Ladies and gentlemen, thank you for standing by. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. I would like turn the conference over to Dan O'Neil. Please go ahead, sir..

Good afternoon and thank you all for joining us today for our Fiscal 2022 Fourth Quarter and Year-End Earnings Call. Joining me today from Credo are Bill Brennan, our Chief Executive Officer, and Dan Fleming, our Chief Financial Officer.

I'd like to remind everyone that certain comments made in this call today may include forward-looking statements regarding expected future results, strategies, and plans, future operations, and markets in which we operate, and other areas of discussion.

These forward-looking statements are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC.

It's 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.

In light of 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 an important measure 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, as well as in our SEC filings, which can all be accessed using the Investor Relations portion of our website. With that, I'll now turn the call over to our CEO.

Bill?.

Thanks Dan and thank you all for joining our call. During this call, I'll provide an overview of our Q4 and fiscal 2022 accomplishments and then show why we're optimistic about continued strong growth in fiscal 2023.

After my remarks, our Chief Financial Officer, Dan Fleming will provide a more in-depth review of our fourth quarter and full year results. We'll then be happy to take questions. While we face some challenges in April, fiscal 2022 was in total another great year for Credo, notably due to the tremendous work of our team partners.

We became a public company on January 27. Our IPO has provided us with more than ample capital to support the investments required to deliver the leading products our fast-growing markets demand.

Our IPO not only bolstered our liquidity, but solidified our path as an independent company, both of which enhanced our relationships with our customers and supply chain partners. During fiscal 2022, we achieved record revenue of $106.5 million, up more than 80% from the prior year. That total included product growth of 120%.

We achieved revenue growth in all our Ethernet product lines, including AECs, optical DSPs, Line Card PHYs, and SerDes Chiplets, and we also achieve growth in our IP licensing business. This success is a testament to the hard work of our team and the trust they've earned with our customers.

Customers choose Credo Solutions for several reasons, but at its heart, we differentiate ourselves with our architectural approach. Our advantage truly lies in our engineering. We optimize analog and DSP architectures to deliver low-power and very small die sizes.

Also, our N minus one process mode approach provides an advantage on development cost as well as our wafer cost.

These factors combined with our purpose-built mentality where we optimized solutions for the many different lengths we serve, enable us to provide tremendous value to our customers across the entire range of their connectivity applications.

Our dedication to engineering optimal system solutions translates to innovations across our product lines and nowhere is this more evident than our Active Electrical Cable or AEC Solutions.

We've worked closely with hyperscalar customers to understand their core needs and through engineering ingenuity and a customer-first mindset, we've been successful in delivering the leading edge AEC System Solutions and effectively, we've pioneered a new high speed connectivity category.

Let me share some of our accomplishments and highlights from the past year across our Ethernet Connectivity Solutions. Within our AEC Solutions, we began ramping at our first hyperscale data center customer. We also deepened our engagements with additional customers, including hyperscalars in several Tier 2 data center operators.

Our customer progress has validated the AEC market and we continue to expect it to grow rapidly. Fiscal 2022 also included notable achievements for the solutions we provide the optical module manufacturers and their end customers.

We developed and deepen engagements with several optical module manufacturers and are working closely with them to proliferate our solutions into their data center, 5G carrier, and OEM customers. During fiscal 2022, we ramped initial production with several optical module customers.

And in March, our team attended OFC to meet with customers and partners, it was a great opportunity to meet in-person and it was also a great opportunity to see the strong interest in our optical offerings. Next, let me discuss our Line Card PHYs.

Data security continues to become more and more important and we've continued to see a strong adoption of our MACsec solutions that provide data encryption. We also gain traction with our retimer and gearbox solutions and this is based on our leading power efficiency and cost effectiveness.

During fiscal 2022, we ramped our Line Card PHY solutions at several new customers including hyperscalers and leading network OEMs. Lastly, customers continue to seek out our IP for licensing and our SerDes Chiplets for ASIC solutions with multi-chip module packaging.

While we are clearly transitioned to a product company, these solutions remain a strategic part of our overall business. In the past year, we had wins with several new and existing IP customers and we continue to recognize revenue from IP contract backlog. We also achieved volume production with the first two of our SerDes Chiplet customers.

From a supply chain perspective, we've been navigating the challenges facing the entire electronics industry. As we announced in our 8-K on April 13th, one of our key supply chain partners in China was shut down due to COVID lockdown mandates.

While we did not face any other supply chain issues, this lockdown limited our ability to deliver to the customer demand we had in Q4 and it impacted our revenue in the quarter. Going forward, we will add geographic diversity to our supply chain strategy.

And given the fact that we have good forecast visibility, we will also judiciously build inventory. In fact, with many of our large customers, we affirm backlog that extends to 52 weeks.

Despite the supply complexity experience in April, we delivered record quarterly revenue of $37.5 million, an increase of 18% from last quarter and 90% year-over-year. Given we had strong relative performance on the IP side of our business, we also achieved very good gross margins.

There were several key drivers to our record-setting quarter which included the continued ramp of a Nick-to-ToR AEC Solution at a leading hyperscalar, as well as multiple new IP license wins and IP revenue recognition from backlog with an industry leader in the consumer market.

We're encouraged as we move into fiscal 2023, as we see increasing strengthened demand for our solutions, as we deepen our customer engagements with industry leaders including hyperscalers, optical module manufacturers, and networking OEMs and ODMs.

As we previously mentioned, we're addressing a large and fast-growing TAM within the high end of the Ethernet Connectivity market. Based on industry reports, we believe our overall TAM will exceed $5 billion in the upcoming years.

We also believe our emerging solutions for new target markets such as USB and PCIe will add an incremental $3 billion to our TAM. Our team has been working very hard to meet and drive customer demand through continued customer engagement and innovation.

The hard work has been paying off and we have many reasons to be excited about our prospects in fiscal 2023 and beyond.

Within AEC, we expect to launch a third major program at our first hyperscalar customer during fiscal 2023, which is indicative of our strong execution on the first engagements and it's also indicative of the credibility Credo has earned to be trusted with a third key program.

Also, we continue to make progress in our AEC engagement with a second hyperscalar customer and we expect to begin ramping that program in fiscal 2023. We're also bullish on the opportunity for 800-gig ports in the future having already sampled 800-gig AEC solutions to several leading partners. We continue to strongly believe at 800-gig, back is dead.

Based on customer traction, we also expect the continued ramp of our optical DSP solutions. We continue to work jointly with customers across a variety of applications targeting various hyperscalers.

While hyperscalers will remain the most significant customers for optical DSPs, we're encouraged by our products for applications for the 5G infrastructure, PON, and Fibre Channel markets.

We're one of the few established leaders in the Line Card PHY market and we've been very pleased with the growth of this product line, which was driven by the expansion of our customer base of hyperscalers and networking OEMs and ODMs.

Going forward, we believe that we will continue our market leadership for MACsec solutions that provide encryption for the growing number of applications requiring high security and we expect our retimers and gearbox solutions to continue to gain momentum based on our ability to deliver more power-efficient and cost-effective solutions.

Lastly, some thoughts on our SerDes IP and Chiplets, which remain a highly strategic part of our overall business. While our IP business is variable on a quarter-to-quarter basis, we continue to build backlog and maintain a robust pipeline of new opportunities for fiscal 2023 and beyond.

We're certainly excited to further deepening our relationships with Ethernet customers as well as further engaging leading USB customers. Credo's diverse portfolio of low power SerDes IP offers our customers optimal solutions for their needs.

Looking forward, our engineering teams are working aggressively on next-generation 800-gig and 1.6T Ethernet solutions across all of our product and IP offerings. And our expectations is that we will be very well-positioned to continue to deliver the same compelling advantages to our customers as these cutting edge markets ramp in the upcoming years.

Fortunately, customer demand for our solutions continues to look very robust. We had growth in every part of our business in fiscal 2022 and we expect the same in fiscal 2023.

Given the breadth of our solutions, our technical innovation, our operational capabilities, the favorable market trends, and ultimately, the strong demand from customers, we look forward to another record-setting year in fiscal 2023, where we expect to achieve at least $200 million in revenue, which would represent growth of more than 88%.

With that, I'd now like to turn the call over to Dan Fleming, our CFO to provide more details on our fourth quarter and full fiscal year results, as well as to give guidance moving forward..

Thank you, Bill and good afternoon. I will first provide a financial summary of our fiscal year 2022, then review our Q4 fiscal 2022 results, and finally, discuss our outlook for Q1 of fiscal 2023. As a reminder, the following financials will be discussed on a non-GAAP basis unless otherwise noted.

As Bill mentioned, this past year has been truly transformative for Credo. We have scaled our business considerably and expanded our TAM, thanks to the strong progress made with our AEC product.

In addition, we are well-capitalized to continue investing in our strong growth trajectory, while maintaining a substantial cash buffer in this volatile environment. I'm pleased to share with you that revenue for fiscal year 2022 was a record at $106.5 million, up 81% year-over-year, driven by product revenue that grew by 120%.

Gross margin for the year was 60.6% as we continued to gain scale. Our operating margin improved by 11% even as we dramatically grew our product revenue mix from 63% in fiscal year 2021 to 77% in fiscal year 2022. This illustrates the leverage we can deliver with our strong topline growth.

While product will continue to drive substantial topline growth, IP remains strategically important to us. And this source of high margin revenue grew 16% for the year, which translated into a $4.1 million improvement in gross profit. In Q4, we achieved another quarter of record revenue at $37.5 million, up 18% sequentially and up 90% year-over-year.

Our sequential growth was largely driven by strong revenue growth of our IP. Our product revenue was $26.4 million for the quarter. While it was flat sequentially, product revenue grew 104% year-over-year. While our Q4 revenue represented strong year-over-year topline growth, this result was at the low end of our guidance range.

As we previously disclosed, the product revenue was limited by government COVID lockdown mandates in China, which caused certain disruptions in the manufacturing of some of our products in the fourth quarter. With the lockdown impacting our supplier, we were simply not able to fulfill all demand.

As Bill mentioned, we're taking mitigating actions to ensure we're better positioned to deliver to demand should we encounter similar issues in the future. Most importantly, we continue to see extraordinary demand across all of our product lines. In fact, we saw each product category, Line Card PHY, Optical, and AEC grow for the quarter and full year.

Additionally, we're pleased to share that we expect this to occur again in fiscal 2023 with our product growth being led by a wave of AEC adoption. The fundamental driver a strong HSDC expansion outlook at the highest speeds remains in place in the face of an uncertain economic and geopolitical landscape.

So, we're thrilled to be well-positioned with a leading set of products. Our first large AEC customer was again much greater than 10% of our revenue and was 30% of revenue for the full year. We expect this customer to remain a large portion of our revenue in the coming quarters as their AEC ramp continues.

Our IP business generated $11.1 billion of revenue in Q4, up 64% year-over-year. IP will remain a strategic part of our business. But as a reminder, our IP results may vary from quarter-to-quarter, driven largely by specific deliverables to pre-existing contracts.

While the mix of IP and product revenue will fluctuate in any given quarter over time, our revenue mix in Q4 was 30% IP due to strong IP execution. This is above our long-term expectation for IP, which is 10% to 15% of revenue. With a strong IP result this quarter, we delivered gross margin of 63.7%, above the high end of our guidance.

This was up 292 basis points sequentially. Our IP gross margin generally hovers near 100% and our product gross margin was 48.5% in Q4, down 495 basis points sequentially, due to a sequential decline in our product engineering services, a high-margin contributor to our product gross margin.

Total operating expenses in the fourth quarter were $21.6 million at the low end of our guidance and up 50% year-over-year as we scaled the organization for growth. Now, I think it's important to note that this is considerably below our 90% year-over-year revenue growth. We expect to continue to deliver a considerable leverage in the business.

Our OpEx increase was driven by a 59% increase in R&D as we continue to invest in the resources to deliver leading solutions. Our SG&A conversely, was up 40% as we built out public company infrastructure. We delivered net income of $2.8 million in Q4, an increase of $0.4 million sequentially and $5.1 million year-over-year.

Cash flow from operations in the fourth quarter was $2.4 million, an increase of $0.6 million sequentially and $13.9 million year-over-year. CapEx was $9.6 million in the quarter, driven by production MACsec , and free cash flow was negative $7.3 million, an improvement of $3.7 million year-over-year.

We ended the quarter with cash and equivalents of $259.3 million, an increase of $18.8 million over the third quarter. This increase in cash came from the net proceeds of a green shoe offering in connection with our successful IPO completed in January.

Our accounts receivable balance increased 36% sequentially to $29.5 million, while days sales outstanding increased slightly to 72 days, up from 71 days in Q3. Our Q4 ending inventory was $27.3 million, up $1.2 million sequentially, as we continue our product ramp.

Now, turning to guidance for the first quarter, we currently expect revenue in Q1 fiscal 2023 to be between $43.5 million and $47.5 million, up 21% sequentially at the midpoint and 324% year-over-year. We expect Q1 gross margin to be within the range of 59% to 61%. We expect Q1 operating expenses to be between $21.5 million and $23.5 million.

And finally, we expect Q1 weighted average diluted share count to be approximately 161 million shares. As Bill mentioned, we expect to achieve at least $200 million of revenue in fiscal 2023.

Coupling our strong growth and our fiscal discipline, we will continue to generate leverage in the business and expect to deliver a double-digit operating margin for the full year. And with that, I will open it up for questions. Thank you..

Our first question will come from line Toshiya Hari from Goldman Sachs. Your line is open..

Hi, good afternoon. Thank you so much for taking the question. I had two if I may. First one, Bill just on kind of the supply dynamic, curious how significant or how meaningful the hit was to revenue in the April quarter.

And if you can kind of share with us how your partner is doing today, again, from a supplier operations perspective, that would be helpful? And will you be caught up from a supply perspective exiting this quarter? And I've got a quick follow-up. Thank you..

Sure, appreciate the question. So, let me give some color. If we look at the disruption we had, it was -- it really began in the first half of April and we were back up and in production by the end of April or the last week in April. The reason we did the 8-K was because we were trying to be as transparent as possible with investors.

Being a newly public company with significant interest from many investors, we were actually having many investor meetings the same week we received the news on the mandate from our supply chain partner. So, we're trying to lean towards being as transparent as possible.

And so we managed to make the low end of our guidance for the quarter and we're happy about that. We've been in a growth mode across all of our products and IP. And so we were still able to perform very well in the quarter, even given the impact that we had from the production shortfall in April.

To answer your question about going forward, we expect to make it up in Q1 -- sorry, yes, in Q1..

Got it. And then as of my follow-up, you talked about fiscal year 2023 revenue outlook of at least $200 million, or I think Bill, you said up 88%. I was hoping you could give a little bit more color or differentiate between your product business and your IP business.

And more importantly, within your product business, I'm guessing the vast majority of that growth is going to be coming from AEC, but how are you thinking about Line Card PHYs, optical DSPs? And then within AEC, I mean, if you can kind of differentiate between your largest customer and your second largest customer, that would be super helpful.

Thank you..

Sure. So, again, appreciate your question. The way that the growth is going to break down, I think it's going to be consistent in a sense that we see growth across all of our businesses. If I were to kind of summarize by product line, I think, Line Card will be very steady growth, as we've seen over the last several years.

AEC will, I think, make up the majority of the absolute growth. But if we look at from a percentage growth standpoint, I think optical will be growing the fastest from a percentage standpoint, although it's from a smaller base.

From an IP perspective, Dan has given guidance that we expect long-term to be on the order of 10% to 15%, we think for the year that we will probably exceed that expectation. And so hopefully, that gives you an idea about the growth that we see in the upcoming year..

And Bill, sorry, within AEC, your largest customer and the second customer which you expect to ramp in fiscal 2023, should we expect the majority of the growth to still come from your largest customer? Could your number two customer be as impactful in fiscal 2023?.

Well, as far as the second hyperscalar that we're working with, we expect the ramp to begin in fiscal 2023 and so with that said, it's sometimes hard to pinpoint exactly when the ramp is going to happen because there's tremendous complexities around the exact deployment schedule of our end customers.

We'll be ready to ramp in the first half of our fiscal year. But we're kind of giving guidance that says that the ramp will probably happen -- the initial ramp will happen towards the end of the year.

And so to answer your question more directly, we don't think it's going to be a huge amount of revenue coming out within FY 2023 from that second hyperscalar. We would expect to have very high growth in the following year..

Thank you. Our next question comes from line of Vivek Arya from Bank of America. Your line is open..

Thanks for taking my question. I actually had a question on the Q1 outlook and then for fiscal 2023. So, when I look at your Q1 outlook, right, and assume let's say 80% is going to come from product and 20% from IP or so, that's a just a very strong sequential growth in your product segment.

So, I just wanted to make sure you have the inventory to support that kind of product? And I imagine part of it is just the swing from the prior quarter that you were not able to deliver.

So, just kind of the confidence and the support to deliver on this kind of sequential product ramp going into Q1?.

Yes, thanks Vivek, that's a great question. Let me address that. So, from -- you're exactly correct in terms of -- there was some ketchup from the delays that we experienced in Q4. And we are -- our factory in Qingshan is back up and running. So, we expect to fulfill the demand, the gap that we had the previous quarter.

And from an inventory standpoint, please also bear in mind that as Bill mentioned, we are experiencing strength across our entire product line. And we have been building inventory across our entire product line and you can see that in our balance sheet Q4 as well.

So, we are we are highly confident that we can achieve what we've set out to achieve in Q1..

All right.

And then on a fiscal 2023, Bill, you gave this very strong outlook of $200 million plus, can you give us a sense of backlog to support that view, just given a lot of the macro concerns about spending slowdowns and whatnot? I understand that a lot of your growth is very company-specific and product cycles, but it's still a very strong outlook for next year.

So, maybe a sense of backlog? And part B of that is how are you thinking Dan about the gross margins that can go with the mix that you have in mind for next year..

Yes, thanks for the question. So, I think that’s -- let me first comment on the fact that the unprecedented tightness in the supply chain has really caused a change in behavior in demand planning with our customers and its causes the demand planning change for us as well.

So, it's how we work with our supply chain partners and it's how our customers work with us. And so many of the customers are going to great measures to ensure the flow of product over the next year, 52 weeks? And so it's hard to put a label on exactly how that firmed demand comes.

So, there is backlog, there is binding forecasts, and other forms of commitment.

Generally speaking, I think as we look out through the next year, I think we feel comfortable that we're close with our key customers and I feel like there is confidence as we come into the year that that demand look that we're getting is a consistent 52-week look and it's rolling every single month.

So, I feel like as we head into the year now, I do feel confident with the end demand from our customers..

And Vivek, let me let me address your gross margin question. The first thing to bear in mind is as we've discussed previously, our IP revenue can vary quarter-to-quarter. So, that does have an impact on our quarter-to-quarter gross margin percentage, obviously.

But in terms of our margin expansion opportunities over the course of time, especially in the long-term, everything is exactly as we had expected it to be over the last few quarters as we've been discussing with you.

So, what that really means is in FY 2023, there is a relatively large mix of products that we have, but margins will continue to expand for our products as we've continued to achieve scale.

And then beyond that -- actually kind of going beyond fiscal 2023, then we believe these market fundamentals are out there that will enable margin expansion specifically with our AEC product line.

As Bill mentioned, we believe DAC is dead at 800-gig ports, but the other thing in FY 2023 and 2024 is our product mix will be shifting a bit where optical will become a significant contributor in 2023 and even more so in 2024, that obviously has an impact on margin expansion opportunities as well.

But let me just reiterate from a long-term perspective, our total corporate gross margin expectation still remains 63% to 65%. And as Bill just mentioned a moment ago, our IP will make up 10% to 15% of that revenue mix. So, if we were to isolate on product margins, you can back solve that around 60% of the product margin itself, excluding IP.

So, hopefully, that gives you some color on our margin expectations..

Thank you. Our next question comes from Tore Svanberg from Stifel. Your line is open..

Yes. Congratulations on a continuous store execution.

Bill, you talked about a third program ramping with your largest customer for AEC here in fiscal 2023, could you just elaborate a little bit more on the magnitude of third program? I mean, obviously, you can't disclose too much, but any metric that you can perhaps share with us, just so we understand the magnitude of the third program versus the previous two?.

Sure. Sure. So, let me first give some color on the first two programs. The first two programs were both Nick-to-ToR AECs. The first was a 50-gig AEC solution that was two lanes of 25. The second one was a next-generation 100-gig, or four lanes of 25 Nick-to-ToR solution.

So, I can't provide too many details about this third program, but it's in the same Nick-to-ToR space and it does have the potential to be significant, although we don't have details on the specifics related to the volume expectations. But from our perspective, we think that this can be the third significant program that we've engaged on..

That's fair.

And as my follow-up, could you also elaborate a little bit on the diversification strategy of your supply chain? Obviously, you were impacted by the China lockdown this quarter, help us understand a little bit how difficult is it to diversify? How long will it take just so we can get a sense for how quickly you can have multiple suppliers to alleviate the current issues?.

Sure. A great question. And it's -- since April, it's become kind of top of mind for us. There's really two different approaches here. One is a mid to long-term approach, which is to gain geographic diversity. we've got a very large volume established -- a very large volume capability established in Qingshan with the supply partners that we've got there.

Both of these supply partners are global corporate -- large global corporations. But generally speaking, as we think about becoming more geographically diverse, we're now, kind of, actively looking at different locations globally and the kind of, timeframe that it would really be for us to bring up production in a significant way.

One of the challenges that we're faced with is that we're still in the very early stages of ramp and so we've had a relatively large investment with our partners with the current locations. So, this would be in addition to that. In any case, we don't expect that in the near-term, we're going to be able to establish this geographic diversity.

And that's why we've talked about judiciously building inventory. We expect in this quarter that we'll establish a significant buffer of inventory so that we have future impacts that are force majeure type of impacts that we'll be able to navigate it much more smoothly than we did in April.

And so that's -- that is really something that we've decided to do because of the strength of the forecast and the backlog and the binding forecast commitments that we've got, we feel comfortable with making that investment. So, really, a short-term is let's address it by building some inventory in a smart way.

And in the long-term, of course, you'll see us bring up production outside of Qingshan..

That's a great perspective. Congrats again..

Thank you..

Thank you. Our next question will come from the line of Quinn Bolton from Needham. Your line is open..

Thanks guys and congratulations on the results and outlook. Wanted to follow-up on Tore's question just sort of around the current supply chain in Qingshan, you mentioned the suppliers, I think, are now back up and running. But we've heard stories that many factories may only be at 50% of labor staff given the effects of the lockdowns.

Is your supplier backup sort of running full steam and are both suppliers providing you with AECs in the first quarter?.

I can say that the feedback that you're getting from your contacts is accurate. Coming back there's really phases towards coming back. And the first phase is basically reestablishing production with a smaller group of employees that will maintain that facility. And so our partners are now hiring again and increasing capacity.

We're not quite back to the full capacity where we have been running. But I think in the next couple of weeks or next few weeks, we're on a good path to achieve what we consider full capacity at this point. And so, yes, both of our partners will get back up and shipping..

Great. The second question is you mentioned sampling the 800-gig AECs to multiple vendors. Just wondering it sounds like 800-gig modules may be starting to be deployed for sort of AI cluster applications.

Wondering if you could give us some sense, when do you think given the 800-gig AECs going into volume productions, whether it's AI clusters, or whether it's the distributed disaggregated chassis application?.

Yes, great question. And I'll start by saying that we do see a lot of 100-gigabits per second per lane silicon, 800-gig for switches, 400-gig for four lanes of 100 for high end servers. We see a lot of silicon that is sampling and in development with leading hyperscalars and switch OEMs.

And so we're seeing a lot of activity right now on 100-gig per lane AEs really, as a result of our solution being readily available and customers need to source some form of 800-gig connectivity solution for their development. And so from a timing standpoint on deployment, this is a really hard one for us to have a great opinion on.

We'd like to see it sooner than later as everybody in the industry would. But in reality, we think that it's going to be in the -- probably in the 12 to 18-month timeframe from now before we see it in volume..

Great. Thank you..

I will say that, again, we'll be ready for production, I think, far in advance of when actual production deployments begin. So, I think we're in great position. And we think just to reiterate at 800-gig or 100-gigabits per second per lane, we see across the board, that we don't see any customers that are really trying to make DAC work.

And so now it's really a function of deploying with AECs for short connections and deploying with optical solutions for longer solutions. So, we think that -- that's more and more firming up as we got to move through the last several months..

Thank you. Our next question comes from Vijay Rakesh from Mizuho. Your line is open..

Yes. Hi, Bill and Dan. Great quarter and guide.

Just a quick question on the mix of revenues on the product side, when you look at the 4Q and 1Q, if you can use the split of AEC versus optical and Line Card?.

Yes, thanks Vijay. So, we don't -- unfortunately, we don't disclose specifics when it comes to our product line mix, but from our from a long-term perspective, the expectations that we've set out where we're trending toward those amounts, which longer term, we would expect AEC to be nearly half of our revenue.

Again, IP, right now, we're not quite at the long-term model, of course, so we're slightly above the 10% to 15%. And then the Line Card business has been a very, very strong business for us, and it continues its strength and is growing. Longer term, it'll probably be in the 15% range.

And then the balance, optical will be a significant contributor this year, especially towards the end of the year and then even more so next year. So, hopefully, that gives you just kind of broad strokes, the direction that we're headed..

Got it. And on the AEC side, I know you guys have a pretty broad portfolio of MACsec and phase shift, and speed-shift and Nick-to-ToR, et cetera.

I'm just wondering when you look at the company landscape and given your broad breadth of portfolio and you're qualified many of the enterprise hyperscale guys, what is the competitive moat? I mean, you guys think you have a 12 to 24-month or even longer lead-time when you compare -- when you look at the competition, who I would say, most of them are still trying to get their product in place, but if you can give some color on how you look at that space?.

Yes, great question. I think that -- first of all, I'll say that we're very happy that we see competitors validating the AEC product category. We feel like we do have a significant bleat in a sense that we've been working on this product category for -- going on four years.

The approach that we've taken, I think, is unique in a sense that we have built an organization internally at Credo that's responsible for the design, the development, and ultimately, the delivery of the AEC System Solution.

That means that at the end of the day, we're responsible for the entire AEC System Solution with a single throat to choke in a sense when we're dealing with customers. Our manufacturing partners do a great job in what they do well.

We had started by thinking that we could sell chips to copper cable companies, and it just simply was very clear very quickly that our approach is going to be more effective if we owned the entire system design from the firmware -- to the holes from the firmware, on the copper, to the test program development to the actual tester design and development.

We felt that that was a much stronger approach than trying to rely on others to put all this together.

So, I do think that as we look at our business now, it's really taken shape in a sense that it's different than our original thinking, which was, hey, we'll just put together a 400-gig on each end of the cable -- 400-gig connector on each of the cable. The solutions we're delivering in volume right now are unique.

These are truly system level solutions that are -- I think would be -- could be classified as the most advanced connectivity solution -- cable connectivity solutions ever delivered to the data center.

If you think about what we're shipping currently to our first hyperscalar, they were successful in deploying a dual tour architecture in a single rack, because of the intelligence in our cable, we've got the ability to sense when the ToR port is failing, our cable makes the decision to switch the data flow to the second port.

So, this is a level of intelligence in the cable that has never been delivered as a DAC never been delivered as an AEC or other optical connection. And so this is the direction that our business has taken as a result of us owning and really building the capability internally.

I can tell you that the second solution that we're developing is also very unique. It's not just a straight cable. And so we expect that more and more innovation will be requested by our customer base, as they see this is now a category where they can think about systems solutions that they haven't even thought of before.

There will be business, especially, in the switching and routing layer that is leading edge 800-gig ports, where you have 800-gig connectors on each end of the cable. That's going to be a robust business as well. But generally, we think that the approach we took is paying off right now, as you see us taking off as a clear leader in the space.

But I will say that having competition is always a great thing. So, we appreciate that multiple people are now investing and that it seems that the market is accepting AEC as really a de facto solution for short connections, meaning three meters and less..

Yes. No, got it. I know you guys have talked about MACsec cables and others.

The other question I had is given that you guys are that N minus one node on the SerDes Chip side, does that allow you more capacity at the foundry side, given that you're not competing for the leading edge? I know you kind of guessed this all the cable side of the supply chain, but on a chip side, is it fair to assume that the capacity is -- you are able to negotiate better capacity there?.

Yes, absolutely. So, you're right on with that and so the strategy that we've taken with our process choices is really based on the fact that connectivity solutions are a primary decision for us. We're not being driven to advanced processes due to memory or large amounts of logic. And so we can choose a process that's the most suitable for our design.

And so we've always had this mentality, if we can use a more mature process and achieve best-in-class power, best-in-class performance, and best-in-class die size, of course, that's the approach we're going to take because we can in turn, become the disruptor in the market. That strategy has turned into a supply chain advantage for us.

Because we are in an N minus one, 12 nanometer is really our workhorse, we've had a lot of success, we've really never been limited from a capacity standpoint. And I will say on top of that, if you look at our die sizes, we -- our demand for wafers is less because our die sizes are smaller.

And so it's turned into a big advantage from a supplier perspective as well. And that really wasn't intended when we made the decision, but it sure is a strength that we've got going into this year..

Thank you. And our next question comes from the line of Suji Desilva from ROTH Capital. Your line is open..

Hi Bill, hi Dan, congratulations on the execution here. A question on AEC and then a bigger picture question.

On AEC, the customer going from one to three wins, can you give a sense of how big that denominator is? How many opportunities there are to given customer like this? And then are those sole-sourced or are they built-sourced, remind us that? Thanks..

Yes, I think that we view every hyperscalar as kind of an independent market. We also view that the work that they're doing at a Nick-to-ToR level, as well as the work that they're doing in the switching and routing layers. We view all of these things as, kind of, separate markets as it relates to a given hyperscalar.

We view that the opportunities that we'll see for AECs for the Nick-ToR space within each one of these hyperscalars will long-term, the -- there will be an AEC opportunity for every server deployed.

As we look at the switching and routing layer, there's different strategies -- different deployment strategies, different port speed strategies that we see. More hyperscalers, is the same as another.

And so we think that AEC is a unique solution, because it puts us in the architectural discussion with the hyperscalars we're engaged with and long-term, I expect all the hyperscalars.

And so I can't -- I don't think there's any nice bow that I can put, other than to say that we believe that the opportunity is going to be -- it's going to track the server shipments, and it's going to be based on the switching and routing layer, based on architectural decisions on disaggregation versus chassis..

Okay.

Are those sole-sourced, just to follow-up?.

I think that where we may be sole-source today, we expect long-term that we'll be in a dual-source environment. And that's really driven by the desires that the hyperscalars have. They live in a world where dual sourcing is an absolute requirement, so we expect that we're going to be living in that world for sure.

We may be sole-sourced for some period of time and we're in a mode of, if we can be the partner that moves quickly and delivers successfully, we'll maintain a large market share..

Okay. And then a follow-up just bigger picture, are you able to guide ahead for fiscal 2023 and in the visibility you have.

I'm curious various cloud vendors have seen kind of buy-and-pause cycles, maybe the processor guys, and you -- can you tell me, if it feels like you're more immune to that sort of cycle, or whether that could be a factor in your core visibility, any color there would be helpful?.

Yes, I don't think that we would ever say that we're immune to the cycles that we've seen in the past.

I will say that we've got discussions ongoing with our customers that are really discussions where we're trying to outline at a -- going out 52 weeks, very specific demand and very specific commitments, so that we can go and source and build to those schedules. So, I feel comfortable.

We even with that, we do apply some conservatism and so, I do feel confident as we go into the year with the demand outlook that we've got, but I will never say that we're going to be immune to big changes, if unforeseen things are possibly coming.

I will say also that the deployments that we're on right now are adding significant efficiency improvements. And so if we look at that deploying a dual ToR server rack, that's supposed to deploy two racks side-by-side. So, there's an enormous savings in cost and enormous savings in power.

And there is the opportunity to have better equipment utilization. And so I will say that even with unforeseen things, this is the type of investment that we think that customers will continue to make because the benefit is just so compelling and that's why has been a strategic imperative for our first customers they've ramped..

Okay. Thanks, Bill. Appreciate all the color. Thanks guys..

Thank you. There are no further questions that this time. Bill, I'll turn the call over to you..

Great. Well, let me thank you all for attending the call. I really appreciate the great questions and I also appreciate the strong interest that you've got in Credo. So, we'll look forward to talking with you in the future. Thank you very much..

This concludes today's conference call. You may now disconnect. Everyone, have a great day..