Credo continues to report outstanding revenue growth, up 180% YoY in Q4 and guided to accelerate further in Q1 as management touted growing traction with hyperscalers, new design wins in qualification and strong customer forecasts driving sustained AEC growth.
GAAP margins have expanded significantly down the line with operating margin quickly approaching 20% as signs of operating leverage emerge. Cash flow margins were robust in Q4 on strong collections, while inventories surged over the past two quarters, indicating that Credo’s hypergrowth phase will likely continue for a few quarters.
Management hinted that a new DSP deal with a hyperscaler represents its largest revenue opportunity to date, with two new hyperscaler customers ramping up in FY26. Backed by these arising revenue streams, Credo guided for revenue growth of 85%+ next year, or over $800 million.
Brief Background on Credo:
Credo’s primary product line is active electric cables (AECs), while it also offers PAM4 digital signal processors (DSPs), optical transceivers, active optical cables (AOCs), and PCIe 6 retimers. Credo’s product portfolio is underpinned by its proprietary SerDes tech, which allows for comparable performance as its peers in data transmission but at a much lower cost.
AECs and active copper cables (ACCs) are challenging fiber optic networking in the two to seven meter space, as these solutions offer lower power, lower costs and at times, higher reliability over the shorter distance. AECs solve a critical issue of data loss that occurs with passive cables at longer lengths, especially in 800 Gbps/port environments with lengths longer than two to three meters. As data center network architectures look toward replacing fiber optic in some cases for short haul networking, both AEC and ACC are being evaluated.
AECs with retimers are a more expensive option compared to ACCs due to offering a cleaner signal, yet they have the additional benefit of being vendor agnostic, which is key for data center operators who are looking to upgrade as they add more racks.
Being copper-based, AECs are cheaper than fiber optics even with the cost of the retimer, and AECs consume less power due to having a small diameter. By allowing more air flow, there are fewer issues with thermal management. This is the primary catalyst for AEC growth within the data center.
In Credo’s case, for distances between two meters and seven meters, AECs are seeing heightened demand as servers scale up from eight GPUs to now 36 and 72 GPU per rack-scale AI systems, and also as clusters grow from 10,000 to 100,000 and soon million-GPU clusters.
For a deeper understanding of Credo’s products and market positioning, read more here: Credo: AI Networking Company Surging in Revenue from Active Electric Cables (AEC)Credo: AI Networking Company Surging in Revenue from Active Electric Cables (AEC)Credo: AI Networking Company Surging in Revenue from Active Electric Cables (AEC)
AEC Adoption Driven by Higher Reliability and Efficiency
For Credo, the strong growth trajectory of its AEC product line in Q4 and FY25 was driven by their higher reliability and energy efficiency, with management highlighting significant customer wins in Q4’s earnings call.
Credo expanded its AEC portfolio with the launch of its 800G HiWire ZeroFlap AECs for AI backend networks in October 2024, aiming to enable large AI clusters sized into the hundreds of thousands of GPUs. The new AECs were designed to reach seven meters with full host-to-switch connectivity, specifically for liquid cooled servers. Credo says the new AEC line saves up to 14 watts per link and up to $1,000 per GPU.
Credo says that ZeroFlap AECs now “are gaining traction as a robust rack-to-rack solution for distances up to 7 meters, offering over 100 times greater reliability than laser-based optical modules, virtually eliminating linked labs and significantly improving energy efficiency, which are both key enablers for best-in-class AI deployments.”
This increased reliability and focus on energy efficiency at the longer seven meter length have already driven a major customer win in xAI’s Colossus 100,000 GPU cluster. At that size, Credo’s ZeroFlap AECs could drive power and cost savings of up to 1400kw (~10 NVL72 racks) and $100 million.
Aside from xAI, Credo says it has a second customer ramping this year where the catalyst was “similar in the sense that their ability to move to these longer length AECs really opens the door for them to improve the reliability.” Credo is eyeing more deployment opportunities through FY27 as cluster sizes continue to increase, with AECs helping hyperscalers greatly improve density (more racks deployed for same amount of power) with a highly reliable, efficient solution.
Eyeing >100% YoY Optics Growth with 100G Optical DSPs and 800G Transceivers
While AECs take center stage for the role as the primary growth driver, Credo’s optics portfolio stands out as well. Management laid out robust triple-digit growth targets for FY26, alongside significant progress with industry-leading product deployment and major customer wins.
Credo recently announced a handful of industry-leading optics products that position it well for more customer wins and strong growth over the next two years. Credo unveiled its ultra-low power 5nm 100G optical DSP at OFC in May, which it says sets new industry-leading benchmarks for power efficiency with full DSP and linear receive optics (LRO) variants. Credo recently showcased its 3nm 200G per lane DSP, support 1.6T port speeds with leading power efficiency and signal integrity. Credo says this new solution positions it to drive the shift to 200G lane speeds over the next few years.
Credo also showcased its family of ultra-low power 800G optical modules with an industry-first power consumption of just 9W, powered by its Lark linear receive optic (LRO) tech. Credo said it “achieved error rates comparable to full DSP solutions” and attracted significant interest from hyperscalers who are prioritizing power efficiency. LRO solutions are gaining traction as they remove the DSP, reducing cost, latency and power consumption by 1-2W per module, which is significant at larger scales.
Highlighting the strength of its optics solutions, Credo secured a major full 800G DSP transceiver win with a US-based hyperscaler, with deployments commencing in fiscal 2026. Credo said that from a revenue standpoint, this win is “probably going to be the largest opportunity that we've had to-date.”
As a result, Credo CEO Bill Brennan is expecting the company to “double or even beyond double our optical revenue in fiscal '26” with accelerated growth in the years ahead. Most optical shipments currently are 50G per lane (400G) with several designs shipping, though Credo expects more traction and revenue growth from 100G per lane designs.
Brennan was also confident in Credo’s ability to drive market share gains in 100G DSPs. He explained that he feels Credo will “experience a lot of success in the 100G per lane market in the next 12 to 24 months” as full DSP and LRO variants launch simultaneously, with the expectation that Credo will be “really well positioned in that market as that develops.”
In terms of the timing for scale-up driven optics growth, Brennan said Credo has been consistent in saying designs wins will come this year with revenue ramp beginning in calendar 2026. Over the next two to five years, he believes optics and DSPs will grow “dramatically” to eventually become a >10% revenue business. Importantly, this comment suggests that optics remains <$40 million as of FY25, and the forecast for doubling or more than doubling in FY26 may only contribute approx. $40 million of an expected $370 million-plus in revenue growth.
PCIe 6, Scale-Up Seen as Growth Driver through 2027
Credo was highly positive about the transition from PCIe Gen5 to PCIe Gen6 driving growth for them in scale-up, with PCIe 6 expected to gain traction in FY26 and FY27.
Credo’s PCIe 6 AECs displayed at GTC promised the same reliability and energy benefits for scale-up networks and rack-scale architectures, while its PCIe 6 retimers showcased “superior performance and interoperability.” Management said that customer momentum for PCIe retimers is accelerating with design winds expected in 2025 and production revenue commencing in calendar 2026. On the AEC front, management said there were “new design wins in qualification” amidst growing traction amongst hyperscalers, positioning them for sustained strong AEC revenue growth.
For scale-up Ethernet, UALink or Nvidia’s new NVLink Fusion, Credo said that these networking standards create a large market for PCIe, shifting from Gen5 to Gen6. CEO Bill Brennan said that these will all be 224G series, with Credo aiming to “establish revenue and really increase that revenue base in the PCIe Gen5 and Gen6 timeframe. And then after that, we're going to be flexible in a sense of offering Gen7” where Credo’s AECs will be universal to Ethernet, UALink or NVLink Fusion.
Financials
Revenue Continues to Accelerate to 218% in Q1
Credo reported 179.7% YoY and 25.9% QoQ growth to $170.0 million in revenue in Q4, beating the consensus estimate for $159.6 million. Revenue growth has sharply accelerated throughout the fiscal year, up from the 60% to 70% level in 1H to high triple digits in 2H.
AEC maintained a “steep growth trajectory” with revenue reaching another record in the quarter, growing double-digits sequentially. Evidence of the rapid ramp of AEC and Credo’s other optic and retimer products, quarterly revenue has nearly tripled since the start of the fiscal year at $59.7 million.
For Q1, Credo guided to $185 million to $195 million in revenue, pointing to a nearly 40 point sequential acceleration to 218% YoY growth at midpoint. This was also 17% above consensus estimates for $162.4 million heading into the report.
Revenue growth estimates have moved sharply higher since February. Q1’s growth estimate just four months ago was 133.4%, and is now nearly 85 points higher, while Q2’s growth estimate has risen 74 points from 100.9%.
For fiscal 2025, Credo reported a 122 point acceleration to 126.3% YoY growth, with revenue of $436.8 million. For fiscal 2026, Credo guided for revenue to exceed $800 million, for growth in excess of 85% YoY, while analysts are now expecting $804.1 million.
What’s important to note here is that analyst growth expectations are much lower than what Credo has been reporting. For fiscal 2026, analysts are expecting sequential growth of 3% to 4% each quarter to reach the $804 million estimate. In Q4, Credo had initially guided for QoQ growth of 19% and reported 26%, while for Q1, Credo has guided for 12% QoQ growth. Assuming Credo can maintain QoQ growth >7% through FY26 as new hyperscalers begin to ramp, these expectations will likely materialize as too low. However, it’s important to caution that Credo is coming up on difficult comps in Q3 and Q4 and those comps elevate risk as it can be a point where hypergrowth companies often fail to impress.
Key Segments – Product Revenue Growth Tops 300% YoY
Credo reported a significant 80 point sequential acceleration in product revenue growth to 303.3% YoY in Q4, with revenue of $164.5 million. Credo said AEC products are gaining traction in rack-to-rack distances up to 7 meters, with xAI being the most successful customer at that distance with a second customer ramping this year.
For optics, Credo noted that it reached its revenue targets and ended FY on strong momentum with an expanding customer base. As previously mentioned, Credo is targeting 100%+ optics revenue growth in FY26.
In retimers, Credo said growth was fueled by 50G and 100G per lane Ethernet products, with customer momentum accelerating. Credo added that for fiscal 2026, they anticipate strong growth in retimers driven by the shift to 100G per lane solutions.
- Product Engineering Service revenue declined (60%) YoY and (50%) QoQ to $1.3 million.
- IP License revenue declined (75%) YoY but rebounded 41% QoQ to $4.2 million.
Note on Customer Concentration
Moving forward, Credo expects to diversify its customer base, eyeing up to five >10% customers in FY26, up from three in FY25. Credo’s largest customer, rumored to be Microsoft, accounted for 61% of revenue in Q4.
Credo also has two new hyperscalers ramping in 2H 26, with the expectation that both could become >10% customers in the long-term, though management offered no timeline for that. CEO Bill Brennan said the first customer is expected to ramp in mid-year, sooner than expected, with the other looking to be later in the second half. Should Credo be able to ramp these two quickly, it could provide additional revenue and growth as tough comps roll around.
Margins Shine with 40% Adjusted Operating Margin in FY26
Credo has excelled on the margin front, driving strong expansion in margins in 2H and in fiscal 2025 despite being solidly in its hypergrowth phase, a difficult feat to accomplish.
For Q4:
- GAAP gross margin was 67.2% for an expansion of 2.4 points YoY and 3.6 points QoQ. Adjusted gross margin was 67.4%. For Q1, Credo guided for GAAP gross margin of 63.4% to 65.4%, and adjusted gross margin of 64% to 66%.
- GAAP operating margin was 19.9%, well ahead of guidance for 17.5%. This marked an exceptional ~33 point improvement from (13%) last year, and its second consecutive quarter above 19%. Adjusted operating margin was 36.8%, up more than 24 points YoY and more than 5 points QoQ. For Q1, Credo’s operating expense forecast implies a GAAP operating margin of 17.4%, and an adjusted operating margin of 36.1% at midpoint.
- GAAP net margin was 21.5%, up more than 38 points YoY and down marginally QoQ. Adjusted net margin was 38.4%, up 19 points YoY and nearly 5 points QoQ.
For fiscal 2025:
- GAAP gross margin expanded less than 3 points to 64.8%, while adjusted gross margin expanded 2.5 points to 65.0%.
- However, Credo drove significant improvement to operating margins with prudent cost management. GAAP operating margin inflected to positive territory at 8.5%, up more than 27 points YoY. Adjusted operating margin expanded 25 points to 26.4%. For fiscal 2026, management shared that they are targeting adjusted operating margin of 40%, a 14 point YoY expansion.
- GAAP net margin was 11.9%, up nearly 27 points YoY. Adjusted net margin was 29.7%, up 22 points YoY.
EPS Growth Expected to be Triple Digit in FY26
Credo has reported robust EPS growth driven by its margin strength, with fiscal 2025’s adjusted EPS of $0.70 increasing from just $0.08 in the prior year. Credo generated the bulk of this EPS in H2 as revenue and margins surged,
Adjusted EPS of $0.35 in Q4 beat estimates by 29.6%, representing growth of 400% YoY. Growth is forecast to accelerate to 782% in Q1 to $0.35 on a low comp, before slowing to 17% YoY by Q4 FY26 against a much tougher comp.
For FY26, Credo is expected to report nearly 111% YoY growth to $1.42 in adjusted EPS, driven by strong topline growth and a projected 14 point expansion in adjusted operating margin.
Free Cash Flow Margin of 32%, But Likely Will be Lower in FY26
Credo’s cash flow margins surged on strong collections, while its balance sheet remained robust with debt still at zero.
- Operating cash flow was $57.8 million in Q4, up more than $53 million QoQ on higher “cash collection driven by the significant sequential product ramp.” OCF margin was 34% in the quarter, compared to 3.1% last quarter and 6.8% a year ago. For FY25, operating cash flow was $65.1 million, for a margin of 14.9%. This decreased from a 17% margin in FY24 as cash flow growth of 99% YoY lagged revenue growth by 27 points.
- Free cash flow was $54.2 million in Q4, for a 31.9% margin. For FY25, free cash flow was $29 million, for a 6.6% margin, down from an 8.9% margin last year on higher capex. Credo mentioned that it expects capex to double YoY in FY26 on upcoming 3nm product tape-outs, which may pressure FCF through the year.
- Cash and equivalents totaled $431.3 million, while debt remained zero.
- Inventories were $90.0 million, up more than 69% QoQ and up 148% in two quarters. This implies Credo is preparing for its new products and new hyperscalers to ramp and hypergrowth to continue.
Tariff Impacts Downplayed
Importantly, despite its China exposure, management downplayed tariff impacts. China specifically accounted for 18.2% of revenue through Q3, but when including Hong Kong, China-related exposure is 75.4%, due to Hong Kong revenue nearly tripling YoY through Q3 to $152.7 million. Credo noted that geographic revenue represents shipment destination or location of contracting entity, which could be different from customers’ principal offices.
In the Q4 call, Needham’s Quinn Bolton pointed out that Credo’s AEC manufacturing partners BizLink and FoxLink are both located in China, questioning management about how tariffs could impact margins.
CFO Dan Fleming said Credo does not expect a “significant tariff risk” to gross margins and it is not the cause of Q1’s sequential guide down. CEO Bill Brennan was more vague on tariffs, saying Credo was “monitoring the situation closely and we're working very closely with our customers, and ultimately, we're trying to be as flexible as we can,” and in the worst case, Credo “could be out of one geographic location and into another” within months.
The more important question for Credo here is if it can accelerate and maintain strong revenue growth while potentially onshoring manufacturing over the next few years to mitigate future tariff risks.
Conclusion
It’s hard to nitpick much in Credo’s Q4 report aside from China revenue, which likely remained elevated given the geographic mix as of Q3. Management highlighted two additional hyperscalers ramping in mid and late-FY26, providing tailwinds to growth as these new projects ramp.
Analysts are only projecting 3% to 4% sequential growth through FY26, which seems low given that Credo guided for double-digit sequential growth in Q1 while highlighting those new customers ramping and more opportunities in optics as FY26 progresses.
The I/O Fund owns AI networking stocks that are linked to Nvidia and custom silicon projects such as Amazon’s $100B capex including Trainium. We share our portfolio with Pro and Advanced Members. Advanced Members also receive real-time trade alerts, entries, exits and trade plans in our weekly webinars. Take advantage of a limited-time offer for $75 off Pro or $100 off Advanced. Email us to upgrade
Damien Robbins, Equity Analyst for the I/O Fund, 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.
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