Credo Technology Group Holding Ltd. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2022. Financial figures below are in U.S. dollars; unless noted otherwise, amounts are in millions.
Business context and results
Credo develops high-speed connectivity products and intellectual property for data infrastructure markets, including integrated circuits, active electrical cables (AECs), SerDes chiplets, and SerDes IP. It uses a fabless manufacturing model. Quarterly growth was driven principally by higher AEC cable shipments.
| Metric | Three months ended Jan. 31, 2022 | Prior-year quarter | Nine months ended Jan. 31, 2022 | Prior-year period |
|---|---|---|---|---|
| Revenue | $31.8 | $13.5 | $69.0 | $38.9 |
| Gross profit / margin | $19.1 / 60.1% | $8.1 / 60.0% | $40.2 / 58.4% | $24.9 / 64.0% |
| Operating loss | $(0.5) | $(4.8) | $(15.6) | $(23.3) |
| Net loss | $(0.1) | $(5.1) | $(16.8) | $(24.4) |
Quarterly revenue increased 136% year over year; product sales rose to $22.7 million from $6.2 million and represented 71% of revenue, versus 46% a year earlier. Nine-month revenue increased 77%, led by product sales growth of $29.7 million. Quarterly gross margin was nearly unchanged, while nine-month margin fell 5.6 percentage points, which management primarily attributed to product sales making up a larger share of revenue. Quarterly basic and diluted loss per share was reported as approximately zero; nine-month loss per share was $0.24, versus $0.35.
Cash, liquidity, and capital
- Cash and cash equivalents were $240.5 million at January 31, 2022, versus $103.8 million at April 30, 2021. Working capital was $276.0 million.
- For the nine months, operating cash use was $33.2 million, investing cash use was $7.9 million, and financing cash inflow was $178.0 million. Operating cash use reflected net losses and working-capital outflows, notably higher inventory and receivables.
- The company reported no borrowings; total liabilities were $28.5 million, including current liabilities of $25.8 million and operating lease liabilities. Management said existing cash and working capital should cover needs for at least 12 months.
- The January 31 IPO included 18.4 million company shares at $10 per share and generated $171.9 million in net proceeds after underwriting discounts and commissions. The underwriters later exercised their option for 3.0 million additional company shares; the February 10 closing generated $28.1 million in net proceeds after underwriting discounts and commissions.
Changes, outlook, and risks
Research and development expense rose 57% year over year in the quarter to $11.0 million, and selling, general and administrative expense rose 46% to $8.6 million. Management expects R&D and selling expenses to increase in absolute dollars, with additional public-company costs anticipated. It expects product sales and IP licensing to become a larger share of revenue over time and sees potential operating leverage as the business scales. The filing provides no specific revenue or earnings guidance.
- Revenue is concentrated: two customers accounted for 22% and 40% of quarterly revenue. Customer concentration is expected to remain significant.
- Supply-chain exposure includes reliance on TSMC for all semiconductor products. The filing notes planned foundry price increases of roughly 10% for advanced chips and up to 20% for less advanced chips, and warns that unoffset costs could pressure margins. COVID-19 may affect customer demand, component availability, and logistics.
- Inventory increased to $26.1 million from $7.1 million at April 30, 2021; management identifies customer forecast changes and order timing as potential sources of inventory risk. Nine-month cash flow also included $20.3 million of inventory cash outflow and a $1.3 million inventory obsolescence write-down.
- A $43.5 million IP licensing and development contract is payable over an estimated three years subject to milestones. As of January 31, $10.9 million had been billed and $5.7 million recognized; remaining milestones were constrained because delivery depends partly on customer actions.
- An Amazon warrant covers up to 4.08 million ordinary shares at $10.74 per share, vesting largely based on payments by Amazon and affiliates. The company recognized $0.4 million as contra-revenue in the quarter.
- Committed third-party manufacturing purchase orders were approximately $10.7 million. A San Jose headquarters lease, commencing in April 2022, has approximately $19.2 million of future minimum payments over a 103-month term.
The filing reports no current litigation considered material and no material changes to the risk factors in the IPO prospectus. Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether AEC shipment growth and new design wins translate into sustained product revenue, and how customer concentration evolves.
- Whether product gross margins can withstand foundry, component, and manufacturing cost increases as product revenue expands.
- Inventory levels, customer forecasts, supply availability, and the timing and collectability of milestone-based IP contract revenue.
- The cash-flow trajectory and use of IPO proceeds, including the effect of public-company expenses and equity compensation.
- The potential dilution and revenue impact associated with the Amazon warrant and the company’s equity incentive plans.