Credo Technology Group Holding Ltd. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended January 28, 2023; comparisons are with the three and nine months ended January 31, 2022. Amounts are in U.S. dollars. The company develops high-speed connectivity products, including integrated circuits and active electrical cables (AECs), and licenses SerDes intellectual property.
Financial performance
| Metric | Three months ended Jan. 28, 2023 | Prior comparable quarter | Nine months ended Jan. 28, 2023 | Prior comparable nine months |
|---|---|---|---|---|
| Revenue | $54.3 million | $31.8 million | $152.1 million | $69.0 million |
| Gross profit / margin | $32.0 million / 58.9% | $19.1 million / 60.1% | $87.6 million / 57.6% | $40.2 million / 58.4% |
| Operating loss | $2.9 million | $0.5 million | $4.8 million | $15.6 million |
| Net income (loss) | $2.8 million | $(0.1) million | $(0.6) million | $(16.8) million |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $(12.8) million | $(33.2) million |
Quarterly revenue rose 70.7%; nine-month revenue rose 120.6%. AEC shipment growth drove more than 90% of the increase in product sales. Higher-dollar IP licenses also contributed, including $10.1 million recognized in the quarter. Quarterly gross margin declined 1.2 percentage points, primarily due to increased excess and obsolete inventory write-downs, partly offset by revenue mix.
Research and development expense increased 86.7% year over year in the quarter to $20.5 million; selling, general and administrative expense rose 39.3% to $11.9 million. The company recorded $2.4 million of impairment charges, primarily for property and equipment that did not reach production qualification. The quarterly tax benefit of $3.2 million contributed to reported net income despite a pretax loss.
Financial position and liquidity
- At January 28, 2023, cash and cash equivalents were $123.8 million and short-term investments were $109.2 million, versus $259.3 million of cash and no short-term investments at April 30, 2022. Cash plus short-term investments totaled $233.0 million.
- Working capital was $306.6 million. Total liabilities were $62.7 million; the balance sheet lists operating lease liabilities but no borrowings. Management said available cash and working capital should cover needs for at least 12 months.
- Nine-month investing cash outflow was $127.0 million, including $109.2 million invested in certificates of deposit and $17.8 million of property and equipment purchases. Operating cash outflow was $12.8 million, principally reflecting working-capital investment in inventory, receivables and contract assets.
- Non-cancelable manufacturing purchase commitments were $37.8 million and technology-license commitments $13.9 million. The company also described manufacturing capacity commitments of at least $35.5 million for fiscal 2024–2028, included in the commitment table, and refundable deposits paid of $2.0 million.
Outlook, commentary and risks
The filing does not provide quantified forward guidance. It reports that on February 14, 2023, the largest customer reduced its demand forecast for certain Credo products. Management expected this reduction to have a substantial negative impact on revenue and results for fiscal Q4 ending April 29, 2023, and fiscal 2024, while stating it did not expect the company’s market share with that customer to be affected.
Customer concentration is material: Customer A represented 52% of quarterly revenue and 46% of nine-month revenue; Customer E represented 20% of quarterly revenue. Customer A accounted for 69% of accounts receivable at January 28, 2023. The company also reported geographic revenue concentration in mainland China. Other cited risks include demand and order volatility, product adoption and life cycles, customer cancellations, semiconductor cyclicality, supply-chain constraints, geopolitical developments, and competition. Management noted rising costs, inventory-control measures among industry participants, and macroeconomic uncertainty.
The company recognized $9.2 million of additional contract assets during the nine months, mainly from an IP licensing and engineering arrangement where revenue criteria were met before billing milestones. A remaining milestone in a separate customer contract is constrained because delivery depends on customer actions. No litigation was pending as of the financial-statement issuance date, and the filing reports no material changes to previously disclosed risk factors other than those described.
Important facts for investors to verify
- How the largest customer’s reduced forecast affects reported revenue, orders and inventory in fiscal Q4 and fiscal 2024.
- Whether AEC growth and the large IP-license contributions recur, given customer concentration and milestone-dependent revenue.
- Inventory levels, write-downs, gross-margin trends and conversion of contract assets and receivables into cash.
- Cash use, manufacturing capacity commitments and the assumptions behind management’s 12-month liquidity assessment.
- The effect of share-based compensation and tax benefits on reported earnings; nine-month share-based compensation was $15.6 million.