United Maritime Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 31, 2023

There are 10 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Quito Q4 Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to go ahead and turn the call over to Dan O'Neill.

Operator

Please go ahead.

Speaker 1

Good afternoon, and thank you all for joining us today for our fiscal 2023 4th quarter year ending earnings call. Joining me today from Credo are Bill Brennan, our Chief Executive Officer and Dan Fleming, our Chief Financial Officer. I'd like to remind everyone that certain comments made in this call today may include forward looking statements regarding expected future financial results, strategies and plans, future operations, the markets in which we operate and other areas of discussion. These forward looking statements are subject to risks and uncertainties that are discussed in detail in our documents filed with the SEC. It's not possible for the company's management to predict all risks nor can the company assess the impact of all factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward looking statement.

Speaker 1

Given these risks, uncertainties and assumptions, the forward looking events discussed during this call may not occur, and actual results could differ materially and adversely from those anticipated or implied. The company undertakes no obligation to publicly update forward looking statements for any reason after the date of this call to conform these statements to actual results or to changes in the company's expectations, except as required by law. Also during this call, we will refer to certain non GAAP financial measures, which we consider to be important measures of the company's performance. These non GAAP financial measures are provided in addition to and not as a substitute for or superior to financial performance prepared in accordance with U. S.

Speaker 1

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. With that, I'll now turn the call over to our CEO. Bill?

Speaker 2

Thanks, Dan, and good afternoon, everyone. Thank you for joining our Q4 fiscal 2023 earnings call. I'll begin by providing an overview of our fiscal year 2023 and fiscal Q4 results. I will then highlight what we see going forward in the fiscal 2024. Dan Fleming, our CFO, will follow my remarks with a detailed discussion of our Q4 fiscal year 2023 financial results and share our outlook for the Q1.

Speaker 2

Credo is a high speed connectivity company delivering integrated circuits, system level solutions and IP licenses to the hyperscale data center ecosystem along with a range of other data centers and service providers. All our solutions leverage our core service technology and our unique customer focused design approach, enabling Credo to deliver optimized, secure, high speed solutions with significantly better power efficiency and cost. Our electrical and optical connectivity solutions delivered leading performance with port speeds ranging from 50 gig up to 1.6 terabits per second. While we primarily serve the Ethernet market today, we continue to extend into other standards based markets as the need for higher speed With more power efficient connectivity increases exponentially. Frito continues to have significant growth expectations Within the accelerating market opportunity for high speed connectivity solutions.

Speaker 2

In fact, the onset of generative AI applications is already Accelerating the need for higher speed and more energy efficient connectivity solutions. And this is where Credo excels. I'll start with comments on our fiscal 2023 results. Today, Credo is reporting results from our 1st full fiscal year as a public company. In fiscal 2023, Rito achieved just over $184,000,000 in revenue, up 73% over fiscal 2022 And we achieved non GAAP gross margin of 58%.

Speaker 2

Product revenue increased 87% year over year, primarily due to the ramp of our active electrical cable solutions. License revenue grew 28% year over year from $25,000,000 to $32,000,000 Throughout fiscal 2023, we had several highlights across our product lines. For active electrical cables or AECs, We continued to lead the market Credo pioneered during the last several years. Our team continued to quickly innovate with application specific solutions and we've been successful in expanding our engagements to include multiple data centers and service providers. Our customer focused Innovation has led to more than 20 different versions of AECs shipped for qualification or production in the last year And we remain sole sourced in all our wins.

Speaker 2

And while our significant power advantage was a nice to have a couple of years ago, It's increasingly becoming imperative as our hydro scaler customers are pushed to lower their carbon footprint. For optical DSPs, Credo continued to build momentum by successfully passing qualification for 200 gig and 400 gig solutions at multiple hyperscalers with multiple optical module partners. In addition, Credo introduced our 800 gig optical DSPs, laser drivers and TIAs and we announced our entry into the coherent optical DSP market. For Linecard 5s, we continue to expand our market leadership. In particular, Credo builds upon our position as the leader for MACsec PHYs with over 50% market share.

Speaker 2

We also extended our performance and power efficiency advantages for 100 gig per lane line card 5s with the introduction of our Screaming Eagle family of retimers and gearboxes with up to 1.6 terabits per second of bandwidth. For IP licensing, we continue to build on our offering of highly optimized Surtees IP. In the year, we licensed Surtees IP in Several process nodes from 4 nanometer to 28 nanometer with speeds ranging from 28 gig to 112 gig and reach performance ranging from XSR to LR. We believe our ability to innovate to deliver custom solutions remains unparalleled. We maintain very close working relationships with hyperscalers and we'll continue to collaborate with them to deliver solutions that are optimized to their needs.

Speaker 2

Despite recent macroeconomic headwinds in the data center industry, we believe the need for higher speed with better power efficiency will continue to grow. This plays perfectly to Creta's strengths, which is why we remain optimistic about our prospects in fiscal 2024 and beyond. I will now discuss the Q4 more specifically. In Q4, we delivered revenue of $32,100,000 and non GAAP gross margin of 58%. I'll now provide an overview of key business trends for the quarter.

Speaker 2

First regarding AEC, Market forecasters continue to expect significant growth in this product category due to the benefits of AECs compared to both legacy direct attached copper cables And compared to active optical cables, which are significantly higher power and higher cost. With our largest customer, we're encouraged by our development focus on several new ADC programs, including an acceleration in their first 100 gig per lane AI program where they intend to deploy Credo AUCs. We saw the initial ramp of a second hyperscale customer, which we expect to grow meaningfully throughout the year. We're ramping 50 gig per For both their AI and compute applications. And I'm happy to report that Credo has been awarded this customer's first 100 gig per lane program.

Speaker 2

We're also actively working to develop several other advanced AEC solutions for their next generation deployments. We continue to make progress with additional customers as well. We remain in flight with 2 additional hyperscalers and are also engaged in meaningful opportunities with service providers. We've seen momentum building for AEC solutions across AI, compute and switch applications and we continue to expect to benefit The speeds moved quickly to 100 gig per lane. Regarding our progress on optical solutions.

Speaker 2

In the optical category, we've leveraged our Surteens technology to deliver disruptive products, including DSPs, laser drivers and TIAs for 50 gig through 800 gig port applications. We remain confident we can gain share over time due to our compelling combination of performance, power and cost. In addition to the hyperscalers that have previously production qualified Credo's optical DSPs, we started of a 400 gig optical DSP for U. S. Hyperscaler is the end customer.

Speaker 2

At OFC in March, We received very positive feedback on our market solutions, including our Dove 800 products, as well as on our announcement to enter the 100 gig ZR coherent DSP market. We're well positioned to win hyperscalers across a range of applications, including 200 gig, 400 gig and 800 gig port speeds. We're also engaged in opportunities for fiber channel, 5 gs, OTM and PON applications with optical partners, Service Providers and Networking OEMs. Within our line card 5 category, During the Q4, we saw growing interest in our solutions specifically for our screening Eagle 1.6 terabit per second VIBES. We've already been successful winning several design commitments from leading networking OEMs and ODMs for the screening and e vapor devices.

Speaker 2

Credo was selected due to our combination of performance, signal integrity, power efficiency and cost effectiveness. We also made significant development progress with our customer Next generation 5 nanometer 1.6 Terabits Per Second MACsec PHY, which we believe will extend our leadership well into the future for applications requiring encryption. Regarding our Surtees IP Licensing and Surtees Chiplet businesses, Our IP deals in Q4 were primarily led by our 5 and 4 nanometer 112 gig series IP, which according to customers offers significant power advantage versus competition based on our ability to power optimize to the reach of an application. Our service chiplet opportunity continues to progress. Our collaboration with Tesla on their Dojo supercomputer design is an example of how connectivity chiplets to enable advanced next generation AI systems.

Speaker 2

We're working closely with customers and standard size such as the UCIE consortium To ensure we retain leadership as the chiplet market grows and matures, we believe the acceleration of AI solutions across the industry will continue to fuel our licensing To sum up, the hyperscale landscape has shifted swiftly and dramatically in 2023. Compute is now facing a new horizon, which is generative AI. We expect the shift to accelerate the demand for energy efficient connectivity solutions that From our viewpoint, this technology acceleration increases the degree of difficulty and will naturally slim the field of market participants. We remain confident that our technology innovation and market leadership will fuel our growth as these opportunities materialize. We expect to grow sequentially in Q1 and then continue with sequential quarterly revenue growth throughout fiscal 2024.

Speaker 2

We believe our growth will be led by multiple customers across our range of connectivity solutions, which will result in a more diversified revenue base as we exit fiscal 2024. I'll now turn the call over to our CFO, Dan Fleming, who will provide additional details. Thank you.

Speaker 3

Thank you, Bill, and good afternoon. I will first provide a financial summary of our fiscal year 2023, then review our Q4 results, and finally discuss our outlook for Q1 fiscal 2024. As a reminder, the following financials will be discussed on a non GAAP basis unless otherwise noted. Revenue for fiscal year 2023 was a record at $184,200,000 up 73% year over year, driven by product revenue that grew by 87%. Gross margin for the year was 58.0%.

Speaker 3

Our operating margin improved by 13 percentage points even as we grew our product revenue mix. This illustrates the leverage that we can produce in the business. We reported earnings per share of $0.05 and $0.18 improvement over the prior year. Moving on to the Q4. In Q4, we reported revenue of $32,100,000 down 41% sequentially and down 14% year over year.

Speaker 3

Our IT business generated $5,700,000 of revenue in Q4, down 55% sequentially and down 49% year over year. IP remains a strategic part of our business, But as a reminder, our IP results may vary from quarter to quarter, driven largely by specific deliverables to pre existing contracts. While the mix of IP and product revenue will vary in any given quarter over time, our revenue mix in Q4 was 18% IP, above our long term expectation for IP, which is 10% to 15% of revenue. We continue to expect IP as a percentage of revenue to come in above our long term expectations for fiscal 2024. Our product business generated $26,400,000 of revenue in Q4, down 37% sequentially and flat year over year.

Speaker 3

Our team delivered Q4 gross margin of 58.2%, above the high end of our guidance range and down 94 basis points sequentially due to lower IP contribution. Our IP gross margin generally hovers near 100% and was 97.4% in Q4. Our product gross margin was 49.7 percent in the quarter, up 2 45 basis points sequentially and up 167 basis points year over year, due principally to product mix. Total operating expenses in the 4th quarter were $27,200,000 within guidance and up 6% sequentially and 25% year over year. Our year over year OpEx increase was a result of a 36% increase in R and D as we continue to invest in the resources to deliver innovative solutions.

Speaker 3

Our SG and A was up 12% year over year as we built out public company infrastructure. Our operating loss was $8,500,000 in Q4, a decline of $10,700,000 year over year. Our operating margin was negative 26.4% in the quarter, a decline of 32.2 percentage points year over year due to reduced top line leverage. We reported a net loss of $5,700,000 in Q4, dollars 8,300,000 below last year. Cash flow used by operations in the 4th quarter was $11,800,000 a decrease of $14,200,000 year over year due largely to our net loss and changes in working capital.

Speaker 3

CapEx was $3,900,000 in the quarter driven by R and D equipment spending and free cash flow was negative $15,700,000 a decrease of $8,400,000 year over year. We ended the quarter with cash This decrease in cash was a result of our net loss and the investments required to grow the business. We remain well capitalized to continue investing in our growth opportunities while maintaining a substantial cash buffer for uncertain macroeconomic conditions. Our accounts receivable balance increased by 14.6% sequentially to $49,500,000 while days sales outstanding increased to 140 days, up from 72 days in Q3 due to lower revenue. Our Q4 ending inventory was $46,000,000 down $4,300,000 sequentially.

Speaker 3

Now turning to our guidance, we currently expect revenue in Q1 of fiscal 2024 to be between $33,000,000 35,000,000 up 6% sequentially at the midpoint. We expect Q1 gross margin to be within a range of 58% to 60%. We expect Q1 operating expenses to be between $26,000,000 $28,000,000 We expect Q1 basic weighted average share count to be approximately 149,000,000 shares. We feel we have moved through the bottom in the 4th quarter. While we see some near term upside to our prior expectations, We remain cautious about the back half of our fiscal year due to uncertain macroeconomic conditions.

Speaker 3

In summary, As we move forward through fiscal year 2024, we expect sequential revenue growth, expanding gross margins due to increasing scale and modest sequential growth in operating expenses. As a result, we look forward to driving operating leverage as we exit the year. And with that, I'll open it up for questions. Thank you.

Operator

Thank The first question that we have is coming from Tore Svanberg of Stifel. Your line is open.

Speaker 4

Yes. Thank you. For my first question and in regards to the Q1 guidance as far as what's driving the growth, Given your gross margin comment, I assume that AEC will probably continue to be down with perhaps the growth coming From kind of for BSP and IP, is that sort of the correct thinking or if not, please correct me?

Speaker 3

Hi, Tore. This is Dan. So you're correct in that our if you look at the sequential increase in gross margin from Q3 to Q4, while our product revenue was down, that's really reflective of a favorable product mix where AEC, as we all know, which is on the lower end of our margin profile, was contributed less of the overall product mix. That trend will continue in Q1. And I would characterize that really as broadly across All of our other product lines, not really singling out one specific product line that's taking up the slack from AEC, so to speak.

Speaker 4

Sounds good. And as my follow-up question for you, Bill, with generative AI, as you mentioned in your script, things are clearly changing. I was just hoping you could talk a little bit more granular about how it impacts each business. I'm even thinking about sort of the 800 gig PAM4 cycle. I mean, is that getting pulled in?

Speaker 4

So, yes, I mean, how if you could just give us a little bit more color on how generative AI could impact each of your four

Speaker 2

Sure, absolutely. So I think generally, I think that AI applications will create revenue opportunities for us across our I think the largest opportunity that we'll see is with AEC. However, optical DSPs, there will definitely be A big opportunity there. Even Linecard Vias chiplets, even Surtee's IP licensing will get an uplift as AI deployments increase. So maybe I can start first with AECs.

Speaker 2

Now it's important to kind of identify the differences Between traditional compute server racks, which is kind of commonly referred to uses the front end network. Basically a NIC to TOR connection, the TOR up to the leaf and spine network. The typical compute rack would have 10 to 20 AECs in rack, meaning in rack connections from Nick to Tor. And highlight that leading edge lane rates today For these connections with compute servers is 50 gig per lane. Within an AI cluster, In addition to the front end network, which is similar, there's a back end network referred to as the RDMA network.

Speaker 2

And that basically allows the AI appliances to be networked together within a cluster directly. And if we start going through the map, this back end network has 5x to 10x the bandwidth as the front end network. And so the other important thing is to note within these RDMA networks, There are leaf spine racks as well. And so if we look at the if we look at one example of a customer that we're working with in deploying. The AI plant track itself will have a total of 56 AECs between the front end and back end networks.

Speaker 2

Each leaf spine rack is a cloth rack or a disaggregated chassis, which will have 256 AECs. And so when we look at it from an overall opportunity for AECs, this is a huge uplift in volume. The volume coincides with the bandwidth. Now lane rates will quickly move. Certain applications We'll go forward at 50 gig per lane, others will go straight to 100 gig per lane.

Speaker 2

And so we see probably a 5x plus Revenue opportunity difference between the typical if you were to say apples to apples with the number of compute server racks versus an AI cluster. So it's kind of extend the it's kind of extend into optical. There is also a typically large There's typically a large number of AOCs in the same cluster. So you can imagine that the short in rack connections are going to be done with AECs. These are 3 meters or less.

Speaker 2

But these appliances will connect To the back end lease spine racks, these disaggregated racks, all of those connections will be AOCs. Those are connections that are greater than 3 meters. And so if we look at this, this is all upside to say a traditional compute deployments where There's really no AOCs connecting rack to rack. Okay. So when we look at the overall opportunity, we think that The additional AEC opportunity within an AI cluster is probably twice as large, Twice as many connections as AOCs, but the AOC opportunity for us will be significant, in a sense that AOCs represent the most cost sensitive portion of the optical market.

Speaker 2

And so It's also a lower technology hurdle since the optical connection is well defined and it's within the cable. So this is a really natural spot for us to be disruptive in this market. We see some are planning on deploying the 400 gig AOCs, others are planning to go straight to 800 gig AOCs. So we view AECs as the largest opportunity. Optical DSPs For sure, we'll get an uplift in the overall opportunity set.

Speaker 2

But also, I think that If we look at Tesla as an example, that's an example of where as they deploy, we're going to see Really nice opportunity for our chiplets that we did for them for that Dojo supercomputer. And it's an example of how AI applications are doing things Completely differently and we view that long term this will be kind of a natural thing for us to Benefit from, we can extend that to Surtee's IP Licensing. Many of the licenses that we're doing now are targeting different AI applications. And also don't forget line cards, the opportunity for the network OEMs and ODMs is also increasing. And of course, line card 5s are something that go on those switch line cards that are developed.

Speaker 2

So generally speaking, I think That AI will drive faster lane rates, and we've been very, very consistent with our message that As the market hits the knee in the curve on AI deployments, we're naturally going to see lane rates go more quickly to 100 gig per lane. And that's where we really see our business taking off. So we're getting a really nice revenue increase from 50 gig per lean Applications, but we really see acceleration as 100 gig per lane happens. And especially when you start thinking about the power advantages that all of our solutions offer Compared to others that are doing similar things. Does that that might have been more than you were looking for, but

Speaker 4

No, that's a great overview. Thank you so much, Bill. That was great. Thank you.

Speaker 2

Sure.

Operator

Thank you for your question. And one moment And the next question will be coming from Quinn Bolton of Needham and Company, your line is open.

Speaker 5

Thanks very much for taking Bill, maybe a follow-up to Tore's question, just sort of the impact of generative AI on the business. Given that most of your AEC revenue today Comes from the standard compute racks rather than AI racks. What do you see in terms of potential cannibalization at least in the near term These hyperscalers prioritize building out the AI racks potentially at the expense of compute deployments Again, in the near term.

Speaker 2

So I feel very good about how we're positioned. It is the case that our first ramp with our largest customer was Compute Rack. I think we're very well positioned with our customer as they transition to AI deployments. So we've talked in the past about 2 different Types of deployments at the server level, of course, compute will continue and we can all guess as to what Ratio, it's going to be between compute and AI. We've got the roadmap very well covered for compute.

Speaker 2

So I think We're well set. And so as that resumes at our largest customer, I think we're going to be in good shape. I'm actually more excited about The acceleration of the AI program that we've been working with the same customer on for close to a year. And so I feel like we're well covered for both compute and AI, and that's really a long term statement. So A little bit of new information I would say is that with our second hyperscale customer, just to give an update generally on that and then Relate that back to the same point that I was making about the earlier customer.

Speaker 2

We are right on track with the AEC ramp. The first program is a compute server rack that we've talked about. We saw small shipments in Q4 and we expect to see a continued ramp through fiscal 2024. However, during the past several months, a new AI application has taken shape. So if we would have talked 100 days ago, We wouldn't have seen this we wouldn't have talked about this program.

Speaker 2

And so we quickly delivered a different configuration of the AEC that was designed for the Compute Server rack. So if you recall, we did a straight cable as well as an X cable configuration. So they asked us to deliver a new configuration that had specific changes that were needed for their Deployment and we delivered the new configuration within weeks, which is that's another example of the benefit to how we're organized. The qualification is underway and we expect this AI Appliance reg to also ramp in our fiscal 2024. It's unclear as to The exact schedule from a time standpoint and a volume standpoint, but we feel like This is going to be another significant second program for us.

Speaker 2

And so I think that For both our first and our second hyperscale customer, I think we're covering the spectrum between compute and AI. So I feel like we're really in great shape. So hopefully that answers your question. Now If I take it a little bit further and say, okay, long term, let's say it's 80% compute, 20% AI and you think maybe Because the opportunity for us is 5 times larger in AI, maybe the opportunity is similar if the ratio is like that. So compute might be equal to AI from an AEC Perspective.

Speaker 2

I think that any way that goes, we're going to benefit. If it goes fifty-fifty, that's a big upside for us with AEC given the fact that there Larger volume, larger dollars associated with an AI cluster deployment. And so I think that For us, it won't affect us one way or another, maybe in the near term quarters. Yes. But The situation at our first customer really hasn't changed since the last update.

Speaker 2

So we think that the year over year increase In revenue for that customer will happen in FY 2025 as we've discussed before.

Speaker 5

Okay. But no further push out or delay of the Q rack at the first hyperscaler given the potential reprioritization to AI in the near term?

Speaker 2

Well, the new program qualifications, we've talked about 2 of them. They're still scheduled in the relatively near future. And of course, as those get Qualified and ramp, we'll see benefit from that. But It's a little bit tough to track month by month, right? That's a little bit too specific in a timeframe standpoint.

Speaker 2

So we've seen a slight delay, but it's not something that we're necessarily concerned about.

Speaker 6

Got it, Bill.

Speaker 5

And then just a Clarification on the second hyperscaler. I think the last update, you had said you may not yet have a Hard forecast for that hyperscalers needs on the AEC side. Have you received sort of a hard PO or at least a more Reliable forecast that you're now sort of forecasting that business from in fiscal 2024?

Speaker 2

Yes, it's coming together. It's coming together and I think we feel comfortable saying that the revenue that will be generated by this 2nd customer will be significant. And I'm not exactly able to talk about how significant. I think that we're We continue to view this through a conservative lens because we really don't know how the second half is going to shape up. But All the indicators that we've heard over the last 90 days are quite positive.

Speaker 2

And I think Dan referenced the fact that in Q2, we expect significant material revenue As that starts.

Speaker 5

Perfect. Thank you.

Operator

Thank you. One moment while we prepare for the next question. And our next question will be coming from Suji Desilva of ROTH Capital, your line is open.

Speaker 7

Hi, Bill. Hi, Dan. Just want to talk about the AEC, the Products, you have multiple products. And I just wanted to know if are there certain ones that are more relevant to AI rack versus a traditional computer rack or are they all applicable across the board?

Speaker 2

I would say that I wouldn't classify all of these solutions. I wouldn't lump them together. We're very much looking at the AEC opportunity As one where we're positioned to implement really customer specific Requests. And so part of what we're seeing is that most of the designs that we're engaged now That's something very specific to a given customer. And so I can say that we're seeing that There's a large number of customers moving to 100 gig per lane quickly, but we're also seeing customers that are reconfiguring existing NICS And building different AI appliances with those NEX.

Speaker 2

And so they're going to be able to ramp with 50 gig per lane solutions. Now as far as configurations go, we see straight cable opportunities, we see wide cable opportunities, we see Opportunities where just recently we had a customer ask us to have 100 gig on one of the cable And 50 gig on the other end of the cable. And so obviously that's a breakout cable. But it's an interesting challenge because This is the first time we'll be mixing different generations of ICs. And so again, this is something We're able to do because we're so unique in a sense that we have a dedicated organization Internal to Credo that's responsible for delivering these system solutions.

Speaker 2

It's really that single party that's responsible for collaborating with the customer, Designing, developing, delivering, qualifying and then supporting the designs with our customers. And so I can't emphasize enough that You give engineers at these hyperscalers the opportunity to innovate in a space they've never been thought of. And it's something that we're getting really good uptake on. And of course, our investment in the AEC space is really unmatched by any of our competition. I think We're unique in the sense that we can offer this type of flexibility.

Speaker 2

So to answer your question, it's not I couldn't really point to one type of cable That is going to be leaned on.

Speaker 7

That's helpful. It paints a picture of how the cables are being deployed here. And then also, I believe in the prepared remarks, Mark, you mentioned 20 AECs being qualified for shipment, if I heard that right. I'm curious how many Across how many customers or how many programs that is, just to understand the breadth of that qualification effort.

Speaker 2

Yes. I would say that there's a set of hyperscalers that are really The large, large opportunity within the industry for the AEC opportunity. But we've also had a lot of success with data centers that might not qualify as capital H hyperscaler as well as service providers. And We can look at the relationships with hyperscalers directly and there's several SKUs that we've delivered. And there's even more in the queue for these more advanced Next generation systems.

Speaker 2

But even if we look at I think we're if you look at the number of $1,000,000 Per quarter or per year customers that we've got, the list is really increasing. The product category, I think, has really been solidified over the last 6 to 9 months. And you see that also because a lot of companies are announcing that they intend to compete longer term.

Operator

Thank you. One moment while we prepare for the next question. And our next question will be coming from Carl Ackerman of BNP. Your line is open.

Speaker 8

Thank you. I have two questions. Good afternoon, Dan and Bill. I guess, First off, it's great to see the sequential improvement in your fiscal Q1, but I didn't hear you confirm your fiscal 2024 revenue outlook From 90 days ago. And I guess, could you just speak to the visibility you have on your existing programs That gives you confidence in the sequential growth that you spoke about throughout fiscal 2024.

Speaker 3

If you could just touch on

Speaker 8

that, that would be helpful.

Speaker 3

Yes. Thanks, Karl. This is Dan. So, yes,

Speaker 1

generally speaking,

Speaker 3

we As we've described, we see some near term upside, but we still remain a bit cautiously optimistic about the back half of the year. So we're very comfortable ultimately with the current estimates for the back half. We do have certainly increasing visibility as time passes We hope to provide meaningful updates in over the next upcoming quarters. But we're working hard to expand these growth opportunities for FY And we remain very encouraged with what we're seeing, especially with the acceleration of AI programs.

Speaker 8

Got it. Understood. Thanks for that. I guess as a follow-up, of the DSP opportunity that you've highlighted in your prepared remarks. Are you seeing your design engagements primarily in fiscal 2024 On Coherent offerings or are you seeing more opportunities in DCI for your 400 gig and 800 gig Opportunities.

Speaker 8

Thank you.

Speaker 2

Yes. So the opportunities that we're seeing The large opportunities that we're seeing are really within the data center. And I can say that it's across the board 200 gig, 400 gig and 800 gig. All of these hyperscalers Have different strategies as to how they're deploying optical. I think we continue to make progress with 204 100, and I think we're in a really good position From a time to market perspective on 800 gig.

Speaker 2

And so we can talk about The cycles that we're spending with every hyperscaler, we're also aligning ourselves very closely In a strategic go to market strategy with select optical module companies. And We think that as it relates to DCI and Coherent specifically, we're in development for that first solution that we're pursuing, which is 100 gig ZR. And we feel like that development will take place throughout this year And that will see first revenue in the second half of calendar twenty twenty four. But as far as 400 gig, that would really be a second follow on Type of DCI opportunity for us. Now in the ZR space, we're going to be unique because we'll market and sell the DSP to optical module makers.

Speaker 2

And so we intend to engage 3 to 4 module makers in addition to our partner, Effect Photonics. And that makes us somewhat unique In a sense that other competitors are going directly to market with the ZR module. I highlight power is really an enabler here. And the key thing is we can do 100 gig ZR module and fit under the power ceiling for a standard QSFP connector, which is roughly 4.5 watts. So there's a large upgrade cycle from 10 gig modules that will enable, but also there's new deployments in addition.

Speaker 2

So that kind of gives you a little bit of flavor about the coherent, but I really see our opportunities more within the data center.

Speaker 8

Understood. Thank you.

Operator

Thank you. One moment while we prepare for the next question. And our next question will be coming from Vivek Arya of Bank of America. Your line is open.

Speaker 6

Thanks for taking my question. Bill, I'm curious to get your perspective on some of these technology changes. One is the role of InfiniBand that's gaining more share in these AI clusters. What does that do to your AEC opportunity? Is that a competitive Is that a complementary situation?

Speaker 6

And then the other technology question is some of your customers and partners have Spoken about their desire to consider co packaged optics and linear direct drive type of architectures. What does that do, right to the need for standalone pluggables?

Speaker 2

Thanks. I appreciate the opportunity to talk about Ethernet versus InfiniBand because there's been a lot said about that. Generally, we see coexistence. I think depending on how you look at the market forecast information, there is a point soon In the future, when Ethernet exceeds InfiniBand, for AI specifically, beyond AI, I think it's game over already. Whether you measure the TAM in ports or dollars, Ethernet is forecasted To far exceed InfiniBand in the out years, so calendar 2025 beyond.

Speaker 2

And so if we think about from an absolute TAM perspective, forecasters are showing Ethernet dollars perspective. They're showing that Ethernet surpasses InfiniBand by 2025. And so the forecast show a CAGR for Ethernet of greater than 50%, while InfiniBand they're showing a CAGR of less than 25%. And so you can also look at this from a port cost perspective where InfiniBand is 2 to 4 times The ASP per port compared to Ethernet depending on who you talk to. And so in a sense, it's so secret that The world will continue to do what the world does.

Speaker 2

They'll pursue cost effective decisions. And we think from a technology standpoint, they're very similar. So if you think from a cost perspective, if you look at apples to apples, if you think that an InfiniBand port is 2x to 4x the cost of an Ethernet port, In a sense, you could justify that 1 to 3 of those ports of Ethernet are free in comparison to InfiniBand. So I think that our position here is that we really believe that Ethernet is going to prevail. We're working on so many AI programs, every single one of them is

Speaker 6

And then Bill, anything on the move by some of your Customers to think about co packaged optics and direct drive. And while I'm at it, maybe let me Ask Dan to have a follow-up on the fiscal 2024. I think Dan you suggested you're comfortable with where I think expectations are Right now, that still implies a very steep ramp into the back half. So I'm just trying to square The confidence in the full year with some of just kind of the macro caution that came through in your comments.

Speaker 3

Yes, we are confident in how we have guided. And as I mentioned, we're very comfortable with the If we look at FY 2024 as you allude to, there is we see strong sequential top line growth throughout the year In order to get to achieve those numbers and it's kind of well documented the What's happened at Microsoft to us for this fiscal year. So if we exclude Microsoft, what that means is we have In excess of 100% year on year growth of other product revenue from other customers, which again, we're very confident Based on all of the traction that we've seen recently that we'll be able to achieve that. And of course, I'll just reiterate one of the key drivers is AI and some of those Programs. So hopefully that gives you some additional color on our confidence for FY 2024.

Speaker 2

Yes. Regarding your question about the linear direct drive, that was, I think, this year's shiny object at OFC. I do think that the idea that it's really The idea is really to how to address the power challenges, basically move away from the optical DSP. I think that This is not a new idea. There was a big move towards this linear drive in the 10 gig Space when that was emerging and I think the fact that there is really none in existence, I think that the DSP was chosen then it really critical to close the system.

Speaker 2

Our feeling is that I think we'll see much of the same this year. I think Marvell did a great job in Kind of setting expectations correctly, they did a long session right after OFC that I think addressed it quite well. I think you'll see small deployments where every link in the system is very, very controlled, But these are typically very small in terms of the overall TAM. Now, we're fully signed up. If the real goal is power, that's exactly where we play.

Speaker 2

So we're fully signed up to looking at unique approaches in the future To be able to offer compelling things from a power perspective. And it's not like I'm completely dismissing The concept that was really behind the idea of linear direct drive, we're actually viewing that as a potential opportunity for us In solving the problem differently. But generally speaking, I don't think you'll see in the future a world where linear direct drive is measured in any kind of significant way. It's not to say that people aren't spending money trying to prove it out right now. That is happening.

Speaker 2

And regarding CPO, I think that was yes, like that was kind of a that was Something that was talked about for many, many years prior. And I think also on that, you'll see smaller deployments if That's ultimately something that some customers embrace, but I don't think you'll see it in a big way. That's simply not what the customer

Operator

And our next question will be coming from David Lu of

Speaker 9

This is David on for Vijay Mizuho. My first question is, assuming that if in fiscal 2025 data center demand for general compute improves and You see the continued new AI ramps. Can you provide any more color on the puts and takes there and The types of operating leverage is going to improve?

Speaker 3

But we're not giving specific guidance yet to fiscal 2025. But you're right and that the ingredients certainly exist where operating leverage. We should exit FY 2024 with pretty robust operating leverage And that we would expect based on what we know now to carry forward into FY 2025, but we haven't framed yet of course what that's going to ultimately look like.

Speaker 9

Okay, sure. And I guess for my second question, when you're talking with hyperscalers of these new AI applications, How important is sort of your TCO advantage when they're exploring a solution? Or are they currently kind of just primarily focused on time to market and maximum performance and just getting their AI deployments out there.

Speaker 2

So I just want to make sure you said total cost of ownership?

Speaker 9

Yes.

Speaker 2

Yes. It's I think it's hands down in favor of AEC. So if we look at 100 gig lane rates, I think The conclusion throughout the market is that there's 2 ways to deploy short cabled solutions. It's really AEC or AOC. If we look at it from a CapEx standpoint, AECs are about half the cost.

Speaker 2

If we look at from an OpEx standpoint, also about half the cost, about half the power, Half the ASP for an apples to apples type solution. So I think the TCO benefit is significant. The other thing you've got to consider is that Especially when you're down in server racks, these are different than switch racks in a sense that having a failure With your cable solution is it becomes a very urgent item. And so when we think about AOCs And the reliability in terms of number of years, it is probably Anywhere from 1 third to 1 tenth. The AECs that we sell are we talked about a 10 year product life.

Speaker 2

And so Kind of matches or exceeds the life of the rack that is being deployed in. The same cannot be true for it cannot be said For any kind of optical solution. So I think across the board, it's hands down the TCO is much more favorable for AEC.

Speaker 9

Okay. Thank you.

Operator

Thank you. One moment for the next question. And our next question will be coming from

Speaker 5

Thanks for the quick two follow ups. One, Dan, was there any contra revenue In the April quarter?

Speaker 3

That's an excellent question, Quinn. I'm glad you caught that. Actually, so There was and you will see that when we file our 10 ks. In the past, you've been able to see that in our press release, In our GAAP to non GAAP reconciliation. But from Q4 and going forward, we're no longer excluding that contra revenue from our non GAAP financials.

Speaker 3

And this really It came about through a comment from the SEC, not singling out credo, but actually all of Amazon's suppliers who have a warrant Where Amazon has a warrant with them. So the positive things of this change are You'll still be able to track ultimately what that warrant expense is, but when we file our Q and ks and Looking historically, there's not really it doesn't really make a reporting difference on a non GAAP basis. It was not material the difference. And it just makes calculation a little bit more straightforward going forward. Our only non GAAP reconciling item Going forward or at least for the foreseeable future is really just share based compensation.

Speaker 5

Got it. So the revenue Doesn't change, you'll just sort of you won't be making the adjustments for the contra revenue and the non GAAP gross margin calculation going forward? Got it. Okay.

Speaker 3

That's exactly correct. Yes, revenue is still revenue. It has a portion of it, which is contra revenue, which obviously brings down the revenue a little bit.

Speaker 5

Got it. Okay. And then for Bill, would you expect in fiscal 2024 a meaningful initial ramp of the 200 or 400 gig optical DSPs or would you continue to encourage investors sort of think that the optical DSP ramp is really beyond a Fiscal 20 24 event at this point?

Speaker 2

I think that when we think about Significant. We think about crossing the 10% of revenue threshold and we don't see that until fiscal 2025. We do see signs of life in China. And as I said, we're shipping 400 gig optical DSPs to U. S.

Speaker 2

Hyperscaler now. My expectation is throughout the year we're going to have a lot more success stories to talk about, but those ramps will most likely not take place within The next three quarters. So it's really a fiscal 2025 target at this point.

Speaker 5

Got it. But it starts this year just You're not calling it meaningful because it does hit 10% threshold?

Speaker 2

Right, exactly.

Speaker 5

Got it. Okay, thank you.

Operator

And that question will be coming from Tore Svanberg of Stifel. Your line is open.

Speaker 4

Yes, Tore here. Bill, maybe a follow-up to the previous question about 200 gig, 4 100 gig. I was a little bit more curious about 800 gig. Are you seeing any changes at all to the timelines there? I think the expectation was that the 800 gig market would Maybe take off second half of next calendar year, but with all those new AI trends, just wondering if you're seeing any Pulling activity there or maybe even seeing some cannibalization versus 200 gig and 400 gig?

Speaker 2

Yes. I think that My expectation is that this is really a calendar year 2024 type of market takeoff. And whether this is the second half or first half, We, of course, would like to see it in first half given the fact that that would imply that there would be success in pulling in AI programs. And so There's a lot of benefit that comes with 800 gig modules and the implication that it has on our AEC business. But I definitely See it kind of in that timeframe.

Speaker 2

I don't really see it as cannibalization of the 204 100 gig. It's really unless you look at it that these New deployments are in lieu of the old technology. But like I said before, every hyperscaler has their own strategy related to The port size that they plan on deploying, everybody's got a unique architecture and where we see optical is typically Typically in the Leaf Spine network, anything above the tour, in AI, I think the real opportunity is going to be with AOCs. And that I think is going to be a very large 800 gig market when those AI clusters really begin deployment, which again I think could be in calendar 2024. So appreciate the question though.

Speaker 4

Great. Thank you.

Operator

Thank you. That concludes the Q and A for today. I would like to turn the call back over to Bill Brennan for closing remarks. Please go ahead.

Speaker 2

Really appreciate the participation today and we look forward to following up on the callbacks. So thanks very much.

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Earnings Conference Call
United Maritime Q4 2023
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