Q1 2025 Earnings Summary
- Broadening Customer Base and Increasing Demand for AEC Solutions: Credo is experiencing increasing demand across multiple customers, including U.S. hyperscalers, emerging hyperscalers, and service providers. They expect a new 10% customer in Q2, indicating revenue diversification and growth. The company sees AECs becoming the de facto standard for in-rack connectivity, and is well-positioned with 400G and 800G AEC solutions, and future 1.6T solutions. This broad adoption is expected to drive growth in the second half of fiscal '25 and into fiscal '26. , ,
- Significant Growth and Momentum in Optical DSP Business: Credo's optical DSP business is on track to achieve its goal of being at least 10% of fiscal '25 revenue. They are making continued progress, with more than 2 million modules shipped and expecting to ship more units this fiscal year than all previous years combined. Engagements with new customers, including an industry-leading module manufacturer, and upcoming 1.6T DSP solutions with advanced power efficiency, indicate strong momentum and future growth prospects. ,
- Improving Gross Margins and Operating Leverage: Credo is experiencing improving gross margins driven by increasing scale, with product gross margin excluding product engineering services up over 900 basis points sequentially to 59.6%. The company expects non-GAAP operating expenses to grow at half the rate of top-line growth, aiming to drive operating leverage throughout the year. This financial performance indicates effective scaling of the business and profitability enhancement. ,
- High customer concentration risk: Credo relies significantly on a few key customers, particularly hyperscalers like Amazon. The company expects Amazon's ramp to drive a significant portion of growth in fiscal '25, and they acknowledge that growth may not be linear quarter-to-quarter. Any changes in spending or delays from these major customers could adversely affect Credo's revenue.
- Uncertainty in gross margin sustainability: Credo's gross margin improvements may not be sustainable or linear. Management has indicated that gross margins can fluctuate due to product mix and scale, and that they remain conservative in their guidance. The substantial gross margin increase in Q1 was partly due to specific factors like one-time reserves in the prior quarter, suggesting future margins may not continue to improve at the same rate.
- Unpredictability in IP licensing revenue: Credo's IP licensing revenue is difficult to forecast and came in lighter than expected in Q1, contributing only 4% of revenue, below the long-term expectation of 10% to 15%. This unpredictability could impact overall revenue and gross margins, especially if IP revenue does not pick up in future quarters as anticipated.
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AEC Business Growth
Q: What drives AEC growth in the second half?
A: William Brennan explained that AEC adoption is becoming a de facto standard for in-rack connections and is expanding to 5 to 7-meter cables as rack densities increase. This expansion can uplift the AEC market and expand the total addressable market (TAM) long term. -
Optical DSP Market Share
Q: What's the outlook for the optical DSP business and market share?
A: Brennan stated they are on track for the optical DSP business to be at least 10% of fiscal '25 revenue. They have over 2 million modules deployed and expect to ship more units this fiscal year than all previous years combined. They aim to deliver competitive solutions at 50G and 100G per lane, with power half that of competitors. -
New 10% Customer
Q: How is customer concentration changing with the new 10% customer?
A: Brennan noted that an emerging hyperscaler is expected to become a new 10% customer in fiscal Q2. This customer has increased spending and reflects receptiveness to Credo's solutions, contributing to revenue diversification. -
Gross Margins and Guidance
Q: What are the expectations for gross margins going forward?
A: Daniel Fleming highlighted that product gross margin excluding product engineering services was up over 900 basis points sequentially to 59.6%. They expect gross margins to stay within the long-term expectation of 63% to 65% and believe they can achieve their goals without relying heavily on IP revenue. -
Licensing Revenue Expectations
Q: What's the outlook for IP license revenue?
A: Fleming stated that for fiscal '25, they expect IP revenue to be within the long-term range of 10% to 15% of total revenue. Although licensing revenue was lighter in Q1 at only 4%, they are confident in achieving their fiscal year target. -
PCIe Retimer Market Entry
Q: Why is Credo entering the PCIe retimer market now?
A: Brennan explained they are entering the PCIe market at Gen 6 speeds (64G PAM4) to deliver compelling benefits in signal integrity, power, and cost. They plan to accelerate to Gen 7 (128G), already having silicon tested by a lead partner, aligning with AI-driven demand for higher bandwidth. -
Rack Densification and TAM Expansion
Q: How does rack densification impact TAM expansion?
A: Brennan stated that as racks become denser, connections previously made with longer optical solutions can now use 5 to 7-meter AECs, potentially doubling the TAM. Customer-driven architectural shifts could significantly uplift the AEC market. -
Active Copper Cables vs. Optics
Q: How do active copper cables compare to optics in AI clusters?
A: Brennan noted that AECs offer higher reliability with nearly zero link flaps compared to laser-based optics. Single connection failures can cost $30,000 to $50,000 and 30 minutes of productivity , so customers are shifting focus to network quality, benefiting AEC adoption. -
Margins and Product Mix
Q: Will product margins decline next quarter?
A: Fleming expects some quarterly fluctuations but remains committed to long-term gross margin targets. They are conservative but don't necessarily expect margins to decline significantly. -
Record AEC Quarter and Customer Percentages
Q: Were there record AEC sales and what are 10% customer percentages?
A: Fleming confirmed record product revenue, with AEC being a large driver. They had two 10% end customers in Q1: the first AEC hyperscaler at 10%, and the second was the largest customer. Significant revenue diversification is expected as they ramp throughout fiscal '25.