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    Credo Technology Group Holding Ltd (CRDO)

    Q3 2024 Earnings Summary

    Reported on Jan 28, 2025 (After Market Close)
    Pre-Earnings Price$22.02Last close (Feb 27, 2024)
    Post-Earnings Price$23.90Open (Feb 28, 2024)
    Price Change
    $1.88(+8.54%)

    What went well

    • Credo is experiencing significant growth in its Active Electrical Cable (AEC) business due to the production ramp with a second hyperscaler customer, leading to sequential growth from Q2 to Q3. The company anticipates an inflection point in the second half of fiscal '25 as these programs ramp up.
    • Diversification of Credo's customer base and product lines has improved revenue visibility and growth prospects. Excluding Microsoft, revenue is up dramatically year-over-year, driven by AI-related programs. Management expresses greater confidence compared to a year ago due to this diversification.
    • U.S. hyperscalers are shifting towards deploying Ethernet-based back-end networks, moving away from InfiniBand. This trend aligns with Credo's AEC solutions and presents a significant opportunity, especially with the deployment of AMD's MI300 GPUs in hyperscale data centers. Credo anticipates that Ethernet will be preferred by most hyperscalers, benefiting its business.

    What went wrong

    • Uncertainty and Variability in AEC Revenue Before Fiscal '25 Inflection Point: The company acknowledges that while AEC products are driving growth, predicting linearity is difficult, and there may be quarter-to-quarter variability until the second half of fiscal '25 when an inflection point is expected. This uncertainty could impact near-term revenue growth.
    • Delayed Ramp in Optical DSP Business: The optical DSP business faces long development cycles, with significant volume ramps not expected until fiscal '26. This delay means that the anticipated revenue growth from this segment may not materialize in the near term.
    • Dependence on Variable and Unpredictable IP and NRE Revenues: The company's gross margins are significantly impacted by variable IP revenue and NRE contributions, which can fluctuate widely quarter-to-quarter. The spike in NRE revenue in Q3 was due to a one-time event with a single customer and is expected to revert to historical averages, potentially leading to revenue volatility. ,

    Q&A Summary

    1. Business Outlook and Revenue Inflection Point
      Q: Has the business outlook changed with increased AI spending?
      A: Management stated that their outlook remains consistent, seeing an inflection point in the second half of fiscal 2025. They feel great about having more irons in the fire than ever before, with no change to prior guidance.

    2. AEC Adoption and Hyperscaler Ramps
      Q: Will AEC adoption broaden among hyperscalers, boosting future ramps?
      A: Credo expects AEC ramps with existing and new customers, anticipating an inflection point in the second half of fiscal 2025 related to two existing hyperscaler customers. They have passed qualification with a third customer and are engaging with two others, aiming for initial ramps in fiscal 2026.

    3. Gross Margin Improvement
      Q: What drove the improvement in product gross margins, and is it sustainable?
      A: Product gross margins improved due to increasing scale and favorable product mix. Excluding NRE, margins were up 328 basis points sequentially from 50% to 53%. Management is on track to attain their long-term gross margin expectation of 63%–65% within the next two years.

    4. Customer Diversification and Revenue Visibility
      Q: How has revenue visibility improved compared to last year?
      A: Revenue visibility has improved significantly due to product and customer diversification driven by AI spending. Excluding Microsoft, revenue is up dramatically, and management is much more comfortable now compared to a year ago.

    5. Chiplet Business Growth
      Q: How is the chiplet business performing and is it expanding?
      A: The chiplet business is meaningful and growing, with two customers in production—Tesla and Intel. Credo has a handful of customers engaging in chiplet designs, viewing it as a meaningful component of their business, though smaller than AEC and optical DSP long term.

    6. Optical DSP Development
      Q: What is the progress and customer reaction to the LPO DSP?
      A: Customer reaction to the LPO DSP has been positive, especially for the 800G market. Credo is demonstrating with two optical module partners at OFC and expects to ship first sample units to a hyperscaler in the next fiscal quarter. Significant volume ramps are expected in fiscal 2026.

    7. NRE Revenue Contribution
      Q: Why was engineering services revenue unusually high this quarter?
      A: The higher NRE revenue was largely due to developing a next-generation chiplet in 5-nanometer for a single customer, requiring more engineering resources than prior geometries. Management does not expect this to set a new level for NRE revenue.

    8. Preference for Ethernet over InfiniBand
      Q: Are customers moving towards Ethernet-based back-end networks?
      A: Management believes U.S. hyperscalers prefer to deploy Ethernet networks over InfiniBand in the long term. Discussions indicate Ethernet is the preferred choice, supporting AEC adoption, although timelines vary among customers.

    9. Revenue from Top Customers
      Q: Which product lines contributed to revenue from top customers?
      A: Two of the top three customers are AEC-driven. The largest customer, their first AEC hyperscaler, accounted for 28% of revenue, and the second AEC hyperscaler contributed 19%. The other top customer was a lead chiplet customer at 23%, driven largely by NRE revenue.

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