Credo dropped another silly-good earnings report. This company simply won't stop shattering estimates and leaving analysts scrambling to revise their models. Fiscal Q2 revenue reported growth of 272% YoY and 20% growth QoQ for revenue of $268 million – beating estimates for revenue of $235 million and growth of 226%. The company is GAAP profitable with an operating margin of 29.4% and an adjusted operating margin of 46.3%.
However, if you thought this quarter’s 14% beat coming in $33 million over expectations was impressive, next quarter’s guide is insane. Credo guided $340 million at the midpoint vs $247.6 million expected — a 37% beat, or roughly $92 million above consensus.
Credo is capable of this strong performance due to the reliability of active electric cables (AECs). The company continues to carve out a name for itself in mission critical interconnect features such as reliability, signal integrity, latency and reach. According to management: “At 100 gig per lane today and 200 gig per lane tomorrow ZeroFlap AECs deliver up to 1,000x better reliability than traditional laser-based optical modules while consuming roughly half the power.
In addition, management stated they had four hyperscalers contribute more than 10% of revenue with the fourth in full volume ramp and the fifth starting to contribute initial revenue. This is up from three in fiscal year 2025. This diversification helps quite a bit as the lead customer cooled off in the recent quarter while another customer stepped up in revenue percentage.
This particular call was also loaded with details on the future road map with information on three new growth pillars that represent “multi-billion dollar market opportunities.” Make sure to read this section if you’re curious about what Credo has planned to expand their dominance to scale-up interconnects.
AECs Lead in Front-End and Scale-Out Connectivity
Last quarter, I made it a point to highlight the CEO’s comments on AEC reliability, because those remarks addressed why Credo continues to deliver 200%+ year-over-year growth:
“Again, reiterating that if you have got a single link flap in, say, 10,000 or 100,000 or 1 million GPU cluster, it brings the entire cluster down because there's no redundancy from that NIC to tour connection. And so we're actually seeing the TAM expanding. And I think for the first time in history that you're seeing copper replacing optical connections. So we're quite bullish on the market generally.”
This was repeated again this quarter with the magical words “expansion of AEC TAM,” which implies Credo is expanding its market as AECs become desirable for lengths of up to 7 meters (copper was traditionally used under 3 meters).
“When you're installing a 100,000 GPU cluster, link flaps can delay time to stability and time to revenue. And when you're training a model costing tens of millions of dollars, link flaps can have a significant impact on overall uptime and productivity. It is this step function improvement in reliability and power efficiency that's driving the expansion of the AEC TAM in the 100 gig and now 200 gig per lane generations. And we expect that trend to continue as customers densify racks and push cluster scale to new levels.”
The TAM is also expanding as AECs are used for front-end network connections, scale-out (or back-end) network connections and also for replacing chassis backplanes (in-rack cabling).
Perhaps most importantly, AECs may see an opportunity for scale-up networking (also back-end networking) yet what is unique about the scale-up networking opportunity is that Credo currently does not see any revenue yet here, creating yet another expansion of TAM should AECs pass qualification: “I would say the one remaining application that will be high volume is with the scale up network as that network goes rack-scale and then ultimately goes row-scale depending on the density and the number of racks that are being deployed.”
Aggressive 3-Year Product Road Map
There was brand-new information on the earnings call on how Credo plans to approach CY2026-2028 with some fairly aggressive product lines.
In the opening remarks, the CEO detailed the following:
- ZeroFlap optics combine the reliability from AECs with an optical DSP and switch level SDK to integrate with their customer’s software. This allows observability data to mitigate system failures from faulty link flaps. According to management: “Our ZF optics solutions expand our addressable market to any length of connection within the data center. We anticipate initial revenue in fiscal '27 and long term, a market that will be a multibillion-dollar opportunity.”
- Credo is also developing high-performance micro LED technology along with partner Hyperlume. The first product will be a pluggable optical solution that uses micro LEDs as the light source to product “active LED cables” or ALCs. The result will be ALCs that offer the same reliability and power efficiency as AECs yet can reach up to 30 meters. According to management, “We plan to sample the first ALC products to lead customers during our fiscal '27 with initial revenue ramping in fiscal '28. We believe the ALC TAM will ultimately be more than double the sizes of the AEC TAM.”
- OmniConnect gearboxes are the third growth vector and will target the XPU market (or ASICs market) that uses 112G VSR SerDes for increases DDR memory capacity and throughput. According to management: “Weaver allows designers to move to commodity DDR memory and achieve up to 30x more memory capacity and 8x the bandwidth […] We anticipate initial revenue in our fiscal '28 with significant scaling thereafter.”
It’s important to note that Credo is future-proofing by designing optical solutions for the ZF flaps and ALCs. Per the Q&A session: “And I would say that, yes, ALCs as well as ZF optics, those are both optical solutions. But the OmniConnect family will be initially copper-based and then longer term, we'll offer near package optics options with that.”
Perhaps most importantly, Credo stated their goal with these new products is to move from a $1 billion annual revenue threshold to $5 billion (although there has to be quite a bit of solid execution in-between): “We've been working on these things for 18 months or so. But now being able to talk about it, I think it shows that their path to a much more diversified company long term as we think about moving the company from that $1 billion threshold of revenue annually to $5 billion and beyond over the next several years.”
We will be closely monitoring the execution around these new products in the coming quarters.
Financials
Stellar Revenue Growth of 272%
Credo’s Q2 FY2026 ending Oct 2025 revenue grew by 272.1% YoY and 20.2% QoQ to a record $268 million, beating estimates by a solid 14.1%. The robust growth was primarily led by continued strong demand for its power-efficient high-speed AI connectivity solutions, particularly its Active Electrical Cable (AEC) product line.
The company’s CEO, William Brennan, said in the earnings call, “These are the strongest quarterly results in Credo's history, and they reflect the continued build-out of the world's largest AI training and inference clusters. AI clusters are no longer measured in tens of thousands of GPUs. They're now measured in hundreds of thousands and soon millions.”
The company’s four hyperscale customers each contributed more than 10% of total revenue. The fourth hyperscaler is now in full volume ramp, and a fifth customer started contributing initial revenue in the recent quarter. The CFO, Daniel Fleming, said in the earnings call, “The largest was 42% of revenue, and that was the customer that we've, in the past, said we expect to be the largest customer this fiscal year. The second largest was 24%, which have to be our first hyperscaler to ramp a few years back. Third largest was 16%, which was our largest customer in Q1. And the fourth was 11%, which is our newest hyperscaler that we've discussed in the past.” Management expects revenue diversification to strengthen further with the fourth customer surpassing the 10% revenue for this fiscal year.
Management also provided a strong guide for the next quarter of $335 million to $345 million, representing a YoY growth of 151.8% and 26.9% QoQ at the midpoint. Notably, this guidance crushed analyst estimates by an extraordinary 37.3%, highlighting the company's robust outlook.
Management expects strong growth to continue and the CFO said in the earnings call, “As we look toward the end of fiscal year '26 and into fiscal '27, we expect sequential revenue growth in the mid-single digits, leading to more than 170% year-over-year growth in the current fiscal year. We expect each of our top 4 customers from Q2 to grow significantly year-over-year in fiscal year '26.”
Product Revenue Growth of 278%
Credo’s product revenue grew by 278% YoY and 20% sequentially to $261.3 million. This stellar performance was primarily driven by the Active Electrical Cable (AEC) product line. The AEC product line achieved new record revenue levels after posting strong double-digit sequential growth, fueled by substantial YoY growth across four hyperscale customers. Management also highlighted that customer forecasts have strengthened across the board in the past months.
- IP License revenue grew by 128% YoY and up 12% QoQ to $6.7 million. The revenue growth decelerated from 152% YoY in FQ1 and accounted for only a small 2.5% of total revenue.
Strong Margins
Credo reported strong profits that exceeded management guidance. During the earnings call Q&A, management reiterated that the long-term adjusted gross margin to be in the range of 63% to 65%.
Vijay Rakesh (Analyst)
“Got it. And then longer term, as you — you're obviously seeing a pretty strong AC ramp. How should we look at the gross margin profile as optical DSPs are starting to ramp as well? Just longer term, how to look at gross margins?”
Daniel Fleming (CFO)
“Yes. We've been very consistent in saying our long-term expectation for gross margins is in the 63% to 65% range. So we are clearly at a point in time right now where we're a bit above that, but we don't expect that to be the case longer term. If you look at the more medium term, probably we guided to 65% at the midpoint. So we'll be kind of near that high end of that long-term expectation. But just longer term, I expect that to settle down into an area that historically, companies like us have been in.”
- Gross profits grew by 298% YoY to $181.1 million with a gross margin of 67.5%, up 430 basis points YoY and up 10% basis points sequentially and higher than the guide of 64.5%. The adjusted gross margin was 67.7%, higher than the guidance of 65%. Management expects gross margin to be 64.8% and adjusted gross margin to be 65% in the next quarter.
- The operating margin was 29.4%, up 41.1 percentage points YoY and up 2.2 percentage points sequentially, driven by strong operating leverage. It was above the guide of 23.2%. Adjusted operating margin was 46.3% compared to 11.5% in the same period last year and 43.1% in the previous quarter. Management’s operating margin guide for the next quarter is 30.1% and the adjusted operating margin is 44.4%.
- Net margin was 30.8% compared to (5.9%) in the same period last year and 28.4% in the previous quarter. Adjusted net margin was 47.7% compared to 17% in the same period last year and 44.1% in the previous quarter.
Adjusted EPS beat of 35.3%
Credo’s GAAP EPS was $0.44 compared to ($0.03) in the same period last year, beating the estimates by 45.1%. Adjusted EPS grew by 857% YoY to $0.67, beating estimates by 35.3%. Analysts expect adjusted EPS to grow by 104.4% YoY to $0.51 in FQ3 and 53% YoY to $0.54 in FQ4.
Cash Flow and Balance Sheet
Credo has strong cash flow driven by growth in profits.
- FQ2 operating cash flow grew by 500% YoY to $61.7 million with an operating cash flow margin of 23% compared to 14.3% in the same period last year.
- FQ2 free cash flow was $38.5 million compared to ($11.7 million) in the same period last year and $53.1 million in the previous quarter. Free cash flow margin was 14.4% compared to (16.2%) in the same period last year and 23.8% in the previous quarter. Free cash flow was down sequentially due to higher capex, driven primarily by investments in production mask sets.
- Cash and short-term investments were $813.6 million compared to $479.6 million in the previous quarter, and the increase was primarily from the proceeds of the ATM (at-the-market) equity offering. Credo received $384.6 million in net proceeds through the issuance of 2.7 million shares. The company announced in October that it entered into an equity distribution agreement with Goldman Sachs to raise money from time to time with a total offering of $750 million. Credo remains debt-free.
- In September, the company also acquired Hyperlume, a developer of miniature light-emitting diode (microLED) based optical interconnect technology for chip-to-chip communication, for a total purchase consideration of $92 million.
- The inventory was $150.2 million, up from $116.6 million in the previous quarter, suggesting strong future growth expectations.
Conclusion:
All around, Credo offered an earnings report that helps confirm the #1 leading trend in my Q4 Top 15 AI Stocks report, which was AI networking, is fully in play. Nvidia’s 162% growth in the networking segment was a nice clue, as well, that Credo would deliver tonight. I spoke about that here with Charles Payne.
It’s a good feeling when you work hard at identifying a thesis and it plays out. The beat this quarter and the strong guide next quarter suggests we are on the right track. However, AI networking will challenge even the most detailed analysts as it’s rapidly evolving, with new suppliers being qualified and new standards emerging in close succession. This is the best part of tech investing — finding the disruptors, and Credo clearly demonstrated tonight that they are one of them.
Equity Analyst Royston Roche contributed to this analysis.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in “CRDO” at the time of writing and may own stocks pictured in the charts.
Recommended Reading: