Credo Technology (CRDO) - 2023 Q1 - Quarterly Report

Cover Page Information 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] - The company's stock is traded on the Nasdaq market under the ticker symbol CRDO[2] - The company is identified as a "smaller reporting company" and an "emerging growth company"[2] - As of August 25, 2022, the company had 145,682,010 common shares outstanding[3] Table of Contents 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] Special Note Regarding Forward-Looking Statements 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] - 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] - 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][8] PART I—FINANCIAL INFORMATION Item 1. Financial Statements 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 | 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 | 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 | 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) - 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] - As of July 30, 2022, all convertible preferred shares had been converted to common shares, resulting in a zero balance for preferred shares[25] - 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] Condensed Consolidated Statements of Cash Flows | 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 1. Description of Business and Basis of Presentation - 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][32] - 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] 2. Significant Accounting Policies - 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][37] - The company adopted ASU 2019-12 (Income Taxes) on May 1, 2022, with no material impact on its consolidated financial statements[41] - 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] 3. Concentrations - 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] - 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] 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 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] - 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][56] 5. Fair Value Measurements - 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][58][59] - 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] 6. Supplemental Financial Information 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] 7. Commitments and Contingencies - As of July 30, 2022, the company had non-cancelable purchase obligations with third-party subcontractors of approximately $18.3 million[67] - The company's products typically include a one-year standard warranty, with associated costs being immaterial during the reporting periods[68] - 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] - The company is not involved in any material legal proceedings and has not recorded any accruals for loss contingencies[70][73] 8. Convertible Preferred Shares - 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] - The preferred shares previously held conversion, dividend, and liquidation rights, which no longer exist post-IPO[76][78][79] 9. Leases - 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] 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] 10. Share Incentive Plan - 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] - 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] - 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] 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 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] - 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] 12. Net Loss Per Share 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 - 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] - The company serves the hyperscale data center, high-performance computing, and 5G infrastructure markets, focusing on high-bandwidth, energy-efficient, and secure solutions[101] - 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] Our Business Model - 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] - 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] - A dual-pronged sales strategy involves engaging directly with end-users and their suppliers to better understand customer needs and drive solution adoption[113][114] Revenue Mix and Associated Gross Margins - 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][117] 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][118] Factors Affecting Our Performance - 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][120][121][124][125][126] - The ongoing COVID-19 pandemic continues to impact business and financial performance, affecting customer demand timing, supply chain availability, logistics, and component supply[127] Results of Operations 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][131] 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] 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] - 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][138] - 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] Liquidity and Capital Resources - As of July 30, 2022, the company had $243.8 million in cash and cash equivalents and $303.4 million in working capital[140] - The company's operations have been financed primarily through its IPO, sales of convertible preferred and common stock, and cash flow from customers[140] - 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] Cash Flows Used in Operating Activities - 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] - 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] Cash Flows Used in Investing Activities - 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] - 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] Cash Flows from Financing Activities - 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] - 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] Critical Accounting Estimates - 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] Recent Accounting Pronouncements - For more information on recent accounting pronouncements, refer to Note 2 of the consolidated financial statements in this quarterly report[152] JOBS Act Accounting Election - 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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 - 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][156] - 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] Changes in Internal Control Over Financial Reporting - 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] Inherent Limitations on Effectiveness of Controls - 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] PART II—OTHER INFORMATION Item 1. Legal Proceedings 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] - 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] Item 1A. Risk Factors 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] - 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] - 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] - 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][170] Item 6. Exhibits 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] - The report also includes an Inline XBRL Instance Document and its related taxonomy extension files (Schema, Calculation, Definition, Label, Presentation Linkbase Document)[174] 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][177]