs. So now we're being compared to optical. So we've kind of been untethered and almost lifted by optics pricing on -- like if we can save money compared to optics. I think that puts us in a good spot. But if we can be 1,000x more reliable, then we just -- we can start talking about the value of the product. I think Dan has talked about margins over the last couple of years, and I think we signaled that we'd see a Nashville expansion as speeds would increase, and that's happened quite nicely.

Yes. Another question that I get a lot in terms of competition in the space is as more people enter the space because obviously, this kind of market is going to track more competition. How do you balance competition for market share relative to gross margins? And then maybe just kind of give us the context about the value you provide that helps keep commoditization in check?

Yes. So we're unique from the competitive landscape. We're the only true vertically integrated player in this market. we compete with groups of companies, chip companies and cable assembly companies, and they kind of team up and they go to market that way. I'm fully crystallized on our model delivering what I would think is a competitive moat. The way we try to compete is we try to, first of all, engage with customers at a level where we enable innovation. They want special things, we do it.

We are highly focused on being first to deliver samples. We're highly focused on first being qualified and first to ramping. If we can do a good job of that, I think the competitive dynamics will play in our favor long term. That's the competitive advantage we bring in production if we can be flawless with delivering. And if there is an issue, if we can absolutely be that single throat to choke, that's going to pay off. So building relationships really takes many, many cycles, many years to do, and I feel like we're well on our way. So competitively, I'm more focused on making sure we satisfy the customers.

Yes. One of your innovations, you mentioned it before, a bit of a surprise to me initially in the market there's been your 7-meter AEC cable. Apart from your first customer, tell us about the interest in that specific product? And then maybe conceptually, how much longer you think you can make connection electrical without losing performance or signal integrity?

So I think 7 meters is going to be at max. I'm not going to maybe that's a challenge to the copper ecosystem to do better. But 7 meters at 100 gig per lane when we talk about going to 200 gig per lane probably goes from 7 to 5. And tell me the first part of your question again?

What's the customer interest been in the 7 meter?

Yes. So what drove by the interest was our customer was on this mission to build a ZeroFlap cluster. And if they looked at their linked flaps, these momentary intermittent disconnections and link it actually shuts the entire cluster down. So they own this mission to come up with a ZeroFlap cluster. And that they asked us to build 7-meter cables because the reliability -- we just don't have flaps with AECs. We don't have these interment failures that you get from laser-based optics.

And so that was what drove the ask and what drove the possibility was liquid cooling and power sourcing. It's the example where I said 18 racks got compressed to 6. This trend is going to continue in the market. So this is the first of what I expect many customers to pursue. And it's such a fundamentally better product from the standpoint of reliability that I think the interest is going to be large, long term. And that applies to scale out and it applies to scale up as well.

Yes. I think the market has a view that your AEC revenue is somewhat levered to a couple or 1 custom ASIC program or custom ASIC programs in general. In other words, as your shipments -- their shipments go, yours will follow or maybe yours lead and theirs follow, especially your largest customer. Do you think that's a true statement?

No. I'll tell you why.

Yes. Yes. And then talk about how you may participate in merchant accelerator clusters as well?

Yes. So we're not a proxy for custom cloud silicon, just to be clear. Our third and fourth customer that we talk about, we're only connecting with NVIDIA gear. So that very clearly yesterday, at the at the AI Info Show. Meta made a presentation, there's a nice photo of a rack with -- that's cabled out with purple cables, which are our cables. That's all NVIDIA gear. And so we're definitely not a proxy. We look at any GPU, any XPU as an opportunity. So we should be able to engage across the board.

Great. And you referenced the right, I referenced before, the 2 additional hyperscale customers. Maybe talk about how you expect them to ramp relative to your lead customer?

Well, I think from the standpoint of the timing of the ramp or kind of the size of revenue that they can -- we can measure in different ways. And I do think that at a high level, you could tie the overall opportunity to CapEx. And if 1 guy has doubled the CapEx of another guy, it's hard to make the case unless we get fully penetrated. But if you say full penetration of both, I think the larger CapEx could be driving a larger revenue number for us.

But as I think about any one of these hyperscalers, my feeling is that they could drive a significant revenue well over $100 million per year revenue with us. And even as we're approaching $1 billion run rate, kind of solidly be a 10% customer even as we keep growing in the future. So I think all of these relationships have the ability to ramp quickly and drive big numbers.

Maybe away from AECs for a moment. You've talked about the value proposition of linear received optics or LRO. From a power perspective, maybe help us understand how adoption has been the level of interest you've seen and how big this LRO offering can be in the context of your overall optical DSP business?

Sure. So kind of shifting gears to optical DSPs. There's a really strong push in the market for better energy efficiency. And if you kind of break down an optical module and you say, how does the power look ratio. The DSP is by far the highest power component, even half to even greater than half the total power consumption. And so if you make the case that for 1.60 that you hit a wall on power and that you need to do things differently. This is where the concept about LPO came from. It was a couple of years ago at the OFC conference.

We kind of took away -- particularly with LPO, what you lose is you abandon interoperability. Signal integrity is not as good. traditional test points for debug and so on, you lose all of this. What you sacrifice to get lower power is questionable if it's even something you can really deploy in a world where you need interoperability. If you only end-to-end connection, it might be possible if you put the work in.

What we came up with in response to that call to action for power was how do we keep everything you get with a full DSP but get the power advantage of maybe reducing out of DSP that you're doing. And so linear receive optics is basically doing instead of DSP on both ends of the fiber, you just do it on one end of the fiber, and we've proven it to be successful. But you're talking about a marketplace that is -- the way things are done are with full DSPs. And so we can think theoretically about moving, but there's a risk aversion to it.

So we're doing both full DSP and LRO DSP solutions, and it's really allowing the customer to decide. If they could fit under the power ceiling and use a full DSP, they typically will. But we are having a lot of interest and how that plays out in that -- in the next 2- to 3-year time frame, we'll see. I'm agnostic. What we're trying to do is solve problems for our customers.

Yes. And maybe just talk about the competitive landscape you see in that market especially given Marvell's dominant in DSP and the fact that Broadcom obviously has a lot of scale to go after the opportunity if it becomes big?

Sure. Yes, a lot of respect for what Marvell has done, a lot of respect for them maintaining their incumbency, A lot of respect to Broadcom as well. When I think competitively about this space. We're really thinking along the lines of how do we move the market to more features. Instead of like saying we're going to just like stay in the cage and fight hand-to-hand comment on optical DSPs. We're thinking about how to go to higher-level ground, give the market something additional to what the market has today.

And the hint that I'll drop is, it's all related to reliability. How do you improve through an optical DSP design, how do you improve reliability for laser-based optic system by 1,000x, right? And that's very much a system-level product. And so it's -- we'll talk more about that in the upcoming months. But our mindset is, yes, I can compete head-to-head. But if I can take the competition to a higher ground, I think we're going to fare even better.

Yes. Fair enough. I'm going to leave you out the conversation. Let's talk about financials. Your gross margins, you've been trending above your long-term guidance of 63%, 65% despite lower IP revenue contribution. What's driving the strength in gross margins right now?

Yes. What we've laid out going back almost 4 years now as we went public is that we would experience an expanding margin due to increasing scale we were maybe you'd say, subscale 4 years ago. And that has played itself out quite well. In fact, even over just the last year, you see that pretty emphatically we went -- if you look Q1 of fiscal '26 versus our Q1 of fiscal '25, 74% year-over-year growth, and the product gross margin expanded over 500 basis points.

Now we're at the point now, as you clearly point out, we are above our long-term expectation for gross margin and a scale story or the increasing scale story has played out as we expected it to. In fact, you might say we're kind of mission achieved there. If you look at sequentially from Q4 to Q1, 31% top line growth and an essentially flat product gross margin. It was up 12 basis points. But from here on out, what you might expect to see is more product mix variation.

So there will be some variability quarter-over-quarter in gross margin. But we emphasize that we do not expect to change our long-term expectation. So 63% to 65% is our long-term expectation, even though there might be pockets of time like we're in right now, where we might be at or above that long-term expectation.

Fair enough. And maybe talk about some of the key areas of R&D you're most focused on and whether you expect R&D intensity to go up at all?

Well, I'll speak to the dollars of it and then Bill can maybe speak to some of the activities. What we laid out for this fiscal year for fiscal '26 is that OpEx is increasing about 50% year-over-year. We continue to add top flight engineers as fast as we can find them. And that trend will continue. The other thing I've mentioned is that over half of our R&D spend is really focusing on future programs, optical in particular. So those are the areas that we're focusing on that bears fruit 3 to 5 years from now. It's not a today thing.

Just sort of philosophically, you've -- well, let me just ask you broadly, long term, do you think Credo is going to remain a pure-play connectivity company? And do you have an ambition to diversify in other products in the future?

Yes. I envision us staying close to home. I mean I think if you were to talk about adjacencies that we could like make the case for adjacencies, you might say switching you might say GPUs. And at this point, we feel like we can grow for a long time. And when we think about going from, say, $1 billion run rate to $5 billion and beyond, I think there's plenty of opportunities that we're going to pursue within the connectivity space. So we are looking at furthering our system-level products.

So when I think about that, I think of 3 tiers, and I've talked about this recently, but SerDes for us is core to everything we do. We think SerDes really matters. And we can talk about examples if we have time, which probably we don't. What we do is different and meaningful. The chips are going to be better, but the system level, like what we've shown with AECs, that system-level product has been really the key to our success as a company. And so when we think about optical investments in the future, I don't think in terms of the optical DSP, I think about building optical DSPs that enable better system-level products.

And so I think you can see us going down that system-level path in multiple areas in optical. And I think you can think about us going down the system-level path, even for connectivity markets like GPU to memory. And so I think that's going to be the key to us moving the company from where we are to doing $5 billion and beyond in the future. So that's really what we're focused on.

Now you might see us pursue inorganic growth in terms of the right resources, the right even there may even be companies that have revenue that's accretive. So generally speaking, we're heads up on really where we're going to take the company over the next 5 to 10 years. But we're not thinking -- at this point, we're not thinking switching and we're not thinking GPUs.

Yes. Very good. And then maybe lastly, you've met with a lot of investors today and presumably over the last several weeks since you reported. Maybe you can give us a sense about what is the one piece of the Credo story you think is underappreciated or missed or misunderstood by investors right now?

Although it's frustrating, I understand that when people think about the cable, they think of commodity, they think, well, obviously, that's going to be commoditized long term. So I don't think there's an appreciation for like the difficulty at a technology level to build these system-level solutions and really the differentiation we're bringing, the advantages that we're bringing to our customers.

And so I would say that over time, there's a stronger understanding. Dan is a great CFO. He should win awards for the things that he's done transforming our company. you get to do that when you're doing super valuable things with your customers. And so even when I told my mom that we were going to build cables, she said I'm very nervous. I'm worried the idea what the semiconductor is, but I know what a cable is. And so getting over that perception is what I would love to do.

Excellent. Well, I think the stock price speaks volumes about that, what people think. So thanks very much for being here. We appreciate you coming.

Thanks. Really appreciate it.

Ladies and gentlemen, thank you for standing by. [Operator Instructions] I would now like to turn the conference over to Dan O'Neil. Please go ahead, sir.

Good afternoon. Thank you for joining our earnings call for the first quarter of fiscal 2026. Today, I'm joined by Bill Brennan, Credos' 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. 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 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.

Credo'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 3-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 AECs, our AEC 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-out network with AECs up to 7 meters in length. Reliability and power efficiency led to choosing AECs over optical solutions as they are up to 1,000x more reliable and consume half the power. AECs virtually eliminate link fabs, 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 is 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 of 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 road map. 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 SerDes design team, our PCIe 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, empower customers to integrate our solutions with faster time to market and better reliability. We are on track to secure PCIe design wins in calendar '25 with production revenue expected in calendar '26. Our expansion into PCIe-based solutions for AI scale-up networks significantly broadens our TAM, and we are well positioned to capitalize on the industry shift to 200-gig per lane scale-up 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 physical 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 are 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.

Credo 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 3 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 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 and equivalents 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 3 customers from Q1 to grow significantly year-over-year in fiscal year '26. We also expect revenue diversification to strengthen further with the 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.

[Operator Instructions] And our first question comes from the line of Karl Ackerman with BNP Paribas.

It sounds like you are seeing at least one of the two new hyperscalers adopting AEC 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 have a follow-up.

Yes. Thanks, Karl. I'll confirm that the most recent ramps that we've seen have been at 100 gig per lane. And depending on the customer, 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 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. When you think about scale-up interconnect opportunities, 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 UALink, and therefore, the market opportunity of one could be larger than the other?

Yes. I would say that the near-term opportunity for us to 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 intra-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 NVLink 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 SerDes. And so I think we're going to be in good shape.

So it's -- again, it's Layer 1 from the standpoint of an AEC. And so I think that 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.

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

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, the market for you is now run rating closer to $1 billion 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?

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're 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 was 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 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 has 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 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 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 intra-rack to rack-to-rack. And traditionally, intra-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 1,000x more reliable, effectively reducing length laps and having the uptime of the cluster being much more.

Again, reiterating that if you have got a single link flap in, say, 10,000 or 100,000 or 1 million GPU cluster, it brings the entire cluster down because there's no redundancy from that NIC to tour connection. And so we're actually seeing the TAM expanding. 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.

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

Yes. So I think that we've talked about this in the past, and I'll 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 bottlenecks associated with the connection between GPUs and memory. We see opportunities there that can be quite large.

Traditionally, we've seen that 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 from 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.

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

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 3-nanometer platform, when you'll be in volume and how you think you're positioned versus the 800G generation?

Yes. 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 3-nanometer straightaway 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 pretty extensively in 5-nanometer, and we've made the decision to really jump forward to 3, which has been -- it's a different strategy than we've 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. We think that the market for 1.6T transceivers is going to take time to develop. 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?

Yes, we definitely see it being broader than the two that you mentioned. 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 -- as the market moves from PCIe Gen 6 into whatever is next, that's when you're going to see different hyperscalers taking an approach that's 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 SerDes for every single one of these protocols.

And our next question comes from the line of Joshua Buchalter with TD Cowen.

On the results. Maybe a follow-up to Tom's first one there. I think you've demonstrated an LRO at 800 gig with your WV850 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.

Yes. 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 everything that's needed 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 we do feel like 1.6T, it will become more and more popular given the need for power efficiency.

Got it. I just had a question. In the prepared remarks, you mentioned I think something about your customers not necessarily ramping linearly. Your guidance is obviously very strong and somewhat linear off of the strong 1Q. Maybe you could elaborate on those comments and bigger picture, how you feel about the visibility into the ramps as your expanding customer base scales?

Yes. We've been pretty consistent in talking about -- at a given customer, we don't necessarily see a linear up and to 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 at one point, there was a lot of concern about us having too much concentration. And in the next quarter, we saw a really good balance between multiple customers and some people were concerned about, hey, it's kind of a decrease from the concentration you had. And long term, I can just tell you that we've been consistent in 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 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 a concern.

And our next question comes from the line of Tore Svanberg with Stifel.

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 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. So I think that as we talk about the market opportunity, the big shift, I think, in the TAM has been with the recognition that 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 NIC to TOR is a big market. And then we've also talked about switch racks. And 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 NIC to TOR, 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 in both markets from the standpoint of 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 TAM, given the fact that we expect the volumes for scale-up to be potentially in 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 if you can use copper, you will use copper given the advantages for reliability, power and cost.

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 down the last 2 quarters. So is that customer sort of just pausing to ramp? Or 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 -- their history, if you look back over time at how they've 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, Tore, 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.

And our next question comes from the line of Christopher Rolland with Susquehanna.

On the results and this will probably be for Bill. So I guess, first of all, for 1.6T, I believe there are some supply constraints that appear to be emerging for 1.6T 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. So 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 will 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?

I think that the AEC TAM is going to stand alone. And people are going to choose to use AECs 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 in optical are going to affect that at all.

Excellent. And for a second question, Bill, I think there's some progress here on your fourth hyperscaler for sure. Any more color on when the fifth could be a 10% or? 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?

Yes. So first, I'll talk about what's upcoming. And I think your question was maybe one step ahead of where we are. The first thing is we need to get that fifth one in production. We're through qualification. And I think that 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 their deployment plans specifically as well as where in their network they're planning on using AECs.

There's a lot of interesting things happening. We talked about the neo cloud market. We've talked about sovereign. And what we're seeing is that -- and 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 and 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 Neo clouds 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, that -- we view that as an opportunity as probably everybody else in the market views it.

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

Dan, congratulations on a pretty good quarter and guide here as well. So on the fourth CSP, it looks like a pretty nice ramp there. It looks like it's growing a lot faster than your prior ramps. Just wondering, is that driven by multiple engagements, multiple cable wins you have within there? Or are you seeing a nice pickup on ASPs as you go to 100 gig per lane?

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

Yes. The ramp with 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?

Yes. 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 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 -- is the read through that the impact is potentially more from the talent side? Or is there some product mix in there?

Yes. It's -- let me just state it this way. We -- if you look at Q4 to Q1, we still or a bit of an impact of the benefit of increasing scale, kind of a very small 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 [indiscernible]

So, I guess, the key message to take away is long term, we don't see any differences in what we stated in our gross margin model [indiscernible] even though we're are closed right now where that gross margin at or above.

[Operator Instructions] And our next question comes from the line of Quinn Bolton with Needham & Company.

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

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?

Yes, sure. That's -- 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.

Excellent. And then second question for me. Over the last, I think, month or so, you guys have announced patent lawsuit settlements, I believe, with Amphenol and Volex. I know you can't get into specifics 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 with other suppliers now of AECs?

Sure. So I'll keep the comments somewhat high level. But 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. The -- 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 5 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 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 and 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.

And our next question comes from the line of Suji Desilva with ROTH Capital.

Congrats on the progress here. Trying to ask Quinn's question maybe a little different way. I'm just trying to -- 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 3-meter rack solutions? Or is it more of a niche with specific architectures? Just trying to get a feel for that dynamic though.

Yes, I wouldn't say it's across the board. I would say that the first step typically is intra-rack, so 3-meter or less connections within the same rack. And this is just recent over the last 6 to 9 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 we're at the 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 color, Bill. 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 catalysts that would shift that transition of market inflection? And most importantly, would 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 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.

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. We thank you for your participation. You may now disconnect.