Credo Technology Group Holding Ltd

NASDAQ:CRDO

Earnings Call Transcript 2022-Q3

[Operator]

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

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

[Dan O'Neil;VP, Corporate Development and Investor Relations, executive]

Good afternoon, and thank you all for joining us today on our first earnings conference call as a public company. 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 manager to predict all risks, nor can the company assess the impact of all factors on its business, or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statement.

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

Also during this call, we will refer to certain non-GAAP financial measures, which we consider to be an important measure of the company's performance. These non-GAAP financial measures are provided in addition to and not as a substitute for or superior to financial performance prepared in accordance with U.S. GAAP. A discussion of why we use non-GAAP financial measures and reconciliations between our GAAP and non-GAAP financial measures is available in the earnings release we issued today as well as in our S1, which both can be accessed using the investor relations portion of our website.

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

[William Brennan, executive]

Thanks, Dan. I want to thank you all for joining our call. Since this is our first earnings call as a public company, I'd like to start with a brief description of what we do. Credo is a pure play high speed connectivity company. Our goal is to deliver high speed solutions to break bandwidth barriers on every wired connection in the data infrastructure market. We've initially targeted the leading edge Ethernet market that's driven by the hyperscalers data centers. We're pursuing an exponential growth curve and speed and that's driving a large, fast growing market that because of its degree of difficulty, is a natural filter on competition. We're building our connectivity solutions to enable these explosive bandwidth increases for every optical and copper connection in the data center. Market forecasters expect the high end of the Ethernet market to grow at almost 50% per year. And we expect this will create a $5 billion plus Ethernet TAM for us by 2025.

Beyond data centers, we have seen other markets begin to experience exponentially increasing speed demands. And we see that as a great opportunity for us to expand beyond Ethernet. I'll talk a little bit more about that opportunity later. Core to our platform is our SerDes technology. High-speed SerDes is a very high hurdle technology that requires leading-edge high-performance analog design and signal processing, and it requires doing it with very low power. We are fortunate to have a team with decades of experience designing to just this type of challenge. With extraordinary focus on optimizing the mix of analog design and DSP, we can deliver differentiated connectivity solutions with optimized power efficiency and cost effectiveness at the highest speeds. This is why we've been successful in engaging with a broad customer base that includes several major hyperscalers, networking OEMs and ODMs as well as optical module manufacturers.

I would like to give a brief overview of our Ethernet connectivity solutions. The first set of Credo solutions I'd like to talk about are Active Electrical Cables or AECs. We began development more than 4 years ago, and we've been the pioneer in establishing this new category of connectivity solutions. We targeted our first efforts to enable disaggregated racks in the switching and routing layers in the data center. The traditional way of making these connections has been with passive copper cables, known as DACs. Now the problem with DACs, when you move to 56 gig single lane speeds to support either 400 gig or 200 gig ports is that the signal integrity becomes a huge challenge. Also, the thickness, weight and bend radius of the DACs make it very difficult to install and service, especially when you've got installers trying to route more than 200 large cables within very tight space in the front and the side of the rack. The loss of signal integrity though is the real issue with DACs.

Now we see the 200 gig and 400 gig market as a crossover generation, where some companies will commit to the struggle with DACs, but many others will move to AECs due to the signal integrity and form factor advantages. However, at 112 gig single lane speeds to support 800 gig ports, we firmly believe that DACs are dead. We also have a growing family of AEC solutions that target server racks with connections from the server NIC to the ToR switch. We're delivering highly innovative solutions driven by our hyperscaler partners. For example, in a collaborative effort with Microsoft, we recently introduced the Switch AEC, which enables a hitless dual ToR architecture. Our switch AEC is able to detect when a ToR port is failing and then instantly switch the data flow to the redundant ToR switch. This kind of innovation is simply not possible with DACs or Active Optical Cables known as AOCs. And over time, we're going to continue to add other equally innovative NIC to ToR AEC solutions to our portfolio.

Next, I'd like to talk about our solutions for optical modules. The first products we developed are optical DSPs that cover all the optical module deployments today in the hyperscaler data centers, including 100 gig, 200 gig and 400 gig and in the future, 800 gig. In addition to our full family of optical DSPs that we're promoting to the data centers, we're also promoting single lane 50 gig optical DSPs for the 5G infrastructure market as well as 64 gig single lane optical DSPs for the fiber channel market. Over time, you'll also see Credo expanding our optical solutions in the future, starting with laser drivers. This week at OFC in San Diego, we announced and are demonstrating our first laser driver solutions.

Next, I would like to talk about our Line Card PHYs. These are solutions optimized for the copper connections needed by switch line card makers for backplane and front panel connections. We also see emerging high-speed server applications as an opportunity. We're selling our Retimers, Gearboxes as well as MACsec devices, devices that provide encryption for applications where security is critical. We've got a complete family of solutions covering the 100 gig, 200 gig and 400 gig port markets. And this week, we announced our products for the 800 gig and 1.6 T port markets.

Finally, Credo has SerDes IP license and chiplet solutions, which we've delivered to highly regarded customers across various end markets. While we are primarily a product company, we believe our IP and chiplet solutions are very strategic, enabling us to engage in highly collaborative relationships with industry-leading customers. We count more than 30 customers that have chosen our SerDes IP and chiplet solutions.

When we talk about our competitive advantage, we start with a term called [ N-1 ] in reference to the process technology that we're using to deploy our solutions. For any given speed, we can engineer a solution in a more mature process and N-1 process technology. And that gives us an advantage on development cost as well as our wafer cost. This is where optimizing analog and DSP architectures and doing it all with low power and very small die sizes results in a remarkable value proposition for our customers. This is a true differentiator for Credo.

Next we bring a purpose-built mentality to our solutions. We don't view every link as a one-size-fits-all technology challenge. We engineer solutions that are optimized for the many different links we serve. We've got optimized solutions for optical as well as the many different types of copper links in the data center. We've got a wide range of SerDes architectures to address the many different links. We have both mixed signal and DSP architectures that are optimized for speed, power as well as die size. We believe we're the world's leader in mixed-signal architectures, and we believe we are the most highly differentiated company for DSP architectures, especially at 112 gig speeds and beyond.

The final source of our competitive advantage is system expertise. We focus on delivering system-level end-to-end signal integrity. We've also developed a tightly coupled [indiscernible] base that adds system design flexibility, and we're driving leading-edge system level test solutions. I'd point to our AEC family as evidence of the fact that we've gone very far with our system-level mentality. We're delivering a complete system solution versus just an IC solution.

All of this boils down to Credo delivering optimized signal integrity, power efficiency and cost effectiveness. This is really the key to our success. We feel that our customer engagement is the best validation of our differentiation because when our customers choose to engage with Credo, they're choosing to bet their next-generation platform on our execution, ultimately, it takes a huge amount of trust to make that kind of decision. We're engaged with 5 of the top 7 hyperscalers, and we count more than 20 additional blue-chip clients that include networking OEMs, ODMs as well as optical transceiver manufacturers and many others. So I'm very happy with where we are with customers.

Now let's talk about new opportunities that we see within our sites that are beyond the Ethernet market. Other connectivity standards in the data infrastructure market are also experiencing an exponentially increasing demand for higher speed and higher bandwidth. We're committed to serving the most demanding high-speed markets where we can deliver the same advantages in power efficiency and cost effectiveness. So in addition to the Ethernet market, Credo will deliver high-speed connectivity solutions for the USB and PCIe markets. Our solutions are targeting next-generation speeds, so it will be some time before we ramp our products. Our go-to-market strategy will be similar to our strategy for Ethernet, leading with IP licensing and following with products.

I'm happy to say that we've signed our first major USB IP license, and that's with an industry leader in the consumer market. We expect these 2 markets will bring us more opportunity and diversity in our customer base, and we believe this will add roughly $3 billion in TAM in the 2025 time frame. Of course, none of our goals will be obtainable without our tremendous team of employees. We've scaled our organization very quickly over the past several years, and we now employ well over 350 people globally. This team enabled us to achieve strong results in fiscal third quarter ended January 31, 2022. During this most recent quarter, we achieved approximately $31.8 million in revenue and delivered gross margins at approximately 61%.

With that introduction, I'd now like to turn the call over to Dan Fleming, our CFO, to provide more details on our January quarter results.

[Daniel Fleming, executive]

Thank you, Bill, and good afternoon. I will first review our Q3 fiscal '22 results and then discuss our outlook for Q4 fiscal '22. As a reminder, the following financials will be discussed on a non-GAAP basis, unless otherwise noted.

I'm pleased to share with you that we achieved record revenue of $31.8 million, up 20% sequentially and up 136% year-over-year. This record result was largely driven by strong revenue growth of our products, which also reached a record of $26.7 million for the quarter, up 35% sequentially and up 190% year-over-year. Our product revenue ramp is at an inflection point as our revenue mix shifts from being IP focused to product focused. This revenue mix shift is first being driven by our AEC products, which continue to ramp at our first hyperscale data center customer. Our largest customer in the quarter was 40% of total revenue, which was associated with this AEC ramp. We expect this customer to remain a large portion of our revenue in the coming quarters as their AEC ramp continues.

Our IP business generated $5.1 million of revenue in Q3, up 20% year-over-year. IP will remain a strategic part of our business, but our IP results will vary from quarter-to-quarter, driven largely by specific deliverables to preexisting contracts. While the mix of IP and product revenue will fluctuate in any given quarter over time, our revenue mix in Q3 was 16% IP, slightly above our long-term expectation for IP, which is 10% to 15% of revenue. Against the backdrop of a challenging supply chain environment, our team delivered gross margin of 60.7%, up 20 basis points sequentially and up 43 basis points year-over-year. Our IP gross margin generally hovers just below 100%, and our product gross margin was 53.5% in Q3, up 564 basis points sequentially and up 867 basis points year-over-year based largely on leverage from our strong product growth.

Total operating expenses in the third quarter were $18.2 million, up 51% year-over-year as we scaled the organization for growth, but slightly down sequentially as certain R&D project-related spending slipped into Q4. We delivered net income of $2.4 million in Q3. Net income expanded by 20 percentage points sequentially and 41 percentage points year-over-year, a testament to the operating leverage we are driving in the business. Our earnings per share was $0.03 in Q3, up $0.10 year-over-year. Cash flow from operations in the third quarter was $1.7 million, an increase of $7.1 million year-over-year. CapEx was $2.9 million in the quarter and free cash flow was negative $1.2 million, an improvement of $7 million year-over-year. We ended the quarter with cash and equivalents of $240.5 million, an increase of $169.5 million over the second quarter. This increase in cash came from the net proceeds of our successful IPO completed in January.

Our accounts receivable balance declined 25% sequentially to $21.7 million, while days sales outstanding declined to 71 days, down from 101 days in Q2. Our Q3 ending inventory was $26.1 million, up $4.8 million sequentially as we continue our sequential product ramp.

Now turning to our guidance for the fourth quarter. We currently expect revenue in Q4 fiscal '22 to be between $37 million and $41 million, up 97% year-over-year at the midpoint. We expect Q4 gross margin to be within a range of 59% to 61%. We expect Q4 operating expenses to be between $21 million and $23 million, including the R&D project-related spend that slipped from Q3. And finally, we expect Q4 weighted average diluted share count to be approximately 158 million shares.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Vivek Arya with Bank of America.

[Vivek Arya, analyst]

And congratulations on achieving the IPO milestone during such a tough time for the market. So a few for you. First, on the AEC market, from what we heard at the recent OFC trade show, seems the size and growth of the market could be larger than previously thought, but we also heard of some incremental competition from Marvell and maybe others. So maybe give us a perspective of how large AEC is for you today? Where can it go over time? And how do you see this emerging competition?

[William Brennan, executive]

Yes, that's a great question. Very much appreciate it. Let me talk about the -- what you saw down at OFC in San Diego. So Marvell made an announcement that they're entering the AEC market in a big way, and we think this is great. [ Matt ] and his team have a strong track record for making good decisions, and we think that he's made another good one. I'll say that this is an important thing for the AEC market in general. For the past several years, many of our potential competitors have been dismissive of the AEC market opportunity, even going as far as to evangelizing a world that will become exclusively optical. And so we see their announcement as a great validation that Marvell and others agree with our long-held belief that AECs really deliver great advantages and will become a de facto solution for short in-rack connections in the future, especially as speeds go beyond 400 gig. And so at OFC, this is where we're demonstrating our AEC solutions, including the 800 gig.

And I'd be honest with you, Marvell's announcement couldn't come at a better time because it drove huge excitement and interest in our booth.

And so kind of reflect a bit on our belief with our approach. And we've talked about pioneering this product category. We were the first to really invest in a big way. And as a result, we took really a system-level approach. We've built a team internally at Credo that focuses exclusively on the AEC system solution. And so we take responsibility for all aspects, including definition, execution, qualification, quality and reliability of our solutions. And we are fully standing behind our AECs. We're taking the full responsibility with our customers. And so we think this approach has been critical to our success thus far, and we're intending on increasing our investment over time.

Now as far as the size of the market, we've talked about this being a market in the 2025 time frame that is in the $3 billion range annually. Now I think that as different data centers move towards faster speeds in the switching and routing layer as well as in their server racks, you may see that market increase in size. It's kind of hard to peg it right now. I think that we're comfortably sitting with a 100% market share as we're the first to really come out of the gate in high volume. But I think, generally, we're really focused on the large opportunity that's in front of us during the next couple of years.

[Vivek Arya, analyst]

And for my follow-up, maybe, Dan, one for you on gross margin. How do you see the evolution of gross margins for the next several quarters as your mix changes perhaps more to the product side? And as part of that, if you could just help me clarify the gross margin that you reported because when I take the 19.565 in non-GAAP COGS and divide it by [indiscernible] I actually get 61.5% gross margin, not 60.7%. Maybe I'm just missing something simple there, but if you could clarify that and just give us your perspective on how gross margin evolves this year?

[Daniel Fleming, executive]

Yes. That's a great -- I'm glad you pointed that out, Vivek, because I like your number more than ours. We had -- because of the way our non-GAAP reporting is done, you might have noticed in the reconciliation, there is a warrant contra revenue item. So for non-GAAP purposes, we add back that contra revenue. So when you're calculating gross margin, you need to make sure you add that back to the denominator in your calculation. So that's the difference between the 60.7% and the 61.5%. So while we have this warrant outstanding and there is contra revenue, we'll continue to recognize revenue on -- or sorry, recognize gross margin on this more conservative approach.

Getting to your broader question, our outlook has not really changed significantly since we last spoke. From -- let me highlight a few things. From Q1 to Q3 of this year, of fiscal '22, our product gross margin, if you calculate that, it's actually expanded more than 900 basis points, a nice expansion sequentially each quarter. And that's largely been driven by our increasing scale as we ramp these new products, especially the AEC product. But now we expect these gross margins to expand from this point forward on a -- in the upcoming years, but we don't expect it to be a purely linear expansion.

So there will be some margin variation from quarter-to-quarter as we're ramping different products and different customers over the course of time. But if we look kind of in a longer view over the next few years, our product gross margins will continue to expand as we gain scale. And really what that's driven by is the relatively fixed portion of COGS becomes a smaller percentage of total COGS. In addition, these product mix changes over the upcoming years will continue to drive margin expansion as well. For instance, optical will become a larger revenue contributor in FY '23 and '24, where that's just starting to ramp currently in FY '22.

And then the last thing I'll mention on margin expansion, in our view, is just the market dynamics of the AEC market, when we get to 400 gig AEC cables, we believe that there's a -- it's a very favorable margin expansion story at that point because of different market dynamics.

[Operator]

Our next question comes from the line of Toshiya Hari with Goldman Sachs.

[Toshiya Hari, analyst]

Congrats on the whole process and the strong execution in the quarter. Bill, I wanted to ask you about the supply side of the equation. Obviously, very tricky times for everyone out there. And during the IPO process, I think you expressed your confidence in your ability to secure supply, whether it be wafers or substrates or what have you. I was hoping to get an update on the outlook there for the next couple of quarters. It feels like things have gotten a little bit more difficult, a little bit more challenging over the past couple of months. But how are you feeling about supply and your ability to address demand for the next, call it, 6 to 12 months? And then I've got a quick follow-up.

[William Brennan, executive]

Sure. Sure. Thank you, and thanks for the question. I love the question because it kind of points out another strength that I believe that we've built as we've built the company over the last several years. We've got a deeply experienced operations team that really has deep relationships within the supply chain. A lot of people were starting to treat the supply chain strategically when we first started seeing tightness. We really -- we go back to 2016 time frame when this team was really forming. And so we've taken a strategic approach. We've always stayed very close in terms of our business plan and our forecast with our supply chain. And so really about 12 to 18 months ago, we really formed a much more structured long-term planning approach. And so I feel very good about where we are. I think that even beyond the next couple of quarters, I see no issues with supporting our very quick ramp.

Another thing I'd like to point out is that we've got a deeply experienced customer-facing team. And so the supply chain challenges have been something that we've gone to our customer base with in a sense of bringing a more structured planning approach on that end of it. And so believe it or not, I think that the tightness here has drawn us closer to our supply chain as well as drawn us closer to our customer base. So I feel confident at this point that we're not going to see disruptions.

[Toshiya Hari, analyst]

That's great. And then as my follow-up, I had a question on the AEC business as well. In your prepared remarks, you mentioned that you had a 40% customer in the quarter, and obviously, that customer is doing a lot with you guys in AEC. How should we think about the broadening of your customer base within AEC over the next couple of years? Again, I suspect this specific customer to be the vast majority of your business in the near term. But if you can talk a little bit about sort of the design-in activity and the back and forth you're having with customers, specifically in AEC, that would be super helpful.

[William Brennan, executive]

Right, right. Another good question. And so generally, let me say that we're really happy about the AEC ramp with that customer, and it really speaks to the overall growth potential, of the overall AEC market opportunity. And so I think you can kind of look at this that this is really the nature of being a small, truly disruptive company in a fast-growing market. There's always going to be a first mover as the new innovative product categories brought to market, proven and ultimately adopted by the first one. And so from our perspective, this is really a validation. And it's really unavoidable that a small company entering a fast-growing market with a limited number of players, it's -- we expected to see a high customer concentration as the revenue scales.

And so we believe, really long term, that all hyperscalers will use AECs in some form or fashion, whether in the switching and routing layers or in the server racks, especially as singling speeds increase. And so the question that you ask is when are we going to ramp our second big customer. And we think that's coming in the upcoming quarters. I will say that we're deeply engaged with the second hyperscaler and things have progressed very quickly. And so this is, again, it's more validation. We're also engaged with several other customers in the whole conversation about AECs. This product category is really quite unique in a sense that we're entering into architectural level discussions with the hyperscalers for their next-generation deployments. So the answer to your question is, I see really within the upcoming quarters, we'll ramp our second large customer. And then over time, I see the opportunity expanding really more broadly.

[Operator]

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

[Quinn Bolton, analyst]

I'll offer my congratulations on the IPO and the first successful quarter post. Bill, I wanted to, again, follow-up on the AEC market. As you walked the floor at OFC, are you seeing any of the AEC competitors looking to develop a switch AEC that could serve as a second source to your product line? And then a follow-up question, you mentioned, I think, today you're ramping 100 gig AECs at your first customer. Dan mentioned, as you get to 400 gig AEC, the margin profile increases dramatically. Can you just give us a sense from a timing perspective, when do you think you start to ship some of the higher-speed AECs, especially the 400 gig and 800 gig AEC versions?

[William Brennan, executive]

Yes. I'll make one correction. I think Dan meant to say the 800 gig is really where we see an opportunity. And it's really a shift from single lane speeds being 56 gig, shifting to 100 gig single lane speeds. And so please make note of that. The -- I think that the way that we view the opportunity is really there's 2 distinct markets. One market is in the NIC to ToR server racks. And then the other one is with disaggregated chassis or disaggregated switch racks and routers as well. And so that's really -- we're shipping to customers. These customers are smaller. They're not the top 7, but we've had customers make a very, very quick decision to adopt our technology. And so we're shipping in production for 400 gigs. But it's not material in a sense of comparing it to our first NIC to ToR customer.

And so it's really a function of each data center, when they really make the conversion and ultimately it comes down to an architectural decision. And so I think that what we'll see is during the next, say, 12 to 18 months, we'll start shipping in a much bigger way for the 400 gig.

[Quinn Bolton, analyst]

And anything on this competition wise to the switch AEC that you provide?

[William Brennan, executive]

Well, of course, our data center customers, of course, they want multiple sources. This is part of the rules of the road for them. And so we've had a couple of competitors try to come up with the switch AEC that we're shipping in production. I think one of the competitors hit the end of the road, and they're no longer trying to build the solution. But I think there's another company that has possibly delivered samples and is in the process of trying to get qualified.

[Quinn Bolton, analyst]

And then just moving to the line card ICs. You guys introduced the Sparrow and Heron retimers and gearboxes this week. Can you just give us a sense, I think at least one of them is currently sampling or maybe already shipping in production, but can you give us a sense of the timing for the revenue ramp on those new solutions?

[William Brennan, executive]

Well, it's really -- it's going to be based on when the 100 gig -- the 100 gig single line switches start shipping. And so I think, generally, we're encouraged. Our line card business is a very nice business for us. It was the first business that we ramped and it's very stable and steady. It's not maybe the largest market opportunity, but we think that the trend towards faster singling speed on switches will drive growth in the market. So I think we're really very well positioned when that market takes off. It's hard for me to guess, but I would say that it's going to be maybe more than 6 to 12 months from now.

[Operator]

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

[Jeremy Kwan, analyst]

This is actually Jeremy calling in for Tore. A question, I guess, on the -- following up on the Sparrow and Heron and specifically for the retime, the Heron. Is there -- are there any advantages in pairing it with your high wire AECs, whether on the AEC side or on the line card side?

[William Brennan, executive]

Yes. So that's -- it's interesting. I'll also note that some of the 100 gig per lane switches will go with a 2 RU form factor on the front panel and they'll use 400 gig ports. And so that's in an effort to try to get to market quickly without having to wait for 800 gig solutions to be available. And so the Heron part, there's a gearbox mode where it can receive 100 gig lanes from the switch and then it can speed shift to 50 gig lanes for the 400 gig modules.

And so naturally, if you're using a combination of products, there's going to be extremely straightforward interop. But again, we're building -- the whole industry is building towards an IEEE standard. And so I wouldn't expect that there's a huge advantage. We're not building in secret features if we're following the standards. So I would expect that it would be very straightforward, maybe more straightforward than connecting with another solution, but no huge advantage.

[Jeremy Kwan, analyst]

And then as we look to opportunities beyond Ethernet, you mentioned USB and PCIe and with the first customer on the consumer side. Can you tell us, for USB, can you tell us what kind of applications specifically you see ramping first? And then over time, what's the balance between USB and PCIe in terms of the TAM?

[William Brennan, executive]

Good question. And so I think that the folks that follow the standards in the USB space know that there's typically a doubling of speed every generation. And we expect that laptops, tablets will be the first application that adopted the fastest speeds. We expect that the peripherals that you plug in to laptops or tablets will need to go to that same speed to really take advantage for the applications that want to take advantage of the bandwidth. And then I think there's a large market in cabling as well. Because of that speed, there is a necessity to have some sort of active solution for cables that are over even 2 feet or less. So we expect those will be the first markets to ramp. And I think there are other applications that will drive high bandwidth that will follow.

[Jeremy Kwan, analyst]

And TAM expectations in terms of USB versus PCIe.

[William Brennan, executive]

We see that USB has the larger potential. I would probably break it down to maybe 60% to 65% of that number that I said would be TAM driven by USB and then the balance would be for PCIe.

[Jeremy Kwan, analyst]

Congrats on a great quarter.

[Operator]

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

[Vijay Rakesh, analyst]

Hello, Bill and Dan, I'll add my congratulations on a solid IPO and a good first quarter here. Just on the -- on your visibility. I was wondering, your peers have talked about very strong visibility into first half. So just wondering how your visibility was. And if you -- how the backlog looks like as well? And I have a follow-up.

[William Brennan, executive]

Yes. So just to make sure that we understood your question. You're asking about our visibility in the first half as well as…

[Vijay Rakesh, analyst]

Yes, as you look out.

[William Brennan, executive]

Yes. So as I mentioned before, part of the process that we've gone through with our customers due to the supply chain challenges is to really get as far a look possible at what their demand profile will be. And so I would say that we've got good visibility right now. And we're on a very regular basis, trying to refresh that visibility with our customer base. It is critical to make sure that we've got products that we can supply. So I think that our visibility is probably better now than it was prior to the kind of supply chain tightness.

[Vijay Rakesh, analyst]

And on the -- going back on the Marvell question, I know they are doing this probably with Amphenol. But I think where you differentiate is, you have a much more integrated cable that goes in sync with your SerDes steps. And obviously a much broader portfolio with speed and phase shift and [indiscernible] as you have noted before. But it also took 2-plus years to kind of get this out in the feet and qualify it, right? So is that -- shouldn't that be a pretty significant proprietary moat for you going forward? That's it.

[William Brennan, executive]

Yes. It's a very good question. And I can speak to our approach. I don't feel great about speaking towards a competitor's approach and playing that game. What we found as we were in development on these AEC solutions is that it was not straightforward to hand off our device to a partner and expect a partner to take it forward, even if I provide the firmware as a starting point. And so that's why we quickly decided to assemble our own team internally that took ownership of every aspect of the design, all the way through qualification. We defined the test, the equipment that's used to test our cables. We wrote all the firmware for the test. We wrote all the firmware on the cable side. We optimize every single pair of wires for signal integrity as part of our manufacturing process. But we are defining every step.

And so we felt like taking the full responsibility and really standing behind it with our customer base was the right approach, very similar to our IC solutions. It's the single throat to choke mentality. If something happens to go wrong, you can't be pointing at each other saying, it's not my problem. And so this is our approach. And we feel like it was critical for our success. It's not to say that others couldn't overcome the hurdles of trying to divide the work and divide the responsibility.

[Operator]

[Operator Instructions] Our next question comes from the line of Suji Desilva with ROTH Capital.

[Sujeeva De Silva, analyst]

Hello, Bill, hello, Dan. So the initial customer that's ramping up here. Can you talk about whether there's an initial ramp volume or whether it should be steady going forward, Dan, in terms of this lead customer that's kicked in initially?

[Daniel Fleming, executive]

Yes. Unfortunately, we can't really talk about specifics about customer engagements like that at that level of detail.

[William Brennan, executive]

I would probably add that we're in the early stages of the ramp. We expect it to continue to ramp throughout the calendar year. And it's really a function of their own plan. And that's ultimately, we're trying to stay as close as possible, and we're getting forecasts that go out in time even to the order of 12 months. And so I think it's something you'll see continuing to ramp.

[Sujeeva De Silva, analyst]

And then just for the other customers that are coming, following on, can you remind us the length of the qualification cycle on average? And is that what is going around right now? Or is it more driven by the customers transitioning to various platforms that would bring you in? Any distinction there would be helpful.

[William Brennan, executive]

Sure. So it's very interesting. If we look at some of the cables that we're targeting for the switching and routing layers. These are 400 gig or 200 gig solutions. And it's really great because when a customer decides to qualify the cables, it is a very straightforward thing. We ship them enough cables to build a rack. They have some of the rack, they qualify the solution, and they can begin production really quickly. So from start to production could be as short as 6 months because this is a fully baked solution.

When we're looking at a line card design, you get involved in the first stages of a big switch maker laying out their PCB. And sometimes it takes on the order of 18-plus months to go from first effort to production. And so it's really nice, the work on the AEC, because it is a system solution has done before and it can be very quickly qualified. The first ramp that we've had, this was really a collaborative effort. This was one where kind of core to our values are the concept of listening to customers, helping them solve problems and making them successful.

And so this is an opportunity where we earned enough credibility for our customer to approach us and say, "Do you think this is possible. And from start to production was on the order of 18 months in that case. But again, this is evidence of the fact that there's real innovation opportunities that have never been seen before because nobody has really taken approach to make an active solution like we have.

And so I will say that the second effort that we've got underway, the second engagement is in a -- it's a similar type of engagement, where they're not picking up a standard cable that we've developed. It's something that's, again, an idea that comes from listening to our customers and helping them solve their problems. And so that one is not going to ramp so quickly. But I would say in the upcoming quarters, we'll see the initial ramp.

[Operator]

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

[Richard Shannon, analyst]

Congratulations on the first quarter out of the gate here. Maybe I'll just ask a quick tactical question for Dan on the guidance here. I think you're suggesting from your prepared remarks that cables will be the kind of the big sequential driver here. So I just wanted to check to see if that conclusion is right and if you're expecting IC growth, product IC growth to also grow. And then just kind of as a corollary to that, you talked about a 40% customer in the last quarter. Is it safe to think of this concentration being at least with that high in the April quarter as well?

[Daniel Fleming, executive]

Yes, those are all astute questions. We -- the last question, yes, we would expect in Q4 a similar type of concentration as customers are going through that ramp right now. And as far as what's driving growth in Q4 in our guidance, it really is, you're correct in your assessment. It really is AEC. We expect our IP revenue to be relatively healthy as well. And generally speaking, yes, you're accurate. You're correct.

[Richard Shannon, analyst]

Bill, a question for you, since I had heard a question here on your optical ramps here. Just want to get your latest update, especially as your team goes through OFC and your thought process and timing of when you're expecting to see a real ramp-up in production volumes on the TAM for DSP side?

[William Brennan, executive]

Sure. Yes, it's been a big week for us at OFC. We've got a large team down in San Diego. We feel like we're in great position on our optical products, and this is a product development that is a little bit longer in nature to get to production because we've got to get through qualification with our customers, and they've got to get through qualifications with the hyperscalers. I'm happy to say that we've started production shipments to several customers. Not a material amount of revenue yet. It's small, but we do expect that the large number of design engagements that are ramping in the upcoming quarters will generate material revenue in our fiscal year '23. And so it's also interesting. We've got solutions that cover the 50 gig per lambda market as well as the 100 gig per lambda market.

And going back 5 or 6 years or so, I was new to the market and the market was basically -- the forecasters were saying that 100 gig per lambda is coming, and that's the only market that you should target. Ultimately we made the decision to invest in 50 gig per lambda. And although many industry watchers believe that the 50 gig per lambda market was cast in stone, we're now playing the role of disruptor. We've got multiple engagements, including 200 gig, 400 gig, singling 50 for 5G and also 64 gig for fibre Channel. And so it shows that although it's important to be on the leading edge, there's still great opportunity in existing markets.

And I think everybody is aware that 3 major data centers are going with a 200 gig module approach for their ramping next-generation architecture. We also have several design engagements for 100 gig per lambda, including both 100 and 400 gig. Down at OFC this week, we're demonstrating a broad set of our solutions, including 200 gig, 400 gig, 800 gig as well as the single lane products I described. I'll note that our module partners played a big role in helping us with demonstrations. II-VI, Accelink, [ CIG ], Hisense, Luxshare and [ ONET ] all provided Credo-based modules that are being demonstrated this week. So I think a little bit more on it. I think key to this market is driving best performance with best power efficiency and doing it with the best possible cost. It can make or break the customers in this market, depending on how cost-effective your solution is.

And so we are demonstrating 800 gig at OFC and I'll say that we're probably never going to win the competition on press releases. We're just a little bit more conservative in our approach. But I'm really confident that we'll have equal or better performance in power. But for sure, we're going to deliver the most cost-effective solution. And that's really based on our N-1 process approach.

[Operator]

I'm showing no further questions in the queue. I would now like to turn the call back over to Bill for closing remarks.

[William Brennan, executive]

Yes. So thank you, everybody, for participating -- actively participating in our first earnings call. We very much appreciate your ongoing interest in Credo. So with that I'll say take care until the next time we talk.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.