Credo Technology Group Holding Ltd — Q3 FY2024 Form 10-Q
Business context and period. Credo develops high-speed connectivity products and SerDes intellectual property for data infrastructure, including integrated circuits, active electrical cables (AECs), chiplets, and licensing and engineering services. This report covers the three and nine months ended January 27, 2024; comparable periods ended January 28, 2023. Amounts below are in U.S. dollars.
Financial results
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Revenue | $53.1 million | $54.3 million | $132.2 million | $152.1 million |
| Gross profit / margin | $32.6 million / 61.4% | $32.0 million / 58.9% | $79.5 million / 60.1% | $87.6 million / 57.6% |
| Operating loss | $5.9 million | $2.9 million | $29.2 million | $4.8 million |
| Net income (loss) | $0.4 million | $2.8 million | $(17.9) million | $(0.6) million |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $28.6 million | $(12.8) million |
- Revenue mix: Q3 product sales were $40.0 million (+5% year over year), product engineering services were $11.8 million (+225%), and IP licenses were $1.3 million (−90%). For nine months, product sales were $104.3 million (−11%), engineering services $16.6 million (+102%), and IP licenses $11.4 million (−57%).
- Profitability: Q3 gross margin improved to 61.4%, while operating expenses rose 10% to $38.5 million, led by research and development and selling, general and administrative costs. The nine-month operating loss widened as revenue declined and operating expenses increased.
- Cash, liquidity and debt: At January 27, 2024, cash and cash equivalents were $96.1 million and short-term investments were $313.1 million; working capital was $471.2 million. The balance sheet reports no borrowings; operating lease liabilities totaled $14.4 million. Management said cash and working capital should fund needs for at least 12 months.
- Cash flows, nine months: Operating cash flow was $28.6 million, investing cash outflow $216.3 million, and financing cash inflow $175.3 million. Investing outflow primarily reflected net purchases of certificates of deposit and $12.5 million of property and equipment. Financing inflow primarily included $173.6 million net proceeds from the December share offering.
Material changes and management commentary
- Q3 revenue declined 2% year over year, primarily because a large prior-year IP license delivery did not recur; higher product sales and engineering services partly offset the decline. Nine-month revenue fell 13%, including lower AEC shipments following reduced demand from a major customer.
- Q3 gross margin increased by 2.5 percentage points, supported by a greater mix of high-margin engineering services and improved product-sales margins. Management attributed the year-over-year engineering-services increase largely to a non-recurring engineering arrangement, which contributed $10.0 million of Q3 revenue and $10.7 million over nine months.
- Research and development expense increased 24% for nine months, reflecting product-development hiring, share-based compensation, and higher design and testing activity. Share-based compensation totaled $24.4 million for nine months versus $15.6 million a year earlier.
- On December 8, 2023, Credo completed an offering in which it sold 10.44 million shares at $17.50 per share and received $173.4 million net. Existing shareholders sold an additional 1.06 million shares; those proceeds were not company proceeds.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management cites customer demand, order timing, product adoption and product-development execution as important uncertainties.
- Revenue is concentrated among a small number of customers: one end customer accounted for 28% of Q3 revenue, and two others accounted for 23% and 19%. Management expects significant customer concentration to continue in the foreseeable future.
- Risks include customer forecast reductions or cancellations, long design-win and qualification cycles, product life cycles and price erosion, semiconductor cyclicality, competitive and technology changes, manufacturing yields and supply constraints, and macroeconomic or geopolitical disruption.
- Non-cancelable commitments included $29.6 million to manufacturing vendors and $16.6 million of technology license fees. The company also estimated at least $24.5 million of purchase-level commitments under a capacity reservation agreement through FY2028, with $8.8 million of refundable deposits paid.
- A remaining milestone under a customer IP licensing and development contract is subject to a revenue constraint because achievement depends on customer actions. The filing reports no material litigation and no material changes to previously disclosed risk factors.
Investor verification points
- Confirm the sustainability and timing of AEC demand recovery and the impact of the major customer’s reduced forecast.
- Assess how much reported engineering-services revenue is recurring; the disclosed arrangement is non-recurring.
- Track customer concentration, contract assets, and collection or milestone timing; contract assets increased by $8.5 million over the nine-month period in the cash-flow discussion.
- Evaluate operating expense growth, share-based compensation, and the effect of the share offering and equity awards on dilution.
- Monitor manufacturing capacity commitments, inventory levels, and management’s liquidity assessment against future investment and operating needs.