• Revenue: $135 million, up 87% sequentially and 154% year-over-year.
• Non-GAAP Gross Margin: 63.8%.
• Product Revenue: $132 million, up 91% sequentially and 155% year-over-year.
• IP Business Revenue: $3 million in Q3.
• Non-GAAP Operating Income: $42.4 million in Q3.
• Non-GAAP Operating Margin: 31.4% in the quarter.
• Non-GAAP Net Income: $45.4 million in Q3.
• Non-GAAP Net Margin: 33.6% in the quarter.
• Cash Flow from Operations: $4.2 million in Q3.
• CapEx: $4.6 million in the quarter.
• Free Cash Flow: Negative $0.4 million.
• Cash and Equivalents: $379.2 million at the end of the quarter.
• Inventory: $53.2 million, up $16.9 million sequentially.
• Q4 Revenue Guidance: $155 million to $165 million.
• Q4 Non-GAAP Gross Margin Guidance: 63% to 65%.
• Q4 Non-GAAP Operating Expenses Guidance: $50 million to $52 million.
• Q4 Diluted Weighted Average Share Count: Approximately 188 million shares.

• Warning! GuruFocus has detected 2 Warning Sign with CRDO.

Release Date: March 04, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Credo Technology Group Holding Ltd (NASDAQ:CRDO) reported record revenue of $135 million for Q3, marking an 87% sequential increase and a 154% year-over-year growth.
• The company achieved a non-GAAP gross margin of 63.8%, which is above the high end of their guidance range.
• Credo's AEC product line experienced strong triple-digit sequential growth, achieving new record revenue levels.
• The company is expanding its market opportunity with the introduction of PCIe products, which are expected to significantly increase their total addressable market (TAM).
• Credo has achieved volume production with three hyperscalers and is in qualification with two additional hyperscalers, indicating strong future revenue diversification.

Negative Points

• The largest customer accounted for 86% of Credo's revenue in Q3, indicating a high level of customer concentration risk.
• Cash flow from operations was $4.2 million, down sequentially due to working capital increases driven by the significant product ramp.
• Free cash flow was negative $0.4 million, although this was an improvement from the previous quarter.
• The company's inventory increased by $16.9 million sequentially, which could indicate potential future write-downs if demand forecasts are not met.
• There is a risk of potential air pockets in revenue if large customer projects conclude without immediate follow-up projects.

Q & A Highlights

Q: Can you provide details on the largest customer's contribution to revenue and the growth outlook for other customers? A: Daniel Fleming, CFO: Our largest customer accounted for 86% of revenue in Q3. This was an outlier due to the significant ramp from our largest hyperscaler. We expect customer diversification in the coming quarters, with 3 to 4 customers contributing more than 10% of revenue. Bill Brennan, CEO: This confirms the AEC product category's market potential and Credo's leadership. We have three hyperscalers in volume production and two more in qualification, expecting ramp in fiscal '26.

Q: How does the shift towards inference in AI affect the demand for AECs? A: William Brennan, CEO: The inference market's growth could increase the opportunity for AECs due to the sheer number of deployments related to inference. We are seeing increased customer activity focused on inference.

Q: Are there plans to enter the PCIe switching ecosystem, and what challenges might that entail? A: William Brennan, CEO: We are focused on PCIe retimers and AECs for scale-up architectures. Transitioning to PCIe switching is a natural progression, though it presents different challenges. We are currently concentrating on perfecting our retimers and AECs.

Q: What is driving the uptick in gross margins for the upcoming quarter? A: Daniel Fleming, CFO: The increase is primarily due to scale benefits. Our product gross margin, excluding product engineering services, was 62.4%, up significantly year-over-year. Additionally, the roll-off of contra revenue associated with an Amazon warrant contributed to margin improvement.

Q: How do you view the competitive landscape in the AEC space? A: William Brennan, CEO: While there is a desire for multiple sources in the market, our focus is on being the best partner by delivering innovations and reliable solutions first. We don't see significant changes in competition and maintain an advantage by owning the entire system solution.

Q: Can you discuss the potential for PCIe AECs and the timeline for ramping these products? A: William Brennan, CEO: We are targeting the Gen6 market, with design cycles in calendar year '25 and production ramp in '26. We are ready to compete and expect to bring advantages to Gen5 as well, with an easy upgrade to Gen6.

Q: What is the outlook for customer diversification and the potential for new large customers? A: William Brennan, CEO: We expect diversification with multiple projects across customers. Our first three customers have multiple SKUs, and we anticipate the same with new customers. The expanding opportunity in optical and PCIe will further diversify our customer base.

Q: How do you view the opportunity in back-end scale-up networks? A: William Brennan, CEO: The opportunity exists across in-house ASICs and merchant GPUs. We see a large TAM as the market moves from Gen5 to Gen6, with Credo well-positioned to take advantage of this transition.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.