Credo Technology Group Holding Ltd (NASDAQ:CRDO) Q2 2023 Earnings Call Transcript

Bill Brennan: I think there’s really two catalysts to cause people to think about the AEC solution. One catalyst that we’ve seen first is added functionality, and that’s a real differentiation and that’s why you’ve seen our first customer ramp with 25 big lanes, which clearly if you were doing something special, you could get the job done with DACs. Our second customer is a combination of functionality as well as speed. And so as the world goes to 50 gig lanes for a large number of customers that we’re talking to, they don’t want to fight the signal integrity and form factor challenges of staying with the DAC. And so speed is the other catalyst. And so where we see the 50 gig per lane market being, kind of, a crossover generation where some will battle the deployment with that.

Others becomes a very — almost a default decision at this point. Because they see a solution that’s half the power, half the cost, way more reliable, way more rugged than in AOC, and so for short in-rack connections, we don’t really see a big decision making that has to occur. If they’re not going to fight the challenges of DACs, they’re going to use AECs and we’ve seen it across the board. As we progress towards 100 gig, which is — it’s just a function of time. For sure, there is no DACs and now it becomes just a question about AECs versus AECs, and I think we’ve established that, that game is over. People will choose AECs just because of the huge CapEx and OpEx advantage, right? If you look at the total cost of ownership, it hands down a better idea.

And with the fact that you throw the fact that the installers aren’t going to break the cables routing a huge number of them in a very tight space. So it’s a much more rugged design.

Vivek Arya: Got it. And for my follow-up, maybe once you’ve done in your Q2, it seems like IP sales were $5 million to $7 million, kind of, below expectations, but you’re more than made up for it, because of the upside on the product side. I’m curious what is the expectation for this IP in Q3? And do you expect to make up for that $5 million to $7 million shortfalls that you had in Q2, because I think you mentioned something about a shift. So is the Q3 just that the missing part of the IP revenue from Q2 that comes into Q3? Or just how should we look at Q3 and what happened to that missing IP revenue from Q2? Thank you.

Bill Brennan: Yes, thanks. So the important thing to note here is that there is no change in our expectation for IP revenue for the full-year. So in other words, our revenue mix for fiscal year ’23 is exactly what we have expected it to be for the year plus that we’ve been talking. And also bear in mind that for the full-year, we expect IP revenue to be above our long-term target, which is 10% to 15% of the overall revenue mix. But we’ve talked a lot about historically about the quarter-to-quarter variability in revenue when it comes to IP. And this is largely driven by ASC 606 and the way the revenue recognition rules work around license revenue where we recognize the lion’s share of the contract value on most of our contracts at the point of delivery of that IP database.

So the last two quarters, Q4 of fiscal ’22 and Q1 of fiscal ’23 we happen to be on the higher end of revenue contribution from IP, but that of course swings both ways. One of the things that we track critically from a gross margin perspective of course is our product gross margin and that has continued to expand as we’ve increased our product shipment volumes. In fact, it was up 80 basis points the product gross margin. So we’re quite pleased with our margins for the quarter and we’re exactly where we expect to be for the full-year. Hopefully, that helps.

Vivek Arya: Thank you, Bill.

Operator: And our next question comes from the line of Richard Shannon with Craig-Hallum.

Richard Shannon: Hi, guys. Thanks for taking my questions. Dan, I guess, I want to follow-up on the topic of product gross margins. If I’m running my numbers right here and if I exclude the product NRE from the calculation, it looks like our product margins were actually down very slightly. Am I calculating this right? And if so, can you help us understand the dynamics that took that down slightly?

Dan Fleming: Yes. I wouldn’t read too much into that. We look at product gross margin a little bit more holistically. And if you look at the elements that come into the other cost of goods sold bucket, that similar to our IP revenue can vary quite a bit quarter-over-quarter. So the way our view is that from an overall product gross margin perspective as our volume continues to increase at this stage, where we are as a company, we should have that a slight uptick in our product gross margin. But you’re right, that excluding NRE in this particular quarter, it did tick down a little bit if you just look at the product margin.

Richard Shannon: Okay. And then as we go forward especially if I think most people are assuming that your AEC mix is going to increase here, we should expect those product gross margins excluding NRE again to grow if very slightly, is that fair?