Credo Technology (CRDO) - 2024 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for the quarter ended October 28, 2023, highlighting a significant increase in net loss to $18.3 million for the six-month period Condensed Consolidated Statements of Operations The company reported $44.0 million in revenue and a $6.6 million net loss for the quarter, with a $18.3 million net loss for the six-month period Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Oct 28, 2023 | Three Months Ended Oct 29, 2022 | Six Months Ended Oct 28, 2023 | Six Months Ended Oct 29, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $44,035 | $51,369 | $79,130 | $97,836 | | Gross Profit | $26,117 | $27,959 | $46,907 | $55,622 | | Operating Loss | $(8,875) | $(1,739) | $(23,266) | $(1,957) | | Net Loss | $(6,623) | $(3,360) | $(18,320) | $(3,433) | | Net Loss Per Share (Basic & Diluted) | $(0.04) | $(0.02) | $(0.12) | $(0.02) | Condensed Consolidated Balance Sheets As of October 28, 2023, total assets increased to $405.8 million, with cash at $129.0 million, while total liabilities rose to $56.3 million Balance Sheet Summary (in thousands) | Account | October 28, 2023 | April 29, 2023 | | :--- | :--- | :--- | | Total Current Assets | $328,316 | $328,232 | | Total Assets | $405,805 | $397,289 | | Total Current Liabilities | $37,235 | $31,032 | | Total Liabilities | $56,257 | $49,654 | | Total Shareholders' Equity | $349,548 | $347,635 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities was $29.6 million for the six months, a significant improvement from the prior year's cash usage, ending with $129.0 million in cash Cash Flow Summary for Six Months Ended (in thousands) | Cash Flow Activity | October 28, 2023 | October 29, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $29,616 | $(10,462) | | Net cash used in investing activities | $(9,655) | $(60,925) | | Net cash provided by financing activities | $664 | $2,723 | | Net increase (decrease) in cash | $20,403 | $(68,780) | | Cash and cash equivalents at end of period | $128,986 | $190,542 | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail business, accounting policies, and financial components, highlighting revenue concentration, geographical shifts, and significant purchase obligations - The company provides high-speed connectivity solutions, including integrated circuits (ICs), Active Electrical Cables (AECs), SerDes Chiplets, and SerDes IP licensing[58] Revenue Concentration by Customer | Customer | Three Months Ended Oct 28, 2023 | Six Months Ended Oct 28, 2023 | | :--- | :--- | :--- | | Customer A | 29% | 34% | | Customer E | 15% | 15% | Revenue by Geography (in thousands) | Region | Three Months Ended Oct 28, 2023 | Three Months Ended Oct 29, 2022 | | :--- | :--- | :--- | | Mainland China | $5,425 | $31,423 | | United States | $7,837 | $6,422 | | Hong Kong | $18,612 | $2,281 | - The company has a warrant agreement with an affiliate of Amazon.com to purchase up to 4,080,000 ordinary shares, with vesting tied to global payments made by Amazon. As of October 28, 2023, 80,000 shares under this warrant were vested[110] - As of October 28, 2023, the company had total non-cancelable purchase obligations of $44.1 million, comprising $32.7 million for manufacturing and $11.4 million for technology license fees[153] Management's Discussion and Analysis (MD&A) Revenue decreased 14.3% year-over-year to $44.0 million due to lower product sales, offset by increased IP license revenue, while operating expenses rose, widening the operating loss Overview & Business Model Credo provides high-speed connectivity solutions for data infrastructure, utilizing a fabless model and expanding its Active Electrical Cable engagements with hyperscalers - The company's business is centered on providing secure, high-speed connectivity solutions (ICs, AECs, SerDes Chiplets, IP) for data infrastructure markets like hyperscale data centers, AI/ML, and 5G[168] - Credo utilizes a fabless business model, partnering with third parties for manufacturing, which allows it to focus on its core competencies in engineering and design[193] - A key business strategy involves engaging directly with end-users to tailor solutions, which in turn can lead to those end-users requiring their suppliers (OEMs, ODMs) to use Credo's products[175][194] - In 2023, the company expanded its Active Electrical Cable (AEC) engagements to include all seven of the world's leading hyperscalers[189] Results of Operations Total revenue decreased 14.3% due to lower product sales, partially offset by a 124.9% surge in IP license revenue, leading to an expanded gross margin but wider operating loss Revenue Breakdown (in thousands) | Revenue Source | Three Months Ended Oct 28, 2023 | Three Months Ended Oct 29, 2022 | % Change | | :--- | :--- | :--- | :--- | | Product sales | $34,247 | $44,349 | (22.8)% | | IP license | $7,354 | $3,270 | 124.9% | | Total Revenue | $44,035 | $51,369 | (14.3)% | - The decrease in product sales was primarily due to reduced demand and lower shipment volumes of AEC cables by one of the company's largest customers[201] - Gross margin for Q2 FY24 increased to 59.3% from 54.4% in the prior year, mainly because of the higher proportion of high-margin IP license revenue in the overall revenue mix[224] Operating Expenses (in thousands) | Expense Category | Three Months Ended Oct 28, 2023 | Three Months Ended Oct 29, 2022 | % Change | | :--- | :--- | :--- | :--- | | Research and development | $21,736 | $18,158 | 19.7% | | Selling, general and administrative | $13,256 | $11,540 | 14.9% | Liquidity and Capital Resources The company maintained a strong liquidity position with $129.0 million in cash, generating $29.6 million in operating cash flow for the six months, sufficient for future needs - As of October 28, 2023, the company had $129.0 million in cash and cash equivalents and working capital of $291.1 million[71] - Net cash provided by operating activities was $29.6 million for the six months ended October 28, 2023, compared to net cash used of $10.5 million in the prior-year period[74][76] - The positive operating cash flow was primarily driven by a decrease in accounts receivable ($16.8 million) and inventory ($9.6 million), along with non-cash charges like share-based compensation ($16.1 million)[36][74] - Management believes that existing cash and working capital are sufficient to fund operations for at least the next 12 months[72] Quantitative and Qualitative Disclosures About Market Risk There were no material changes to the company's market risk disclosures from its prior annual report - There were no material changes to the company's market risk assessment during the three and six months ended October 28, 2023[82] Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of the end of the period, the company's disclosure controls and procedures were effective at the reasonable assurance level[85] - There were no material changes in the company's internal control over financial reporting during the quarter ended October 28, 2023[86] PART II—OTHER INFORMATION Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business or financial condition - The company is not presently a party to any litigation that is expected to have a material adverse effect[90] Risk Factors There have been no material changes to the company's previously disclosed risk factors - As of the date of this report, there have been no material changes from the risk factors previously disclosed in the company's most recent Form 10-K[91] Other Information This section discloses the adoption of Rule 10b5-1 trading plans by two executive officers, including the CFO and CTO - On June 26, 2023, CFO Daniel Fleming adopted a Rule 10b5-1 Trading Plan to potentially sell up to 90,000 ordinary shares between September 2023 and September 2024[92] - On September 7, 2023, CTO Chi Fung (Lawrence) Cheng adopted a Rule 10b5-1 Trading Plan to potentially sell up to 2,000,000 ordinary shares between January 2024 and December 2024[93]