Title

Presentation

Credo Technology Group Holding Ltd beats earnings expectations. Reported EPS is $0.52, expectations were $0.3613.

Dan O’Neil: Good afternoon. Thank you for joining our earnings call for the 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. 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, 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 US 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.

Bill Brennan: And thanks, everyone, for joining our earnings call for the ’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 three-tiered innovation framework, comprising of purpose-built Certeus 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.

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 density to continue to be a catalyst for an expanding AEC TAM. Over the past year, we’ve seen customer interest for AECs expand from inter-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 enables them to architect their entire scale-up network with AECs up to seven meters in length. Reliability and power efficiency led to choosing AECs over optical solutions, as they are up to 1,000 times more reliable and consume half the power. AECs virtually eliminate link flaps, which are intermittent losses of connection, boosting cluster reliability and productivity while reducing power consumption. Our system-level approach drives innovation, accelerates time to market, and delivers a distinct competitive edge.

By owning and delivering the entire solution stack, including SerDes IP, retimer ICs, system-level design, qualification, and production, Credo has forged strong customer relationships and solidified its position as the leader in the AEC market. Moving forward, we’ll continue driving innovation with PCIe AECs and other advanced products coming to market in the near future. Let me now turn to the optical market. During the first quarter, we sustained strong momentum in our optical business, positioning us as on track to achieve our goal of again doubling optical revenue in fiscal 2026. 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, the rigorous connectivity demands next-generation applications.

Our collaborative approach with customers helps ensure solutions that enhance performance, scalability, and power efficiency, further building on our position in the market. We provide customers with a leading-edge portfolio of innovative full DSP and linear receive optical or LRO solutions, supporting port speeds up to 1.6 terabits per second. For several years, the industry has debated the shift from copper to optical connectivity solutions. While consensus holds that copper will remain prevalent in the foreseeable future, Credo is strategically prioritizing optical solutions as a cornerstone of our product roadmap. We see an expanding TAM for both copper and optical connectivity solutions. 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. Now regarding our retimer business. In Q1 fiscal 2026, our Ethernet retimer business achieved stronger 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 Certi’s design team, our PCI solutions deliver an unparalleled combination of maximum reach and minimal latency, a rare achievement as these attributes are typically a trade-off.

Our engineering team’s innovative design approach has resulted in a truly differentiated solution. Our top-tier devices, coupled with our award-winning pilot debug and telemetry tools, empower customers to integrate our solutions with faster time to market and better reliability. We are on track to secure PCI design wins in calendar 2025, with production revenue expected in calendar 2026. 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 2026, 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 2026 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’re currently qualifying.

By combining this core SerDes differentiation, central to our competitive edge, with our integrated circuit expertise and system-level design approach, we deliver solutions optimized to meet each customer’s needs. 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.

Dan Fleming: Thank you, Bill, and good afternoon. I will first review our Q1 results and then discuss our outlook for 2026. In Q1, we reported revenue of $223.1 million, up 31% sequentially and up 274% year over year, and well above the high end of our guidance range. Our product business generated $217.1 million of revenue in Q1, up 31% sequentially and up 279% year over year. Notably, our AEC product line again grew healthy double digits sequentially to achieve new record revenue levels once again. Our top three end customers were each greater than 10% of revenue in Q1. As a reminder, customer mix will vary from quarter to quarter, and we continue to make progress in diversifying our customer base. We can continue to expect that three to four customers will be greater than 10% of revenue in the coming quarters and fiscal year, as hyperscale customers continue to ramp to more significant volumes and as we expect to begin to ramp two new hyperscale customers in fiscal year 2026.

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, 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 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. 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 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 2026 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 2026, we expect sequential revenue growth in the mid-single digits, leading to approximately 120% year-over-year growth.

We expect each of our top three customers from Q1 to grow significantly year over year in fiscal year 2026. We also expect revenue diversification to strengthen further with a fourth customer surpassing the 10% revenue threshold for the year. We expect non-GAAP operating expenses to increase year over year by less than 50% in fiscal year 2026. As a result, we expect our non-GAAP net margin to be approximately 40% in the coming quarters and for fiscal year 2026. And with that, I will open it up for questions.

Operator: Thank you. At this time, I would like to remind everyone, in order to ask a question, press star and then the number one on your telephone keypad. To be able to take as many questions as possible, we ask that you please limit yourself to one and one follow-up. And our first question comes from the line of Karl Ackerman with BNP Paribas. Your line is open.

Karl Ackerman: Thank you. It sounds like you are seeing at least one of the two new hyperscalers adopting the 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 not only the breadth but also the depth of your engagements.

Bill Brennan: And I have a Yeah. Thanks, Karl. I’ll confirm that the most recent ramps that we’ve seen have been at a 100 gig per lane. And depending on the customer, you know, we’ve got multiple programs in flight. Naturally, as we begin a relationship with a new customer, it always starts with a single platform and then, typically, what we’ve seen is it expands from there. But I would say that everything we’ve seen over the last three months has 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.

Karl Ackerman: Helpful. Thank you. 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 Scalopy to net solutions. Having said that, do you believe AECs offer greater competitive advantages to scale-up Ethernet or PCIe-based applications such as UA Link, and therefore, the market opportunity of one could be larger than the other. Thank you.

Bill Brennan: 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 five to Gen six. We do see that AECs will represent a really nice opportunity both for inter-rack as well as rack-to-rack as scale-up goes row scale. The longer-term discussion is around the you know, the debate in the industry about the 200 gig per lane protocol. And, you know, of course, we’ve heard from Broadcom, we’ll scale up Ethernet. UAL is really being driven by AMD and others. Of course, NVIDIA has come forward with EntityLink Fusion. And PCIe is talking about know, going you know, going to PCIe gen seven 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, the same identical IEEE 200 gig SerDes. And so I think we’re gonna be in good shape. So it’s again, it’s it’s layer one, from the standpoint of an AEC. So I think that you know, for us, we just like to see the market go faster sooner. Because the scale-up opportunity represents a significant increase in TAM. Really, over the next, over the next two to five years.

Karl Ackerman: Congrats. Thank you.

Bill Brennan: Thanks.

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

Vivek Arya: Thank you for taking my questions. First, set of questions 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 but if I zoom out know, the market for you is now run rating closer to a billion dollars or so. How large do you think this market is, over time? And do you think this market is cannibalizing, traditional copper, or do you think at some point it is even cannibalizing optical, transceivers?

Dan Fleming: Hey, Vivek. This is Dan. Let me, address the 10% customer question that you had. So, as we mentioned in our prepared remarks, we had 310% customers in Q1. They were the same three customers that were 10% customers in Q4. The mix was a little bit different, though. Our largest customer was 35% of revenue, second largest was 33%. And the third largest was 20%. So we were quite pleased with that, but kind of the customer diversity that we demonstrated within Q1. Having said that, we expect continued diversification, as Bill highlighted, throughout fiscal 2026. You know, we do see two additional hyperscalers ramping one of which, which is our fourth hyperscaler, we mentioned should reach to be a 10% customer for the full year of fiscal 2026.

And then last thing I’ll mention on customer you know, our largest customer for fiscal 2025 is the largest driver of our growth in fiscal 2026 as we stand right now and look forward. So, so that’s an important, factor to bear in mind as well as you as you look, at how our year will progress.

Bill Brennan: 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 inter-rack kind of solution as we replace passive copper cables. And, you know, the catalyst being speed, and also functionality. The market’s gone to 50 gig per lane, and so we’ve seen a good transition as and now we’re seeing a really good traction as it relates to a 100 gig per lane. I still think we’re in the early innings from a market sizing standpoint even for, you know, just just breaking out the inter-rack.

Again, to reiterate, we see a huge opportunity from Nick to Tor applications as well as Switchrack applications. And that is for front end and and really emphasized you know, much more strongly in in back end, both in scale out and scale up. What we’ve seen recently that we talked about in the prepared comments was that we’re seeing a move from inter-rack to rack-to-rack. And traditionally, inter-rack has been passive copper cables or DACs, and we’ve seen rack-to-rack being more optical solutions because of the distance. But I think with the emphasis on reliability as it really relates to clusters, that you know, that we see customers really considering using AECs is really driven by reliability. Mentioned on the prepared comments that we’re up to a thousand times more reliable effectively reducing link flaps and having the uptime of the cluster being much more Again, reiterating that that if you have got a single link flap in, say, a 10,000 or a 100,000 or a million cluster brings the entire cluster down because there’s no redundancy.

From that NIC to Tor connection. And so we’re actually seeing the TAM expanding 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.

Vivek Arya: And for my follow-up, they’ll actually have a question for both you and and Anne, which is what what is the next big thing for Credo? Is it optical DST If yes, you know, how how large can it be? For you? And I asked that because you know, it’s great to see that you have this, you know, tremendous operating leverage. You know, you’re guiding every quarter sales are up. You know, $1,520,000,000, and OpEx hardly goes up. So are you investing enough in diversifying beyond AEC then? Like, so just what what is the next big thing for Credo, and are you investing adequately in that? So I think the

Bill Brennan: that, you know, we’ve we’ve talked about this in the past, and I’ll I’ll know, speak again about the opportunity generally that we’re seeing that’s being driven by AI. Really, for for our company, it’s 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’s concerned, but we also see really big opportunities as we move from an Ethernet protocol to additional protocols to the scale-up network. We believe that there’s system-level opportunities in optical.

And we’re not gonna go into too many details here, but you’ll see more in the upcoming months as we, announce new products. And then even you know, bottlenecks associated with the connection between GPUs and memory. See opportunities there that that can be quite large. Traditionally, we’ve seen that the training the training has really been driving the market, but we see a really big upside in inference. As well. And and so again, we we we see, you know, 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.

Dan Fleming: One thing I’ll add to that, Vivek, just from a are we investing enough? You know, we are, you know, continuing to manage our operating expense 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 a just from a pure R&D standpoint this year, you know, more than more than half of our OpEx in R&D is tied to optical projects and, things that are in the forthcoming, pillars of our business.

Vivek Arya: Okay. Thank you.

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

Tom O’Malley: I wanted to follow-up on the optical DSP business. We’re getting on the brink of a more material 1.60x transition. Could you talk about what your feelings are about your competitiveness at that node? And maybe give us a little bit of insight into the three nanometer platform, when you’ll be in volume, and how you think you’re positioned versus the 800 g generation.

Bill Brennan: Yeah. Regarding our our 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 and so we moved to three nanometer we nanometer you know, straight away due to power. We felt like the initial transceivers that were introduced to the market being well over 20 watts something that was gonna take off in high volume. And so we researched you know, pretty extensively in five nanometer, and we’ve made the decision to really jump forward to three which has been a it’s it’s a different strategy than pursued in the past, and it’s really been driven by the need for for for power efficiency. So we feel like we’re in great shape from the standpoint of the the product that we’re gonna bring to production in the upcoming months.

You know, we think that that the the market for 1.6 t transceivers is gonna take time to develop. It’s 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 gonna bring it to production shortly.

Tom O’Malley: How helpful. And then you spent a lot of time in the preamble talking about PCIe retimers. Today, that’s the large GPU manufacturer and then also one large hyperscaler who’s really started off their efforts there. When you talk about the opportunity in the future, are you thinking that that is concentrated amongst those two customers? Or do you see PCIe proliferation amongst other hyperscalers as well? Thank you.

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

Operator: And our next question comes from the line of Joshua Buchalter with TD Cowen. Your line is open.

Joshua Buchalter: Hey, guys. Excuse me. Thank you for taking my question, and congrats on the results. Maybe a follow-up to to Tom’s first one there. I I think you’ve demonstrated the LRO at 800 gig with your Dove eight fifty platform, but it sounds like you know, a lot of the industry research and maybe you guys think 1.6 t 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 to ramp for for the the LROs LRO solutions. Thank you.

Bill Brennan: Yeah. We definitely see that every hyperscaler is kind of an independent market. The industry doesn’t move one direction, and that and that’s you know, 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 1.6 t, again, power is is you know, becoming more and more important. And, you know, we’ve proven that we’re able to deliver just rock solid transceivers with our partners from a bit error rate standpoint. Maintaining, you know, everything that’s needed from a from an industry standard perspective. As compared to to LPO and offering significant power savings. So we think that, we’ll see good success with 800, but but we do feel like 1.6 t it will become more and more popular given the need for power efficiency.

Joshua Buchalter: Got it. Thank you. And had a question. In the prepared remarks, you mentioned I think, something about the your customer is not necessarily ramping linearly. You know, your guidance is obviously very strong and and that’s 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 ramp as you’re, you know, you’re you’re expanding customer base scales? Thank you.

Bill Brennan: Yeah. We’ve been pretty consistent in in, you know, talking about you know, at a at a given customer, we don’t necessarily see a linear up into the right ramp. That’s just not how things work as customers prepare for next generation ramps. Typically, we see a surge as they are preparing to start a a new generation of deployment. Then we see it balancing out. And then, ultimately, it it trends upward over time until we get to the next product transition. And so nothing you know, nothing new here. It’s just if if we start tracking quarter to quarter and and you know, at one point, there was a lot of concern about us having too much concentration. And then the next quarter, we saw a really good you know, good balance between multiple customers, and and some people were concerned about hey.

What it was kind of a decrease from the concentration you had. And you know, long term, can I can just tell you that we’ve been consistent in, you know, the messaging that we’re gonna see diversity diversification across customers, and we’re gonna see diversification across mediums, copper and optical? We’re gonna see diversification across across protocols as well. And so I think we’re right on track with know, showing better stability as it relates to having multiple customers in flight. And so we feel good good about the fact that we’ve kinda moved forward from a few quarters ago where there the concern.

Joshua Buchalter: Thank you, and congratulations again.

Operator: And our next question comes from the line of Tore Svanberg with Stifel. Your line is open.

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

Bill Brennan: Yeah. So I think that that, you know, as we talk about the market opportunity, you know, the big shift, I think, in in the TAM has been with the recognition that, you know, with with the densification of of the of the rows, that the opportunity for AEC is expanding. And the drivers again are are really clear. It’s reliability and it’s power efficiency. And and third is is probably system cost. That’s opposed to to optical solutions. And so I could make an argument that the inter-rack market is really still in the, in the early stages. Although now you’ve seen you know, the solution really take off with four of the hyperscalers. We’ve talked about you know, how we fully expect that all of the hyperscalers will will be adopting AECs at some point in the future.

And so when we talk about inter-rack, we really talk about know, server racks, whether those are are AI appliances or whether they’re general compute. And so Nick to Toro is a big market. And then we’ve also talked about Switchracks. And but you know, in the market, there’s a trend towards desegregation of of chassis. That’s been a trend that’s been in place for many years. We’ve seen that part of the market not take off as fast as Nick Dator, and so it represents a big growth opportunity. When we talk about rack-to-rack, this is really the expanding part of the TAM really, you know, in in both markets from the standpoint of you know, AI back end networks, as well as switch tracks. Switch tracks are starting to go to multiple rack architectures.

And so as we talk about the near-term opportunity, for for Rack to Rack, it’s really represented by the the scale-out network. But long term, we see that the scale-up network also represents a a a really you know, large growth in TAM, given the fact that we expect the the volumes scale up to be you know, potentially an order of magnitude larger than the scale of connections. So I I think on several fronts, we could make the argument that we’re still in the early stages. And I don’t think there’s any doubt, in the market about know, if you can use copper, you will use copper. You know, given the advantages for reliability, power, and cost.

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

Dan Fleming: Maybe the answer to both of those questions is probably yes. We it’s, you know, their history, if if you look back over time, at how they’ve you know, purchased inventory from us. It it’s it’s been not consistently up into 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 I did just to for clarity, Tory, I wanted to make sure that it’s understood by everyone that our largest customer from fiscal twenty five we expect to be the largest customer in our fiscal twenty six by the year end. And, by far, actually. So it won’t be a a close second. In all likelihood. As as we have forecast today, from all of these customers.

Tore Svanberg: Yep. No. That’s good color. Thank you, and congrats again.

Bill Brennan: Thanks.

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

Christopher Rolland: Hey, guys. Congrats on the results, and thanks for the question. And this will probably be for Bill. So I guess, first of all, for 1.6 t, I I I believe there are some supply constraints that appear to be emerging. For 1.66 p optical and lasers in particular. So I I have two questions here. The first one is, you think this affects your optical DSP outlook And then secondly, do you think that these optical constraints could actually accelerate your AEC business?

Bill Brennan: Yeah. So I think generally speaking for our optical business, I think we’re we’re you know, seeing great results. And and this is really we began our big ramp with 400 gig. Or 50 gig per lane solutions. We’re seeing, you know, recent success with 800 gig, and we expect to be able to grow for, you know, 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 you know, by each independent customer strategy. We see big opportunity for a 100 gig per lane. We see the the same thing that you’re seeing from a 1.6 t transceiver perspective, that it’s gonna take more time than than the industry analysts have predicted.

And so we don’t see any you know, slowing of the growth that we’re expecting. Based on that delay. It’ll be quite good if there’s an acceleration. But but generally speaking, it doesn’t really impact you know, our bullishness as it relates to the optical space.

Christopher Rolland: M, I did. Accelerate your AUC if there are supply constraints?

Bill Brennan: You know, I think that that the the AEC TAM is gonna stand alone. And, you know, people are gonna choose to use AECs you know, based on 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 gonna affect that at all.

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

Bill Brennan: Yeah. So first, I’ll I’ll talk about, you know, what’s what’s upcoming. And I think your question was, you know, maybe maybe one step ahead of where we are You know, the first thing is we we need to get that fifth one in production. We’re through qualification. And I think that, you know, from a timing standpoint, no changes to what we’ve 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 know, where in their network they’re planning on on using AUCs. The, there’s a lot of interesting things happening. You know, we we talk about the neo the the neo cloud market.

We’ve talked about sovereign. And what we’re seeing is that you know, and I get well, prior to the comment, I’ll say that it finally you talked about the big GPU guy. And what we’re seeing even today is that we’re connecting with you know, many GPUs. And including, you know, 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 of AI clusters. And so we’re we’re connecting to plenty of, you know, of NVIDIA GPUs now. As we’re in production. And we see opportunities that go beyond hyperscalers as you know, CapEx globally expands with 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 as probably everybody else in the market views it.

Christopher Rolland: Thanks for the color, Bill.

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

Vijay Rakesh: Yeah. Hi, Bill and Dan. Dan, congratulations on the on a pretty good quarter and guide you as well. So on the on the fourth CSP, looks like a pretty nice map there. You know, it looks like it’s going a lot faster than your programs. 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 length?

Bill Brennan: Yeah. I’m I’m I apologize, but you broke up as as you’re asking the question. Do you think you could repeat that?

Vijay Rakesh: Yeah. The the ramps with the fourth customer seems to be I pretty nice accelerated ramp. Are you seeing is that driven by a much higher content on 100 gig per lane? Or what is what is driving the pretty so actually, it did pick up there, I guess.

Bill Brennan: Yeah. I think that the accelerated pickup was based on our 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 of this first program that’s ramping. And I think you can you can, you know, get a feel for the the scale of all of these deployments. I don’t think there’s any any big you know, big big change, you know, from the standpoint of ASPs or margins, think it’s, you know, right down the middle of the fairway. From what we’re seeing elsewhere.

Vijay Rakesh: Got it. And then on the margin guide, I I think I know you mentioned some, you know, some impact from the from is it is the read through that the impact is potentially more from tenant side? Or, you know, or is there some product mix in in the

Dan Fleming: Yeah. It’s let me just state it this way. You know, we, if you look at Q4 to Q1, we still bore a bit of an impact of the benefit of increasing scale. Kind of a very small, you know, 20 basis point sequential increase in gross margin. So we’re at the stage or we’re at the scale where any fluctuations are probably going to be caused by by some product mix issues. So and all of these things, none of them will ever be linear. We been very clear in in stating that. Although we’ve been very fortunate over the last few as for winning. That’s guess the the key message to take away is you know, long term, we don’t see any differences in what we stated in our gross margin model. Cents. Though we’re we’re clearly imposed right now with that gross margin. At or above.

Vijay Rakesh: Got it. Thanks.

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

Quinn Bolton: Hey, guys. Thanks for squeezing me in. 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, you know, other opportunities at that hyperscaler ramping so that you ultimately will have both infra rack and rack to rack programs at that customer, and then I’ve got a follow-up. Hey. I appreciate the question, and and the the you know, the goal to understand more. I’m I’m not gonna be too specific with know, with the exact application, but I will say it’s not a single rack architecture.

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

Bill Brennan: Yeah. Sure. That’s you know, we’re right on track with where we would expect to be as we turn on a new relationship. Once there’s a a very good first experience, it’s typically leads to next generation planning. And, you know, this is really where we do our best work is is you know, as people are looking at architecting, the next generation deployment we typically get involved very early in in architecting the racks even. You know, that’s one of the you know, the areas where we we’re able to show several different racking options as we talk about next generation. And so it’s really natural from 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.

Quinn Bolton: Excellent. And then second question for me. Over the last, I think, month or so, you guys have announced to patent lawsuit settlements, I believe, with Amphenol and Volex. I I know you can’t get into specifics of of either of those agreements, but is there anything you can say about whether you’ve granted licenses that could generate royalties going forward? And just any thoughts you have now that perhaps you’ve settled with two of the four cable vendors, how do you see competition going forward? Are you effectively enabling greater competition by granting those licenses or signing those patent settlement agreements you know, with with other suppliers now of AECs.

Bill Brennan: Sure. So I I’ll I’ll I’ll keep the comments somewhat high level. But, you know, I think that 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 you know, have taken us to the point where we would expect to be. The and and you’ll you’ll you’ll see that we’re pretty active in conversations with, with others as well. Really, nothing in these announcements changes our sense of our place in the market. And you know, when we think about our market share, or forecast going forward, We’ve really consistent in saying that the market for AECs is gonna be very large really, over the next five to ten years, and it’s large enough for multiple winners.

And when we get you know, back to how we compete as you know, 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 you know, what we believe is gonna be the big difference maker long term. In in how market share is is you know, ultimately gonna play out. So we’re trying to do such a good job for our customers that we’re, that we’re difficult compete with. And I think we’ve talked about our moat. We’ve talked about expanding our moat. And we feel you know, quite good about owning all aspects of the product we think it’s uniquely competitive. Thanks for that perspective, Bill.

Operator: And our next question comes from the line of Suji Desilva with ROTH Capital. Your line is open.

Suji Desilva: Hi, Bill, Dan, Dan. Congrats on the progress here. To ask Quinn’s question maybe a little different way. I’m just trying to with the spirit of understanding, how broadly in Interac is being adopted. You have five customers you’re working with. Do they all have programs that are gonna be interrack cables along with three meter rack solutions, or is it more of a niche, you know, with specific architectures? Just trying to get a feel for that dynamic, though.

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

Suji Desilva: 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 any color there? Any upcoming catalysts that would shift that transition and market inflection? And most importantly, would that you know, what kind of credo addressable market multiplier might that create?

Bill Brennan: 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 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, you know, the the the leaf and spine within the front end networks. And that part of the market has moved more slowly to next generation speeds. So I think speed is gonna be a catalyst. For it to take off more broadly, but we are seeing the first uptake in 100 gig per lane back end networks. For the switching application specifically. Okay. Thanks, Will.

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

Bill Brennan: Well, thank you, everybody, for the questions, and I really appreciate the ongoing strong interest. So we’ll we’ll speak quite soon. Thanks.

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