Credo Technology Group Holding Ltd. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended October 28, 2023; comparisons are with the quarter ended October 29, 2022. The six-month period covers the first half of fiscal 2024. Amounts below are in U.S. dollars.
Business context
Credo develops high-speed connectivity products and intellectual property for data infrastructure, including integrated circuits, Active Electrical Cables (AECs), SerDes chiplets, and SerDes IP. Its markets include hyperscale data centers, enterprise and high-performance computing, and communications infrastructure.
Key financial results
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Revenue | $44.0 million | $51.4 million | $79.1 million | $97.8 million |
| Gross profit / margin | $26.1 million / 59.3% | $28.0 million / 54.4% | $46.9 million / 59.3% | $55.6 million / 56.9% |
| Operating loss | $8.9 million | $1.7 million | $23.3 million | $2.0 million |
| Net loss | $6.6 million | $3.4 million | $18.3 million | $3.4 million |
| Net loss per share | $0.04 | $0.02 | $0.12 | $0.02 |
- Quarterly product sales fell 22.8% to $34.2 million; product engineering services fell 35.1% to $2.4 million. IP license revenue rose 124.9% to $7.4 million, including $2.8 million recognized on an IP license delivered during the quarter.
- For the first half, revenue declined 19.1%. Product sales fell 19.3% and IP license revenue fell 25.8%; product engineering services increased 3.3%.
- Gross margin improved year over year, which management attributed primarily to higher-margin IP license revenue mix in the quarter and higher-margin optical product revenue in the six-month period. Operating expenses rose: R&D increased 19.7% in the quarter and 27.4% for the first half; SG&A increased 14.9% and 13.5%, respectively. Higher personnel, share-based compensation, and product development costs were cited.
Cash, liquidity and obligations
- At October 28, 2023, cash and cash equivalents were $129.0 million and short-term investments were $111.5 million, totaling $240.5 million. Total current assets were $328.3 million and current liabilities were $37.2 million; working capital was $291.1 million.
- For the six months, operating cash flow was positive $29.6 million, compared with cash used of $10.5 million a year earlier. The current-period inflow reflected working-capital movements and non-cash items despite the net loss, including collections of receivables and lower inventory.
- Six-month investing cash outflow was $9.7 million, including $7.4 million of property and equipment purchases; financing cash inflow was $0.7 million. Cash increased by $20.4 million during the period.
- No borrowings are reported on the balance sheet. Lease liabilities had a present value of $14.2 million. Non-cancelable manufacturing purchase commitments totaled $32.7 million and technology license commitments totaled $11.4 million. The company also reported $8.8 million of refundable deposits paid under a capacity reservation agreement.
- Management stated that existing cash, cash equivalents, and other working-capital resources should fund needs for at least the next 12 months.
Changes, outlook and risks
- Management said lower AEC cable shipments, primarily reflecting reduced demand from one of its largest customers, drove much of the product sales decline. The company had previously disclosed that the customer’s reduced forecast was expected to have a substantial negative impact on fiscal 2024 revenue and results; management said it did not expect its market share with that customer to be affected.
- Credo reported AEC engagements with all seven leading hyperscalers, including additional program awards and qualifications. Design wins do not assure future orders or revenue, and ramp timing depends on customers’ product launches and market acceptance.
- Revenue remains concentrated among a small number of customers. In Q2, two reported contracting customers represented 29% and 15% of revenue; on the company’s end-customer view, one customer represented 29%. Customer identities are anonymized in the filing.
- The filing provides no quantified revenue or earnings guidance. Key risks include customer forecast changes or cancellations, concentration, lengthy sales cycles, product adoption and life cycles, competition, semiconductor cyclicality, supply constraints, manufacturing yields and costs, and macroeconomic and geopolitical uncertainty.
- A remaining milestone under a customer IP licensing and development contract is constrained because delivery depends on customer actions and is subject to significant uncertainty. The company had recognized $33.8 million of revenue and billed $33.4 million of the contract’s $43.5 million total cash consideration by October 28, 2023.
- The company reported no litigation as of the financial statement issuance date and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether the large customer’s reduced AEC demand persists, and how customer forecasts translate into shipments and revenue.
- Whether reported hyperscaler design wins and qualifications convert into sustained production orders and diversified revenue.
- Whether expense growth, particularly R&D and share-based compensation, can be supported as revenue recovers or scales.
- How much of operating cash flow reflects sustainable operations versus working-capital timing, and whether purchase commitments and capacity reservations align with demand.
- Progress and collectability of the remaining customer-contract milestones, and the effect of customer concentration on future results.