Release Date: September 04, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Credo Technology Group Holding Ltd (CRDO, Financial) reported a record product revenue of $57.3 million, up 30% compared to the prior quarter.
- The company achieved a non-GAAP gross margin of 62.9%, driven by increasing scale and product mix.
- Credo's AEC product line continues to be a major revenue driver, with expectations for further growth in fiscal 2025.
- The optical DSP business is on track to contribute at least 10% of fiscal 2025 revenue, with significant customer traction and design wins.
- The company is well-capitalized with $398.6 million in cash and equivalents, providing a substantial buffer for growth investments.
Negative Points
- Revenue for Q1 was $59.7 million, down 2% sequentially, indicating some volatility in quarterly performance.
- IP business revenue was $2.4 million, down 14% year-over-year, and below the long-term expectation of 10% to 15% of total revenue.
- Non-GAAP operating income decreased to $2.2 million from $7.5 million last quarter, with a non-GAAP operating margin of 3.7%, down from 12.3%.
- Cash flow used in operations was $7.2 million, primarily due to changes in working capital driven by a ramp in product shipments.
- Free cash flow was negative $13.1 million, a significant decrease of $32.4 million year-over-year, indicating higher capital expenditures and operational costs.
Q & A Highlights
Highlights of Credo Technology Group Holding Ltd (CRDO) Q1 2025 Earnings Call
Q: Can you speak to the key drivers contributing to the acceleration in growth in the second half of the year for the AEC business?
A: William Brennan, CEO: AEC adoption is continuing broadly and has become a de facto standard for in-rack connectivity. We see broad adoption with US hyperscalers, global hyperscalers, emerging hyperscalers, and service providers. The increasing rack power densities and migration to liquid cooling are reducing the physical length required for back-end network connections, thus increasing the opportunity for AECs. We expect future growth with both 400-gig and 800-gig AEC solutions and are well-positioned for the 1.6 market.
Q: What are your market share aspirations for the optical DSP business, and how do you see the adoption of LROs evolving?
A: William Brennan, CEO: We are on track to achieve our goal of optical DSPs being at least 10% of fiscal '25 revenue. We have shipped over 2 million modules with Credo DSPs and expect to ship more units this fiscal year than in all previous years combined. We are delivering both full DSP and LRO solutions, aiming to provide power-efficient options for the 1.6 market. We anticipate sustained growth in this category.
Q: Can you elaborate on the expected ramp of the PCIe retimer market and when we should expect early revenues?
A: William Brennan, CEO: We are entering the PCIe market at the Gen 6 speed (64 gig PAM4) and plan to accelerate to Gen 7. We aim to deliver compelling benefits in signal integrity, energy efficiency, and cost. We expect to see early revenues as we engage with customers and deliver differentiated solutions.
Q: How is the new expected 10% customer in Q2 contributing to your growth?
A: William Brennan, CEO: This is not a new customer but one we have worked with for a couple of years. Their increased spending has made them a significant customer. This customer is an emerging hyperscaler, and we expect them to contribute materially to our revenue.
Q: Can you discuss the dynamics of the optical DSP market and your engagement with hyperscaler customers?
A: William Brennan, CEO: We engage directly with hyperscalers and module makers. This three-party conversation is crucial for success. We have joint development programs with hyperscalers specifying our DSPs, and we are seeing momentum in this market.
Q: What drove the product revenue uptick and gross margin improvement in Q1, and what are your expectations for Q2?
A: Daniel Fleming, CFO: Strong turns bookings contributed to the product revenue uptick. Our largest AEC hyperscale customer contributed significantly. The product gross margin improvement was driven by scale and product mix. For Q2, we expect IP to contribute modestly more to revenue, but achieving our gross margin targets does not rely on an oversized IP contribution.
Q: How do you see the market for active copper cables (ACCs) versus active electrical cables (AECs)?
A: William Brennan, CEO: We see the market for passive copper and ACCs as not being significant long-term. The broad market prefers fully retimed AECs for their interoperability and performance. We do not see significant competition from ACCs, especially at higher speeds like 100 gig per lane and above.
Q: Can you provide more details on the expected ramps in the second half of fiscal '25 and the diversity of your customer base?
A: William Brennan, CEO: We expect significant growth driven by our largest AEC hyperscale customer, Amazon, and increasing demand from other customers. We see Microsoft returning to historical levels and a third hyperscaler becoming a significant customer. Optical DSPs and other product categories like Line Card PHYs and SerDes chiplets will also contribute to growth.
Q: How do you view the seasonality of IP licensing revenue, and what are your expectations for fiscal '25 and beyond?
A: Daniel Fleming, CFO: We have not observed seasonality in IP revenue. We expect IP to contribute 10% to 15% of fiscal '25 revenue. Longer-term, as product shipments grow, the IP revenue percentage may decrease, but it remains a strategic part of our business.
Q: Can you clarify the expectations for product margins and IP contribution in Q2?
A: Daniel Fleming, CFO: We do not expect a significant decline in product margins in Q2. We remain conservative in our guidance. We expect IP to contribute modestly more to revenue in Q2 than in Q1, but achieving our gross margin targets does not rely on an oversized IP contribution.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
