Executive Summary

Record quarter: revenue $72.0M (+20.6% q/q, +63.6% y/y); non-GAAP gross margin 63.6%; non-GAAP diluted EPS $0.07; GAAP diluted EPS $(0.03) .
Broad-based strength across AECs, optical DSPs, and line-card retimers; product revenue $69.1M and product ex-engineering $64.4M hit new records .
Guidance inflects sharply: Q3 FY25 revenue $115–$125M and non-GAAP GM 61–63% as AI cluster deployments accelerate; management expects double-digit sequential growth into Q4 and FY25 revenue up ≥100% y/y .
Stock reaction catalysts: outsized Q3 guide “well above Street expectations” per analyst framing; AEC leadership and “ZeroFlap” reliability narrative versus optics; diversified customer base including three 10%+ end customers in Q2 (one at 33%) .

What Went Well and What Went Wrong

What Went Well

Record revenue across all three main product lines and clear second-half inflection driven by AI deployments; “turning point has arrived” (CEO) .
AEC momentum: another record AEC quarter with strong demand from two top hyperscalers and an emerging hyperscaler; ZeroFlap 800G AECs positioned to eliminate costly optical link flaps and leverage liquid cooling for 7m reach .
Margin leverage: company-level non-GAAP GM 63.6% near high-end; product non-GAAP GM 62.2% (+66 bps q/q, +943 bps y/y) on scale; non-GAAP operating margin expanded to 11.5% (+780 bps q/q) .

What Went Wrong

GAAP loss persists (net loss $(4.2)M; GAAP diluted EPS $(0.03)); OpEx stepped up q/q (GAAP $53.9M; non-GAAP $37.6M) as R&D spend rose .
Free cash flow negative $(11.7)M in Q2, with CapEx $21.9M (5nm tape-outs); cash and ST investments down to $383.0M from $398.6M in Q1 .
Customer concentration remains a watch item: the second AEC hyperscaler was 33% of revenue and declined sequentially ($31M→$24M), highlighting potential quarter-to-quarter non-linearity even amid strong overall ramp .

Financial Results

Summary P&L and EPS (GAAP/non-GAAP)

Metric	Q4 FY2024	Q1 FY2025	Q2 FY2025
Revenue ($M)	$60.8	$59.7	$72.0
GAAP Gross Margin %	65.8%	62.4%	63.2%
Non-GAAP Gross Margin %	66.1%	62.9%	63.6%
GAAP Net Income (Loss) ($M)	$(10.5)	$(9.5)	$(4.2)
Non-GAAP Net Income ($M)	$11.8	$7.0	$12.3
GAAP Diluted EPS ($)	$(0.06)	$(0.06)	$(0.03)
Non-GAAP Diluted EPS ($)	$0.07	$0.04	$0.07
Non-GAAP Operating Margin %	12.3%	3.7%	11.5%

YoY context (Q2 FY2024 vs Q2 FY2025): Q2 FY2024 revenue $44.0M vs $72.0M (+63.6%); GAAP GM 59.3% vs 63.2%; non-GAAP GM 59.9% vs 63.6%; GAAP diluted EPS $(0.04) vs $(0.03); non-GAAP diluted EPS $0.01 vs $0.07 .

Revenue Breakdown

Metric ($M)	Q4 FY2024	Q1 FY2025	Q2 FY2025
Product Sales	$40.798	$53.839	$64.443
Product Engineering Services	$3.341	$3.486	$4.632
IP License	$16.643	$2.389	$2.959
Total Revenue	$60.782	$59.714	$72.034

Operational KPIs

KPI	Q1 FY2025	Q2 FY2025
Cash & Short-Term Investments ($M)	$398.6	$383.0
Cash from Operations ($M)	$(7.2)	$10.3
CapEx ($M)	$5.9	$21.9
Free Cash Flow ($M)	$(13.1)	$(11.7)
Inventories ($M)	$31.6	$36.3
Non-GAAP Product GM %	61.5%	62.2%

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance/Result	Change
Revenue ($M)	Q3 FY2025	N/A	$115.0–$125.0	New
GAAP Gross Margin %	Q3 FY2025	N/A	60.6%–62.6%	New
Non-GAAP Gross Margin %	Q3 FY2025	N/A	61.0%–63.0%	New
GAAP OpEx ($M)	Q3 FY2025	N/A	$58.6–$60.6	New
Non-GAAP OpEx ($M)	Q3 FY2025	N/A	$42.0–$44.0	New
Diluted Shares (approx)	Q3 FY2025	N/A	~184M	New
Revenue ($M)	Q2 FY2025	$65.0–$68.0	$72.0 (actual)	Beat vs guidance
Non-GAAP Gross Margin %	Q2 FY2025	62.0%–64.0%	63.6% (actual)	In range (near high end)
Non-GAAP OpEx ($M)	Q2 FY2025	$36.0–$38.0	$37.6 (actual)	In range
GAAP OpEx ($M)	Q2 FY2025	$51.3–$53.3	$53.9 (actual)	At high end

Earnings Call Themes & Trends

Topic	Previous Mentions (Q4 FY2024 and Q1 FY2025)	Current Period (Q2 FY2025)	Trend
AI-driven demand and AEC leadership	FY2024 success “primarily driven by our customers’ AI deployments”; AECs becoming de facto for in-rack connectivity ≥50G per lane; expectation of second-half inflection	Record AEC quarter; ZeroFlap reliability narrative; strong demand across top hyperscalers; shipments driving inflection	Strengthening
Optical DSP adoption	On track for ≥10% of FY25 revenue; first design win with leading module maker; LRO concept gaining traction; 3nm focus for 1.6T	Record optical DSP revenue in Q2; 50G/100G per lane driving near-term; 200G tape-outs, sampling with module makers	Accelerating near term; 200G builds
PCIe connectivity roadmap	Entry planned at Gen6 (64G PAM4) with retimers and AECs; early Gen7 (128G) silicon tested	Gen6/Gen7 showcased at OCP; sampling in CY25; production revenues expected CY26	Progressing
Customer diversification	Two 10% customers in Q1; expecting a new 10% customer in Q2; broader emerging hyperscalers	Three 10% customers in Q2 (one 33%); four more at 5–10%; emerging hyperscalers ramping	Improving breadth; watch concentration
Supply chain/inventory	Building scale; operating leverage; no specific inventory commentary in Q4/Q1	Management monitoring consumption; “high consumption rate,” not seeing inventory build at partners amid surge	Healthy flow-through

Management Commentary

“Credo generated record revenue of $72.0 million, up 21% sequentially and 64% year over year… the turning point has arrived, driven by AI deployments and deepening customer relationships.” — Bill Brennan, CEO .
“Our product lines grew double digits sequentially to achieve new, record revenue levels… Product non-GAAP gross margin was 62.2%… primarily due to increasing scale.” — Dan Fleming, CFO .
“AECs outperform laser-based optics, offering lower power, reduced cost and more importantly, greater reliability… billions of hours of operations without link flaps.” — Bill Brennan, CEO .

Q&A Highlights

Guidance surprise and drivers: Q3 guide “well above Street expectations” per analysts; upside driven by larger-than-expected projects and sheer number of GPUs deployed; attach rates per GPU likely rising over time .
Competitive landscape and second-sourcing: Market desires multiple suppliers; Credo aims to be first to sample/qualify/ramp; >20 custom SKUs; comfortable competing from “high ground” as customers second-source .
Customer mix clarity: Microsoft at ~11%; second hyperscaler at 33% (down q/q); emerging hyperscaler at 14%; second hyperscaler expected to drive second-half inflection .
Optical DSP timeline: 50G/100G per lane to drive FY25–FY26; 200G per lane more impactful in FY27; strong engagement with module makers and hyperscalers .
Inventory visibility: High consumption rates observed; not seeing inventory build at logistics partners despite surge; close monitoring continues .

Estimates Context

Street consensus via S&P Global was not available at time of writing due to a data access limit; we anchor comparisons to company guidance and call commentary indicating the Q3 guide was “well above Street expectations” per analysts on the call .
Implication: Models likely need upward revisions for Q3/Q4 revenue and margins; FY25 revenue growth ≥100% y/y and operating leverage targets suggest higher non-GAAP operating margins versus prior estimates .

Key Takeaways for Investors

The core narrative is an AI-driven second-half inflection led by AECs, with optical DSPs and line-card retimers adding breadth; this underpins the step-up to $115–$125M in Q3 revenue and expected double-digit sequential growth into Q4 .
Margin expansion is primarily scale-driven; non-GAAP GM near the long-term model and operating margin improved to 11.5%—expect continued leverage as OpEx grows at less than half the rate of revenue in FY25 .
Customer concentration persists but is improving: three 10% customers and four more at 5–10%; watch for non-linear quarterly patterns even as aggregate demand ramps .
Reliability “ZeroFlap” story versus optics resonates with hyperscalers, potentially expanding AEC TAM beyond in-rack to 5–7m rack-to-rack connections as liquid cooling densifies clusters—an investable product-cycle tailwind .
Near-term optical growth is anchored in 50G/100G per lane; 200G per lane and PCIe Gen6/7 should emerge CY25–CY26 and beyond, supporting medium-term diversification and TAM expansion .
Liquidity remains ample ($383.0M cash/ST investments), but FCF was negative given elevated tape-out CapEx; monitor conversion of outsized Q3/Q4 guides to cash generation as shipments ramp .
Trading setup: Expect estimate revisions and positive sentiment into Q3 on revenue acceleration and reliability differentiation; monitor customer mix and any supply-chain/timing volatility acknowledged by management .

Credo Technology Group Holding Ltd (CRDO)·Q2 2025 Earnings Summary