DustPhotonics Ltd ($CRDO)

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.

Good morning, everyone. Thank you for joining our call in connection with our announcement that we have entered into a definitive agreement to acquire DustPhotonics. Today, I'm joined by Bill Brennan, Credo's Chief Executive Officer; and Dan Fleming, Credo's Chief Financial Officer. During this call, we will make certain forward-looking statements. These forward-looking statements are subject to risks and uncertainties discussed in detail in our press release and our documents filed with the SEC, which can be found in the Investor Relations portion of the company's website. It is not possible for the company's management to predict all risks, nor can the company assess the impact of all factors on its business 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 statements. Given these risks, uncertainties and assumptions, the forward-looking events discussed during this call may not occur, and actual results could differ adversely and materially from those anticipated, implied or inferred. 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. With that, I will now turn the call over to Bill.

Thanks, Dan. Yesterday, we announced that Credo has entered into a definitive agreement to acquire DustPhotonics, a leader in silicon photonics PIC technology. This is a meaningful step forward for Credo. It expands our optical portfolio and strengthens our position across the full connectivity stack for AI infrastructure, from copper to optical and across front-end scale-out and scale-up networks. Over the last few years, we've built a strong foundation in high-speed connectivity by combining SerDes, DSP and system-level design. As AI clusters scale, the requirements around reliability, power and performance are only getting tighter. This move is about staying ahead of those demands. By combining forces with DustPhotonics, we bring together our technology with their silicon photonics PICs to create a more complete connectivity platform. There is a clear near-term revenue opportunity. DustPhotonics has strong stand-alone PIC business with design wins at leading hyperscalers. Their technology simplifies architectures, reduces laser counts and supports higher speeds with a road map to 3.2 terabits per second. This becomes an additional growth driver for us, starting in fiscal '27. At the same time, this strengthens our ZeroFlap optics platform. By owning both the DSP and the PIC, we can deliver a more optimized system level design, move faster on product development and improve margins. DustPhotonics also adds a complementary road map in laser-based CPO and NPO, alongside our micro LED initiatives. Having both approaches allows us to meet a broader set of customer requirements as architectures evolve. From a financial standpoint, we continue to see strong growth in our AEC business through fiscal '27 and beyond. Combining DustPhotonics with our broader optical portfolio, we now believe this marks an inflection point, with combined optical revenue expected to exceed $500 million in fiscal '27. This is a natural extension of how we deliver value at Credo. We've taken a system-level approach and focused on owning more of the stack to create better solutions. DustPhotonics brings world-class expertise. And together, we're in a stronger position to deliver reliable, energy-efficient connectivity at the scale our customers need. We expect to close in the second quarter of calendar '26, and we look forward to sharing more at that time. Thanks for joining us. We'll now open it up for questions.

[Operator Instructions] Your first question comes from the line of Quinn Bolton with Needham & Company.

Congratulations on the acquisition, makes sense strategically. I guess, Bill, I guess a big question for me. You're talking about now, $500 million of optical product revenue in fiscal '27. Is there any breakdown you can give us, how much of that comes from ZeroFlap optics? How much might come from the optical DSPs? And how much comes from the stand-alone PICs that DustPhotonics is selling into either direct into the hyperscalers or module vendors to the hyperscalers?

We're not going to break it down, but I can tell you that we've got strong momentum in optical DSPs, ZF optics, and with Dust, we'll add to that momentum. So it's going to be a combination of all 3.

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

Congratulations on the deal. Bill, I was hoping if you could elaborate a little bit more on this system-level approach in the optical space. So obviously, now you got the DSP, you got the PIC, I do know there's a few other components out there. But -- just was hoping you could elaborate a little bit on that? And was that sort of a push from customers? Or is this basically for leveraging the success that you already had in AECs to creating more of a vertical business model to the optical space as well?

Sure. We are absolutely building on the system level approach that we've taken with AEC. So within AEC, of course, there's really 1 key component, and that's the DSP. For optical transceivers for ZF optics, of course, the optical DSP is important, but there's other components like the PIC that are really critical to building out an optimized system level design. That will enable us to build a better system-level product. And ultimately, it will allow us to improve margins as well because we're eliminating a component where there would be margin stack if we're buying it in the open market. But I will say we're excited about the large market opportunity in the stand-alone SiPho PIC market. Analysts expect this to be a multibillion-dollar opportunity in the upcoming years. And when we add this component to our optical DSPs, we think it's highly complementary. And it really allows us to offer our transceiver customers a more complete solution as well.

Your next question comes from the line of Tom O'Malley with Barclays.

I had a question kind of on the dual road map that you're now going to be running. So Dust obviously uses laser-based technology for their NPO-CPO road map. You guys have shared historically just around your LED intersection with that technology trend. Could you maybe talk about customer traction that Dust may have in CPO today? Maybe where they're manufacturing the PIC today? And then just in the future, why you think you need those 2 kind of avenues to address the technology?

Sure. So we see the opportunity for CPO and NPO, something that's very much developing. I think there's going to be different approaches. And the micro LED effort that we've got -- this is a solution that at a fundamental technology level, addresses the reliability issues with laser-based solutions. And so we're very much going to continue to invest heavily in that area. As it relates to silicon photonics PICs, if you look at the work that we've done with ZF optics, as we look at the telemetry information and managing impairments that come with laser-based optics, there's an added layer with the DustPhotonics PIC, their sensors in their solution, and that's really going to enhance our telemetry capabilities. So when we look at NPO-CPO, we definitely see a diversity of solutions that will exist in the market. And our goal is to really cover the -- any approach that our customers want to take.

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

I had questions on some of the financials that you described. So first, on the $500 million in sales, I understand this is more kind of vertical integration at this point. But -- and I'm wondering how that $500 million, how does it compare to what you thought before the deal or how you thought about that a few months ago, so i.e., how much of it is incremental to the way, right, we all think about the company's current growth trajectory? And then secondly, maybe if you could give us a sense for how the margin structure will evolve as hardware, right, or transceivers become a greater part of the mix, are you expecting them to come at the same gross and operating margins as your core business? Will there be a shift? And longer term, is there a certain business mix that you are heading towards in terms of what you do with AECs versus optics?

This is Dan Fleming. So let me answer that question. So first, with regard to the $500 million that Bill referenced. So it is above what we had previously guided. Our fiscal '27 revenue is now expected to grow in excess of 75% year-over-year, and that's with a mid-single-digit sequential growth through the first half of the year and the second half inflection driven by that ramp of our optical portfolio, which is optical DSP, ZF optics and now, our silicon photonics platform. So from a margin perspective, everything that we've announced so far is within our expectation of our long-term model. On ZF optics, in particular, as we integrate silicon photonics, our own solution into our ZF optics, that is accretive to the overall ZF optics story. And we've previously stated that ZF optics, as we expect, is within that long-term gross margin model [ mid 60s ] percent as well.

Your next question comes from the line of Joseph Cardoso with JPMorgan.

Bill, you touched on it briefly in your prepared remarks, but I'm curious if you could flesh it out a little bit more for us that are less familiar with Dust and kind of what they bring to the table. And specifically, I wanted to see if you can elaborate about how their PIC or other technologies are differentiated relative other solutions or similar solutions in the market today? And then beyond the obvious benefits of owning another piece of the technology stack, like what specific value does their technology deliver for Credo to become more competitive in the market as it relates to their -- to your guys' optical portfolio?

The silicon photonics PIC really brings an added complement to the system-level solution that we're building. And as I mentioned before, the -- our ability now to sell a more complete portfolio at a component level is really additive as well. When we look at -- there's different ways of building optical modules. Silicon photonics is a more simple, lower-cost solution than, say, EM lasers that have dominated the data center optics in the past. And so we think that again, this is a really critical component to build on, both at the system level as well as the component level. And when we think about what the future brings for NPO and CPO, this will absolutely give us a clear path on that front as well.

Your next question comes from the line of Sean O' Loughlin with TD Cowen.

Congrats on the acquisition and the momentum. Sort of building on Joe's question, I was wondering if you could talk about the motivations for why it was -- why you felt the need to bring this asset in-house rather than just source PICs from them on the merchant market? I understand the portfolio expansion aspect, for sure. But is there something specific that maybe you can bring to help them scale? Or is it really just about the additional incorporation of their technology into the transceiver, both margin and portfolio?

Well, first, we see a large market opportunity in the stand-alone PIC market. I mentioned earlier that it's a multibillion-dollar market per analysts, and that's really in the very near term. By 2030, some analysts call it a $6 billion market. So there's a very large market opportunity. The technology that Dust has developed is leading edge. And just that as a stand-alone business that's additive to what we're doing is very meaningful. But maybe more importantly, our ability to build the most optimized ZeroFlap optics platform is going to be enhanced by having this PIC as another key component to the optical DSP. I mentioned earlier that from the standpoint of moving faster on product development and improving margins, this is all part of a system-level approach that we're taking. When we look at the opportunity for both front-end and scale-out, we see pluggable transceivers, both optical and copper, really a long-term solution. There is no catalyst to go to a different form factor. As we look at the scale-up opportunity, network density is going to be driving the need for more dense form factors on connectivity. When we see that market, we see a 10x number of connections. And that is going to be the catalyst for moving to different form factors. And so with this, really, the third leg here is it positions us very well in owning this technology as we develop CPO and NPO solutions for customers in the future.

Your next question comes from the line of Sebastien Naji with William Blair.

Congrats on the acquisition. This seems like a more sizable acquisition in the past. It sounds like DustPhotonics already had a little bit of scale, some engagement. So maybe, could you talk a little bit about how you expect this acquisition to impact your OpEx or even your CapEx in fiscal 2027?

Yes. We haven't given guidance yet overall for fiscal '27. So stay tuned in the next -- in the upcoming earnings announcement. We'll talk about that a bit -- a bit more than we can at the moment. I will mention, though, that we expect this deal to be accretive in fiscal '27 and beyond.

Your next question comes from the line of Jim Schneider with Goldman Sachs.

Can you maybe just talk a little bit about how your customer pipeline has evolved for the ZF optical transceivers, given sort of that you've mentioned expanding adoption across the hyperscaler deployments, and thus already seems to be at multiple hyperscalers today? How does that -- what does it mean for the kind of the aperture of customer engagements?

We've been making great progress on customer traction for ZF optics. And we'll update on that more in the future when we do our upcoming call in June. The traction that Dust has is great. When we look at the customers that they're engaged with, both at a hyperscaler level as well as at a module manufacturing customer level, it's really quite good, and it's very complementary to what we've already done. And over the next year, we will be integrating the Dust technology within the ZF optics platform. And so we see near term that the traction that they've got with their stand-alone PIC business will be a great driver for us. And then longer term, it will be very complementary as we look at ZF.

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

Maybe just a quick one for you, Bill. The press release for the deal mentioned the contingency earn out here. Maybe you can describe what that -- what the nature of that is over what time frame? That would be great.

Dan, why don't you take that one?

Yes. So Richard, it's over a 2-year time frame. And it's based on a mix of financial metrics that we expect them to achieve.

Your next question comes from the line of Christopher Rolland with Susquehanna.

Hello. Can you guys hear me?

Yes.

You can hear me. Okay. So I guess, first, a housekeeping. How much revenue does Dust do today? And then secondly, my question, as I talk to people in the optical supply chain, they suggest that PICs might be more of like a foundry opportunity and less of a merchant opportunity as it just might be high -- harder to get a good margin on that chip. And I know, Dan, you already addressed that. And you talked a little bit about the tech differentiators, but what do you think might allow you to get a sustainable margin on the PIC? You had on your website, I think an integrated laser technology within this PIC. Is that part of it? Anything you can speak to specifically that would differ from a design coming out of a foundry, for example, would be great.

Well, let me -- go ahead, Bill.

Yes. I think you hit on a couple of key points. We're not going to break out the revenue for Dust, but I will say that their backlog is quite healthy, and it's growing throughout fiscal '27. As it relates to the margin question, there's great opportunity for scale, the scale that we can bring as we combine forces with Dust. So I think from a margin standpoint, I don't think there's any shift in any of the messaging that we've given in the past.

Your next question comes from the line of Michael Genovese with Rosenblatt Securities.

Guys, the $500 million target for optics in fiscal '27, which is basically calendar '26, I mean, that's a good start. I think it would give you about 2% market share in transceivers. So my question is, longer term, do you have any goals in this market to become a very large player? Is there anything you could say about market share goals kind of beyond this year? Or do we think about it as a niche product or something that will become more of a mass market product eventually?

I think the question was related to our ZF optics transceivers. And we see this as a critical solution for customers that have architectures where their GPU or [ NIC ] to [ tour ] or first switch connection is longer than what we can service with our AEC business. So there are several customers that have an architecture where they're looking for longer [ NIC ] to [ tour ] connections. That's really the market and I think it can be quite sizable. The reason that our solution is unique is because we're able to utilize really deep, real-time continuous telemetry data to be able to proactively identify and mitigate potential link flaps. As you know, clusters, tens of thousands, even 100,000 GPUs tied together. The key element related to reliability is they're all working as 1 cluster. And if you've got link flaps, you can shut down the entire cluster. And so this is one of the reasons that AEC is so popular and really a de facto standard for that [ NIC to tour ] connection in a cluster where it can be used based on the length of the connection. With [ Z optics ], we're offering that bulletproof reliability. And we're doing that through going up the stack. We're not looking so much at the overall transceiver market and what percentage it might be, but it absolutely will be a multibillion-dollar opportunity that we're growing into. And that's really over the next several years.

Your next question comes from the line of [ David Liu ] with Mizuho.

On for Vijay here. Congrats on this deal. My question is, when do you see Dust's road map to 3.2 starting to ramp? And maybe a time line for when Credo's integration of Dust's technology solution might start to ramp? And how does that feed into your view of the mix of SiPho versus the [ EML ] market share [indiscernible]? Thanks.

Dust has made lots of progress, even at this point on 448 or 3.2 terabits per second. I think they're very much ahead of the market and will be an enabler for that next-generation port speed. I do think it's going to take some time before that market develops. But the great news is that the combination of the Dust PIC as well as the Credo optical DSP and SerDes, we're going to be right there as that market really develops. And so we're talking about solutions that exist already with Dust.

Your next question comes from the line of [ Crawford Clark ] with Jefferies.

Crawford Clark on for [ Blayne Cars ] with Jefferies. Congrats on the pending acquisition. I wanted to better understand whether you're already working with Dust to supply PICs for ZF optics? And I'm really just -- I'm really trying to get at, essentially, is there any risk to the qualifications that you have in progress for ZF optics given that decision to in-source?

The great thing about both being suppliers to the optical transceiver market in general is that we've got great experience working with Dust. And that's on designs that we're both involved in for optical transceiver customers of ours. So we've got great confirmation on the technology in general. As it relates to ZF, there's really no change in what we're expecting from a ramp perspective. The integration of Dust within our platform will take place over the course of about a year, and couldn't feel better about it.

Your next question comes from the line of Quinn Bolton with Needham & Company.

Bill, I guess I just wanted to ask, the stand-alone PIC business that you have or Dust has today with other module vendors, as you bring Dust in house, do you see any conflict or any risks to that business going to other PIC suppliers? Or do you think because ZeroFlap optics is sort of a premium transceiver product, that it doesn't really compete with the other modules that your customers have Dust? And then I've got a quick follow-up for Dan.

We don't really see a conflict at this point. What we're doing on ZF is completely different from the standpoint of looking at, say, the commodity transceiver market. So we believe we're going to be able to manage our component business in parallel with our ZF optics.

There are no further questions at this time. Mr. Brennan, I turn the call back over to you.

Well, I appreciate everybody getting on the call. We're excited about the opportunity in front of us, and we look forward to updating you further on our progress in the near future.

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