Credo Technology Group Holding Ltd. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended July 30, 2022; comparable quarter ended July 31, 2021. Amounts below 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 operates a fabless model using third-party manufacturers.
Financial performance and liquidity
| Metric | Q1 FY2023 | Prior-year quarter |
|---|---|---|
| Revenue | $46.5 million | $10.7 million |
| Gross profit / margin | $27.7 million / 59.5% | $5.2 million / 48.3% |
| Operating loss | $0.2 million | $11.6 million |
| Net loss | $0.1 million | $12.6 million |
| Operating cash flow | $(12.2) million | $(8.9) million |
| Capital expenditures | $5.3 million | $1.3 million |
Cash and cash equivalents were $243.8 million at July 30, 2022, down from $259.3 million at April 30, 2022. Working capital was $303.4 million. The filing reports no borrowings; total liabilities were $63.7 million, including operating lease liabilities. Management stated that cash and working capital should fund needs for at least the next 12 months.
Operating cash use reflected working-capital outflows, particularly a $25.2 million increase in accounts receivable and a $10.6 million increase in inventory, partly offset by higher accounts payable and deferred revenue. Property and equipment purchases included product mask sets and R&D laboratory equipment.
Changes versus the prior comparable period
- Revenue increased 333%, mainly from AEC shipments and IP licensing. Product sales rose to $35.3 million from $7.3 million; IP license revenue rose to $10.4 million from $1.0 million.
- A $9.0 million high-dollar IP license delivery materially contributed to the quarter’s growth. Product sales and related engineering services accounted for 78% of revenue, versus 80% a year earlier; IP licensing and related services accounted for 22%, versus 20%.
- Gross margin improved 11 percentage points, which management attributed to product-sales scale and high-margin IP revenue. R&D expense increased 72% to $16.7 million, and SG&A increased 57% to $11.2 million, including higher personnel and share-based compensation costs.
- Despite near break-even net income, operating cash use increased year over year, reflecting working-capital investment.
Outlook, risks and unusual items
No formal quarterly or annual revenue or earnings guidance is provided in the filing. Management expects product sales and IP license revenue to grow as a proportion of revenue over time and anticipates improving operating leverage as the business scales. It cautions that quarterly results are not necessarily indicative of full-year results.
- Customer concentration is substantial and varies over time. Two customers represented 42% and 19% of current-quarter revenue; three customers represented 37%, 21% and 21% of accounts receivable at quarter-end. Mainland China accounted for $22.8 million, approximately 49%, of revenue by shipment destination and contracting entity.
- Credo relies on third parties for manufacturing and cited COVID-related disruption in China, including lockdowns affecting key AEC suppliers. It is seeking greater supply-chain geographic diversity and holding more AEC inventory, which may not prevent disruption and could result in inventory write-downs.
- The company relies on TSMC for semiconductor foundry services and disclosed planned foundry price increases; inability to offset higher input costs could reduce margins. Other risks include customer order changes or cancellations, product adoption and life cycles, competition, cyclicality, inflation, and geopolitical tensions involving China and Taiwan.
- Open subcontractor purchase orders payable within one year totaled approximately $18.3 million. No litigation was pending as of the financial-statement issuance date; warranty expense was not material.
- A warrant issued to Amazon.com NV Investment Holdings LLC covers up to 4.08 million ordinary shares at $10.74 per share, subject to vesting tied to customer payments. Credo recorded $0.4 million of contra-revenue from the warrant in the quarter.
- Share-based compensation was $5.5 million, up from $1.1 million. Management said disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether customer concentration and the timing of large IP milestones make the 333% revenue increase repeatable; the filing does not establish that the $9.0 million license contribution will recur.
- How receivables, inventory and supplier payment terms evolve, given operating cash outflow of $12.2 million and the quarter-end working-capital balances.
- Whether supply-chain diversification and inventory actions can manage China-related disruption and component cost increases without excess or obsolete inventory.
- The cash impact of planned product and R&D investment, lease obligations and approximately $18.3 million in committed purchase orders; management’s stated liquidity horizon is at least 12 months.
- Potential dilution and revenue effects associated with the customer warrant; ordinary shares outstanding were 145.7 million as of August 25, 2022.