Credo Technology Group Holding Ltd. — Form 10-Q Summary
Reporting period: Fiscal 2023 second quarter ended October 29, 2022; comparisons are with the three and six months ended October 31, 2021. Amounts are in U.S. dollars.
Business context
Credo develops high-speed connectivity products and IP for data infrastructure, including integrated circuits, active electrical cables (AECs), SerDes chiplets, and SerDes IP. Its markets include hyperscale data centers, high-performance computing, and 5G. The company uses third parties to manufacture, assemble, and test its products.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $51.4 million | $26.4 million | $97.8 million | $37.2 million |
| Gross margin | 54.4% | 60.4% | 56.9% | 56.9% |
| Operating loss | $1.7 million | $3.6 million | $2.0 million | $15.2 million |
| Net loss | $3.4 million | $4.1 million | $3.4 million | $16.7 million |
| Basic and diluted loss per share | $0.02 | $0.06 | $0.02 | $0.24 |
- Q2 revenue increased 94.4%; six-month revenue increased 163.3%. Product sales drove the growth, rising 140.3% for the quarter and 209.6% for the six-month period. Management attributed the increase primarily to higher AEC shipments.
- Q2 gross margin fell 6 percentage points year over year, mainly because product sales made up a larger share of revenue than higher-margin IP business. Six-month gross margin was unchanged.
- Six-month operating expenses were $57.6 million, including $34.8 million in research and development and $22.7 million in selling, general and administrative expenses. Share-based compensation was $10.4 million, versus $2.4 million a year earlier.
- For the six months, operating cash outflow was $10.5 million, versus $34.9 million a year earlier. Investing cash outflow was $60.9 million, including $10.9 million of property and equipment purchases and a $50.0 million certificate-of-deposit investment. Financing provided $2.7 million.
Liquidity, balance sheet, and changes
- At October 29, 2022, cash and cash equivalents were $190.5 million and short-term investments were $50.0 million; working capital was $300.3 million. Cash and cash equivalents were $259.3 million at April 30, 2022.
- Total assets were $414.0 million and shareholders’ equity was $344.1 million. The filing reports no borrowings; lease liabilities were $16.6 million in total, including current and non-current portions.
- Accounts receivable rose to $51.8 million from $29.5 million at April 30, and inventory rose to $47.8 million from $27.3 million. Management attributed operating cash use in part to increases in receivables and inventory.
- Management said existing cash and working capital should be sufficient to meet needs for at least the next 12 months. Future capital requirements depend on growth, spending, and market acceptance; additional financing, if needed, may not be available on acceptable terms.
Outlook, commentary, and risks
- No specific revenue, earnings, or margin guidance is provided in the filing. Management expects product revenue to become a larger share of revenue over time and anticipates operating leverage as the business scales.
- Revenue remains concentrated: one customer accounted for 44% of Q2 revenue; the top four named customers together represented 79%. Mainland China accounted for $31.4 million, or about 61%, of Q2 revenue. Customer and geographic concentration can make results sensitive to changes in orders and demand.
- A $9.0 million IP license delivery recognized during the six-month period contributed to IP license growth. A separate customer IP licensing and development contract has $43.5 million of total cash consideration tied to milestones; some remaining milestones are constrained because they depend on customer actions and are uncertain.
- Non-cancelable commitments at quarter-end included $41.7 million for manufacturing vendors and $14.2 million for technology license fees. A capacity-reservation arrangement includes purchase commitments of at least $35.5 million through fiscal 2028 and refundable deposits scheduled for payment.
- Key stated risks include customer order changes or cancellations, product adoption and design-win timing, competition and product life cycles, supply-chain constraints and costs, COVID-19 impacts, and geopolitical tensions involving China and Taiwan. The company also cited potential inventory risk from efforts to secure AEC supply.
- The company reported no litigation as of the financial statement issuance date and no material change to its previously disclosed risk factors other than share-price volatility and public-company internal-control compliance risks. Management concluded disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether AEC shipment growth and customer demand continue, and how concentrated revenue remains among major customers.
- Whether receivables and inventory convert to cash without material delays, excess stock, or write-downs.
- How product mix, manufacturing costs, and the shift from IP revenue affect gross margins.
- Progress and revenue recognition for customer-dependent IP milestones, and fulfillment of manufacturing capacity commitments.
- Whether liquidity remains adequate as operating needs, capital spending, and purchase commitments evolve; the filing provides no formal financial guidance.