Credo Technology Group Holding Ltd

Previous wording

During the three months ended August 3, 2024 and July 29, 2023, we generated $59.7 million and $35.1 million in total revenue, respectively. Product sales and product engineering services revenue comprised 96.0% and 92.0% of our total revenue in the three months ended August 3, 2024 and July 29, 2023, respectively, and IP license revenue represented 4.0% and 8.0% of our total revenue in the three months ended August 3, 2024 and July 29, 2023, respectively. During the three months ended August 3, 2024 and July 29, 2023, we generated $9.5 million in net loss and $11.7 million in net loss, respectively.

Current wording

During the three and six months ended November 2, 2024, we generated $72.0 million and $131.7 million in total revenue, respectively, and during the three and six months ended October 28, 2023, we generated $44.0 million and $79.1 million in total revenue, respectively. Product sales and product engineering services revenue comprised 95.9% of our total revenue in both the three and six months ended November 2, 2024 and 83.3% and 87.2% in the three and six months ended October 28, 2023, respectively, and IP license revenue represented 4.1% of our total revenue in both the three and six months ended November 2, 2024 and 16.7% and 12.8% in the three and six months ended October 28, 2023, respectively. During the three and six months ended November 2, 2024, we generated $4.2 million and $13.8 million in net losses, respectively, and during the three and six months ended October 28, 2023, we generated $6.6 million and $18.3 million in net losses, respectively.

Previous wording

We sell our products to hyperscalers, original equipment manufacturers (OEMs), original design manufacturers (ODMs) and optical module manufacturers, as well as to companies in the enterprise and HPC markets. We work closely and have engagements with industry-leading companies across these segments. A relatively small number customers have historically accounted for and continue to account for a significant portion of our revenue. We report revenue by customer in our financial statement disclosure based on the contracting parties who place purchase orders or sign revenue contracts with us. See Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. However, certain of our end customers have their contract manufacturing partners place orders with us. As a result, the contract manufacturers, rather than the end customers, are reported as our customers for financial reporting purposes. As a supplement to our financial statement footnote disclosure, and to provide further insight into our end customer concentration, the following table summarizes our revenue by customer as a percentage of total revenue based on end customer profile, rather than based on the contracting parties who place purchase orders or sign revenue contracts with us:

Current wording

We sell our products to hyperscalers, original equipment manufacturers (OEMs), original design manufacturers (ODMs) and optical module manufacturers, as well as to companies in the enterprise and HPC markets. We work closely and have engagements with industry-leading companies across these segments. A relatively small number of customers have historically accounted for and continue to account for a significant portion of our revenue. We report revenue by customer in our financial statement disclosure based on the contracting parties who place purchase orders or sign revenue contracts with us. See Note 3 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. However, certain of our end customers have their contract manufacturing partners place orders with us. As a result, the contract manufacturers, rather than the end customers, are reported as our customers for financial reporting purposes. As a supplement to our financial statement footnote disclosure, and to provide further insight into our end customer concentration, the following table summarizes our revenue by customer as a percentage of total revenue based on end customer profile, rather than based on the contracting parties who place purchase orders or sign revenue contracts with us:

Previous wording

Comparison of Three Months Ended August 3, 2024 and July 29, 2023

Current wording

Comparison of Three and Six Months Ended November 2, 2024 and October 28, 2023

Previous wording

Total revenue for the three months ended August 3, 2024 increased by $24.6 million, compared to the same period in fiscal year 2024, primarily due to an increase in product sales revenue of $23.8 million and product engineering services revenue of $1.2 million. IP license revenue was relatively consistent between the comparative periods.

Current wording

Total revenue for the three months ended November 2, 2024 increased by $28.0 million, compared to the same period in fiscal year 2024, primarily due to an increase in product sales revenue of $30.2 million and product engineering services revenue of $2.2 million. This was offset by a decrease in IP license revenue of $4.4 million.

Previous wording

The increase in product engineering services revenue for the three months ended August 3, 2024, compared to the same period in fiscal year 2024, was primarily due to an increase in engineering time of 110% spent in our product engineering services arrangements.

Current wording

The increase in product engineering services revenue for the three months ended November 2, 2024, compared to the same period in fiscal year 2024, was primarily due to an increase in engineering time of 156% spent in our product engineering services arrangements.

Previous wording

The increase in product sales revenue for the three months ended August 3, 2024, compared to the same period in fiscal year 2024, was primarily due to a significant increase in the volume of unit shipments of AEC products which contributed over 90% of the increase in product sales revenue. The AEC sales increase was primarily driven by the ramp-up of our AEC solutions at our second hyperscale data center customer this fiscal quarter.

Current wording

The increase in product sales revenue for the six months ended November 2, 2024, compared to the same period in fiscal year 2024, was primarily due to a significant increase in the volume of unit shipments of AEC and Optical products which contributed over 95% of the increase in product sales revenue. The sales increase was primarily driven by new design wins and increased diversification of our customer base across the product lines.

Previous wording

Cost of revenue for the three months ended August 3, 2024 increased by $8.1 million, compared to the same period in fiscal year 2024, primarily due to an increase in cost of product sales revenue of $8.0 million. The increase was primarily due to the increased shipments of AEC products noted above.

Current wording

Cost of revenue for the three months ended November 2, 2024 increased by $8.6 million compared to the same period in fiscal year 2024, primarily due to an increase in cost of product sales revenue of $8.5 million. The increase was primarily due to the increased shipments of AEC products noted above.

Previous wording

Gross margin in the three months ended August 3, 2024 increased by 3.2 percentage points compared to the same period in fiscal year 2024, primarily driven by the improved economies of scale in our product sales. Our product sales gross margin increased by 5.5 percentage points for the three months ended August 3, 2024, compared to the same period in the prior year.

Current wording

Gross margin in the three months ended November 2, 2024 increased by 3.9 percentage points compared to the same period in fiscal year 2024, primarily driven by the improved economies of scale in our product sales. Our product sales gross margin increased by 10.5 percentage points for the three months ended November 2, 2024, compared to the same period in the prior year, driven primarily by the increased shipments of higher gross margin AEC products, partially offset by a $2.0 million increase of write-downs for excess and obsolete inventory.

Previous wording

Research and development expense for the three months ended August 3, 2024 increased by $7.8 million compared to the same period in fiscal year 2024. The increase was due primarily to a $4.5 million increase in share-based compensation expense driven by increased amortization expense from new equity awards granted to employees, a $2.5 million increase in personnel costs as a result of new hires for product development and a $0.7 million increase in depreciation expense associated with increase in R&D equipment.

Current wording

Research and development expense for the three months ended November 2, 2024 increased by $10.0 million compared to the same period in fiscal year 2024. The increase was due primarily to a $3.7 million increase in share-based compensation expense driven by increased amortization expense from new equity awards granted to employees, a $2.6 million increase in personnel costs as a result of new hires for product development, a $2.3 million increase in design activities and higher engineering activities relating to testing and laboratory supplies for new product development, and a $1.0 million increase in depreciation expense associated with increase in R&D equipment.

Previous wording

Selling, general and administrative expense for the three months ended August 3, 2024 increased by $8.8 million compared to the same period in fiscal year 2024. The increase was primarily due to a $4.1 million increase in share-based compensation expense driven by increased amortization expense from new equity awards granted to employees, $2.0 million increase in personnel costs as a result of higher selling, general and administrative headcount, and a $2.0 million increase in external consultation fees relating to general and administrative expenses.

Current wording

Selling, general and administrative expense for the three months ended November 2, 2024 increased by $8.9 million compared to the same period in fiscal year 2024. The increase was primarily due to a $4.7 million increase in share-based compensation expense driven by increased amortization expense from new equity awards granted to employees, $2.0 million increase in personnel costs as a result of higher selling, general and administrative headcount, a $0.7 million increase in external consultation fees relating to general and administrative expenses, and a $0.5 million increase in logistic expenses related to selling activities.

Previous wording

Provision for income taxes for the three months ended August 3, 2024 increased by $1.2 million, compared to the same period in fiscal year 2024. The fluctuation was primarily due to the tax benefit of share-based compensation being offset by a full valuation allowance in the U.S. entity.

Current wording

Provision for income taxes for the six months ended November 2, 2024 increased by $1.0 million, compared to the same period in fiscal year 2024. The fluctuation was primarily due to the tax benefit of share-based compensation expense being offset by a full valuation allowance on deferred tax assets in the U.S. entity in fiscal year 2025.

Previous wording

Our activities consist primarily of selling our products, licensing our IP, providing product and IP engineering services, and conducting research and development of our products and technology. As of August 3, 2024 and April 27, 2024, we had $103.9 million and $66.9 million in cash and cash equivalents, respectively, and working capital of $472.9 million and $485.6 million, respectively. Our principal use of cash is to fund our operations and invest in research and development to support our growth. See Note 7 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of our cash requirements under non-cancelable purchase obligations.

Current wording

Our activities consist primarily of selling our products, licensing our IP, providing product and IP engineering services, and conducting research and development of our products and technology. As of November 2, 2024 and April 27, 2024, we had $239.2 million and $66.9 million in cash and cash equivalents, respectively, and working capital of $488.6 million and $485.6 million, respectively. Our principal use of cash is to fund our operations and invest in research and development to support our growth. See Note 7 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of our cash requirements under non-cancelable purchase obligations.

Previous wording

Net cash used in operating activities was $7.2 million for the three months ended August 3, 2024. The cash outflows from operating activities for the three months ended August 3, 2024 were primarily due to $21.5 million of cash outflows for working capital purposes and $9.5 million in net loss, partially offset by $23.8 million of non-cash items. The cash outflows from working capital for the three months ended August 3, 2024 were primarily driven by (a) an increase in accounts receivable of $12.2 million primarily due to large billings from customers not due yet in the three months ended August 3, 2024; (b) an increase in inventory of $5.4 million to support unfulfilled backlog and related new product ramps; (c) a decrease in accrued expenses, compensation and other liabilities of $3.7 million due to ESPP purchase and final billing payment made for one of our technology license obligations and (d) an increase in contract assets of $2.8 million due to certain product engineering services and IP licensing arrangements where certain billing milestones were not met prior to the timing of revenue recognition. These cash outflows were offset by cash inflows relating to an increase in accounts payable of $5.8 million due to amounts payable relating to increased external consultation fees associated with general and administrative and outside research & development services.

Current wording

Net cash provided by operating activities was $3.0 million for the six months ended November 2, 2024. The cash inflows from operating activities for the six months ended November 2, 2024 were primarily due to $50.6 million of non-cash items, partially offset by $33.7 million of cash outflows for working capital purposes and $13.8 million in net loss. The cash outflows from working capital for the six months ended November 2, 2024 were primarily driven by (a) an increase in accounts receivable of $22.1 million primarily due to large billings from customers not due yet in the six months ended November 2, 2024; (b) an increase in inventory of $12.6 million to support unfulfilled backlog and related new product ramps; and (c) a decrease in deferred revenue of $2.0 million due to the satisfaction of performance obligations over the passage of time.

Previous wording

Net cash provided by operating activities was $24.6 million for the three months ended July 29, 2023. The cash inflows from operating activities for the three months ended July 29, 2023 were primarily due to $24.8 million of cash inflows for working capital purposes and $11.5 million of non-cash items, partially offset by $11.7 million in net loss. The cash inflows from working capital for the three months ended July 29, 2023 were primarily driven by (a) an decrease in accounts receivable of $21.6 million primarily due to collection of large customer invoices in the fiscal quarter ended July 29, 2023; (b) an decrease in inventory of $5.0 million primarily driven by tightened production management and increased product sales compared to the fiscal quarter ended April 29, 2023; (c) an increase in accounts payable of $2.5 million due to amounts payable relating to increased research and development spending. These cash inflows were offset by cash outflows relating to an increase in other non-current assets of $2.5 million primarily relating to payments of refundable deposits for a manufacturing supply capacity reservation agreement.

Current wording

The cash inflows from working capital for the six months ended October 28, 2023 were primarily driven by (a) an decrease in accounts receivable of $16.8 million primarily due to collection of large customer invoices in the fiscal quarter ended October 28, 2023; (b) an decrease in inventory of $9.6 million primarily driven by tightened production management and increased product sales compared to the fiscal quarter ended April 29, 2023; (c) an increase in accounts payable of $5.6 million due to amounts payable relating to increased research and development spending. These cash inflows were offset by cash outflows relating to an increase in other non-current assets of $4.6 million primarily relating to payments of refundable deposits for a manufacturing supply capacity reservation agreement.

Previous wording

Net cash provided by investing activities of $42.5 million in the three months ended August 3, 2024 was primarily attributable to maturities of certificates of deposit for $162.1 million, offset by purchase of the same for $113.7 million and purchases of property and equipment of $5.9 million. Purchases of property and equipment primarily related to third-party IP licenses and computer equipment and software used for research and development purposes.

Current wording

Net cash provided by investing activities of $171.5 million in the six months ended November 2, 2024 was primarily attributable to maturities of certificates of deposit for $313.1 million, offset by purchases of the same for $113.7 million and purchases of property and equipment of $27.8 million. Purchases of property and equipment primarily related to mask set costs capitalized relating to the Company’s products already introduced or to be introduced, and third-party IP licenses and computer equipment and software used for research and development purposes.

Previous wording

Net cash used in investing activities of $6.6 million in the three months ended July 29, 2023 was attributable to purchases of property and equipment of $5.3 million and net outflow from certificates of deposit of $1.3 million from maturities of certificates of deposit for $59.2 million and purchases of the same for $60.5 million . Purchases of property and equipment primarily related to mask sets purchases for new products introduced or in process of being introduced, and computer equipment and software used for research and development purposes.

Current wording

Net cash used in investing activities of $9.7 million in the six months ended October 28, 2023 was attributable to purchases of property and equipment of $7.4 million and net outflow from certificates of deposit of $2.3 million from maturities of certificates of deposit for $109.2 million and purchases of the same for $111.5 million. Purchases of property and equipment primarily related to mask sets purchases for new products introduced or in process of being introduced, and computer equipment and software used for research and development purposes.

Previous wording

Cash Flows Provided by (Used in) Operating Activities

Current wording

Cash Flows Provided by (Used in) Financing Activities

Previous wording

Net cash provided by financing activities of $1.6 million for the three months ended August 3, 2024 was primarily attributable to $2.4 million in proceeds from exercises of employee share options and the issuance of shares under the ESPP net of tax withheld for RSU settlement, offset by $0.8 million in payments for long-term technology license obligations.

Current wording

Net cash used in financing activities of $2.4 million for the six months ended November 2, 2024 was primarily attributable to $4.6 million in payments for long-term technology license obligations and $2.3 million tax withheld related to RSU settlement, offset by $4.4 million in proceeds from exercises of employee share options.

Previous wording

Net cash provided by financing activities of $0.5 million for the three months ended July 29, 2023 was solely attributable to $3.4 million in proceeds from exercises of employee share options and issuances of shares under the ESPP offset by $2.7 million in payments for long-term technology license obligations.

Current wording

Net cash provided by financing activities of $0.7 million for the six months ended October 28, 2023 was solely attributable to $3.7 million in proceeds from exercises of employee share options and issuances of shares under the ESPP offset by $3.1 million in payments for long-term technology license obligations.

Previous wording

There have been no material changes to our critical accounting estimates during the three months ended August 3, 2024, as compared to those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended April 27, 2024. In the current macroeconomic environment, our estimates could require increased judgment and carry a higher degree of variability and volatility. We continue to monitor and assess our estimates in light of developments, and as events continue to evolve and additional information becomes available, our estimates may change materially in future periods.

Current wording

There have been no material changes to our critical accounting estimates during the three and six months ended November 2, 2024, as compared to those disclosed under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended April 27, 2024. In the current macroeconomic environment, our estimates could require increased judgment and carry a higher degree of variability and volatility. We continue to monitor and assess our estimates in light of developments, and as events continue to evolve and additional information becomes available, our estimates may change materially in future periods.