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    Credo Technology Group Holding Ltd (CRDO)

    Q4 2024 Earnings Summary

    Reported on Jan 28, 2025 (After Market Close)
    Pre-Earnings Price$20.22Last close (May 29, 2024)
    Post-Earnings Price$21.40Open (May 30, 2024)
    Price Change
    $1.18(+5.84%)

    What went well

    • Credo expects its AI revenue to double year-over-year by Q4 fiscal 2025, including both product and licensing revenue.
    • The company is experiencing increased demand for customized Active Electrical Cables (AECs), with the number of connections per GPU doubling or more in next-generation AI cluster designs, driving growth. Credo has over 100 people dedicated to the AEC business, working on more than 20 SKUs in active development, and holds competitive advantages by being first to deliver and first to qualify, and by being a single point of contact for customers, increasing customer satisfaction.
    • The PAM4 DSP business is growing, targeting 10% of fiscal 2025 revenue, with multiple drivers including production with a first U.S. hyperscaler, qualification with a second, a return in spending with non-U.S. hyperscalers, and promising engagements with optical module partners.

    What went wrong

    • Increased competition in the Active Electrical Cable (AEC) market from major players like Marvell and Astera could erode Credo's market share and margins. While Credo has not seen significant changes yet, they acknowledge the potential for second sourcing in the future.
    • Uncertainty about significant revenue contribution from Linear Receive Optics (LRO) products in fiscal 2025, as there is "not much really forecasted" for this year. The ramp of LRO products may take longer than anticipated, which could delay expected growth.
    • Sequential decline in IP revenue is expected in Q1 fiscal 2025, which may impact overall gross margins. The company indicates that IP revenue will decline quarter-over-quarter, affecting their gross margin range.

    Q&A Summary

    1. AI Revenue to Double
      Q: Will AI revenue double next year?
      A: Management expects AI revenue to grow 100% from fiscal Q4 2024 to Q4 2025, driven by AI programs ramping in the second half. They ended Q4 with approximately 75% of revenue from AI, which is expected to double by Q4 2025. , ,

    2. Non-AI Revenue Modest Growth
      Q: How will non-AI revenue perform next year?
      A: Management anticipates modest year-over-year growth in non-AI revenue, with significant growth driven by AI program ramps in the second half.

    3. Third Hyperscaler Ramp
      Q: When will the third hyperscaler customer ramp?
      A: The third hyperscaler is expected to ramp in the second half of the fiscal year. Initial engagements involve 50 gig per lane switch racks, expanding to AI appliance racks at 100 gig per lane. This relationship is developing similarly to the first two customers.

    4. Customer Diversification
      Q: What is the revenue breakdown among top customers?
      A: In Q4, there were four 10% customers: two AEC hyperscalers, a large consumer company, and a lead chiplet customer. For the full year, Microsoft accounted for 26%, a second AEC hyperscaler 20%, and the lead chiplet customer 15%, indicating revenue diversification.

    5. Competitive Dynamics in AEC
      Q: How are competitors impacting the AEC business?
      A: Despite entrants like Marvell and Astera, management hasn't seen significant changes in the competitive environment. Credo focuses on delivering and qualifying first, with over 100 people dedicated to AECs, offering unique single-point responsibility for customers.

    6. Increasing AECs per GPU
      Q: Is the number of AECs per GPU increasing?
      A: Yes, next-generation AI cluster designs are increasing AEC connections per GPU from 2–4 to potentially 8 or more, fueling growth. AI appliance racks may see AECs per rack rise from 56–64 today to nearly 200 in the future.

    7. Gross Margin Guidance
      Q: How will gross margins trend next quarter?
      A: Gross margins are guided at 63%–65% for Q1, a modest sequential decline due to a decrease in IP revenue. Product margins are expected to improve with increasing scale during fiscal 2025.

    8. Chiplet Customer CapEx Impact
      Q: Will increased chiplet customer CapEx benefit Credo?
      A: If the chiplet customer increases spending, Credo expects proportional participation. The ongoing business with the first customer continues, and management remains optimistic about chiplets with additional customers coming online.

    9. ACCs vs. AECs and NVIDIA
      Q: Will ACC adoption affect AEC business?
      A: ACCs are viewed as use-case limited, primarily within NVIDIA's NVLink fabric. Management doesn't see ACCs impacting AEC adoption, expecting AECs to remain the standard in hyperscaler deployments. The move towards Ethernet by hyperscalers is seen as positive for Credo. ,

    10. Customization Driving AEC Business
      Q: Are custom AEC products becoming more common?
      A: Yes, a high percentage of shipments are customer-specific, with Credo providing cables featuring 2–5 connectors and unique features to meet specific rack design needs. ,

    11. AI Revenue Includes Licensing
      Q: Does AI revenue growth include licensing?
      A: Yes, the expected doubling of AI revenue includes both product and licensing revenue.

    12. LRO Solutions Prospects
      Q: What is the outlook for LRO solutions?
      A: LRO solutions reduce power consumption by 30%–40%, bringing 800 gig modules down to sub-10 watts. Multiple partners are designing with LRO, potentially contributing to revenue in fiscal 2025, though significant amounts aren't yet forecasted. ,

    13. PAM4 DSP Business Momentum
      Q: How is the PAM4 DSP business performing?
      A: Targeting 10% of revenue in fiscal 2025, the PAM4 DSP business is driven by a first U.S. hyperscaler in production, a second in qualification, and new engagements with leading optical module partners.

    14. Full-Retimed DSPs in AI Networks
      Q: Do AI networks require full-retimed DSPs?
      A: Yes, management sees no momentum for solutions without DSPs. LRO solutions, which maintain standards and interoperability while reducing power, are favored, especially in power-critical AI clusters with shorter connections.

    15. Accelerating Time-to-Market
      Q: How is Credo accelerating time-to-market?
      A: By organizing for rapid response and close collaboration with customers, including frequent interactions and taking full ownership of qualification testing using over 10 thermal chambers, Credo expedites delivery and qualification.

    16. IP Licensing Revenue Outlook
      Q: How will IP licensing revenue trend?
      A: Expected to be near the high end of the 10%–15% range in fiscal 2025. IP revenue will decline sequentially in Q1 but remain at historic averages, contributing about one-fourth of the annual amount in the quarter. ,

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