Credo Technology Group Holding Ltd (CRDO) 2025 Q1 Earnings Call Summary

Optimistic Highlights

• Record Product Revenues

Credo reported record product revenues of $57.3 million, up 30% compared to the prior quarter, driven by rapidly expanding AI deployments.

• Strong AEC Business

AECs continued to be the main source of revenue, with expectations for significant growth in fiscal '25 and beyond.

• Optical DSP Progress

Optical DSP business is on track to be at least 10% of fiscal '25 revenue, with significant customer traction and future growth prospects.

• Line Card PHY Growth

Line Card PHY business contributed significantly to product revenue growth, driven by 400 gig and 800 gig solutions.

• Positive Financial Outlook

Q2 revenue is expected to be between $65 million and $68 million, with non-GAAP gross margin between 62% and 64%.

Pessimistic Highlights

• Decline in IP Revenue

IP business generated $2.4 million, down 14% year-over-year, with quarterly variability expected.

• Sequential Revenue Decline

Q1 revenue of $59.7 million was down 2% sequentially.

• Lower Non-GAAP Gross Margin

Q1 non-GAAP gross margin of 62.9% was below the low end of guidance, primarily due to lower IP contribution.

• Negative Free Cash Flow

Free cash flow was negative $13.1 million, a decrease of $32.4 million year-over-year.

• Increased Inventory

Q1 ending inventory was $31.6 million, up $5.7 million sequentially.

Company Outlook

• Positive Revenue Growth

Sequential growth is expected to accelerate in the second half of fiscal '25, driven by existing and new customer engagements.

• Operating Leverage

Non-GAAP operating expenses are expected to grow at half the rate of top-line growth, driving operating leverage throughout the year.

• Expansion into New Markets

Plans to enter the 64 gig PAM4 PCIe Gen 6 market later this year, with optimized solutions for signal integrity, latency, power efficiency, and cost-effectiveness.

• Continued AEC Adoption

AECs are becoming the de facto solution for in-rack connectivity at 50 gig per lane speeds and above, with potential expansion to rack-to-rack connections.

• Focus on Energy Efficiency

Emphasis on delivering power-optimized solutions, particularly in the Optical DSP and AEC product lines, to meet the growing demand for energy-efficient connectivity solutions.

Q & A Highlights

• Q: On AEC business acceleration in the second half. (Toshiya Hari, from Goldman Sachs)

A: AEC adoption is broadening, becoming the de facto standard for in-rack connectivity. Future growth is expected with 400 gig and 800 gig AEC solutions, and potential expansion to 1.6T. (Bill Brennan)

• Q: On Optical DSP market share aspirations and LRO adoption. (Toshiya Hari, from Goldman Sachs)

A: Credo is building momentum in the Optical DSP market, with plans to deliver power-optimized solutions for 1.6T. The competitive landscape is shifting, and Credo aims to deliver solutions with significantly lower power consumption. (Bill Brennan)

• Q: Clarification on DSP shipments in fiscal '25. (Tore Svanberg, from Stifel, Nicholas & Company)

A: The reference was to the Optical DSP business, with expectations to ship more units in fiscal '25 than in all previous years combined. (Bill Brennan)

• Q: On entering the PCIe retimer market. (Tore Svanberg, from Stifel, Nicholas & Company)

A: Credo plans to enter the PCIe Gen 6 market with solutions optimized for signal integrity, power efficiency, and cost. The company also has 128 gig silicon tested for future Gen 7 solutions. (Bill Brennan)

• Q: On new 10% customer in Q2. (Suji Desilva, from Roth Capital)

A: The new 10% customer is an existing customer with increased spending, considered an emerging hyperscaler. (Bill Brennan)

• Q: On rack densification and TAM expansion. (Suji Desilva, from Roth Capital)

A: Rack densification and shorter reach connections could potentially double the TAM for AECs. (Bill Brennan)

• Q: On Optical DSP engagement with hyperscalers. (Sean O'Loughlin, from TD Cowen)

A: Credo engages directly with hyperscalers and module makers, with a focused strategy to drive adoption of Optical DSP solutions. (Bill Brennan)

• Q: On IP license revenue expectations. (Sean O'Loughlin, from TD Cowen)

A: For the full year, IP revenue is expected to be within the long-term range of 10% to 15%. (Dan Fleming)

• Q: On active copper cables and AECs. (Karl Ackerman, from BNP Paribas)

A: The market for passive copper and amplified solutions is not expected to be significant long-term. AECs are becoming the de facto standard for high-quality, reliable connections. (Bill Brennan)

• Q: On licensing revenue seasonality. (Karl Ackerman, from BNP Paribas)

A: No seasonality observed in IP revenue. Long-term expectation for IP revenue remains 10% to 15%. (Dan Fleming)

• Q: On product revenue and gross margin drivers. (Thomas O'Malley, from Barclays)

A: Product revenue was driven by strong turns bookings, with significant contributions from AEC hyperscalers. Gross margin improvement was primarily due to scale. (Dan Fleming)

• Q: On IP revenue expectations for October quarter. (Thomas O'Malley, from Barclays)

A: IP revenue is expected to contribute modestly more in Q2 than in Q1. (Dan Fleming)

• Q: On gross margin expectations for October quarter. (Quinn Bolton, from Needham)

A: Gross margin improvement may not be linear, but the company remains conservative in its guidance. (Dan Fleming)

• Q: On royalty revenue from IP business. (Quinn Bolton, from Needham)

A: Royalty revenue is not expected to be a significant part of the IP business compared to licensing revenues. (Bill Brennan)

• Q: On record product revenues and 10% customer percentages. (Richard Shannon, from Craig-Hallum)

A: Record product revenue was driven by AECs. The largest customer contributed 62% of revenue, and the second largest was at 10%. (Dan Fleming)

• Q: On next-gen AI clusters and AECs. (Richard Shannon, from Craig-Hallum)

A: AECs offer higher reliability and lower link flap rates compared to laser-based optics, driving demand for AECs in AI clusters. (Bill Brennan)

• Q: On second half fiscal '25 ramps. (Tore Svanberg, from Stifel, Nicholas & Company)

A: Growth is expected from multiple customers and product lines, including AECs, Optical DSPs, Line Card PHYs, and SerDes Chiplets. (Bill Brennan)

• Q: On OpEx growth rate. (Tore Svanberg, from Stifel, Nicholas & Company)

A: OpEx is expected to grow at half the rate of revenue growth in fiscal '25, extending into fiscal '26. (Dan Fleming)