Credo Technology Group Holding Ltd (CRDO) Earnings

Management highlights

- **Record Financial Performance**: Revenue reached $479 million, up 10% sequentially and 115% year-over-year, marking the seventh consecutive quarter of triple-digit YoY growth. Non-GAAP gross margin was 68%, and non-GAAP net income exceeded $236 million, up 140% YoY. - **Optical Business Expansion**: The optical segment is accelerating, driven by record DSP revenue, first silicon photonics PIC revenue from the Dust Photonics acquisition, and progress in Zero Flap Optics. Management targets over $600 million in optical revenue for FY27. - **AEC Leadership**: AECs continue to grow with deep relationships across five hyperscalers and expanding NeoCloud engagement. Penetration is increasing as deployments scale toward higher data rates (200G per lane). - **Strategic Differentiation via Reliability**: Credo emphasizes a system-level approach integrating silicon, firmware, and software to ensure reliability, power efficiency, and telemetry. This 'Zero Flap' capability aims to reduce cluster bring-up time and improve uptime. - **New Growth Engines**: Introduction of Active LED Cables (ALCs) targeting 30-meter reach and OmniConnect Gearbox solutions for inference workloads, with initial revenue expected in FY28.

Guidance

- **Q2 FY27 Revenue**: Expected between $525 million and $535 million. - **Q2 FY27 Gross Margin**: Expected between 67% and 69%. - **Q2 FY27 Operating Expenses**: Expected between $100 million and $105 million. - **Full Year FY27 Outlook**: Management expects an inflection in H2 driven by optical revenue exceeding $600 million, resulting in >85% YoY total revenue growth. - **FY27 Margins**: Non-GAAP gross margin expected to be broadly consistent with FY26 levels; non-GAAP net margin expected to be ~50%. - **FY27 OpEx**: Expected to increase ~55% YoY due to R&D investments, growing well below the revenue growth rate.

Segment performance

Credo did not provide a specific breakdown of revenue by product segment (e.g., AEC, Optical, Retimers) in absolute dollar terms or as percentage contributions for the quarter. The company reported total revenue of $479 million, with management noting that Active Electrical Cables (AECs) remain the largest business unit, while Optical and Retimer businesses delivered record revenues.

Risks & headwinds

- **Customer Concentration**: Top four end customers each accounted for at least 10% of Q1 revenue, with the largest customer representing 33%. While diversification efforts are ongoing, reliance on a few key clients remains a risk. - **Supply Chain Constraints**: Scaling production for Zero Flap Optics requires significant working capital and supply chain execution. Management acknowledged challenges in foundry capacity and pricing but expressed confidence in meeting volume targets. - **Tariff Uncertainty**: Guidance is based on the current tariff regime, which management described as fluid, posing potential risks to future margins and costs. - **Execution Risk in New Products**: Rapid ramping of new technologies like Silicon Photonics PICs, ALCs, and OmniConnect solutions carries execution risks regarding design wins, manufacturing yields, and customer adoption timelines.

Analyst Q&A

• Q: Analyst asked about the mix within the $600M+ optical revenue target and the significance of joining the OpenCPX consortium for scale-up markets. /

  A: Management stated fiscal 27 is a stepping stone, with DSPs contributing initially and NPO/CPX solutions ramping in FY28. They emphasized an agnostic approach to form factors (CPX/NPO), leveraging their broad portfolio including PICs and potentially complete optical engines to address density needs in scale-up networks, aiming for outsized growth through 2030.

• Q: Analyst inquired about supply chain challenges and customer demand visibility for scaling Zero Flap Optics volumes. /

  A: Management highlighted proactive supply chain investments made 18-24 months ago, leading to increased working capital. They expressed strong confidence in supplying increasing volumes in H2 FY27 and beyond, citing successful marketing engagement with hyperscalers and neoclouds to drive demand alongside supply readiness.

• Q: Analyst requested details on customer concentration statistics and product diversification within those top customers. /

  A: CFO disclosed that the top three customers represented 33%, 28%, and 13% of revenue, respectively, with a fourth at 10%. While the top three remained similar to the prior quarter, the fourth changed. Management confirmed that product diversification is strengthening across these hyperscaler accounts, moving beyond just ADCs.

• Q: Analyst asked how Credo’s solutions address the emerging inference workload opportunity compared to training. /

  A: Management focused on OmniConnect solutions, specifically gearboxes addressing memory fan-out issues critical for inference. They detailed a SERDES-to-LPDDR interface (starting with LPDDR5) that expands memory capacity up to 2TB per GPU, improving performance and bandwidth comparable to HBM5 while eliminating packaging reliability issues, positioning Credo strongly for frontier model inference.

• Q: Analyst questioned the competitive moat provided by telemetry data collected from the installed base. /

  A: CEO explained that their pilot software provides real-time, rich telemetry down to the SERDES level (eye height, SNR), enabling predictive maintenance ('yellow light') rather than just failure detection. This data allows for proactive mitigation (e.g., orderly GPU removal) and creates a feedback loop to optimize future DSP designs, enhancing reliability and reducing cluster bring-up time significantly.