Credo reported a large beat and raise in Q3 ending in January, with revenue coming in more than 12% above estimates at $135 million for growth of 154.4% YoY and 87.4% QoQ. This is the most growth I can recall from any AI-related earnings report this quarter with an earnings season that wraps up this evening. Regardless of market volatility, Credo is communicating they are special. We’ve covered the product in the past here. Next quarter points to an acceleration in growth to 163.2% — which is especially impressive when you consider the company is seeing strong growth on the bottom line.
Gross margin exceeded management’s guidance at 63.6% while Credo’s strong operating leverage was visible as operating margin came in nearly 8 points ahead of guidance and improved more than 30 points sequentially.
Inventories and accounts receivable surged sequentially, supporting management’s comments that active electric cables (AECs) experienced the inflection point in growth management had expected in the third quarter. Interestingly, Credo’s margin profile is improving significantly despite it being in a strong ramp phase for its products, with GAAP operating and net margins both in the double-digit positives in Q3, a sharp contrast to double-digit negatives just one quarter prior.
Free cash flow was marginally negative this quarter at ($0.4) million due to the purchase of production equipment, plus the large inventory at $53.2 million. The company has $379 million in cash, and thus this isn’t too big of an issue.
Also, note that Credo had very high customer concentration this quarter with 86% of revenue from one customer (hinted to be Amazon) yet is ramping with other hyperscalers (likely Microsoft, xAI, Oracle). This means the company is agnostic, which is truly the best spot to be given they have both large custom silicon and merchant GPU customers.
Revenue
Credo reported revenue of $135.0 million in Q3, beating analyst estimates of $120.4 million. Revenue grew 154.4% YoY and 87.4% QoQ, driven by the inflection in active electric cables (AECs).
Here is what management stated about this outsized growth: “Regarding our AEC product line, as expected, our revenue surged in the third quarter, driven by our largest hyperscale customer. Compared to alternatives, the benefits of AECs have become clearer. More than ever, data centers are highly focused on back-end network reliability […] Our ZeroFlap AECs deliver more than 100 times better reliability than laser-based optical solutions. And as a result, we're seeing AECs replacing optics for rack-to-rack solutions for lengths up to seven meters. We continue to make significant progress with additional hyperscalers for our Ethernet AEC solutions. We've achieved volume production with three hyperscalers, and we're in qualification with two additional hyperscalers, expecting production in fiscal '26.”
For more information on Zero Flap AECs, read our previous analysis here.previous analysis here.
For Q4, Credo guided for revenue of $155 million to $165 million, or 163.2% YoY growth at midpoint, almost an 8 point sequential acceleration. This blew past estimates for $136.3 million for growth of 124.2% YoY. Analyst estimates for fiscal Q1 and Q2 2026 are likely to move higher following this result given that it came in nearly $25 million higher than estimates at midpoint.
For the full year, Credo is on track to generate $426.7 million, based on the midpoint of Q4, well ahead of estimates for $388.8 million and representing growth of 121.1% YoY.
To put how quickly Credo is ramping in perspective, Q3’s revenue was more than Q1 and Q2 combined. Additionally, at the midpoint of Q4’s guidance, Credo would be generating $295 million in Q3 and Q4 combined, or $50 million more than it generated in the four quarters prior.
Key Segments
Product Revenue rises 224% YoY
Credo’s product revenue accelerated significantly in Q3, rising nearly 224% YoY and more than 100% QoQ to $129.3 million. This is a sharp inflection from the 70% to 90% YoY growth seen in the prior three quarters.
For the nine months ending in January, product revenue was $247.7 million, up nearly 138% YoY. Based on Q4’s guidance and product revenue contribution, Credo is on track to potentially reach $400 million in product revenue for the full year.
As pointed out above, AECs and retimers are driving the revenue, yet there are other products that will contribute to the company’s ongoing growth. The founders come from Marvell, and there is overlap here with SerDes technology solutions, including PCIe5 (now) PCIe6 (next year) products incl retimers, which help to increase bandwidths from 50G per lane to 100G per lane to soon offer 200G per lane, including on active optic cables and transceivers. The goal is to corner both long-scale reach and very short-scale reach as architectures move toward scale up and scale out (this is discussed more below). Credo was also first to release a 800G PAM4 DSP for half-retimed modules with the idea these modules can reduce power by 40% compared to full-DSP modules.
- Product Engineering Services: Product engineering services revenue declined nearly (78%) YoY and (42%) QoQ to $2.7 million.
- IP Licensing: IP licensing revenue rose nearly 137% YoY and was flat QoQ at $3 million.
Margins Support a Blowout Report
Credo’s margin improvements are arguably more impressive than the large beat and raise on the top-line in Q3, as Credo reported double-digit positive GAAP margins down the line after reporting negative margins last quarter. When asked what was driving the margins, management stated it was due to scale: “Principally driven by scale. It's really as simple as that.”
- Q3 GAAP gross margin was 63.6%, one full point above the high-end of guidance for 60.6% to 62.6%.
- For Q4, management guided gross margin to be between 62.7% and 64.7%, or a marginal improvement sequentially at midpoint.
- Q3 GAAP operating margin was 19.4%, a more than 30 point sequential improvement from (11.7%) in Q2 and well ahead of management’s guidance for an 11.9% margin. Adjusted operating margin was 31.4%, up nearly 20 points sequentially.
- For Q4, management’s expense guidance implied GAAP operating margin would dip sequentially to 17.5%. Adjusted operating margin is implied to be 32.1%, a slight sequential improvement.
- Q3 GAAP net margin was 21.7%, a more than 27 point sequential improvement from (5.9%) in Q2. Adjusted net margin was 33.6%, up more than 16 points sequentially.
This is a phenomenal improvement in operating and net margins in just one quarter, displaying Credo’s strong operating leverage as it enters its rapid ramp phase. Credo was able to deliver just north of $64 million QoQ growth in product revenue in Q3 while spending less than $6 million more in total operating expenses in the quarter. The strong performance in Q3 was also able to push GAAP operating margin into positive territory for the nine-month period, with GAAP operating income of $3.3 million for a margin of 1.3%.
EPS to See Triple Digit Growth
Credo reported GAAP EPS of $0.18 in Q3, ahead of estimates for $0.11. This was a notable improvement from a GAAP loss of ($0.03) per share last quarter, as net income rose substantially due to Credo’s operating leverage; Q3’s net income was $29.4 million versus a ($4.2 million) loss in Q2.
Adjusted EPS rose 525% YoY to $0.25, beating estimates for $0.18. Analysts are forecasting triple-digit growth in adjusted EPS to continue for the next three quarters.
Balance Sheet and Cash Flows
Credo’s inventories and accounts receivable both surged sequentially, while cash flows were negative as Credo is working to ramp production significantly.
Operating cash flow was $4.2 million, due to “working capital increases driven by the significant sequential product ramp.” Capex was $4.6 million, resulting in free cash flow of ($0.4) million due to purchasing equipment.
Inventories were $53.2 million in Q3, up more than 46% QoQ. Accounts receivable were $157.1 million, up more than 92% QoQ.
Cash and marketable securities totaled $379.2 million, while debt remained at zero.
Earnings Call:
High Customer Concentration (Likely Amazon)
Per our last write-up, Credo’s major customers are Microsoft and Amazon, with the third and fourth perhaps being Oracle or xAI as these two lesser-known names were mentioned in the previous earnings call. This quarter, customer concentration was quite high with one customer at 86%, and this drilled into during the Q&A. Management stated they will have 3-4 customers at 10% or greater revenue and the lead customer will be at 2/3 revenue as soon.
An analyst pointed out that due to the strength of this one customer, the other combined customers would be dropping from $48M in October to $19M in January.
Per the CFO's opening remarks: “As we shared last quarter, we had seven customers that contributed more than 5% of revenue. And going forward, we expect that three to four customers will be greater than 10% of revenue in the coming quarters and fiscal year, as additional hyperscalers ramp to more significant volumes, as Bill described.”
It seems management is implying the customer that surged was Amazon, and not Microsoft. This makes sense given what we know about the Trainium2 ramp. Notably, to be agnostic to both custom silicon and merchant GPUs is the cherry on the cake for a supplier.
Dan Fleming, CFO:
Yes. We've talked in the past about – actually Amazon is a great example. So our largest hyperscaler, if you look at their Q1 revenue, was $30 million. Then it went down a bit in Q2. Now it obviously surged in our Q3. Our internal expectation is probably be in the same ZIP code as to where they were in absolute dollar terms this – in Q3 or where they were in Q3. So if you look at that being what it is and knowing that we guided 19% sequentially up quarter-over-quarter into Q4 at the midpoint. That would imply that maybe they’re two-thirds of our revenue in Q4 would be what that math would apply.
Merchant GPUs (Likely) To be in Volume Production
By now, I hope my readers are well aware that the soft price action in Nvidia has nothing to do with China or DeepSeek. These are shallow narratives the media must quickly conjure up to fill a headline. We offered many before market open earnings reports on “what it could mean” that Nvidia suppliers were offering a muted Q1 starting on Feb 5th, followed by a more long-form analysis on the free side on Feb 25th.
Similar to myself, analysts would love nothing more than to get a green light from a supplier who is downwind from Nvidia. Amazon is a custom silicon project, and thus Credo’s report last night does not provide any evidence that Nvidia’s larger Blackwell systems (expected to drive more than 50% of revenue this year) are ramping in volume. If anything, it suggests the opposite if Amazon is at very high customer concentration while Microsoft, Oracle and/or xAI (the other three customers, presumably) are at a combined 14%.
On one hand, Credo stated the other three hyperscalers are in volume production – which is exactly what we want to hear as it not only verifies the larger Blackwell systems are moving along (since Credo is mainly a back-end networking growth opportunity) but also that Credo is qualified (as of now) to be in this stack in addition to the custom silicon from Amazon.
“Our ZeroFlap AECs deliver more than 100 times better reliability than laser-based optical solutions. And as a result, we're seeing AECs replacing optics for rack-to-rack solutions for lengths up to seven meters. We continue to make significant progress with additional hyperscalers for our Ethernet AEC solutions. We've achieved volume production with three hyperscalers, and we're in qualification with two additional hyperscalers, expecting production in fiscal '26.”
I put the word “likely” in parathesis because merchant GPUs were not specifically mentioned, yet the readthrough is that it’s Nvidia’s GPUs that Credo is providing the AECs to given these specific hyperscaler customers buildouts.
Scale Up, Scale Out Architectures (Total Addressable Market):
Scale up architectures refers to the increasing size of GPUs or AI accelerators per system. Prior to Blackwell, the maximum was eight, whereas the new architecture will be 36 or 72 GPU systems. Each new generation will likely attempt to increase size in which these systems scale up.
As we consider hypergrowth networking stocks like Credo, consider that its revenue today is mainly scale out (which refers to adding more systems, such as the 100,000 GPUs systems being built today). The total addressable market for Credo will expand considerably as we go into years (perhaps up to a decade) of the scale up trend driving forth major advancements in training first and foremost (with inference market too nascent to determine where it will end up in terms of its best and highest use across architectures.
The rack-level architectures that are scale up to 36 GPUs or 72GPUs this year will offer Credo a new opportunity to drive revenue. Per management: “Our Gen6 64 gig PAM4 AECs will deliver the same compelling benefits for AI scale-up networks as deployments move to rack scale architectures. Credo will demonstrate our PCIe AECs at Nvidia's GTC Show later this month.” It was also stated: “Existing customer wins and future opportunities here include 100 gig and 200 gig per lane applications for both traditional switching and increasingly for AI servers requiring retimers for scale-out networks. This year, Credo has entered the market for PCIe retimers used in scale-up networks.”
This was also stated: “We've talked about the volumes being larger than the scale-out network opportunities. So we really see this as a big new TAM. As the market moves from Gen-5 to Gen-6, we're talking about moving from 32 gig NRZ, which is really very old technology, and it is really not competitive if you compare it to the market leader from a bandwidth standpoint per lane.”
Conclusion:
Credo had an excellent earnings report and we are excited to build out this position further over the next few months. Suppliers who participate in both custom silicon and merchant GPUs are in an enviable position as it can remove lumpiness. Regarding lumpiness, Nvidia is not out of the weeds yet as the following analyst discussion foreshadows the delay we reported on is alive and well this quarter: “And the other combined customers would be dropping from $48M in October to $19M in January.” However, Credo’s comments the other hyperscalers are in volume production matches Nvidia’s commentary — and so hopefully we see a clearing of the selling pressure in the next 2-3 months. (And you know the IOF loves to buy low for the next leg up, so we are not stressing it – rather simply making sure our readers are well informed and not relying on the Street’s China tariffs and DeepSeek narratives, which are shallow narratives at best).
Credo's gross margin is one of the strongest I can recollect in the AI hardware space with an operating margin that exceeds many AI suppliers’ gross margin. The fact we are seeing revenue primarily from scale-out, while there is an equal opportunity (if not larger opportunity) for back-end networking with scale up for AI systems – and, the fact Credo plays in both arenas with custom silicon and GPUs — is the cherry on the cake.
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.
Recommended Reading: