Credo Technology (US:CRDO)2022-06-07 16:00Part I Business 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 market30 - 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 20253435 - 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 testing919394 - The company has significant customer concentration, with four customers accounting for 30%, 18%, 11%, and 10% of total revenue in fiscal 2022, respectively87 Risk Factors 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 2022118127 - 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 Taiwan168174289 - 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 years258263273 - 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 Alphawave139 - 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 success318328 Properties 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 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 company113657 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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, 2022419 - The company has never paid cash dividends and does not plan to in the foreseeable future421 - 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' option426 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) 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 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 activities497 - 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 infrastructure499 - The company incurred impairment charges of $3.1 million in fiscal 2022 related to property and equipment that did not reach production qualification500 Liquidity and Capital Resources 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 IPO510 - 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 equipment509 Critical Accounting Estimates 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 affiliate516518 - 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 changes519 - 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 used523524526 Quantitative and Qualitative Disclosures About Market Risk 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. dollars530 - A hypothetical 10% adverse change (weakening) in the U.S. dollar exchange rate would have increased fiscal 2022 operating expenses by about 2%532 - The company has not entered into any foreign currency derivatives to hedge its foreign currency exposure to date531 Financial Statements and Supplementary Data 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 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 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 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 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 level719 - 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 rules720 Part III Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees 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 Statement727728729 Part IV Exhibits and Financial Statement Schedules 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 report734 - Financial statement schedules have been omitted because they are not applicable or the information is included elsewhere735