Credo Technology Group Holding Ltd (CRDO) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary and Q&A session reflect strong financial performance, optimistic guidance, and strategic growth initiatives. Credo's expectation of 120% YoY revenue growth, expanding customer base, and product line growth are positive indicators. While management avoided specific details on ASP uplift and timeline for a new 10% customer, the overall sentiment remains positive with a focus on system-level solutions and strong market positioning. The lack of market cap information limits precise impact prediction, but the positive outlook suggests a stock price increase in the short term.
Key Financial Performance
Revenue $268 million, representing 20% sequential growth from Q1 and an extraordinary 272% increase year-over-year. The increase is attributed to the continued build-out of the world's largest AI training and inference clusters.
Non-GAAP Gross Margin 67.7%, up 11 basis points sequentially and up 469 basis points year-over-year. This reflects strong operational performance and product mix.
Non-GAAP Net Income $128 million, a record high, demonstrating substantial leverage in the business. This is a 30% sequential increase compared to Q1.
Product Revenue $261.3 million, up 20% sequentially and up 278% year-over-year. Growth was driven by substantial year-over-year growth across 4 domestic hyperscale customers.
Non-GAAP Operating Income $124.1 million, up from $96.2 million in Q1, driven by more than 20% sequential top-line growth and mid-single-digit OpEx growth.
Non-GAAP Operating Margin 46.3%, compared to 43.1% in the prior quarter, a sequential increase of 319 basis points.
Cash Flow from Operations $61.7 million, up $7.5 million sequentially, reflecting strong operational cash generation.
CapEx $23.2 million, driven largely by purchases of production MACsec.
Free Cash Flow $38.5 million, down from $51.3 million in Q1 due to higher CapEx investments.
Cash and Equivalents $813.6 million, an increase of $333.9 million from Q1, largely from the proceeds of the ATM offering.
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Operating Highlights
Active Electrical Cables (AEC): Fastest-growing segment with strong revenue growth. Four hyperscalers contributed over 10% of total revenue, with a fifth starting to contribute. AECs are displacing optical connections up to 7 meters, offering better reliability and power efficiency.
Integrated Circuits (IC): Strong performance driven by retimers and optical DSPs. Significant growth expected in 50-gig and 100-gig per lane deployments, with 200-gig solutions showing promise. PCIe retimer and AEC families progressing on plan.
Zero Flap Optics: New laser-based optical connectivity family delivering AEC-class reliability. Currently in live data center trials with initial revenue expected in fiscal '27.
Active LED Cables (ALCs): New connectivity category using micro LEDs. First products to sample in fiscal '27, with revenue ramping in fiscal '28. TAM expected to be more than double the size of AEC TAM.
OmniConnect Gearboxes: New product family addressing memory-to-compute connectivity. First product, Weaver, offers significant improvements in memory capacity and bandwidth. Initial revenue expected in fiscal '28.
Total Addressable Market (TAM) Expansion: Credo's TAM is expected to exceed $10 billion in the coming years, more than tripling from 18 months ago.
Revenue Growth: Record revenue of $268 million in Q2, up 20% sequentially and 272% year-over-year.
Gross Margin: Non-GAAP gross margin at 67.7%, up sequentially and year-over-year.
Net Income: Non-GAAP net income of $128 million, a record high.
Cash Flow: Cash flow from operations at $61.7 million, with free cash flow at $38.5 million.
Strategic Partnerships: Deep partnerships forged through innovative frameworks and pilot debug platforms.
New Growth Pillars: Introduction of three new product categories: Zero Flap Optics, Active LED Cables, and OmniConnect Gearboxes, each targeting multibillion-dollar markets.
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Risk or Challenges
Forward-looking statements: The company acknowledges that forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially and adversely from those anticipated or implied. Management cannot predict all risks or assess the impact of all factors on the business.
Customer concentration: Revenue is heavily reliant on a few hyperscale customers, with 3 to 4 customers expected to contribute more than 10% of revenue in the coming quarters. This concentration poses a risk if any of these customers reduce their orders or switch to competitors.
Tariff regime: The current tariff regime remains fluid, which could impact costs and profitability.
Inventory levels: Ending inventory increased significantly to $150.2 million, which could pose a risk if demand does not materialize as expected, leading to potential write-offs or reduced cash flow.
Capital expenditures: CapEx increased significantly, driven by production investments. This could strain cash flow if revenue growth does not meet expectations.
Supply chain constraints: The company highlighted potential constraints in the supply chain, particularly for high-bandwidth memory, which could impact product availability and customer satisfaction.
Market competition: The company operates in highly competitive markets, including AI clusters and connectivity solutions, where technological advancements and pricing pressures could impact market share and profitability.
Regulatory and compliance risks: The company must navigate complex regulatory environments, which could lead to compliance costs or operational disruptions.
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Guidance & Outlook
Revenue Projections: Revenue for Q3 of fiscal '26 is expected to be between $335 million and $345 million, representing a 27% sequential increase at the midpoint. Sequential revenue growth in the mid-single digits is expected toward the end of fiscal '26 and into fiscal '27, leading to more than 170% year-over-year growth in fiscal '26.
Gross Margin: Non-GAAP gross margin for Q3 of fiscal '26 is expected to be within a range of 64% to 66%.
Operating Expenses: Non-GAAP operating expenses for Q3 of fiscal '26 are expected to be between $68 million and $72 million. For fiscal '26, non-GAAP operating expenses are expected to increase year-over-year by approximately 50%.
Net Margin and Income: Non-GAAP net margin for fiscal '26 is expected to be approximately 45%, with net income projected to more than quadruple year-over-year.
Customer Growth: Each of the top 4 customers from Q2 is expected to grow significantly year-over-year in fiscal '26. Revenue diversification is expected to strengthen further, with the fourth customer surpassing the 10% revenue threshold for fiscal '26.
Product Revenue Growth: Significant growth is expected in the AEC product line and IC business, including retimers and optical DSPs. New product categories such as Zero Flap optics, ALCs, and OmniConnect gearboxes are anticipated to contribute to revenue growth in fiscal '27 and beyond.
Market Opportunities: The total market opportunity for Credo's connectivity solutions is projected to exceed $10 billion in the coming years, more than triple the market size from 18 months ago.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:What factors contribute to the potential of the ALC market being double the AEC TAM?
A:The ALC market's potential is driven by both quantity and ASPs. ALCs deliver the same reliability as AECs, are power-efficient, and have a thinner wire gauge and longer length. The scale-up networks moving from intra-rack to row scale could lead to a 10x increase in the number of scale-out connections.
Q:What were the revenue contributions of the top 4 customers in Q2?
A:The largest customer contributed 42% of revenue, the second largest 24%, the third largest 16%, and the fourth largest 11%. The largest customer for the fiscal year had been down in previous quarters but was back up again in Q2.
Q:How is the company focusing on system-level products in the optical domain?
A:The company is expanding its portfolio at the system level, including ALCs, ZF optics, and the OmniConnect family. They aim to deliver non-commodity solutions with enhanced reliability, telemetry, and integration within network software. Examples include ZF optics for AI clusters and the OmniConnect family for memory-to-compute connectivity.
Q:What is the company's approach to 112 gig VSR SerDes technology?
A:The company developed the SerDes specifically for application-specific needs, focusing on the smallest footprint, lowest power, and application-specific performance. The VSR SerDes enables 120 terabits per second of bandwidth with a reach of 10 inches, supporting both copper and optical solutions.
Q:What applications are the 4 customers using AECs for, and what is the outlook for co-packaged optics?
A:The 4 customers use AECs for front-end network connections, scale-out opportunities in AI clusters, and switch racks. The remaining high-volume application is the scale-up network. Co-packaged optics face challenges like reliability, serviceability, and cost, and the company does not see a significant impact from them in the near term.
Q:How does the ASP lift from 100 to 200 gig per lane compare to the 50 to 100 gig transition?
A:The ASP lift depends on the number of connectors, devices, and connection lengths. There has been uplift from 50 to 100 gig, and a similar uplift is expected from 100 to 200 gig, though it cannot be simply categorized.
Q:What is the company's view on AEC supply constraints?
A:The company does not foresee concerns related to AEC production volumes with its partners. However, there is increasing discussion about wafer demand and potential capacity constraints in the market. The company’s strategy of using older geometry processes like 12-nanometer provides an advantage.
Q:What is the status of the top 2 customers regarding lane speeds?
A:The company is in production with 25 gig, 50 gig, and 100 gig per lane solutions. The top 2 customers are still primarily at 25 or 50 gig per lane, but the market is expected to migrate to 100 gig and then 200 gig per lane over the next 2-3 years.
Q:What is the company's strategy for ALC manufacturing?
A:The strategy for ALCs will be similar to AECs, with the company owning the entire stack and taking accountability for the entire system solution.
Q:What is the timeline for scale-up revenues and ALC ramps?
A:Scale-up revenues are expected to ramp with PCIe Gen 6 solutions, with initial ramps for ALCs in fiscal '28. The company is also preparing for PCIe Gen 7 and 200 gig per lane solutions.
Q:What is the long-term gross margin expectation?
A:The long-term gross margin expectation is 63% to 65%. While current margins are slightly above this range, they are expected to settle within this range over time.
Q:What is the company's approach to the optical transceiver market?
A:The company is focusing on system-level solutions rather than competing in the commodity market. The solutions will include DSPs, software, and tight customer integration, with no change to the long-term gross margin model.
Q:What is the status of the fifth customer and their potential to become a 10% customer?
A:The fifth customer has initial revenue this year but is not expected to be a 10% customer this fiscal year. They have the potential to reach 10% on a quarterly basis in the future, but it will take time.
Q:How does the company view the AEC market and its competitive landscape?
A:The company pioneered the AEC market and has taken steps to protect its IP. It views competition as a challenge to move quickly and deliver what customers want. Licensing agreements with third parties do not change the competitive landscape.
Q:What is the company's visibility into customer inventory levels?
A:The company has good visibility into the supply chain and does not see significant inventory build-up. Connectivity solutions are ordered alongside GPUs, ensuring alignment in the supply chain.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the ASP uplift from 100 to 200 gig per lane, stating that it cannot be simply categorized. Additionally, they did not provide a clear timeline for when the fifth customer might become a 10% customer, only stating that it will take time.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AEC IC
ALCs OmniConnect
Credo Chief
Customer
DDR
Flap optic
Fleming review
Hyperlume
IC business
Officer
OmniConnect gearbox
TAM
Weaver
Zero Flap
connectivity pillar
dollar market
family
flap
function improvement
market dollar
memory capacity
memory connectivity
million
multibillion dollar
optic ALCs
package
purpose SerDes
reach
retimers
step function
ten
thousand
CRDO Transcript
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The earnings call reveals a decline in key financial metrics: revenue decreased by 12% year-over-year, gross margins fell, net income dropped by 20%, and EPS decreased. Operating expenses increased significantly, further impacting profitability. The lack of detailed strategic initiatives or positive guidance, coupled with the acknowledgment of risks in forward-looking statements, suggests uncertainty. The Q&A section did not provide additional clarity or positive insights. These factors collectively point to a negative sentiment, likely resulting in a stock price decline of -2% to -8% over the next two weeks.
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The earnings call summary presents a mixed picture: strong financial performance with revenue and net income growth, but lack of clarity on strategic initiatives and outlook. The absence of shareholder return plans and unclear management responses in the Q&A section add uncertainty. Given these factors, the sentiment is neutral, as positive financial metrics are offset by vague forward-looking guidance and risk acknowledgments.
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