Astera Labs (ALAB) Q2 2026 earnings call transcript

Good afternoon. My name is Holly and I will be your conference operator today. At this time, I would like to welcome everyone to the Astera Labs Q2-2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After management remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again.

Thank you.

I will now turn the call over to Leslie Green, investor relations for Astera Labs. Leslie, you may begin. Thank you, Holly, and good afternoon, everyone. And welcome to the Astera Labs Q2-2026 earnings conference call. Joining us on the call today is Jitendra Mohan, Chief Executive Officer and Co-Founder, Sanjay Gajendra, President and Chief Operating Officer and Co-Founder and Desmond Lynch, Chief Financial Officer. Before we get started, I would like to remind everyone that certain comments made in this call today may include forward-looking statements regarding, among other things, expected future financial results, strategies and plans, future operations, and the markets in which we operate. These forward-looking statements reflect management's current beliefs, expectations, and assumptions about future events which are inherently subject to risks and uncertainties that are discussed in detail in today's earnings release and the periodic reports and filings we file from time to time with the FCC, including the risks set forth and our most recent annual report on Form 10K.

It is not possible for the company's management to predict all risks and uncertainties that could have an impact on these forward-looking statements 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 and uncertainties and assumptions, the results, events, or circumstances reflected in the forward-looking statements discussed during this call may not occur and actual results could differ materially from those anticipated or implied. All of our statements are based on information available to management as of today and the company undertakes no obligation to update such statements after the call except as required by law. Also, during this call, we will refer to certain non-GAP financial measures which we consider to be important measures of the company's performance.

For example, the overview of our Q2 financial results and Q3 financial guidance referred to various non-GAP financial measures. These non-GAP financial measures are provided in addition to and not as a substitute for financial results prepared in accordance with U. S. GAP. A discussion of why we use non-GAP financial measures and reconciliations between our GAP and non-GAP financial measures and outlook are available in the earnings release we issue today which can be accessed through the investor relations portion of our website.

With that, I would like to turn the call over to Jitendra Mohan, CEO of the Stair Labs. Jitendra.

Thank you Leslie. Good afternoon everyone and thanks for joining our second quarter conference call for fiscal year 2026. Today, I'll provide an update on AI infrastructure market trends or Q2 results in recent announcements. I then turn the call over to Sanjay to discuss the Stair Labs long-term growth profile. This will then cover our Q2 financial results and Q3 guidance. Since our last earnings call, investment in AI infrastructure has continued to accelerate. Multiple industry forecasts now point to hyperscalers AI and cloud infrastructure spending in 2027 reaching into the trillion-dollar range with sovereign AI initiatives, inference workloads and enterprise adoption expanding globally. These secular trends are increasing the need for intelligent connectivity and expanding our long-term growth opportunity.

As far as delivered, outstanding results in Q2 with record revenue of $392.4 million up to 27 percent sequentially and up 104 percent year over year. This strong performance was driven by broad-based strength across our entire product portfolio, reflecting the diversification of our business as we continue to win new designs across multiple customers and product categories.

ECI6 momentum further accelerated in Q2, representing more than 50 percent of our total revenue driven by both Scorpio AI fabric switches and AD3 timers. This milestone demonstrates the maturity and scale of our Gen6 portfolio and clear market leadership. On the AI fabric front, Scorpio delivered significant growth in Q2. High-Radix Scorpio X series has entered volume production and will continue to scale materially in the second half of this year. We expect Scorpio to become our largest product family in Q3, which is one-quarter ahead of our prior expectations, marking an important strategic milestone. We are now shipping multiple configurations of Scorpio X series into scalar applications to our initial customers and we remain on track to ship Scorpio X series to additional customers by year end.

Scorpio PC series also continued to expand across multiple customers with new shipments to hyperscalers and AI infrastructure providers. These programs are currently in free production and are expected to ramp more meaningfully in 2027.

We are also closely engaged with our customers to support their future system architectures with purpose-built AI fabrics including next-generation PCI Express and ULL-Link protocols. Upcoming AI systems will employ more complex switching topologies to enable larger XPU cluster sizes and higher bandwidth. These designs are expected to drive a material increase in our silicon dollar content per XPU.

To summarize, our Scorpio fabric switch family is well positioned for a multi-year growth cycle driven by the following factors. First, higher dollar content per XPU due to greater attach rate and increased capabilities.

Second, expanding customer base with exceptional traction and design in pipeline. Third, a green field time growing rapidly with broadening use cases across training and inferencing. Turning towards single conditioning business, ADs delivered record quarterly revenue in Q2, driven by strong adoption of retirements and gearboxes across scale-up and scale-out topologies in AI and general purpose compute platforms.

ADs growth is being fueled by increased AI system deployments, expanding AI accelerator cluster sizes, greater unit attach rates and higher ASPs associated with the transition to PCI-E6.

Taurus also provided strong revenue growth in Q2 with increased units shipped across a variety of AI and general purpose platforms. During the quarter, we also shipped pre-production volume of our 100 gig per lane Taurus smart cable modules for 800 gig AECs per scale-out application. We expect Taurus to continue its growth trajectory in the second half of the year as 800 gig deployments expand, driving improved attach rates and higher ASPs compared to 400 gig solutions.

We also expanded our Taurus portfolio with a new family of 3.2T smart re-timers and smart re-drivers supporting 200 gig per lane for next generation ethernet and UL in connectivity. These are the industry's first solutions to enable smart swap, giving platform designers the flexibility to choose between low-power smart re-drivers and long-reach smart re-timers without requiring a board redesign. This architectural flexibility is critical as AI systems evolve rapidly and designers need to address increasing signal integrity challenges at higher data rates while optimizing system power consumption. We expect our new high-speed 200 gig per lane re-timers and re-drivers to double our Taurus portfolio market opportunity to over $4 billion by 2030.

In CXL, we are seeing renewed momentum as industries recognizing its potential to unlock performance and utilization benefits in agent take AI applications. For a growing set of memory intensive inference in agent take AI workloads, memory capacity and utilization are increasingly becoming system constraints and CXL attached memory can offer attractive cost performance relative to local HBM. As our hyper-scroller customers look to address current memory supply and pricing dynamics, we are also seeing additional opportunities for CXL in mainstream general-purpose server platforms. During Q2, we closed a new design with our standard Leo memory controller at a US hyper-scaler. Looking into 2027, we expect to ship both standard and custom Leo CXL memory controllers in volume across general-purpose compute and AI inferencing applications to two US hyper-scalers.

Activity and engagement within the CXL's ecosystem continues to be robust and we expect to convert additional designs in the coming quarters. In closing, I'm proud of the results we have delivered and what excites me most is the trajectory ahead for us general apps. Scorpio X series is in volume production and we expect our Scorpio family to become our largest product category by revenue in Q3. A significant milestone in our evolution as a company. At the same time, new and existing designs across Aries, Taurus and Leo are contributing to our broad base growth. Intelligent connectivity is now fundamental to AI infrastructure and we are winning with the customers and platforms that define the market. With two-one executions deep customer partnerships and growing design win visibility, we are confident in our ability to continue outgrowing the market.

With that, let me turn the call over to our president and CEO Sanjay Vajendra to provide more details on our product momentum and strategic initiatives.

Thanks, Jendra, and good afternoon. I'll walk through our product institution and the expanding market dynamics that are positioning a certain apps to capture a significantly larger share of AI infrastructure spend over the coming years. Our laser focus on execution and innovation has delivered a purpose-built intelligent connectivity platform to our hyperscaler customers and is solving sophisticated technology challenges exist aggressive timelines. This resource-oriented mindset has helped us strengthen the trust that our customers and partners place in us. As a result, we continue to unlock many new opportunities in next-generation design across multiple customers to rapidly expand our top line growth.

Let me deep dive into some of the key product categories starting with AI fabrics. Our broad portfolio of Scorpio switching solutions is perfectly suited to address the increasing complexity and bandwidth requirements in AI architecture with leading hyperscalers planning large-scale training and inference deployments with ever-growing accelerator cluster sizes. Our Scorpio X series high-rated fabric switch family provides intelligent AI fabric with industry-leading features to maximize token economics. These capabilities are driving exceptional demand for our Scorpio X smart fabric switches to address the 20 billion merchant scale-up switching layer. Hardware accelerated hyper-cast and in-network compute capabilities delivered up to 2x improvement in collective performance for large-scale training and inference workloads. These capabilities are implemented through our Cosmos software platform which now extends beyond basic sleek management functionality to enable dynamic traffic shaping in advanced real-time performance management.

And we're not stopping here. Drawing on our multi-generational partnerships with customers and the lessons learned from deployments at scale, we are building an ambitious roadmap for our scale-up smart fabric switches. Our Scorpio roadmap is closely aligned with our customers next-generation XPU architectures enabling more complex topologies, larger cluster sizes and higher bandwidth.

Looking ahead, we expect the content opportunity for Scorpio X series solutions alone to grow well beyond $1,000 per XPU in future generations of AI platforms. Scorpio PC series momentum also remains very strong with both early stage and production deployments expanding across multiple AI platforms. We are shipping Scorpio PC series to several customers to enable high-speed connectivity across AI networking applications. Over the long term, we aim to proliferate Scorpio PC series across a broader set of applications spanning modular AI servers, disaggregated KV cache appliances, storage platforms, and enterprise-level servers.

On single-conditioning, Aries delivered record quarterly performance in Q2 and is well positioned for sustained growth over the long term. PCI-6 retimals and gearboxes have become critical infrastructure for AI servers where signal integrity directly determines whether systems achieve rated performance. Aries established itself as a gold standard across major XPU and CPU platforms for PCI-5, and this position has continued for PCI-6. We continue to invest in our customer's technology, roadmaps, and we expect to have PCI-7 solutions ready to meet their timelines.

Toros is also expected to deliver strong long-term growth, based systems over the long term. We are pleased to report that Toros has entered pre-production ramps for 100 gig per lane in Q2, which will support platforms utilizing 800 gig links. Our Toros portfolio expansion, supporting 200 gig per lane for 1.60 and beyond, positions our roadmaps through the next Ethernet generation and the forthcoming ramp of UA link driving continued content games and above industry growth for the Toros product family.

Moving to UA link, the consortium's two-auto specification validates our architecture approach. UA link 2.0 codifies in-network compute, advanced lab features, and 200 gig service as next generation scale-up fabric requirements. Please directly align with our investment areas. We remain engaged with lead customers and ecosystem partners to enable UA link deployments supported by our upcoming fabric and civil conditioning solutions. We are on track to deliver UA link enables Scorpio X-Series K-lub switches in 2027. Optical connectivity represents a substantial expansion vector with the potential to unlock tens of billions of dollars of additional market opportunity beyond our current corporate connectivity time. Over the past two years, we have assembled capabilities spanning analog and mixed signal design, DSP, electronic and photonic I. C. integration and optical packaging through organic investment and the X-scale acquisition.

This enables us to deliver complete optical engines in addition to optical components. Our optical strategy unfolds in three phases. First, high-density fiber attack solutions leveraging our X-scale core technology enables up to 50 meter fiber connectivity with ultra low latency. Our initial opportunity with a tier one AI platform provider is expected to enter volume production in 2027.

Second, near-packaged optics or NPO chipsets enabling multi-rack scale-up clusters via optical links are also targeted for 2027 production. Third, fully integrated Scorpio X-Series fabric switches with CPO optical engine module represents our longer-term roadmap for 2028 and beyond supporting larger fabric domains with terabits per second optical IO per switch. Beyond standard products, we continue to make solid progress with our custom solutions. The increasingly diverse XPU landscape and workloads are driving demand for custom connectivity solutions.

We are executing across multiple vectors with custom solutions for hybrid drag architecture, including Enviling Fusion-based designs, and separately custom LEO memory controllers in specialized interface applications. We expect initial shipments for these custom design events to commence in 2027. We are also engaged with multiple customers on additional high-value custom connectivity opportunities to deliver end-to-end purposeful silicon solutions. Together, these design events and active opportunities validate our capability to deliver differentiated custom silicon and represent a multi-billion-dollar incremental opportunity over time.

Overall, our platform philosophy, which we call AI your way, reflects our strategy. Rather than subtracting a single architecture approach, we provide the broadest portfolio of connectivity solutions that let customers deploy AI infrastructure optimized for their specific workloads, whether that's standards-based or custom, or copper, or optical interconnects, and scalar for scalar connectivity across a plethora of standards. This architectural flexibility is becoming a competitive advantage as the market diversifies.

To summarize, SRI Labs has hit another important inflection point with Scorpio high-ready AI fabrics reaching volume production. This marks our evolution to a complete AI fabric infrastructure provider extending beyond signal conditioning and memory connectivity solutions. Our expansion into optical interconnects and custom solutions further broadens our addressable market in 2027 and beyond.

With that, let me turn over the call to death to walk through our Q2 financial results and Q3 guidance in more detail.

Thank you, Sanjay, and good afternoon, everyone. Today, I will review our Q2 financial results and then discuss our Q3 guidance, both presented on a non-gap basis. We delivered outstanding second-quarter results with record revenue of $392.4 million, up 27% sequentially, and up 104% year-over-year. Growth is broad-based across our AI fabric and signal conditioning portfolios, led by PCI-E6 products and the initial production ramp of Scorpio. Our Scorpio product family delivered a strong Q2. Scorpio PC's momentum continued during the quarter, driven by the scaling of existing customer deployments and the early ramp of new programs into production. Scorpio X series also grew strongly as we began shipping initial production volumes across a variety of radix configurations.

Aries revenue reached a new quarterly record, driven by strong PCI-E6 re-timer adoption across both scale-up and scale-out applications. Overall, revenues from PCI-E6 across their AI fabric and signal conditioning portfolios represented both in 50% of total company revenues in Q2, up from one driven by increased unit shipments across both AI and general-purpose compute platforms.

Non-gap draws margins to the second quarter with 73.7%, above our guidance of 73%. Non-gap operating expenses for the second quarter were $135.8 million, up 10% sequentially, reflecting continued investment in our roadmap. Non-gap operating margins for the second quarter was 39.1%, up 290 basis points from Q1, driven primarily by strong revenue growth and the resulting operating leverage. For the second quarter, interest in other income was $12.1 million. Our non-gap tax rate was 12%, and non-gap net income was $145.8 million, resulting in non-gap deleted earnings per share of 80 cents and increase of more than 30% from Q1. We ended the quarter with cash, cash equivalents and marketable securities totaling $1.25 billion, up $68.5 million from Q1, driven by cash from operations of $87.7 million.

Now, turning to our outlook for the third quarter, we expect revenue to be in the range of $540 to $560 million. At the midpoint, this represents 40% sequential growth, driven by the transition of Scorpio X series to volume production, continued strength in 80s PCIE-6 re-timers and pre-production shipments of Taurus solutions, supporting 100 gigabits per lane for 800 gigabyte ethernet. As Jitendra mentioned, we expect Scorpio to become our largest product line by revenue in the third quarter, marking an important milestone in our journey from smart signal conditioning products to mission-critical AI fabric solutions. This milestone reflects the progress we have made over the past several quarters of Scorpio X series transitions to volume production.

We expect third quarter, non-gap gross margin to be approximately 72%. We expect third quarter, non-gap operating expenses to be between $156 and $160 million. Our non-gap operating margin is expected to be approximately 40% percent, up 400 basis points sequentially, which reflect significant operating leverage as our revenue expands.

Interest in other income is expected to be approximately $12 million, and we expect our non-gap tax rate to be approximately 12%. We expect our Q3 diluted earnings per share to be between $1.16 and $1.21.

In closing, Q2 is an excellent quarter with strong execution driving record revenue and expanding operating leverage. Our strong Q3 guidance reflects continued momentum and confidence in sustained growth across both our AI fabric and signal conditioning portfolios. We will continue to invest strategically to capture the substantial opportunity ahead for maintaining strong profitability and driving long-term value to our stockholders.

This concludes our prepared remarks. I will now turn the call back to your operator to begin Q&A.

Operator? We will now begin the question and answer session. Please limit yourself to one question. At this time, I would like to remind everyone in order to ask a question, press star, then one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Harlan Sir with JP Morgan. Harlan, your line is now open. Please go ahead.

Yeah, so thanks Harlan. So a couple of points. First, the Scorpio X series has been gaining tremendous amount of interest in the market. So we have started shipping the parts for pre-production, for multiple customers starting this quarter. We do expect Q3 at least for a lead opportunity and lead customer to ramp to high volume production in Q3 and essentially taking over or suppressing the revenue from Scorpio P series. So we should give you an idea of the value that we bring in scale-up use cases. We do expect to ship to revenue for additional customers on Scorpio X by end of the year. So in general, what I would say is that there's been an exceptional traction that we're seeing both for Scorpio X and P. X tends to be more tied to scale-up and various different configurations.

So speed goes to a multitude of opportunities. But overall, it's been great to see how the customer base is seeing the value that we deliver with our Scorpio family. And like we noted in the call, Q3 onwards, we expect Scorpio as a family to be the largest client within the company.

Your next question comes from the line of blame Curtis with Jeffries. Blaine, your line is now open. Please go ahead.

Just kind of curious if you could talk about the drivers within Aries. And then as you look to kind of the next, you know, generations of AI servers, are you seeing, what kind of design traction are you seeing and re-timer attached in those systems? Yeah, so two parts to that. One is in Scorpio 5, which is our gen 5 portfolio that's been around. I want to say it definitely continues to expand, especially as we're seeing inference-based applications start showing up. So that's driving a new wave of growth. It's how I would put it. 86, which is for gen 6, supporting the higher data rate, the 64 gigabit per second. Obviously, that is comes in with higher attached rate and going into several new platforms.

And also, there are other use cases around the keyboard application and so on. So overall, like you always said, the re-timers is a socket that somewhat keeps on giving in the sense that you need it for a variety of use cases. If anything, the surprise is how long gen 5 has continued and given that there is a new set of use cases opening up for inference, all of those are contributing to a helper's achievement new record on the Aries portfolio.

And by the way, we expect this trend to continue as new gen 6 platforms and GPUs are being, developed. So this is not a trend that would stop. And then, of course, then we move on to gen 7 and you can expect some of the cycles to continue for a long time.

Thank you. Your next question comes from the line of Joe Moore with Morgan Stanley. Joe, your line is now open. Please go ahead.

Joe, thank you for the question. Yeah, we continue to see a lot of interest in UA link for scale up networking. As you mentioned during the prepared remarks, the ecosystem is evolving. We have new IP vendors coming online, new tools coming online. Some of the other vendors have also introduced their own products or announced their own products, just kind of all points to a nice vibrant ecosystem.

From a customer standpoint, we continue to stay engaged with our customers that is continuing interest in UA link. A lot of it is actually driven by not only the additional throughput that the UA link brings, but also because of the low latency that you link will deliver compared to some of these other protocols. So we find a lot of traction for that in inferencing applications. And the throughput and the latency and the open ecosystem is definitely continuing to drive the traction from our customers. We are completely plugged in in terms of the development cycle for UA link. We plan to intercept the XPUs that are on track to be released in 2027 with our own UA link solutions.

And as we have discussed, we want to come in here with a full portfolio of devices which should be anchored around our switch platform and then also providing sitting conditioning solutions both for copper and optical. In fact, we recently introduced our Taurus family which supports UA link at 200 gig per lane line rates. So it's all looking very good. We continue to stay completely engaged. And as things move from the PC Express generation to UA link, we do expect the dollar content per XPU to increase. And that's going to be a favorable trend for us.

Okay, thank you. Your next question comes from the line of Tori Stenberg with Stifle.

And I'm especially curious if that new software is also landing you more new customers because I assume that's something that's going to be very, very beneficial as they launch their switch fabrics. Yeah, as Sanjay mentioned, Tori, there is exceptional traction from our new customers for the new smart grid devices that we introduced. Part of it comes just because of the fact that we have higher radics and higher lane count and therefore we can connect more XPUs to the switch. But a lot of it is also stemming from the advanced capabilities that we built in. And I think this is what you refer to when you talk about software, which is the in-network compute as well as hypercast.

Both of these are very important technologies that really set us apart and enable very low latency inferencing as well as very high efficiency for in for in-network compute, almost 2X improvement in the collective operations that are required for training. And all of these are hardware based features, but they are enabled through software and this software resides in our Cosmos platform.

And so while previously Cosmos was, you know, mainly responsible for optimization, telemetry, diagnostics, now we are becoming part of the orchestration layer and the, you know, XPUs are talking directly to this, our Cosmos platform to run the workload. And this drives a lot more stickiness into our solution. Many customers that has adopted our platform in this generation will continue to use this for the next generation, the easiest thing for them to do. And we continue to support these type of advanced capabilities in our current devices and we'll carry them forward for the next devices, next generation devices as well.

Thank you. Your next question comes from the line of Natalia Winkler with UBS. Natalia, your line is open. Please go ahead.

I think it was about time, isn't it? I think it's finally great to see some traction back on CXL as you know, we've been investing in the technology for quite a while now. And it's great in some ways because we understand exactly what is needed both from hardware and software standpoint. So now we see actually three main use cases. One is largely driven around sort of the memory market dynamics. People want to find alternates to the availability or the high cost of memory today. And they're trying to do that through CXL and then try to leverage the fact that you can stick different kinds of memory behind a CXL The second one which is very exciting for us is the GPU attach or accelerator attach where combined with our KV cache acceleration type of function, we're able to do unique things that fundamentally are improving the latency and performance for inference applications.

The third one is something that we've been talking for a while which is general compute or HPC application where for use cases like SAP where you need a high memory or memory in density workloads the CXL provides a way of adding more memory to the CPU. So those are the three main applications or dynamics that we see. And for us, what we are tracking is of course multiple design when and opportunities at this point with most of them in qualification or early stage this year and getting into high volume production in 2027. So we do see this trend to continue by the way and we are investing heavily in coming up with technologies and capabilities to solve the memory wall problem and the memory availability problem in some ways given where the market is from that front.

So overall we're positive and and we're continuing to invest.

Thank you. Your next question comes from the line of Sean O'Loughlin with TD Cohen. Sean your line is now open please go ahead.

So let me comment on that. So first of all we do fully expect copper and optical to coexist as you know most of the scale up connectivity today is done in copper and our customers are asking us to continue to push that forward and we will continue to do that and as these data rates go up and the signal integrity challenges increase there is definitely room for additional products and additional product categories just like we announced our Taurus 200 gig both three timers as the drivers in support of these applications. Now we do expect that you know for this generation and the next generation the scale up within a rack will continue to be copper but then as these cluster sizes grow and the data rates increase optical will definitely play an increasingly important role as you start connecting these racks to each other and you know cluster size expands from maybe one or two racks to four five or even a larger number of racks and we are very well positioned to play our part in this you know developing a market segment.

We are very closely engaged with our customers we understand when they want to deploy these you know increased cluster sizes and we expect that the the first deployment will happen with NPO solutions as we go you know from copper in addition to copper to NPO solution our dollar content per XPU or per link actually goes up so we definitely welcome this change overall if you look at the optical market is several tens of billions of dollars in TAM that gets unlocked you know once NPO gets deployed and data rates continues to increase we will start to see CPO getting deployed so we look at it as 2027 being the year where NPO gets deployed and then 2028 and beyond is when CPO gets deployed from a product development standpoint we are very comfortable we started investing in this couple of years back we have a team of engineers working on the EIC solution which is the electrical component we have a team of engineers that is working on the silicon photonics and of course late last year we acquired X-scale photonics which gives us the ability to develop a connector and put all of these things together we have now the ability of we will have the ability to have full optical engines which will eventually lead to to not only optical links and your torus like components as you pointed out but actually a fully optically enabled Scorpius switch so we are really looking forward to that supplying both that optically enabled Scorpius switch as well as the individual components that make up the full optical link and that's a tremendous opportunity for us in addition to what we have at copper thanks for that congrats again thank you your next question comes from the line of papa sila with city group papa your line is now open please go ahead thank you for taking my question and congrats on the impressive results so I I wanted to double click on the contentor accelerator I think when you initially kind of IPO you would more around the fifty to hundred dollars per accelerator and over the past quarters or so you went to thousand dollar plus and Sanjay you mentioned today's Scorpius alone could be well over thousand dollar per accelerator so I so I'm wondering if that's thousand dollar plus for Scorpius is it a pre-UA link metric or perhaps if you can provide color on the path for that thousand dollar plus per accelerator for Scorpius your accent finally maybe time everything together if you can speak more generally or your content per accelerator currently and where do you see that going over the next two three years yeah good question I think this is a fundamental question that you asked and it's a very important focus for us which is how do we keep ensuring that our long-term business continues to grow and we are able to sustain the kind of growth that we're able to deliver and it really like you highlighted comes down to how can we keep increasing the dollar content that we can get per XPU attach like you correctly noted we started with small numbers when I see your time now we see our business contributing multiple thousands of dollars per XPU with the scale or scale up switch itself offering over thousand dollars per XPU and this is you know already starting to happen of course with the high rate switch that we are shipping right now but at the same time this is just the beginning of it because when you start adding you know several other features that are that are important in terms of optical for example or adding more single conditioning because of the the higher speed and the higher attach rate we do believe that this number will continue to scale up and that is what we're focusing our investment right now which is how do we ensure a we keep increasing the dollar content we get per XPU targeting multiple thousands of dollars and we how do we continue to keep diversifying our business adding more hyperscalers around the anchor socket that we have which is the scale up switch and continue to grow significantly above where the market is that is very helpful thank you your next question comes from the line of Tom O'Malley with Barclays Tom your line is now open please go ahead hi team yeah this is a trip Smith on for Tom O'Malley appreciate the question of very nice results I was just curious about how we should think about Scorpio gross margins now that it's becoming a bigger part of the business and what are the you know puts and takes there for gross margins looking out and I believe you still have the Amazon warrant impact so I just wanted to double check on that and how we should be modeling that over the next few quarters thank you any thanks for the question is this here as we mentioned in the prepared remarks we do expect her QC a gross margins be approximately 72% it really is her portfolio continues to diversify we continue to see a wider range of gross margins with the main impacts being silicon versus module revenue mix and the different use cases associated with her switching portfolio I want to score to close both P and X series and we do have a wide range of margins really driven by use case and when you count utilization but I would say on average Scorpio close all use cases as an average margin profile broadly in range with her sort of corporate gross margins and any given quarter this makes can sort of change but what I would say on the switching side is that we are going after large opportunities and as the top line continues to scale we'll see the gross margin dollars flow through and contribute to the bottom line we clearly saw that in our Q2 results and also our Q3 guidance from here but really giving the broadening of the portfolio I would expect her gross margins continue to train towards a long-term target of 70% from here your next question comes from the line of ananda barua with loop capital markets ananda your line is now open please go ahead yes thanks aper for the question good morning good afternoon guys thanks for taking the question what's the useful way to think about the contribution that the China China hyperscale can make across the portfolio as you continue to introduce the new products and move up from generation to generation thanks and then this is a good observation in China as you can imagine the open protocols are quite popular which includes PCI Express ethernet and increasingly uvilink so we definitely see that as a as a good market not nearly as big as what we have here but certainly there is a lot of interest in we are engaging with the customers there without PCI solutions as well as our torus-based ethernet solutions so in aggregate that can be a very promising opportunity especially as PCI Express is the nervous system of servers and probably the best way to connect many adding card format GPUs together to deliver good inferencing capabilities I appreciate and is it a way to be noticeable in the P&L over time I think it'd be in an absolute scale yes our revenues from China will continue to increase however we do expect the rest of the world to increase even faster so as a percentage of total revenue they will continue to be in the single digit your next question comes from Suji De Silva with Roth Capital Partners Suji your line is now open please go ahead I pretend to I pretend to Sandra and Des because that's the result here I'm curious you talked about the software supporting telemetry and network frustration gaining more kind of functionality is there kind of a soft line where you might cross over to helping the execute itself with some of the functionality the co-processor or would you draw a server straight line there is connectivity versus that eventual trend in memory computing like that yeah we're good point no actually that is you know what I was trying to say when I answered the question earlier that with the with the advancement of the in-network compute and hypercast features in our latest Scorpio seed is directly you know talking to the switch to orchestrate the workloads to to reduce the latency and increase the throughput for both inferencing as well as training workloads so that's a very important development for COSMUS platform where not only are we doing that traditional you know optimization customization diagnostics and telemetry but we are really helping to improve the workload and directly improve the utilization of the GPUs that are connected to our switch so it's a very important development and as I mentioned it makes our our solution software solution more powerful and a lot more sticky as customers you know designing our current generation of switches and then look to upgrade them in the future okay thanks your next question comes from the line of Simon Leopold with Raymond James Simon your line is now open please go ahead yeah thanks Jeff coaching in for Simon maybe you could just talk qualitatively about your end market concentration how is it trend the quarter how do you expect it to trend over the next you know I guess through 2027 especially with the new launches yeah it's a really good question if what I was really pleased to see in our first half I was actually in the broad based trends across our sort of portfolio and really looking at our sort of drivers I would say 80s delivered the record quarterly revenue in Q2 and remained our largest product line really supported by the ongoing transition to PCI-E6 across both scale out and scale up connectivity and I do expect areas to continue to grow in Q3 and beyond as we mentioned in the prepare remarks a Scorpio continues to show strong momentum in Q2 and really driven by X and PCAs and as we mentioned we do expect to see Scorpio becoming our largest product line in terms of revenue as a result the production round the high rate of solutions in Q3 tortoise also continues to show nice growth really supported by AI in general purpose and sort of platforms and I do expect to see further growth in the third quarter driven by the strong basis the 400 gig demand as well as early contribution to the 100 gigs as well and I think as Sanjay sort of mentioned we continue to see sort of strong progress on the Leo CXL products and we continue to see some revenue here in the back half of the year which will ramp more materially into sort of 27 as we look into 27 we'll continue to see further opportunities on the optical and custom sort of but we're really pleased with the overall performance of the portfolio and the continued diversification great great I was actually more.

Our next question comes from Carl Ackerman with BNP Peritas. Carl your line is now open please go ahead.

I'll take this question Sanjay here so like you said the demand for Scorpio X and Scorpio P is truly being exceptional. We have over 10 customers engaged on the Scorpio X itself. Many of these opportunities are either getting into pre-production or getting deeper into the qualification cycle so to that standpoint we are already shipping Scorpio X to multiple customers right now as they get ready for their own internal qualification cycle and we do expect that we'll have additional customers ramping to next year based on the progress that they can make. So this trend is something that of course given the features and capabilities that we have especially with the 320 lane we're able to unlock several things when it comes to inference type of applications.

So there are several unique things that we are able to achieve and all of these are contributing to diversifying our customer base on Scorpio X and like noted on Scorpio P it's truly broad base because the PC is going to go into standard PCI switching application. So from storage through networking and some of the scale out use cases we have several designments and design ends that are ramping to production. So in general I want to say Scorpio family is taken off in a very positive way for us and we intend to add more customers and more revenue growth in the second half through 2027.

If you may just add to that the chip itself supports both liquid cooling and air cooling. In fact we do have customers that are designing it for both of them. Many a point about the new cloud is also very valid because you know people when they start to deploy these solutions for especially inferencing applications sometimes they can do that without using a full rack level solution. And so we do see these increasing you know use case of enterprise customers in new clouds looking at solutions that are based on Scorpio as a scale up and using admin card form factor GPUs to deliver good inferencing PCO. And also maybe to add one point that is somewhat lost is you know we even with the lead hyperscaler we have there are multiple platforms where we are designed in.

It's not like there is this one right. So I think that's a nuance that that needs to be considered as you look at our business.

There are no further questions at this time.

I will now turn the call back over to Leslie Green for closing remarks. Thank you everyone for your participation in questions and please refer to our investor relations website for information regarding upcoming financial conferences and events. Thanks so much. This concludes today's conference call. You may now disconnect.