Credo Technology Group achieves $268 million revenue, 272% YoY growth, with strong guidance and transformative new product pillars for future expansion.

Ladies and Gentlemen, thank you for standing by at this time. All participants are in a listen only mode. Later, we will conduct a question and answer session at that time. If you have a question, please press Star then the number one on your telephone keypad. If you'd like to withdraw your question at any time, simply press Star one again. I now like to turn the conference over to Dan O'Neill

Neill.

Please go ahead Sir.

Good afternoon. Thank you for joining our earnings call for the SECond quarter of fiscal 2026. Today I'm joined by Bill Brennan, Credo's Chief Executive Officer and Dan Fleming, Credo's Chief Financial Officer. During this call we will make certain forward looking statements. The forward looking statements are subject to risks and uncertainties discussed in detail in our documents filed with the SEC, which can be found in the Investor Relations SECtion of the Company's website. It's not possible for the Company's management to predict all risks, nor can the Company assess the impact of all factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward looking statement. Given these risks, uncertainties and assumptions, the forward looking events discussed during this call may not occur and actual results could differ materially and adversely from those anticipated or implied. The Company undertakes no obligation to publicly update forward looking statements for any reason after the date of this call to conform these statements to actual results or to changes in the Company's expectations, except as required by law. Also, during this call, we will refer To certain non GAAP financial measures which we consider to be important measures of the Company's performance. These non GAAP financial measures are provided in addition to and not as a substitute for or superior to financial performance prepared in accordance with 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 section of our website. I will now turn the call over.

To our CEO Bill. Thanks Dan and thank you everyone for joining our fiscal 26 second quarter earnings call. I'll walk through our Q2 results, highlight the transformative developments we've announced since our last call and then share our forward outlook. After my remarks, our Chief Financial Officer Dan Fleming will provide a detaiLED financial review and our guidance for the third quarter. In the second quarter we delivered record revenue of $268 million representing 20% sequential growth from Q1 and an extraordinary 272% increase year over year. Non GAAP gross margin came in at a robust 67.7% and we generated approximately $128 million of non GAAP net income. These are the strongest quarterly results in credo's history and they reflect the continued buildout of the world's largest AI training and inference clusters. AI clusters are no longer measured in tens of thousands of GPUs, they're now measured in hundreds of thousands and soon millions. The scale, density and complexity of these systems are pushing every aspect of interconnect Reliability, power efficiency, signal integrity, latency reach and total cost of ownership have all become mission critical. This is the challenge our customers face and it's where CREDO is uniquely positioned to deliver the solutions they need to succeed. Our three tiered innovation framework, purpose built SERDES technology, world class IC design and a true system level development approach, all wrapped with our industry leading pilot debug and telemetry platform has allowed us to forge deep strategic partnerships. Let me now walk through our business in detail. Starting with our active electrical cables, the AEC product line remains the fastest growing segment in the company. AEC revenue again grew strongly driven by rapidly increasing customer diversity. In Q2, four hyperscalers each contributed more than 10% of total revenue. The fourth hyperscaler is now in full volume ramp and a fifth started contributing initial revenue. Customer forecasts have strengthened across the board in the past months. AECs have become the de facto standard for inter rack connectivity and are now displacing optical rack to rack connections up to 7 meters at 100 gig per lane today and 200 gig per lane tomorrow. 0 flap AECs deliver up to 1000 times better reliability than traditional laser based optical modules while consuming roughly half the power. When you're installing a 100,000 GPU cluster, link flaps can delay time to stability and time to revenue. And when you're training a model costing tens of millions of dollars, link flaps can have a significant impact on overall uptime and productivity. It is this step function improvement in reliability and power efficiency that's driving the expansion of the AEC TAM in the 100 gig and now 200 gig per lane generations. And we expect that trend to continue as customers densify racks and push cluster scale to new levels. Next our IC business which includes retimers and optical DSPs also continued with strong performance. We expect significant optical DSP growth in fiscal 26 driven by 50 gig and 100 gig per lane deployments, with longer term growth driven by our 200 gig per lane solutions. Live demonstrations last quarter of our 200 gig Perlane Bluebird Optical DSP drew significant interest and extremely positive feedback. Ethernet retimers remain important in both traditional switching fabrics and the fast growing AI server segment where features like MacSec encryption, gearbox functionality and rich software programmability are highly valued. Our PCIe retimer and AEC families are also progressing on plan. Customer silicon evaluations have consistently highlighted our best in class combination of reach, latency and power efficiency, a rare trifecta enabLED by our unique purpose built SERDES architecture. We remain on track for PCIe design wins in fiscal 26 followed by meaningful production revenue in fiscal 27. Our existing AEC and IC businesses both address multibillion dollar market opportunities with excellent visibility for continued growth. But the truly exciting part of this quarter is that we've added three entirely new growth pillars, each representing distinct multibillion dollar market opportunities that significantly expand our total addressable market and extend the reach and depth of our connectivity leadership. The first new growth pillar is Zero Flap Optics, the first laser based optical connectivity family that delivers AEC class network reliability. EnabLED by a customized optical DSP that is tightly coupLED with our pilot software and integrated with a switch level SDK. Our Zero Flap Optics integrate with our customers network software Link health telemetry data on each optical link enables autonomous detection and mitigation of conditions that cause link flaps before they bring down the cluster. This enables a step function improvement in network reliability. We're currently in live data center trials with our lead partner and we expect to begin sampling a second US Hyperscaler later this fiscal year. Our ZF Optics solutions expand our addressable market to any length of connection within the data center. We anticipate initial revenue in fiscal 27 and long term a market that will be a multi billion dollar opportunity. The second new pillar of growth was announced in September. CREDO has combined forces with Ottawa based Hyperloom, a team of experts specializing in high performance microLED technology. CREDO has been investing in micro LED innovation over the past 18 months with the intent of developing a new class of connectivity solutions. Uniting with the Hyperloon team will accelerate our time to market. As a first product, we'll develop and bring to market a pluggable optical solution that utilizes micro LEDs as the light source. Our same three tiered innovation playbook will be the catalyst to pioneering this entirely new connectivity category we call Active LED cables or ALCs. ALCs will deliver the same reliability and power profile as an AEC but in a thin gauge cable that can reach up to 30 meters and is ideal for row scale of networks. Customer reaction has been very positive. We plan to sample the first ALC products to lead customers during our fiscal 27th. With initial revenue ramping in fiscal 28, we believe the ALC TAM will ultimately be more than double the size of the AEC TAM. Finally, we announced the third new pillar of long term revenue growth, Omni Connect Gearboxes, a family of products that will enable a disaggregated and optimized approach to XPU connectivity. In November, together with our lead customer, we unveiLED the first gearbox that will address the memory wall by redefining memory to compute connectivity, a solution we call Weaver. Today's on package high bandwidth memory is capacity and throughput limited as well as expensive and supply chain constrained. Weaver allows designers to move to commodity DDR memory and achieve up to 30 times more memory capacity and 8 times the bandwidth. The key enabler for the Omni Connect family is Credo's purpose built 112 gig VSR Serdes that enables a 10x improvement in beachfront I O density and has a reach of up to 10 inches. The Weaver gearbox from 112 gig BSR to DDR effectively overcomes the physical and logical limitation of current memory to compute connectivity solutions. Our first customer for Weaver announced their plan to deliver an XPU targeted for inference with 2 terabytes of memory capacity. A complete game changer for workloads such as real time AI, video generation and full self driving where memory capacity and bandwidth are the primary gating factors. Industry forecasters project the memory to compute connectivity market to be a multibillion dollar market by the end of the decade. We anticipate initial revenue in our fiscal 28 with significant scaling thereafter. The next Omni Connect Gearboxes to be introduced will provide a future enabLED path to scale out, scale up and near package optics connectivity with XPUs. In summary, we now have five distinct high growth connectivity pillars AECs, IC solutions including retimers and optical DSPs, zero flap optics, ALCs and Omni Connect Gearbox Solutions. Together they'll give CREDO a combined total market opportunity that we believe will exceed $10 billion in the coming years, more than triple where we stood just 18 months ago. Looking forward, we couldn't be more excited about the combination of continued growth in our core AEC and IC businesses plus the upcoming ramps of zero flap optics, ALCs and Omni Connect gearboxes. We believe this combination gives us a strong outlook into continued revenue growth through fiscal 26 and well beyond. Team CREDO continues to execute at an elite level delivering record results quarter after quarter while simultaneously pioneering and launching new multi billion dollar product categories. I'm proud of our world class operational excellence and innovation. With that, I'll turn the call over to Dan Fleming for a detaiLED financial review and our Q3 guidance.

Thank you Bill and good afternoon. I will first review our Q2 results and then discuss our outlook for Q3 of fiscal year 26. In Q2 we reported revenue of $268 million, up 20% sequentially and up 272% year over year and well above the high end of our guidance range. Our product business generated $261.3 million of revenue in Q2, up 20% sequentially and up 278% year over year. Notably, our AEC product line again grew healthy double digits sequentially 20 to achieve new record revenue levels once again based on substantial year over year growth across four domestic hyperscale customers. Our top four end customers were each greater than 10% of revenue in Q2. As a reminder, customer mix will vary from quarter to quarter and we continue to make progress in diversifying our customer base. We continue to expect that three to four customers will be greater than 10% of revenue in the coming quarters and fiscal year as hyperscale customers continue to ramp to more significant volumes and as we expect to begin to ramp an additional hyperscale customer in the coming quarters. Our team delivered Q2 non GAAP gross margin of 67.7% above the high end of our guidance range and up 11 basis pointss sequentially. Our product non GAAP Gross margin was 66.8% in the quarter, up 18 basis pointss sequentially and up 469 basis pointss year over year. Total non GAAP operating expenses in the SECond quarter were $57.3 million, slightly above the midpoints of our guidance range and up 5% sequentially. Our non GAAP operating income was $124.1 million in Q2 compared to non GAAP operating income of 96 points in Q1 up demonstrably due to the leverage attained by achieving more than 20% sequential top line growth. While OPEX growth was in the mid single digits. Our non GAAP operating margin was 46.3% in the quarter compared to a non GAAP operating margin of 43.1% in the prior quarter, a sequential increase of 319 basis pointss. Our bottom line once again demonstrated the substantial leverage we are delivering in the business. Our non GAAP net income was $127.8 million in the quarter a record high and a 30% sequential increase compared to non GAAP net income of $98.3 million in Q1 and our non GAAP net margin was 47.7% in the quarter as we drove significant leverage in the business. Cash flow from operations in the SECond quarter was $61.7 million, up $7.5 million sequentially. CapEx was $23.2 million in the quarter, driven largely by purchases of production mask sets and free cash flow was $38.5 million, down from $51.3 million from the first quarter due to higher CapEx investments. We ended the quarter with cash and equivalents of $813.6 million, an increase of $333.9 million from the first quarter, up largely from the proceeds of our At The Market offering which began in October. We remain well capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer. Our Q2 ending inventory was $150.2 million, up $33.5 million sequentially. Now turning to our guidance, we currently expect revenue in Q3 of fiscal 26 to be between $335 million and $345 million, up 27% sequentially. At the midpoints, we expect Q3 non GAAP gross margin to be within a range of 64 to 66%. We expect Q3 non GAAP operating expenses to be between $68 million and $72 million. We expect Q3 diluted weighted average share count to be approximately 194 million shares. These expectations are based on the current tariff regimen which remains fluid as we. Look toward the end of fiscal year. 26 and into fiscal 27. We expect sequential revenue growth in the mid single digits leading to more than 170% year over year growth in the current fiscal year. We expect each of our top four customers from Q2 to grow significantly year over year in fiscal year 26. We also expect revenue diversification to strengthen further with our fourth customer surpassing the 10% revenue threshold for this fiscal year. We expect non GAAP operating expenses to increase year over year by approximately 50% in fiscal year 26. As a result, we expect our non GAAP net margin to be approximately 45% for fiscal year 26. This should translate to net income more than quadrupling year over year and with that I will open it up for questions.

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

Hey guys, thanks for taking my question. I appreciate it. So you're seeing an expansion of the AEC market pretty rapidly here with the fourth and then now soon to be the fifth 10% customer kind of rolling on. I found it interesting amidst what is clearly like a really strong ramp in the AEC market, you're able to say that when you look at the ALC market, you could see that being double the AEC TAM. So talking big numbers, maybe you could spend a little time talking about whether that's unit driven, whether that's ASP driven. Just surprised. Given the size, given how well AECs up.

Thank you. So I think it's a combination of both the quantity as well as ASPs. Now when we think about, when we think about ALCs, it's really an ideal product from the standpoint of delivering the same reliability as AECs, which is really the most critical factor right now with host to C0 or GPU to switch connections. Also from a power efficiency standpoint, it's in the same class as AECs. I would say from a, you know, from a system cost per second perspective, again, you know, in that same class, what, what it delivers is a thinner wire gauge and longer length. And as we, as we see the scale of networks really going from inter rack to row scale, we're talking about a tremendous increase in the number of connections. We estimate that it could be up to 10 times that of the number of scale out connections. And so yes, we are really, really bullish and we're strong believers in micro led as a technology. That's really going to be a game changer for us as well as our customers.

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

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

And your next question comes from the line of Tor Svumberg with Stifel. Your line is open.

Yes, congratulations on the solid results. Bill, I had a question on your sort of three new product lines here. Obviously all in the optical domain. You know, first of all, could you maybe elaborate a little bit on how much you're focusing on the system level products? You know, because obviously in copper, yeah, you have system level products, but the three areas in optical, you know, how much of those should we assume are systems? And then I have a follow up. Thank you.

Yeah, so we've, we've been very consistent in talking about our intent to continue to expand our portfolio at the system level. And I would say that yes, ALCS as well as ZF Optics, those are both optical solutions, but the Omni Connect family will be initially copper based and then longer term will offer near package optics options with that. And so I think that, you know, from the standpoint of delivering value to our customers, we are very much focused on delivering non commodity, non IEEE standard, you know, well beyond what that standard calls for. And I think ZF Optics is a great example of that in a sense that going back 18 to 20 months ago, we really heard strong feedback from multiple customers that reliability was the top priority as people became more familiar with the issues that they were seeing with building out AI clusters. And so with one of the customers that we were on stage with at ocp, we got to work thinking about how do we integrate, integrate higher level within the stack, how do we integrate within the, you know, the network software for that customer within their AI cluster. And so the concept is, you know, how do we, you know, how do we provide more visibility, more telemetry? How do we make that information available and actionable at a network level? When we think about, you know, the, you know, the opportunity that we're creating for our customer here is it's really creating almost like a check engine light. Being able to set a threshold on links, all of the links within a cluster, and be able to sense real time when any of those links are degrading. Being able to set a threshold and once that signal integrity drops below that threshold, being able to action it by, in an orderly fashion, taking that GPU out of the cluster before you see a link flap that could potentially pick down, take down the cluster entirely. And so that type of value add is completely innovative and it's defining a new class of optical connectivity. And it's very, very targeted for reliability. And that reliability is really, with traditional laser based optical transceivers, that's been a big investment. We delivered a custom optical dsp. We, you know, have the whole pilot telemetry platform is something that we've been working on for many years. And there's a lot of, you know, special development work that was done to tightly, tightly couple that optical DSP and then integrating within, you know, a switch level SDK. This is, these are all things at a system level that needed to be done to be able to bring this product to market. When we think about ALCs, I've talked about that, you know, that's a game changer. It's basically changing the light source to, at a ground level, deliver better reliability. And when we think about our first gearbox in the Omni Connect family, it is a copper solution, but it's redefining how memory to compute or memory to XPU connectivity is done. And when we think about, you know, the alternative being HBM all in package, all, you know, driving extremely, you know, challenging heat dissipation environments, that, that translates directly to reliability as well. So being able to move the memory up to 10 inches away, not only does it lift the logical and physical limitation that you've got by being, you know, in a package with a beachfront I O density that's not as dense, it really eliminates the reliability issue that you've got with the heat that's generated by putting so much memory in it in a single package with the XPU. So it's really a combination of both optical and copper. But again, we're agnostic to the medium. We're agnostic to exactly how these solutions are put together, whether they're copper or fiber. It's ultimately delivering a solution to the customers that is just much better than is in the market today.

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

So regarding the SERDES that was developed, you know, specifically for this application, you know, I love the arguments in the market about, you know, who's got the best SERDES and a lot of times in the market, you know, people like to think the longest reach SERDES is obviously the best. We look at it differently, we really look at it from an application specific perspective. And so when we think about the idea of, you know, giving an XPU customer a piece of IP to integrate, we think about how do we achieve the, you know, the smallest footprint, the lowest power and ultimately with this, with this VSR SERDES that we developed on a max reticle die, we can fit 1200 of these surdes creating 120 terabits per second of potential bandwidth. That's unprecedented that you know, that that has yet to be achieved. Especially when you think about the reach being 10 inches. Other competitive solutions, the reach would be you know, an inch or less and so you know, basically forcing there to be a die to die connectivity versus moving a chip outside the package. It's a real breakthrough. I would argue that this SERDES is best in class and it's enabling an entire family of solutions that range from IO solutions for memory but also from a scale out or scale up perspective and long term with near package optics. And the near package optics will leverage the work that we're doing in micro LED. So you know, first step will be ALCs and then we'll roll that right into some, you know, some additional game changing applications like near package optics.

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

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

So the different applications that we've talked about in the past have been number one, front end network connections. Of course, that was the first application to ramp with our first customer years ago. We've also talked about the scale out opportunity as part of the back end network of AI clusters. The third application we've talked about is switch racks. And that would be as opposed to buying a chassis filled with switches. You would stack those vertically in a rack and that backplane connection within a chassis would become a short cabled connection within the rack. Those are the first three applications we've talked about and we are in production with all three of those with different customers. We're definitely not fully penetrated with all of our customers, but we are in production with all three of those applications. I would say the one remaining application that will be high volume is with the scale up network as that network goes rack scale and then ultimately goes row scale depending on the density and the number of, number of racks that are being deployed. Now as it relates to CO package optics, this is, you know, this is a, you know, this has been a long conversation really for the 12 years I've been involved in this industry, you know, there's been a conversation about, you know, moving to a CO package. It's changed names or changed acronyms over time. But I think that, you know, before it takes off in a really big way, there's, you know, got to be answers to the pitfalls that are very, very well known. Number one, related to reliability, serviceability, maintenance, cost, of course. And we think that there are solutions that are going to be more optimized from a power standpoint, more optimized from a reliability standpoint. And we're focused on bringing those solutions to market really, maybe even within the same time frame as people talk about CO package optics. So there's been lots of demonstrations, but we don't see a lot of customers moving forward in a big way that would have an impact on us. I think it's safe to say that, you know, from that host to t0 connection perspective, reliability is top, you know, absolutely, you know, top of the list on priorities. So I think we're, we're, you know, that that's obviously the high volume part of the market and we don't see that, you know, we don't see that moving to CPO anytime soon.

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

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

Your next question comes from the line of Quinn Bolton with Needham and Company. The line is open.

Hey guys. Congratulations on the nice results and outlook, I guess. Bill, I had a question just on.

The supply side of things. I think looking at the 10K you guys put out, you list Bizlink as sort of your sole provider of AEC cable manufacturing. And obviously the forecast here is getting pretty big pretty quickly. How are you feeling about AEC supply? You know, are there any constraints you're working through, any, anything to call out on the supply front? I think we're entering a period of time where we will be talking about supply constraints more frequently now as it relates to our AEC volumes. I don't, I don't see any, you know, any. I don't see a concern related to the quantity that, that we can produce with our partners. I think we've proven that over the last year that, that we can ramp significantly in a very short period of time. So this is a completely different equation than, you know, thinking about a wafer foundry. And so I, I do, over the last two to three months, we've really seen in, you know, increase in the, you know, the, you know, the conversations around, you know, what is the total potential wafer demand in the market for next year and the year beyond and the year beyond that. And I do think that if we look at it from a demand standpoint, the market in general is going to kind of quickly get to the point where we're kind of almost self regulated by foundry capacity. And so I don't want to be too controversial talking about it, but I think from an advanced node perspective, I think it's going to be a more frequent conversation about capacity constraints at a wafer level. Now, as it relates to credo, I think that a couple of things give us an advantage. We've talked about, if you remember, the n minus one process strategy, which is we've always had a strategy to be in older geometry processes than our competition if we can deliver best in class power, best in class die sizes and best in class performance. And so we've done that successfully over time. So right now, 12 nanometers our workhorse and that's not as tight as say 3 nanometer or 5 nanometer. And so we feel, you know, we feel pretty good about where we are just related to, you know, a situation where there's an increasing demand across the board for wafer volume. But I also will say that our foundry partners are very, very well in tune that the connectivity solutions, you know, the relatively small die size connectivity solutions are critical for, you know, for shipping GPUs can't really ship GPUs about connectivity solutions. And so I think for a couple of reasons, you know, I think we're going to be able to manage our way through that. Now as far as our partners within the AEC product. Yeah, I mean this is why, you know, being vertical vertically integrated like we are gives us an advantage because I've got a system level supply chain team that is, you know, making sure that all of the partners that supply components that go into the AECs, that they've got as much visibility and much commitment as they need to go build out what we see needed in the future. And so I think, yeah, great question. I think it's going to be really topical as we go through calendar 26. And for my follow up bill, just looking at your top two customers, I believe they are still at either 50 gig or 25 gig per lane. But just wondering if you could, you know, confirm that at least, you know, that salt feels like the vast majority of your AEC business is at 50 gig per lane. And it sounds like there's an opportunity that as those customers ultimately transition to 100 gig per lane, there's probably some ASP lift you would see with that transition. I won't ask you to comment on specifically when they may transition, but just I don't think it's happened yet and was hoping you could confirm that the top two guys are still either 25 or 50 gig per lane. I'll confirm that, that we're in production with 25 gig per lane, 50 gig per lane, as well as 100 gig per lane. And probably one of the fastest growing parts of our business has been the shipments of 100 gig per lane solutions. And so the, you know, the, yeah, you're right that it's not so simple for me to categorize it. I do think that over time you'll see the entire customer base moving to 100 gig per lane and then making a move towards 200 gig per lane over the next two to three years. So I think generally you're, you're the trend that you're referring to. I think, you know, that we can say generally that, that it's accurate that we'll see uplift as the market migrates towards faster speeds.

Your next question comes from the line of Suji da Silva with Roth Capital Partners. Your line is open.

Hi, Bill. Hi, Dan. Congrats on the progress here. Maybe you could talk about your customers now. You know, when you first ipo, you. Had a handful of customers. Now you're, you know, gaining what's five customers here potentially. For the hyperscalers that don't kind of use you at a scaled level, you. Know, 10% plus type levels, I know. You'Re in all of at some level. What, what is the difference between the customers you haven't penetrated yet and the ones you know you're getting to 10. Plus percent in various quarters.

We look at every one of the hyperscalers as almost a different market. You know, they're all trying to maybe solve the same problem generally, but there's so many different ways to solve those problems. And so network architecture is very much specific to each one of our customers. And you know, I can tell you that, you know, the first program that we engage with, you know, typically that's led to many other programs within the same customer. And I think that as we think about the customer base right now, we think of six hyperscalers in the US and we think of a handful in Asia. But I think we're going to be talking more and more about that next tier of customer because I think it's going to be possible to drive pretty big numbers with that next tier of data centers. So generally I think that as I think about our business, you know, this has been a very significant quarter for us in a sense, you know, that we're, that we're showing a path to a much more diversified business, not just from a customer base. But from a protocol perspective with PCIe as well as from a, you know, just the overall TAM expanding by addressing a much broader market with our system level solutions. And so if you think about it, we talk about Omni Connect first and we're really addressing die to die or chip to chip connections at a system level. And when you think about retimers, you know, those connections can probably be up to a half to one meter. And typically on an appliance card or a switch card. When we think about AECs up to 7 meters, we think about ALCs up to 30 meters and we think about ZF optics up to a kilometer or beyond, whatever the maximum length is within the data center. And so I think in the past 90 days this has been probably the most transformative from a news standpoint. We've been working on these things for, you know, for 18 months or so. But now being able to talk about it, I think it shows a clear path to a much more diversified company long term as we think about moving the company from that billion dollar threshold in revenue annually to 5 billion and beyond over the next several years.

Okay, appreciate how you classify the product there for us. And then my other questions on manufacturing. I know with aecs you're doing the cable manufacturing and how selling the entire cable solution. Is it the same strategy for alc? Will it be modules versus cables outsourcing. Any color they're available?

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

Your next question comes from the line of Jay Rakesh with Mizuho. Your line is open.

Yeah, hey Bill and Dan, congratulations here. Just a quick question on the scale up, do you see those revenues start to ramp in second half calendar 26 and I think you mentioned active LED cables ALC in calendar 27. Is that the way to look at.

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

Got it. And then longer term, as you obviously seeing a pretty strong AC ramp, how should we look at the gross margin profile as optical DSPs are starting to ramp as well as just longer term how to look at those margins?

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

Your next question comes online of Sean. Okay, Lo Halen with TD Cowan. Your lot is open.

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

Thanks. I think it goes back a couple of years ago that we first became very interested in micro LED technology as an option to bring, you know, really differentiating products to markets to market. You know, first with ALCs and then the second step is, you know, to, you know, to answer some of the pitfalls of near package optics. The, you know, the first couple of companies that we, that we engaged with were independent companies. And you know, ultimately we made the decision earlier this year to, to, you know, to basically bring the, bring the technology in house, bring the team in house so that we, you know, could have a very predictive outcome on, on, on time to market. And so at this point what we've learned over the last, you know, 18 months to two years is significant. The team that we've combined forces with Hyperloom, we feel like right at this point it's, it's more of an execution play. It's not really a, you know, so the technology I think is well, well along the path to being developed now. It's just an execution play, bringing it to market. And so I feel confident about bringing product to market in our fiscal 27 and ramping first initial ramps in fiscal 28. You know, from the standpoint of our confidence on this, as far as this being a product that are, that's going to resonate with our customers, I think, you know, that we've got several years under our belts bringing new products and categories of products to market. The initial conversations with customers, I don't see any, I don't see any major barriers to overcome from the standpoint of, you know, customers accepting the product. These are going to be, you know, these are, these are going to be bookended solutions. So they're going to be delivered in the form of a cable. And you know, the bottom line is when we deliver on the promise of reliability, power efficiency and system cost that's equal to AECs. But you get a thinner wire and you get longer length. It's really, you know, it's really, you know, the perfect type of product. As I really again view this as more of an execution challenge and I feel very good about the team we've got in place, the additions that we've got planned over the next 12 months to make sure we get this right.

Yeah, thanks for that. And then quick follow up on ZF Optics understanding that they're a system level solution. Is there a line rate or a lane rate that the ZF Optics platform is targeting to intersect with or is it relatively Agnostic can be leveraged at 50 gig, 100 gig to 200 gig per lane type of applications.

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

Thanks for the color guys and congrats again.

Thanks.

Your next question comes from the line of Christopher Rowland with Susquehanna. The line is open.

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

Yeah, we. So in my prepared remarks I specifically said, you know, mid single digits revenue growth sequentially through fiscal 27. So. So that's the expectation that we've, that we've set. You know we set that expectation probably three or four quarters ago as well as if you go back and look at things and we've outperformed that. So sure things could change but we're not setting any expectation that's different from.

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

Yeah. So let me just first state that we're continuing to manage our operating expenses in order to support the revenue growth that we foresee and as you know, all of these projects, all of these pillars of growth that Bill has talked about, you know, there's a long gestation period for, for all of them and you need engineers, engineering talent to be able to execute on that. So we're feel like we're in a great position to do so. Our Q3 OpEx guide was up more than it has been in the last few quarters. Up 22% at the midpoint. But as you, you know, dig into our queue, you'll see our R and D spend was sequentially down in Q2. So in, in one way we're kind of making up for that small decline. So long story short, getting to 70 million at the midpoint, that does set a new base. There's additional project related spend within that, plus additional hiring. We've brought the Hyperloom team on board. There's a lot of different factors that go into that number, but.

If you.

Plug that number into your model and have a small sequential increase in Q4, you'll kind of end up at a 50% year over year opex growth from fiscal 25 to fiscal 26, which is, was also in my prepared remarks. So hopefully that's helpful.

Excellent. Thank you.

Your next question comes from the line of Carl Ackerman with PMP Paribus. Your line is open.

Yes, thank you. Gentlemen, I have two questions if I may. First, could you speak to why you. Are now licensing your active electrical cable. IP to third parties and how this agreement reflects your perceived competitive moat and. Go to market for AECs.

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

Got it. That's helpful. Bill, maybe a question for Dan. You know, you noted that you've got. 12 minutes of visibility with several hyperscale customers. I guess it begs the question, you know, what was the largest delta in your upper revised outlook versus your prior. Outlook of 960 and change? I guess how much of it was simply the ramp of your the fifth hyperscale customer versus just higher order rates. Of existing programs or even new AEC. Applications, cross scale out and desegregated chassis at some of these other customers. Thank you.

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

Ken, your next question comes from the line of Joseph Cardozo with JP Morgan. Your line is open.

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

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

Very clear, Bill. And then maybe just a quick clarification on the fifth customer in the quarter. And maybe this is anecdotal, but it sounds at least like they're tracking ahead of expectations relative to last quarter with some initial revenue this quarter. But just wanted to clarify if that was the case and as we think about that customer tracking into the back half of this year, is there any opportunity for this customer to be 10% at least on a quarterly basis now in the back half or has the denominator just kind of outpaced that, that opportunity there? Thanks for the questions, appreciate it.

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

And your last question comes from Sebastian Najee with William Blair. Your line is open.

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

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

Great. Thank you.

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

Yeah, thank you. I really appreciate the strong interest in credo. We'll talk to you all soon. We're a little bit off schedule, so the callback might be a bit rushed and a bit delayed. But again, really appreciate it. Thank you very much.

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