Credo Technology Group Holding Ltd. (CRDO) had a rough Wednesday morning, even after delivering a fiscal first-quarter earnings report that beat expectations on both the top and bottom lines. The culprit? Shrinking margins, rising costs, and the fact that the stock had already run up a lot this year.
Shares were down 8% in premarket trading to $190.10, according to market data. That pullback comes after a 43.6% gain through Tuesday's close, which likely left the stock vulnerable to profit-taking.
So what happened? After Tuesday's closing bell, Credo reported fiscal 2027 first-quarter revenue of $479 million, beating the analyst estimate of $471.77 million. Adjusted earnings came in at $1.20 per share, topping the $1.17 consensus. Revenue rose 10% from the prior quarter and a whopping 115% from a year earlier, exceeding the high end of the company's guidance. It also marked the seventh straight quarter of triple-digit annual growth.
But here's where the story gets a bit more complicated.
Margins Narrow As Costs Surge
GAAP gross margin fell to 64.5% from 68.2% in the prior quarter and was down from 67.4% a year earlier. That's a notable dip, and investors tend to watch margins closely, especially for a company growing as fast as Credo.
GAAP operating income rose to $120.7 million from $60.7 million a year ago, but it declined from $155.8 million in the previous quarter. The GAAP operating margin narrowed to 25.2%, compared with 35.7% in the prior quarter and 27.2% a year earlier.
What's driving the squeeze? GAAP operating expenses more than doubled to $188.4 million from $89.6 million. Research and development spending climbed to $114.5 million from $52.4 million, while selling, general and administrative expenses rose to $73.9 million from $37.2 million. That's a lot of investment, and it's eating into profitability.
Credo Profit More Than Doubles
Despite the margin pressure, the bottom line still looked strong. Net income increased to $129.4 million, or 67 cents per share, compared with $63.4 million, or 34 cents per share, a year earlier. Adjusted net income surged 140% to $236.3 million. Adjusted operating income rose to $230.6 million from $96.2 million, and the adjusted operating margin reached 48.2%.
Cash flow was also solid. Operating cash flow totaled $90.2 million, while free cash flow reached $82.9 million. Credo ended the quarter with $764.3 million in cash, cash equivalents and short-term investments.
AI Demand Drives Connectivity Growth
So why is Credo spending so much? The company says rising AI infrastructure investment continues to fuel demand. Larger computing clusters, faster data rates and more complex networks are creating opportunities across its optical and copper products.
The active electrical cable business remains Credo's largest segment. Growth came from deeper ties with five hyperscalers, rising demand from neo-cloud companies and the shift toward 200-gig-per-lane and 1.6-terabit ports.
Optical digital signal processor (DSP) revenue hit a first-quarter record. Credo expects its first 1.6-terabit DSP revenue later in fiscal 2027. The company also secured two major design wins for next-generation products, which should ramp in fiscal 2028, though some activity could begin late in fiscal 2027.
Following its DustPhotonics acquisition, Credo recorded its first silicon photonics photonic integrated circuit (PIC) revenue. The company expects its 800-gigabit and 1.6-terabit transceiver products to ramp. Near-package optics design wins should begin ramping in fiscal 2028, while Zero Flap Optics has started production shipments. Credo plans additional 800-gigabit and 1.6-terabit ramps during fiscal 2027.
The retimer business also posted record first-quarter revenue. Screaming Eagle led demand at 100 gigabits per lane, while Blue Heron began contributing at 200 gigabits per lane.
Credo Issues Strong Outlook
Looking ahead, Credo expects second-quarter revenue of $525 million to $535 million, topping the $515.79 million analyst estimate. The company projected an adjusted gross margin of 67% to 69% and expects its full-year adjusted gross margin to remain broadly in line with fiscal 2026.
Credo expects ZeroFlap Optics, silicon photonics PICs and optical DSPs to each contribute more than $100 million in fiscal 2027. Together, those businesses should generate more than $600 million in fiscal 2027 optical revenue. The company also expects fiscal 2027 total revenue growth of more than 85%.
Beyond that, Credo's Omni Connect SerDes and Weaver gearbox products target rising memory bandwidth and capacity needs, especially in AI inference systems. Credo sees potential content worth thousands of dollars per GPU, with revenue expected from fiscal 2028.
So, the long-term story seems intact. But for now, investors are focused on the near-term margin squeeze and the fact that the stock had already priced in a lot of good news. Sometimes, even a great report isn't enough to keep a hot stock from cooling off.
