Credo Technology Group Holding Ltd (NASDAQ:CRDO) Q1 2024 Earnings Conference Call August 24, 2023 4:15 PM ET Company Participants Dan O'Neil - VP-Corporate Development and IR Bill Brennan - CEO Dan Fleming - CFO Conference Call Participants Toshiya Hari - Goldman Sachs Quinn Bolton - Needham & Company Matt Ramsay - TD Cowen Karl Ackerman - BNP Paribas Suji Desilva - ROTH MKM Tore Svanberg - Stifel Brett Simpson - Arete Research Vijay Rakesh - Mizuho Richard Shannon - Craig-Hallum Capital Group Operator Ladi ...

Currency and Dividend Risks - The company's PRC subsidiaries generate revenue in Renminbi, which is not freely convertible, potentially limiting their ability to pay dividends due to currency exchange restrictions and a withholding tax rate of up to 10% on dividends payable to non-PRC resident enterprises[407] - The company is subject to foreign exchange control systems that could prevent it from obtaining sufficient foreign currencies to satisfy demands, potentially impacting its ability to pay dividends in foreign currencies[382] - The company does not intend to pay cash dividends on its ordinary shares for the foreseeable future, and any future dividends will depend on various factors, including business prospects and financial condition[463] - The company's cumulative undistributed earnings subject to withholding taxes were $12.3 million as of April 29, 2023, with the intention to reinvest these earnings indefinitely[866] Political and Legal Risks - The company faces potential political, legal, and economic instability in Hong Kong, which could adversely affect its business and results of operations[377][379] - The company may face challenges in enforcing U.S. court judgments in the Cayman Islands, where it is incorporated, due to differences in legal systems[452] - The company's intellectual property rights may be challenged or invalidated, and it may face difficulties in enforcing these rights in jurisdictions with weak legal protections[415] - The company may be subject to cybersecurity review requirements under PRC laws, and violations could result in administrative penalties, including fines and service suspension[398] - The company is subject to cybersecurity reviews in China if it processes personal information of over one million users and seeks foreign stock exchange listings[446] Operational and Financial Risks - The company relies on dividends and other distributions from its subsidiaries to fund cash and financing requirements, but there is no assurance that subsidiaries will be able to make such payments[380] - The company’s operations could be disrupted by natural disasters, power outages, or geopolitical events, particularly as its headquarters and key suppliers are located in active earthquake zones[473] - The company’s success depends on retaining key personnel, including executive officers and engineering teams, as it lacks long-term employment agreements with them[471] - The company’s share price may be volatile due to factors such as changes in customer demand, product life cycles, and economic conditions[458] - The company may issue equity or equity-linked securities for acquisitions, potentially diluting shareholder ownership[470] Regulatory and Compliance Risks - The company faces risks related to export control regulations, including potential violations of U.S. export control laws, which could result in criminal prosecution or administrative sanctions[368] - The company operates in multiple countries and is subject to anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and any violations could result in substantial fines and penalties[372] - Compliance with data privacy laws, including GDPR and CCPA, could result in regulatory fines of up to $2,500 per violation and $7,500 for willful violations, increasing compliance costs[445] Shareholder and Corporate Governance Risks - The company has the ability to issue 50,000,000 preferred shares and additional ordinary shares without shareholder approval, which could impede acquisition attempts or changes in control[443] - Anti-takeover provisions, such as the issuance of "blank check" preferred shares, may discourage acquisitions, potentially limiting shareholder opportunities to sell shares at a premium[464][465] - As of April 29, 2023, the company had 148,651,394 outstanding ordinary shares, with warrants and options covering an additional 20,748,004 shares, all potentially tradable in the public market[483] Tax and Financial Reporting - The company's total current tax expense for the year ended April 29, 2023, was $740,000, with a total deferred tax benefit of $2.107 million[864] - The company's total tax expense (benefit) for the year ended April 29, 2023, was $(1.367) million[864] - Unrecognized tax benefits as of April 29, 2023, were $2.9 million, which, if recognized, would affect the effective tax rate[867] - The company's unrecognized tax benefits as of April 30, 2022, were $1.8 million[867] - The company recognized $1.2 million of revenue in the year ended April 29, 2023, that was included in the deferred revenue balance as of April 30, 2022[783] Leasing and Facilities - The company's total leased facilities as of April 29, 2023, amount to 182,281 square feet, with the United States accounting for 89,727 square feet, Mainland China for 66,929 square feet, Taiwan for 18,537 square feet, and Hong Kong for 7,088 square feet[478] - Total lease payments for operating leases are projected at $18.815 million, with a present value of lease liabilities at $15.5 million[862] - The company's leases have remaining terms generally between one year and eight years, with no finance leases[860] - The company's operating lease expenses for fiscal year 2024 are projected at $3.456 million[862] Intellectual Property and Trade Secrets - The company's trade secrets and proprietary information are at risk of misappropriation, particularly in the semiconductor industry, which experiences high employee turnover[418]

Credo Technology Group Holding Ltd (NASDAQ:CRDO) Q4 2023 Earnings Conference Call May 31, 2023 5:00 PM ET Company Participants Dan O'Neil - Vice President-Corporate Development & Investor Relations Bill Brennan - Chief Executive Officer Dan Fleming - Chief Financial Officer Conference Call Participants Tore Svanberg - Stifel Quinn Bolton - Needham & Company Suji Desilva - Roth Capital Karl Akerman - BNP Vivek Arya - Bank of America Operator Good day, and thank you for standing by. Welcome to the Credo Q4 Fi ...

Financial Data and Key Metrics Changes - For Q3 2023, Credo reported revenue of $54.3 million, representing a 6% sequential growth and over 71% year-over-year growth [6][54] - Non-GAAP gross margin was reported at 59.3%, which was within guidance for Q3 [6] - The company delivered net income of $7.5 million in Q3, an increase of $5.1 million year-over-year and up 208% sequentially [57] - Cash and equivalents at the end of the quarter were $233 million, a decrease of $7.5 million from the previous quarter [29] Business Line Data and Key Metrics Changes - The revenue mix in Q3 was 23% from IP, above the long-term expectation of 10% to 15% [26] - Product revenue generated $41.7 million in Q3, down 13% sequentially but up 56% year-over-year, driven principally by AEC growth [55] - IP business reached $12.6 million in Q3, up 285% sequentially and 145% year-over-year [54] Market Data and Key Metrics Changes - The company is engaged with hyperscale data center operators and networking equipment OEMs, with a focus on the Ethernet market [16] - AECs are expected to become a multibillion-dollar market within four to five years, as they become the most prevalent solution for in-rack connectivity [8] Company Strategy and Development Direction - Credo remains focused on high-speed connectivity solutions, with ongoing engagements in advanced programs with major customers and hyperscalers [7] - The company is developing advanced AEC solutions for next-generation server rack and switch rack applications [9] - Credo aims to leverage its differentiated SerDes technology to deliver disruptive solutions to the optical market [20] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about growth opportunities despite a reduction in forecast due to macroeconomic headwinds [17] - The company believes that the fundamental connectivity technology trends remain consistent across the data infrastructure market [17] - Management noted that while there are delays in qualification and pushouts, they remain confident in their sole source position with their largest customer [32] Other Important Information - The company expects Q4 revenue to be between $30 million and $32 million, down 43% sequentially at the midpoint [58] - Operating expenses for Q4 are expected to be between $26 million and $28 million [58] Q&A Session Summary Question: What is driving the change in the near-term outlook for the largest customer? - Management indicated that the change is due to inventory adjustments and delays in qualification, not due to technical issues with products [32][46] Question: How does the revenue outlook for fiscal 2024 look? - The company is guiding to a flat revenue outlook for fiscal 2024, with two-thirds of the reduction related to the largest customer and one-third due to increased conservatism across the board [62] Question: What is the current mix of AECs in the sales? - AECs are expected to represent about 40% to 45% of the sales mix in fiscal 2023, with expectations for a similar mix in fiscal 2024 [114] Question: What is the timeline for moving from 12 to 5-nanometer products? - The company is actively working on 5-nanometer developments across all product segments, with tape-outs expected in the upcoming quarters and products likely available within the next 12 to 18 months [75] Question: Is there any obsolescence risk with current inventory? - Management does not expect any obsolescence risk in inventory, although they have increased reserves based on internal procedures [109]

Financial Performance - For the three months ended January 28, 2023, Credo Technology Group reported a net income of $2,823,000, compared to a net loss of $144,000 for the same period in 2022, marking a significant turnaround [27]. - The total comprehensive income for the three months ended January 28, 2023, was $3,147,000, compared to a total comprehensive loss of $376,000 for the same period in 2022 [27]. - For the nine months ended January 28, 2023, the net loss was $610,000, a substantial improvement from a net loss of $16,821,000 for the same period in 2022 [27]. - Total revenue for the three months ended January 28, 2023, was $54,270,000, a 70.6% increase from $31,800,000 for the same period in 2022 [46]. - The revenue for the nine months ended January 28, 2023, was $152.11 million, compared to $68.95 million for the same period in 2022, indicating a growth of 120.5% [73]. - Net income for the three months ended January 28, 2023, was $2.8 million, compared to a net loss of $0.1 million in the same period of 2022 [185]. Assets and Liabilities - As of January 28, 2023, total shareholders' equity was $354,553,000, an increase from $305,689,000 as of January 31, 2022 [30]. - Total assets increased to $417,251,000 as of January 28, 2023, up from $375,689,000 as of April 30, 2022, representing an increase of 11.1% [44]. - Total liabilities rose to $62,698,000 from $41,526,000, marking a 50.9% increase [44]. - The company reported inventory of $50.32 million as of January 28, 2023, compared to $27.34 million as of April 30, 2022, reflecting a significant increase [131]. Cash Flow and Expenses - Cash and cash equivalents decreased to $123,783,000 from $259,322,000 year-over-year, a decline of 52.3% [54]. - The company reported a net cash used in operating activities of $(12,776,000) for the nine months ended January 28, 2023, compared to $(33,192,000) for the same period in 2022 [54]. - Research and development expenses for the three months ended January 28, 2023, were $20,530,000, a 86.5% increase from $10,995,000 in the same period last year [46]. - The company reported share-based compensation expenses of $5.169 million for the three months ended January 28, 2023, compared to $1.438 million for the same period in the prior year [161]. Revenue Sources and Customer Concentration - The Company’s revenue is primarily driven by sales of integrated circuits (ICs) and Active Electrical Cables (AECs), with a focus on high-speed connectivity solutions for the 100G to 800G markets [86]. - The Company has a significant concentration of revenue from a small number of customers, with Customer A contributing 52% of revenue for the three months ended January 28, 2023 [72]. - Product sales accounted for 70.0% of total revenue in Q1 2023, while IP license revenue represented 23.0% [185]. Market and Operational Risks - The company is navigating risks related to customer order forecasts and the lengthy sales cycle, which may impact future performance [41]. - The largest customer reduced its demand forecast for certain products, which is expected to negatively impact revenue for the fiscal fourth quarter ending April 29, 2023 [198]. - The company anticipates a negative impact on product demand due to reduced economic growth in the U.S., Europe, China, and globally in 2022 and into 2023 [218]. - Geopolitical tensions, especially between the People's Republic of China and Taiwan, could disrupt the company's supply chain and operations [218]. Strategic Focus and Future Outlook - The company continues to focus on developing and marketing new products and technologies, which is critical for future growth [41]. - Significant investments in research and development are expected to continue to support competitiveness and product portfolio expansion [201]. - The company anticipates that revenues from product sales and IP licenses will become a larger proportion of total revenue relative to engineering services over time [194]. - The company expects to generate an increased proportion of revenue from product sales as customer adoption widens, reducing customer concentration over time [181].

Financial Data and Key Metrics Changes - Credo achieved record revenue of $51.4 million in Q2 2023, representing a 94% increase year-over-year and an 11% increase sequentially [8][25] - Product revenue reached $48.1 million, up 33% sequentially and 143% year-over-year, driven by strong AEC adoption [25] - Gross margin for the quarter was 54.9%, with product gross margin at 52.6%, up 80 basis points sequentially and 4.8 percentage points year-over-year [27][30] - Operating income was $3.4 million, an improvement of $5.6 million year-over-year, but down 41% sequentially [29] - Net income for Q2 was $2.4 million, an increase of $5.7 million year-over-year, but down 55% sequentially [30] - Cash and equivalents at the end of the quarter were $240.5 million, a decrease of $3.2 million from the previous quarter [32] Business Line Data and Key Metrics Changes - AECs continued to show strong execution, with expectations for significant growth in the coming years as the market for AECs is forecasted to grow to a multi-billion dollar market [10][12] - The optical solutions category saw new product announcements, including several new 100 gig per lane products, which received positive customer feedback [14][15] - Line Card PHY solutions established leadership at 50 gig and 100 gig per lane speeds, with increasing demand for MACsec PHYs due to security needs [18][19] Market Data and Key Metrics Changes - The company is engaged with multiple hyperscale customers, with expectations for revenue ramps from these engagements in fiscal 2024 [11][12] - The AEC market is projected to grow significantly, driven primarily by hyperscalers, but also with potential contributions from enterprise markets as they move to higher speeds [70][71] Company Strategy and Development Direction - Credo is focused on high-speed connectivity solutions, expanding its product families and intellectual property offerings to meet increasing market demands [7][8] - The company aims to maintain its competitive edge by delivering optimized, secure, and high-speed solutions with better power efficiency and cost [8][20] - The strategy includes engaging in joint development models with optical module manufacturers to enhance market penetration [15][75] Management's Comments on Operating Environment and Future Outlook - Management noted a reduction in CapEx and delays among Chinese hyperscale customers, but U.S. hyperscalers continue to show strong demand [44][46] - The company remains optimistic about its growth trajectory, expecting to achieve at least $200 million in revenue for fiscal 2023, representing over 88% growth compared to fiscal 2022 [22][33] - Management highlighted the importance of next-generation technologies and the competitive landscape, emphasizing the need for continuous innovation [46][82] Other Important Information - The company is actively working on diversifying its supply chain to mitigate risks associated with potential disruptions in China [79] - Credo is positioned as an early leader in the chiplet market, with significant opportunities anticipated as the industry moves towards standardization [21][82] Q&A Session Summary Question: Growth in AEC business and switch applications - Management discussed the dual opportunities for AECs within server racks and switch racks, noting a significant market potential [36] Question: Competitive landscape for NIC to ToR applications - Management acknowledged the desire for multiple sources among data center customers but emphasized their competitive advantages and ongoing innovations [39][40] Question: Changes in customer behavior and project timelines - Management observed a reduction in CapEx among Chinese customers but noted that U.S. hyperscalers continue to show strong demand without significant project delays [44][46] Question: Revenue recognition for the second customer in AEC business - Management expressed confidence in the ramp-up of revenue from the second customer, highlighting the strategic importance of the project [48][84] Question: Strength in product revenue and market segments - Management confirmed that the strength in product revenue was primarily driven by AECs, particularly with their lead customer [73] Question: Future opportunities in PCIe and USB markets - Management outlined plans to enter the PCIe market significantly with the move to Gen 6 and similar timelines for USB opportunities [64][65]

[PART I—FINANCIAL INFORMATION](index=5&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) Presents Credo Technology Group Holding Ltd's unaudited condensed consolidated financial statements for the quarter ended October 29, 2022, detailing key financial positions and performance [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets increased to **$414.0 million** by October 29, 2022, driven by higher inventories and property, while total liabilities also grew significantly Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | October 29, 2022 | April 30, 2022 | | :--- | :--- | :--- | | **Total current assets** | $349,807 | $332,177 | | **Total assets** | $414,032 | $375,689 | | **Total current liabilities** | $49,482 | $26,497 | | **Total liabilities** | $69,928 | $41,526 | | **Total Shareholders' Equity** | $344,104 | $334,163 | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Total revenue nearly doubled to **$51.4 million** for the three months ended October 29, 2022, narrowing the net loss to **$3.4 million** despite a lower gross margin Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 31, 2021 | Six Months Ended Oct 29, 2022 | Six Months Ended Oct 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | **Total revenue** | $51,369 | $26,427 | $97,836 | $37,151 | | **Gross profit** | $27,959 | $15,954 | $55,622 | $21,134 | | **Operating loss** | $(1,739) | $(3,554) | $(1,957) | $(15,184) | | **Net loss** | $(3,360) | $(4,100) | $(3,433) | $(16,677) | | **Net loss per share (basic and diluted)** | $(0.02) | $(0.06) | $(0.02) | $(0.24) | [Condensed Consolidated Statements of Comprehensive Loss](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) The company reported a total comprehensive loss of **$3.7 million** for the three months ended October 29, 2022, primarily from net loss and foreign currency translation adjustments Comprehensive Loss (in thousands) | Metric | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 31, 2021 | | :--- | :--- | :--- | | Net loss | $(3,360) | $(4,100) | | Foreign currency translation gain (loss) | $(320) | $32 | | **Total comprehensive loss** | **$(3,680)** | **$(4,068)** | [Condensed Consolidated Statements of Convertible Preferred Shares and Shareholders' Equity (Deficit)](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Convertible%20Preferred%20Shares%20and%20Shareholders%27%20Equity%20%28Deficit%29) Total shareholders' equity increased to **$344.1 million** by October 29, 2022, primarily due to share-based compensation and equity incentive plan proceeds - Shareholders' equity grew to **$344.1 million**, with key positive contributions from share-based compensation (**$10.4 million**) and proceeds from equity plans (**$2.7 million**) over the six-month period[28](index=28&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities significantly improved to **$10.5 million** for the six months ended October 29, 2022, resulting in a **$68.8 million** net decrease in cash Cash Flow Summary (in thousands) | Activity | Six Months Ended Oct 29, 2022 | Six Months Ended Oct 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(10,462) | $(34,919) | | Net cash used in investing activities | $(60,925) | $(4,985) | | Net cash provided by financing activities | $2,723 | $7,166 | | **Net decrease in cash** | **$(68,780)** | **$(32,710)** | [Notes to Unaudited Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) Details the company's high-speed connectivity business, significant accounting policies, customer revenue concentration, a warrant issued to an Amazon affiliate, and substantial non-cancelable purchase obligations - The company's business is focused on providing secure, high-speed connectivity solutions including ICs, AECs, and SerDes Chiplets, based on its proprietary SerDes and DSP technologies[35](index=35&type=chunk) Significant Customer Concentration (as a % of total) | Metric | Customer A | Customer C | Customer D | | :--- | :--- | :--- | :--- | | **Accounts Receivable (Oct 29, 2022)** | 44% | 14% | 11% | | **Revenue (Q2 FY23)** | 44% | 16% | 19% | - A warrant was issued to an Amazon affiliate to purchase up to **4,080,000** ordinary shares, vesting based on payments up to an aggregate of **$201 million**, with **$0.6 million** recognized as contra revenue for the six months ended Oct 29, 2022[62](index=62&type=chunk)[63](index=63&type=chunk) - As of October 29, 2022, the company had total non-cancelable purchase obligations of approximately **$56.0 million** (**$41.7 million** for manufacturing and **$14.2 million** for technology license fees)[77](index=77&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses strong financial performance with **94.4%** revenue growth, driven by product sales, alongside a gross margin decline and increased operating expenses, while maintaining sufficient liquidity Revenue by Type (in thousands) | Revenue Type | Three Months Ended Oct 29, 2022 | Three Months Ended Oct 31, 2021 | % Change | | :--- | :--- | :--- | :--- | | Product sales | $44,349 | $18,454 | 140.3% | | IP license | $2,084 | $6,142 | (66.1)% | | **Total revenue** | **$51,369** | **$26,427** | **94.4%** | - The increase in product sales was primarily due to higher unit shipments of Active Electrical Cables (AECs) introduced in fiscal 2021[144](index=144&type=chunk) - Gross margin decreased by **6 percentage points** in Q2 FY23 compared to the prior year, driven by a product mix shift towards lower-margin product sales[148](index=148&type=chunk) - Research and Development (R&D) expenses increased by **53.9%** YoY to **$18.2 million**, and Selling, General & Administrative (SG&A) expenses increased by **49.7%** YoY to **$11.5 million**, due to higher personnel costs and public company expenses[150](index=150&type=chunk)[153](index=153&type=chunk) - The company ended the period with **$190.5 million** in cash and cash equivalents and believes its existing capital is sufficient for at least the next 12 months[157](index=157&type=chunk)[158](index=158&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=31&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company reports no material changes to its market risk profile since its last Annual Report, with primary exposure to interest rate fluctuations affecting cash equivalents and investments - There were no material changes to the market risk assessment from the Annual Report for the year ended April 30, 2022, other than an updated disclosure on interest rate risk[173](index=173&type=chunk) - The company's main market risk is interest rate risk, as its excess cash is invested in fixed and floating rate securities like money market funds and time deposits[174](index=174&type=chunk) [Item 4. Controls and Procedures](index=31&type=section&id=Item%204.%20Controls%20and%20Procedures) The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of October 29, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[176](index=176&type=chunk) - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[177](index=177&type=chunk) [PART II—OTHER INFORMATION](index=34&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=34&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business or financial condition, acknowledging potential ordinary course claims - As of the filing date, the company is not a party to any litigation that it believes would have a material adverse effect on its business[183](index=183&type=chunk) [Item 1A. Risk Factors](index=34&type=section&id=Item%201A.%20Risk%20Factors) Updates risk factors, highlighting continued share price volatility, supply chain disruptions from China's 'Zero-COVID' policy, geopolitical tensions, rising inflation, and challenges in implementing Sarbanes-Oxley internal controls - The company's ordinary share price has been highly volatile, trading between a low of **$8.61** and a high of **$18.00** since its IPO in January 2022[186](index=186&type=chunk) - Significant risks include geopolitical issues, particularly tensions between the People's Republic of China and Taiwan, and supply chain impacts from China's 'Zero-COVID' policy, which could interrupt operations[188](index=188&type=chunk) - The company faces challenges in implementing the stringent internal controls required under Section 404(a) of the Sarbanes-Oxley Act, and failure to do so could harm investor confidence[190](index=190&type=chunk)[191](index=191&type=chunk) [Item 6. Exhibits](index=36&type=section&id=Item%206.%20Exhibits) Lists exhibits filed with the Form 10-Q, including Sarbanes-Oxley Act certifications from the Principal Executive Officer and Principal Financial Officer, and Inline XBRL financial data files - The exhibits filed with this report include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as well as Inline XBRL documents[195](index=195&type=chunk)

Credo Technology Group Holding Ltd. (NASDAQ:CRDO) Q1 2023 Earnings Conference Call August 31, 2022 5:00 PM ET Company Participants Daniel O’Neil - Vice President of Corporate Development & Investor Relations William Brennan - President & Chief Executive Officer Daniel Fleming - Chief Financial Officer Conference Call Participants Vivek Arya - Bank of America Toshiya Hari - Goldman Sachs Vijay Rakesh - Mizuho Suji Desilva - ROTH Tore Svanberg - Stifel Trevor Janoskie - Needham & Company Operator Ladies and g ...

[Cover Page Information](index=1&type=section&id=Cover%20Page%20Information) This section provides key filing details for the company's quarterly report - Credo Technology Group Holding Ltd filed its quarterly report (Form 10-Q) for the period ended July 30, 2022[1](index=1&type=chunk) - The company's stock is traded on the Nasdaq market under the ticker symbol CRDO[2](index=2&type=chunk) - The company is identified as a "smaller reporting company" and an "emerging growth company"[2](index=2&type=chunk) - As of August 25, 2022, the company had **145,682,010 common shares** outstanding[3](index=3&type=chunk) [Table of Contents](index=3&type=section&id=Table%20of%20Contents) The report is structured into two parts covering financial and other key corporate information - The report includes financial information (Part I) and other information (Part II), covering financial statements, MD&A, market risks, controls, legal proceedings, risk factors, and exhibits[5](index=5&type=chunk) [Special Note Regarding Forward-Looking Statements](index=4&type=section&id=Special%20Note%20Regarding%20Forward-Looking%20Statements) This report contains forward-looking statements subject to significant risks and uncertainties - This quarterly report contains forward-looking statements regarding future growth, strategy, and business trends, which are subject to various risks and uncertainties that could cause actual results to differ materially[7](index=7&type=chunk) - Risk factors include the COVID-19 pandemic, armed conflicts, customer demand, product life cycles, order changes, market acceptance, new product development, R&D costs, seasonality, and the gain or loss of major customers[7](index=7&type=chunk) - The company does not undertake any obligation to update these forward-looking statements, and investors should not rely on them as predictions of future events[7](index=7&type=chunk)[8](index=8&type=chunk) [PART I—FINANCIAL INFORMATION](index=5&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This chapter presents the unaudited condensed consolidated financial statements for Credo Technology Group Holding Ltd as of July 30, 2022, and April 30, 2022 [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) | Metric | July 30, 2022 (in thousands of USD) | April 30, 2022 (in thousands of USD) | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | 243,783 | 259,322 | | Accounts receivable | 54,769 | 29,524 | | Inventories | 37,031 | 27,337 | | Contract assets | 6,027 | 10,071 | | Prepaid expenses and other current assets | 4,383 | 5,923 | | **Total current assets** | **345,993** | **332,177** | | Property and equipment, net | 38,209 | 21,844 | | Right-of-use assets | 16,226 | 16,954 | | Other non-current assets | 5,222 | 4,714 | | **Total assets** | **405,650** | **375,689** | | **Liabilities and Shareholders' Equity** | | | | Accounts payable | 21,186 | 8,487 | | Accrued payroll and benefits | 2,928 | 4,713 | | Accrued expenses and other current liabilities | 15,489 | 12,063 | | Deferred revenue | 3,004 | 1,234 | | **Total current liabilities** | **42,607** | **26,497** | | Non-current operating lease liabilities | 14,290 | 14,809 | | Other non-current liabilities | 6,848 | 220 | | **Total liabilities** | **63,745** | **41,526** | | **Shareholders' Equity** | | | | Common stock | 7 | 7 | | Additional paid-in capital | 432,473 | 424,562 | | Accumulated other comprehensive income (loss) | (73) | 23 | | Accumulated deficit | (90,502) | (90,429) | | **Total shareholders' equity** | **341,905** | **334,163** | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) | Metric | Three Months Ended July 30, 2022 (in thousands of USD) | Three Months Ended July 31, 2021 (in thousands of USD) | | :--- | :--- | :--- | | **Revenue** | | | | Product | 35,263 | 7,263 | | Product engineering services | 824 | 1,319 | | IP license | 10,380 | 1,030 | | IP license engineering services | — | 1,112 | | **Total revenue** | **46,467** | **10,724** | | **Cost of revenue** | | | | Cost of product revenue | 17,525 | 4,357 | | Cost of product engineering services revenue | 100 | 865 | | Cost of IP license revenue | 1,179 | — | | Cost of IP license engineering services revenue | — | 322 | | **Total cost of revenue** | **18,804** | **5,544** | | **Gross profit** | **27,663** | **5,180** | | **Operating expenses** | | | | Research and development | 16,683 | 9,693 | | Selling, general and administrative | 11,198 | 7,117 | | **Total operating expenses** | **27,881** | **16,810** | | **Loss from operations** | **(218)** | **(11,630)** | | Other income (expense), net | (220) | (45) | | **Loss before income taxes** | **(438)** | **(11,675)** | | Provision for (benefit from) income taxes | (365) | 902 | | **Net loss** | **(73)** | **(12,577)** | | **Net loss per share** | | | | Basic and diluted | — | (0.18) | | Weighted-average shares | 145,077 | 68,409 | [Condensed Consolidated Statements of Comprehensive Loss](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) | Metric | Three Months Ended July 30, 2022 (in thousands of USD) | Three Months Ended July 31, 2021 (in thousands of USD) | | :--- | :--- | :--- | | Net loss | (73) | (12,577) | | Other comprehensive loss: | | | | Foreign currency translation loss | (96) | (5) | | **Total comprehensive loss** | **(169)** | **(12,582)** | [Condensed Consolidated Statements of Convertible Preferred Shares and Shareholders' Equity (Deficit)](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Convertible%20Preferred%20Shares%20and%20Shareholders'%20Equity%20(Deficit)) - As of July 30, 2022, the company had **145,344 thousand common shares**, **$432,473 thousand in additional paid-in capital**, an accumulated deficit of **($90,502) thousand**, and total shareholders' equity of **$341,905 thousand**[25](index=25&type=chunk) - As of July 30, 2022, all convertible preferred shares had been converted to common shares, resulting in a zero balance for preferred shares[25](index=25&type=chunk) - For the three months ended July 30, 2022, common stock issued under share incentive plans and share-based compensation expense increased additional paid-in capital by **$1,977 thousand** and **$5,546 thousand**, respectively[25](index=25&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) | Cash Flow Source | Three Months Ended July 30, 2022 (in thousands of USD) | Three Months Ended July 31, 2021 (in thousands of USD) | | :--- | :--- | :--- | | Net cash used in operating activities | (12,219) | (8,949) | | Net cash used in investing activities | (5,258) | (1,339) | | Net cash provided by financing activities | 1,977 | 6,758 | | Effect of exchange rate changes | (39) | (6) | | Net decrease in cash and cash equivalents | (15,539) | (3,536) | | Cash and cash equivalents at beginning of period | 259,322 | 103,757 | | Cash and cash equivalents at end of period | 243,783 | 100,221 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) [1. Description of Business and Basis of Presentation](index=10&type=section&id=1.%20Description%20of%20Business%20and%20Basis%20of%20Presentation) - Credo Technology Group Holding Ltd, founded in September 2014, provides secure, high-speed connectivity solutions for 100G, 200G, 400G, and 800G Ethernet applications based on its proprietary SerDes and DSP technology[31](index=31&type=chunk)[32](index=32&type=chunk) - The company has changed its fiscal year to a 52- or 53-week period ending on the last Saturday in April, with the first quarter of fiscal 2023 ending on July 30, 2022[34](index=34&type=chunk) [2. Significant Accounting Policies](index=10&type=section&id=2.%20Significant%20Accounting%20Policies) - The preparation of financial statements requires management to make estimates and assumptions, including inventory write-downs, standalone selling prices for multiple performance obligations, fair value of equity awards, and realization of tax assets, which have increased variability due to COVID-19[36](index=36&type=chunk)[37](index=37&type=chunk) - The company adopted ASU 2019-12 (Income Taxes) on May 1, 2022, with no material impact on its consolidated financial statements[41](index=41&type=chunk) - The company is evaluating the potential impact of ASU 2016-13 (Financial Instruments—Credit Losses), which requires a forward-looking expected loss model and will be effective in fiscal 2023[42](index=42&type=chunk) [3. Concentrations](index=11&type=section&id=3.%20Concentrations) - The company's credit risk is concentrated in cash and cash equivalents and accounts receivable, with cash held at major global financial institutions in amounts exceeding insured limits[43](index=43&type=chunk) - A significant portion of the company's revenue is derived from a small number of customers, and this customer concentration is expected to continue[44](index=44&type=chunk) **Accounts Receivable and Revenue Concentration by Major Customer:** | Customer | A/R % as of July 30, 2022 | Revenue % for Three Months Ended July 30, 2022 | Revenue % for Three Months Ended July 31, 2021 | | :--- | :--- | :--- | :--- | | Customer A | * (less than 10%) | * (less than 10%) | 32% | | Customer B | 21% | * (less than 10%) | * (less than 10%) | | Customer C | 21% | 19% | * (less than 10%) | | Customer D | 37% | 42% | * (less than 10%) | | Customer E | * (less than 10%) | * (less than 10%) | 17% | [4. Revenue Recognition](index=12&type=section&id=4.%20Revenue%20Recognition) **Revenue by Geographic Market (in thousands of USD):** | Region | Three Months Ended July 30, 2022 | Three Months Ended July 31, 2021 | | :--- | :--- | :--- | | Mainland China | 22,757 | 81 | | United States | 12,072 | 4,294 | | Hong Kong | 4,765 | 1,322 | | Mexico | 1,525 | 2,552 | | Taiwan | 67 | 1,630 | | Rest of World | 5,281 | 845 | | **Total** | **46,467** | **10,724** | - As of July 30, 2022, remaining performance obligations under contract were approximately **$22.5 million**, and fulfilled but unrecognized obligations were approximately **$20.2 million**, expected to be recognized over the next two years[52](index=52&type=chunk) - On December 28, 2021, the company issued a warrant to Amazon.com NV Investment Holdings LLC to purchase up to 4,080,000 common shares at an exercise price of $10.74 per share, recognizing **$0.4 million** in contra-revenue for the three months ended July 30, 2022[53](index=53&type=chunk)[56](index=56&type=chunk) [5. Fair Value Measurements](index=13&type=section&id=5.%20Fair%20Value%20Measurements) - The company uses a three-tier fair value hierarchy (Level 1, Level 2, Level 3) to measure fair value, maximizing the use of observable inputs[57](index=57&type=chunk)[58](index=58&type=chunk)[59](index=59&type=chunk) - The carrying values of the company's financial instruments, including cash equivalents, accounts receivable, and accounts payable, approximate their fair values due to their short-term nature[59](index=59&type=chunk) [6. Supplemental Financial Information](index=13&type=section&id=6.%20Supplemental%20Financial%20Information) **Inventories (in thousands of USD):** | Category | July 30, 2022 | April 30, 2022 | | :--- | :--- | :--- | | Raw materials | 11,921 | 11,610 | | Work-in-process | 13,352 | 10,352 | | Finished goods | 11,758 | 5,375 | | **Total** | **37,031** | **27,337** | **Property and Equipment, Net (in thousands of USD):** | Category | July 30, 2022 | April 30, 2022 | | :--- | :--- | :--- | | Computer equipment and software | 13,725 | 1,736 | | Lab equipment | 9,977 | 9,521 | | Production equipment | 16,644 | 15,502 | | Leasehold improvements | 1,613 | 1,465 | | Other | 537 | 524 | | Construction-in-progress | 6,433 | 2,932 | | **Total** | **48,929** | **31,680** | | Less: Accumulated depreciation and amortization | (10,720) | (9,836) | | **Net** | **38,209** | **21,844** | - Depreciation and amortization expense for the three months ended July 30, 2022 was **$1.6 million**, primarily related to EDA software, mask costs, and lab equipment[64](index=64&type=chunk) [7. Commitments and Contingencies](index=14&type=section&id=7.%20Commitments%20and%20Contingencies) - As of July 30, 2022, the company had non-cancelable purchase obligations with third-party subcontractors of approximately **$18.3 million**[67](index=67&type=chunk) - The company's products typically include a one-year standard warranty, with associated costs being immaterial during the reporting periods[68](index=68&type=chunk) - The company provides indemnifications in the ordinary course of business but has not incurred significant costs or recorded liabilities as of July 30, 2022[69](index=69&type=chunk) - The company is not involved in any material legal proceedings and has not recorded any accruals for loss contingencies[70](index=70&type=chunk)[73](index=73&type=chunk) [8. Convertible Preferred Shares](index=15&type=section&id=8.%20Convertible%20Preferred%20Shares) - Prior to the completion of the IPO in fiscal 2022, all **52,059,826 outstanding convertible preferred shares** were automatically converted into common shares on a one-for-one basis and were retired[75](index=75&type=chunk) - The preferred shares previously held conversion, dividend, and liquidation rights, which no longer exist post-IPO[76](index=76&type=chunk)[78](index=78&type=chunk)[79](index=79&type=chunk) [9. Leases](index=16&type=section&id=9.%20Leases) - The company leases office space domestically and internationally with terms typically ranging from one to nine years, with lease liabilities recorded as right-of-use assets and non-current operating lease liabilities[83](index=83&type=chunk) **Lease Expense and Supplemental Cash Flow Information (in thousands of USD):** | Metric | Three Months Ended July 30, 2022 | Three Months Ended July 31, 2021 | | :--- | :--- | :--- | | Operating lease expense | 889 | 679 | | Cash paid for operating lease liabilities | 766 | 647 | | Right-of-use assets obtained in exchange for lease obligations | — | 259 | - As of July 30, 2022, the weighted-average remaining lease term for operating leases was **7.43 years**, and the weighted-average discount rate was **6%**[84](index=84&type=chunk) [10. Share Incentive Plan](index=16&type=section&id=10.%20Share%20Incentive%20Plan) - As of July 30, 2022, **248,478 common shares** remained subject to the company's right of repurchase and are not included in outstanding common shares[85](index=85&type=chunk) - As of July 30, 2022, the balance of Restricted Stock Units (RSUs) was **4,208,688 shares**, with a weighted-average grant-date fair value of **$10.32**[87](index=87&type=chunk) - As of July 30, 2022, the balance of outstanding stock options was **10,800,951**, with a weighted-average exercise price of **$1.94**[88](index=88&type=chunk) **Share-Based Compensation Expense (in thousands of USD):** | Category | Three Months Ended July 30, 2022 | Three Months Ended July 31, 2021 | | :--- | :--- | :--- | | Cost of revenue | 304 | 87 | | Research and development | 2,862 | 482 | | Selling, general and administrative | 2,380 | 506 | | **Total** | **5,546** | **1,075** | [11. Income Taxes](index=17&type=section&id=11.%20Income%20Taxes) **Provision for (Benefit from) Income Taxes (in thousands of USD, %):** | Metric | Three Months Ended July 30, 2022 | Three Months Ended July 31, 2021 | | :--- | :--- | :--- | | Provision for (benefit from) income taxes | (365) | 902 | | Effective tax rate | 138.96% | (7.72)% | - The fluctuation in the effective tax rate was primarily due to a lower pre-tax loss, a partial release of the valuation allowance against U.S. R&D tax credits, and lower foreign withholding taxes[94](index=94&type=chunk) - There were no significant changes in the total amount of unrecognized tax benefits during the three months ended July 30, 2022, and no significant changes are expected in the next 12 months[95](index=95&type=chunk) [12. Net Loss Per Share](index=18&type=section&id=12.%20Net%20Loss%20Per%20Share) **Net Loss Per Share Calculation (in thousands of USD, except per share amounts):** | Metric | Three Months Ended July 30, 2022 | Three Months Ended July 31, 2021 | | :--- | :--- | :--- | | Net loss | (73) | (12,577) | | Weighted-average shares used for basic and diluted calculation | 145,077 | 68,409 | | **Basic and diluted net loss per share** | **—** | **(0.18)** | - Potentially dilutive securities, including options, restricted stock, RSUs, ESPP shares, and customer warrants, were excluded from the diluted weighted-average share calculation due to their anti-dilutive effect in a loss period[96](index=96&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This chapter discusses the company's financial condition and results of operations for the three months ended July 30, 2022, highlighting its business overview, revenue mix, performance factors, and detailed operational and cash flow analysis [Overview](index=19&type=section&id=Overview) - Credo is an innovator in high-speed connectivity solutions for optical and electrical Ethernet applications, with products based on its proprietary SerDes and DSP technology[99](index=99&type=chunk) - The company serves the hyperscale data center, high-performance computing, and 5G infrastructure markets, focusing on high-bandwidth, energy-efficient, and secure solutions[101](index=101&type=chunk) - For the three months ended July 30, 2022, total revenue was **$46.5 million** and net loss was **$0.1 million**, a significant improvement from **$10.7 million** in revenue and a **$12.6 million** net loss in the prior year period[109](index=109&type=chunk) [Our Business Model](index=20&type=section&id=Our%20Business%20Model) - The company operates a product-centric, IP-based business model, generating revenue from product sales and IP licensing, supplemented by engineering services for customer-specific needs[111](index=111&type=chunk) - The company employs a fabless business model, partnering with third-party manufacturers for production to focus its engineering and design resources on core competencies[112](index=112&type=chunk) - A dual-pronged sales strategy involves engaging directly with end-users and their suppliers to better understand customer needs and drive solution adoption[113](index=113&type=chunk)[114](index=114&type=chunk) [Revenue Mix and Associated Gross Margins](index=21&type=section&id=Revenue%20Mix%20and%20Associated%20Gross%20Margins) - The company generates revenue from product sales, IP licensing, and related engineering services, using custom engineering to strengthen customer relationships and secure long-term revenue opportunities[116](index=116&type=chunk)[117](index=117&type=chunk) **Revenue and Gross Margin (in thousands of USD, %):** | Category | Revenue for Three Months Ended July 30, 2022 | Gross Margin for Three Months Ended July 30, 2022 | Revenue for Three Months Ended July 31, 2021 | Gross Margin for Three Months Ended July 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Product | 35,263 | 50.3% | 7,263 | 40.0% | | Product engineering services | 824 | 87.9% | 1,319 | 34.4% | | **Total Product and Product engineering services** | **36,087** | **51.2%** | **8,582** | **39.2%** | | IP license | 10,380 | 88.6% | 1,030 | 100.0% | | IP license engineering services | — | —% | 1,112 | 71.0% | | **Total IP license and IP license engineering services** | **10,380** | **88.6%** | **2,142** | **85.0%** | | **Total revenue** | **46,467** | | **10,724** | | - The company expects the proportion of product sales and IP license revenue to gradually increase and anticipates long-term improvements in operating leverage as the business scales[117](index=117&type=chunk)[118](index=118&type=chunk) [Factors Affecting Our Performance](index=22&type=section&id=Factors%20Affecting%20Our%20Performance) - Performance is influenced by design wins, customer demand, product pricing and gross margins (including TSMC price increase risks), market acceptance, R&D investment, and industry trends like data center and 5G deployments[119](index=119&type=chunk)[120](index=120&type=chunk)[121](index=121&type=chunk)[124](index=124&type=chunk)[125](index=125&type=chunk)[126](index=126&type=chunk) - The ongoing COVID-19 pandemic continues to impact business and financial performance, affecting customer demand timing, supply chain availability, logistics, and component supply[127](index=127&type=chunk) [Results of Operations](index=24&type=section&id=Results%20of%20Operations) **Statements of Operations as a Percentage of Revenue:** | Metric | Three Months Ended July 30, 2022 | Three Months Ended July 31, 2021 | | :--- | :--- | :--- | | Product | 75.9% | 67.7% | | Product engineering services | 1.8% | 12.3% | | IP license | 22.3% | 9.6% | | IP license engineering services | —% | 10.4% | | **Total revenue** | **100.0%** | **100.0%** | | Cost of revenue | 40.5% | 51.7% | | **Gross margin** | **59.5%** | **48.3%** | | Research and development | 35.9% | 90.4% | | Selling, general and administrative | 24.1% | 66.4% | | **Total operating expenses** | **60.0%** | **156.8%** | | Loss from operations | (0.5)% | (108.5)% | | Loss before income taxes | (1.0)% | (108.9)% | | Provision for (benefit from) income taxes | (0.8)% | 8.4% | | **Net loss** | **(0.2)%** | **(117.3)%** | **Revenue Comparison (in thousands of USD, %):** | Category | July 30, 2022 | July 31, 2021 | % Change | | :--- | :--- | :--- | :--- | | Product | 35,263 | 7,263 | 385.5% | | Product engineering services | 824 | 1,319 | (37.5)% | | IP license | 10,380 | 1,030 | 907.8% | | IP license engineering services | — | 1,112 | (100.0)% | | **Total revenue** | **46,467** | **10,724** | **333.3%** | - Total revenue **grew by 333.3%**, driven by significant increases in product sales from higher AEC cable shipments and IP license revenue from a **$9.0 million** high-value IP license[130](index=130&type=chunk)[131](index=131&type=chunk) **Cost of Revenue Comparison (in thousands of USD, %):** | Category | July 30, 2022 | July 31, 2021 | % Change | | :--- | :--- | :--- | :--- | | Cost of product revenue | 17,525 | 4,357 | 302.2% | | Cost of product engineering services revenue | 100 | 865 | (88.4)% | | Cost of IP license revenue | 1,179 | — | N/A | | Cost of IP license engineering services revenue | — | 322 | (100.0)% | | **Total cost of revenue** | **18,804** | **5,544** | **239.2%** | - **Gross margin increased by 11 percentage points** year-over-year to **59.5%**, driven by improved operating leverage from scaling product sales and high-margin IP license revenue[134](index=134&type=chunk) **Operating Expenses Comparison (in thousands of USD, %):** | Category | July 30, 2022 | July 31, 2021 | % Change | | :--- | :--- | :--- | :--- | | Research and development | 16,683 | 9,693 | 72.1% | | Selling, general and administrative | 11,198 | 7,117 | 57.3% | | Provision for (benefit from) income taxes | (365) | 902 | (140.5)% | - R&D expenses **increased by $7.0 million** due to higher personnel costs for new product development, share-based compensation, and IT/facilities costs[135](index=135&type=chunk) - SG&A expenses **increased by $4.1 million**, primarily from higher personnel costs, professional services fees, D&O insurance as a public company, and share-based compensation[136](index=136&type=chunk)[138](index=138&type=chunk) - The provision for income taxes **decreased by $1.3 million**, mainly due to a lower pre-tax loss, a partial release of the valuation allowance against U.S. R&D tax credits, and lower foreign withholding taxes[139](index=139&type=chunk) [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) - As of July 30, 2022, the company had **$243.8 million** in cash and cash equivalents and **$303.4 million** in working capital[140](index=140&type=chunk) - The company's operations have been financed primarily through its IPO, sales of convertible preferred and common stock, and cash flow from customers[140](index=140&type=chunk) - Management believes existing cash and working capital are sufficient to meet needs for at least the next 12 months, though future capital requirements depend on growth, sales, and R&D spending[141](index=141&type=chunk) [Cash Flows Used in Operating Activities](index=26&type=section&id=Cash%20Flows%20Used%20in%20Operating%20Activities) - For the three months ended July 30, 2022, net cash used in operating activities was **$12.2 million**, primarily due to the net loss and working capital outflows from increased accounts receivable and inventory, partially offset by non-cash items[144](index=144&type=chunk) - For the three months ended July 31, 2021, net cash used in operating activities was **$8.9 million**, mainly due to the net loss, partially offset by working capital inflows and non-cash items[145](index=145&type=chunk) [Cash Flows Used in Investing Activities](index=27&type=section&id=Cash%20Flows%20Used%20in%20Investing%20Activities) - For the three months ended July 30, 2022, net cash used in investing activities was **$5.3 million**, primarily for purchases of property and equipment, including new product masks and R&D lab equipment[147](index=147&type=chunk) - For the three months ended July 31, 2021, net cash used in investing activities was **$1.3 million**, mainly for the purchase of R&D lab equipment[148](index=148&type=chunk) [Cash Flows from Financing Activities](index=27&type=section&id=Cash%20Flows%20from%20Financing%20Activities) - For the three months ended July 30, 2022, net cash provided by financing activities was **$2.0 million**, entirely from proceeds from employee stock plan exercises and ESPP share issuances[149](index=149&type=chunk) - For the three months ended July 31, 2021, net cash provided by financing activities was **$6.8 million**, primarily from employee stock plan exercises and proceeds from convertible preferred stock issuance, partially offset by IPO issuance costs[150](index=150&type=chunk) [Critical Accounting Estimates](index=27&type=section&id=Critical%20Accounting%20Estimates) - There were no material changes to critical accounting estimates during the three months ended July 30, 2022, though the COVID-19 pandemic has increased judgment and volatility in these estimates[151](index=151&type=chunk) [Recent Accounting Pronouncements](index=27&type=section&id=Recent%20Accounting%20Pronouncements) - For more information on recent accounting pronouncements, refer to Note 2 of the consolidated financial statements in this quarterly report[152](index=152&type=chunk) [JOBS Act Accounting Election](index=27&type=section&id=JOBS%20Act%20Accounting%20Election) - As an "emerging growth company," the company has elected to use the extended transition period provided by the JOBS Act for complying with new or revised accounting standards, which may make its financial statements not comparable to those of other public companies[153](index=153&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=27&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This chapter states there were no material changes to the company's market risk assessment during the three months ended July 30, 2022 - There were no material changes or developments in the market risk assessment for the three months ended July 30, 2022, from what was disclosed in the Annual Report for the year ended April 30, 2022[154](index=154&type=chunk) [Item 4. Controls and Procedures](index=27&type=section&id=Item%204.%20Controls%20and%20Procedures) This chapter confirms the effectiveness of disclosure controls and procedures and notes no material changes to internal controls during the reporting period [Disclosure Controls and Procedures](index=27&type=section&id=Disclosure%20Controls%20and%20Procedures) - The company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed under the Securities Exchange Act is recorded, processed, summarized, and reported in a timely manner[155](index=155&type=chunk)[156](index=156&type=chunk) - As of the end of the period covered by this report, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[157](index=157&type=chunk) [Changes in Internal Control Over Financial Reporting](index=29&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) - There were no changes in internal control over financial reporting during the quarter ended July 30, 2022, that have materially affected, or are reasonably likely to materially affect, internal controls[158](index=158&type=chunk) [Inherent Limitations on Effectiveness of Controls](index=29&type=section&id=Inherent%20Limitations%20on%20Effectiveness%20of%20Controls) - Management believes that any control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance and must weigh its benefits against the costs due to resource constraints[159](index=159&type=chunk) [PART II—OTHER INFORMATION](index=30&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=30&type=section&id=Item%201.%20Legal%20Proceedings) This chapter states the company is not currently involved in any legal proceedings that would have a material adverse effect on its business - The company is not currently involved in any legal proceedings that are expected to have a material adverse effect on the company[162](index=162&type=chunk) - The outcome of any legal proceeding is uncertain and could result in defense and settlement costs, diversion of management resources, and other adverse effects[162](index=162&type=chunk) [Item 1A. Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) This chapter reiterates the company's risks, highlighting potential impacts from stock price volatility, global economic conditions, COVID-19, and geopolitical issues - There have been no material changes to the operational and financial risks faced by the company from those disclosed in the Annual Report for the year ended April 30, 2022[163](index=163&type=chunk) - The company's stock price may continue to be volatile, influenced by factors such as customer demand, product lifecycles, pricing, order patterns, operating costs, financial forecasts, analyst ratings, competitor announcements, industry cyclicality, and global economic conditions[165](index=165&type=chunk) - The **COVID-19 pandemic** (particularly China's "zero-COVID" policy and its supply chain impact) and geopolitical issues (such as escalating tensions involving mainland China, Taiwan, or Hong Kong) could disrupt supply chains, operations, and adversely affect the business[167](index=167&type=chunk) - Failure to timely and effectively implement the controls and procedures required by Section 404(a) of the Sarbanes-Oxley Act could materially and adversely affect the company's business[169](index=169&type=chunk)[170](index=170&type=chunk) [Item 6. Exhibits](index=32&type=section&id=Item%206.%20Exhibits) This chapter lists the exhibits filed with or incorporated by reference into this quarterly report, including CEO and CFO certifications and XBRL data files - Exhibits include CEO and CFO certifications filed pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[174](index=174&type=chunk) - The report also includes an Inline XBRL Instance Document and its related taxonomy extension files (Schema, Calculation, Definition, Label, Presentation Linkbase Document)[174](index=174&type=chunk) [Signatures](index=33&type=section&id=Signatures) This chapter contains the report's formal sign-off by the President & CEO and the CFO as required by the Securities Exchange Act - This report was signed on September 1, 2022, by William Brennan, President and Chief Executive Officer, and Daniel Fleming, Chief Financial Officer of Credo Technology Group Holding Ltd[176](index=176&type=chunk)[177](index=177&type=chunk)

Part I [Business](index=9&type=section&id=Item%201.%20Business) Credo Technology Group provides high-speed connectivity solutions for data infrastructure, reporting **$106.5 million revenue** in FY2022, an **81.4% increase** Fiscal Year 2022 vs 2021 Financial Highlights | Metric | Fiscal 2022 | Fiscal 2021 | Change | | :--- | :--- | :--- | :--- | | **Total Revenue** | $106.5 million | $58.7 million | +81.4% | | **Net Loss** | $22.2 million | $27.5 million | -19.3% | | **Product Revenue % of Total** | 77% | 63% | +14 p.p. | | **IP Revenue % of Total** | 23% | 37% | -14 p.p. | - Credo's mission is to deliver high-speed solutions to overcome bandwidth limitations in the wired data infrastructure market[30](index=30&type=chunk) - The company's primary markets are driven by hyperscalers, high-performance computing (HPC), and 5G infrastructure; the market for high-speed connectivity products is estimated to grow from **$2 billion** in 2022 to **$5 billion** in 2025[34](index=34&type=chunk)[35](index=35&type=chunk) - Credo utilizes a fabless business model, relying on third-party contractors, with TSMC as the exclusive supplier for semiconductor wafer production, and other key partners for packaging, assembly, and testing[91](index=91&type=chunk)[93](index=93&type=chunk)[94](index=94&type=chunk) - The company has significant customer concentration, with four customers accounting for **30%**, **18%**, **11%**, and **10%** of total revenue in fiscal 2022, respectively[87](index=87&type=chunk) [Risk Factors](index=22&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including net losses, customer and manufacturing concentration, intense competition, international operational uncertainties, and intellectual property challenges - **Business Risks:** The company has a history of net losses (**$22.2 million** in fiscal 2022) and depends on a limited number of customers for a substantial portion of revenue, with its top two customers accounting for **52%** and **14%** of total revenue in fiscal 2022[118](index=118&type=chunk)[127](index=127&type=chunk) - **Manufacturing and Supply Chain Risks:** Credo operates a fabless model and relies entirely on TSMC for IC manufacturing, creating risks from capacity shortages, price increases, and geopolitical tensions concerning Taiwan[168](index=168&type=chunk)[174](index=174&type=chunk)[289](index=289&type=chunk) - **International Operations and PRC Risks:** Significant operations in mainland China pose risks from legal uncertainties, government oversight, and potential Nasdaq delisting under the HFCAA if auditors cannot be inspected for two consecutive years[258](index=258&type=chunk)[263](index=263&type=chunk)[273](index=273&type=chunk) - **Competition Risks:** The company faces intense competition from large, well-resourced companies, with principal product competitors including Broadcom and Marvell, and IP licensing competitors like Synopsys, Cadence, and Alphawave[139](index=139&type=chunk) - **Intellectual Property Risks:** The company may face costly intellectual property infringement claims and must protect its own patents and trade secrets, which is critical to its success[318](index=318&type=chunk)[328](index=328&type=chunk) [Properties](index=68&type=section&id=Item%202.%20Properties) As of April 30, 2022, Credo leases **176,851 square feet** globally for R&D, sales, and administration, with primary facilities in the US, mainland China, and Taiwan Leased Facilities by Location (as of April 30, 2022) | Location | Primary Use | Leased Square Feet | | :--- | :--- | :--- | | United States | R&D, Sales, Admin, Operations | 89,727 | | Mainland China | R&D, Admin, Operations | 66,929 | | Taiwan | R&D, Admin, Operations | 18,537 | | Hong Kong | Admin, Operations | 1,658 | | **Total** | | **176,851** | [Legal Proceedings](index=69&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently involved in any litigation expected to have a material adverse effect on its business - As of the filing date, Credo is not a party to any litigation expected to have a material adverse effect on the company[113](index=113&type=chunk)[657](index=657&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=70&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Credo's ordinary shares began trading on Nasdaq under "CRDO" on January 27, 2022, following its IPO, with no cash dividends paid or planned - The company's ordinary shares began trading on Nasdaq under the symbol "CRDO" on January 27, 2022[419](index=419&type=chunk) - The company has never paid cash dividends and does not plan to in the foreseeable future[421](index=421&type=chunk) - The company closed its IPO on January 31, 2022, selling **18,383,800** ordinary shares, with an additional **3,000,000** shares sold on February 10, 2022, via underwriters' option[426](index=426&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=71&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance, noting an **81.4% revenue increase** to **$106.5 million** in FY2022 and a narrowed net loss [Results of Operations](index=80&type=section&id=7.1%20Results%20of%20Operations) Total revenue increased **81.4%** to **$106.5 million** in FY2022, driven by product sales, while gross margin declined and operating loss narrowed Revenue by Source (in thousands) | Revenue Source | FY 2022 | FY 2021 | % Change | | :--- | :--- | :--- | :--- | | Product sales | $73,721 | $27,477 | 168.3% | | Product engineering services | $7,741 | $9,579 | (19.2)% | | IP license | $23,309 | $17,273 | 34.9% | | IP license engineering services | $1,706 | $4,368 | (60.9)% | | **Total revenue** | **$106,477** | **$58,697** | **81.4%** | Gross Profit and Margin | Metric | FY 2022 | FY 2021 | Change | | :--- | :--- | :--- | :--- | | **Gross Profit** | $64,015 thousand | $38,278 thousand | +67.2% | | **Gross Margin** | 60.1% | 65.2% | -5.1 p.p. | - Research and development expenses increased by **37.6%** to **$47.9 million** in fiscal 2022, primarily due to a **$9.1 million** increase in personnel costs and a **$3.1 million** increase in design and testing activities[497](index=497&type=chunk) - Selling, general and administrative expenses increased by **21.7%** to **$34.9 million** in fiscal 2022, driven by higher headcount and professional services spending to support public company infrastructure[499](index=499&type=chunk) - The company incurred impairment charges of **$3.1 million** in fiscal 2022 related to property and equipment that did not reach production qualification[500](index=500&type=chunk) [Liquidity and Capital Resources](index=82&type=section&id=7.2%20Liquidity%20and%20Capital%20Resources) As of April 30, 2022, Credo had **$259.3 million** in cash, significantly bolstered by **$194.2 million** IPO proceeds, ensuring liquidity for the next 12 months Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(30,832) | $(42,361) | | Net cash used in investing activities | $(17,580) | $(6,056) | | Net cash provided by financing activities | $204,181 | $77,888 | - Net cash from financing activities in fiscal 2022 was primarily due to **$194.2 million** in net proceeds from the IPO[510](index=510&type=chunk) - Net cash used in investing activities increased to **$17.6 million** in fiscal 2022, mainly for purchases of mask sets for new products and laboratory equipment[509](index=509&type=chunk) [Critical Accounting Estimates](index=83&type=section&id=7.3%20Critical%20Accounting%20Estimates) Critical accounting estimates involve significant judgment in revenue recognition, inventory valuation, and share-based compensation, particularly pre-IPO share valuations - **Revenue Recognition:** Determining the Standalone Selling Price (SSP) for performance obligations, especially for IP, requires significant estimation, including accounting for a customer warrant issued to an Amazon affiliate[516](index=516&type=chunk)[518](index=518&type=chunk) - **Inventory Valuation:** The company writes down inventory for excess and obsolescence based on estimated future product demand, which is subject to market conditions and technological changes[519](index=519&type=chunk) - **Share-Based Compensation:** Prior to the IPO, the fair value of ordinary shares was determined by the board with third-party valuations using income and market approaches; post-IPO, the market price is used[523](index=523&type=chunk)[524](index=524&type=chunk)[526](index=526&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=86&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is foreign currency exchange volatility, with a hypothetical **10% USD weakening** increasing FY2022 operating expenses by **2%** - The company's main market risk is foreign currency exchange volatility, as some operational expenses are in foreign currencies, while the majority of sales and expenses are in U.S. dollars[530](index=530&type=chunk) - A hypothetical **10%** adverse change (weakening) in the U.S. dollar exchange rate would have increased fiscal 2022 operating expenses by about **2%**[532](index=532&type=chunk) - The company has not entered into any foreign currency derivatives to hedge its foreign currency exposure to date[531](index=531&type=chunk) [Financial Statements and Supplementary Data](index=87&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for FY2020-2022, showing revenue growth, narrowed net loss, and a strengthened balance sheet post-IPO [Consolidated Balance Sheets](index=89&type=section&id=8.1%20Consolidated%20Balance%20Sheets) As of April 30, 2022, total assets increased to **$375.7 million**, with cash at **$259.3 million**, and shareholders' equity turning positive at **$334.2 million** post-IPO Consolidated Balance Sheet Highlights (in thousands) | Account | April 30, 2022 | April 30, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $259,322 | $103,757 | | Total current assets | $332,177 | $137,799 | | **Total assets** | **$375,689** | **$155,490** | | **Liabilities & Equity** | | | | Total current liabilities | $26,497 | $12,532 | | Total liabilities | $41,526 | $12,956 | | Total shareholders' equity (deficit) | $334,163 | $(55,431) | [Consolidated Statements of Operations](index=90&type=section&id=8.2%20Consolidated%20Statements%20of%20Operations) In FY2022, total revenue reached **$106.5 million** (**81.4% increase**), gross profit was **$64.0 million**, and net loss narrowed to **$22.2 million** Consolidated Statement of Operations Highlights (in thousands) | Account | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Total revenue | $106,477 | $58,697 | $53,835 | | Gross profit | $64,015 | $38,278 | $46,106 | | Operating income (loss) | $(21,968) | $(25,234) | $2,071 | | Net income (loss) | $(22,176) | $(27,511) | $1,329 | | Net loss per share (basic & diluted) | $(0.25) | $(0.40) | — | [Consolidated Statements of Cash Flows](index=94&type=section&id=8.3%20Consolidated%20Statements%20of%20Cash%20Flows) In FY2022, net cash used in operations was **$30.8 million**, while financing activities provided **$204.2 million** from the IPO, increasing cash to **$259.3 million** Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(30,832) | $(42,361) | $(10,253) | | Net cash used in investing activities | $(17,580) | $(6,056) | $(8,832) | | Net cash provided by financing activities | $204,181 | $77,888 | $61,206 | | **Net increase in cash** | **$155,565** | **$29,849** | **$42,151** | [Controls and Procedures](index=118&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective as of April 30, 2022, with no material changes, and internal control attestation is omitted for this newly public company - The CEO and CFO concluded that as of April 30, 2022, the company's disclosure controls and procedures were effective at the reasonable assurance level[719](index=719&type=chunk) - As a newly public company, this annual report does not include a management report on internal control over financial reporting or an auditor's attestation report, per SEC transition rules[720](index=720&type=chunk) Part III [Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees](index=119&type=section&id=Item%2010%2C%2011%2C%2012%2C%2013%2C%2014) Information for Items 10-14, covering directors, executive compensation, and security ownership, is incorporated by reference from the forthcoming 2022 Proxy Statement - The information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the forthcoming 2022 Proxy Statement[727](index=727&type=chunk)[728](index=728&type=chunk)[729](index=729&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=120&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists documents filed with the Form 10-K, confirming financial statements are in Item 8 and schedules are omitted as not applicable - All required financial statements are included in Item 8 of the report[734](index=734&type=chunk) - Financial statement schedules have been omitted because they are not applicable or the information is included elsewhere[735](index=735&type=chunk)