Earnings Call Highlights: Credo (CRDO) | FY26 Q2

Summary

Credo hit another all-time high amid the AI cluster super-expansion wave.

Q2 FY26 revenue of $268M (+272% YoY, +20% QoQ) and net income of $127.8M at a 47.7% net margin beat expectations across the board.

The company announced three new growth engines:

Zero-flap Optics, Active LED Cable and OmniConnect Gearbox (a memory interconnect chip),

expanding its total addressable market (TAM) to more than $10B.

Q3 revenue guidance of $335–345M (+27% QoQ at the midpoint) marks a steady entry into a multi-line growth cycle.

Financials (Non-GAAP)

• Revenue: $268M (QoQ +20%; YoY +272%)

• Gross margin: 67.7% (above the top of the guided range)

• Operating expenses (Opex): $57.3M (QoQ +5%)

• Operating income: $124.1M (46.3% operating margin; QoQ +319 bps)

• Net income: $127.8M (47.7% net margin; QoQ +30%)

• Free cash flow: $38.5M (operating cash flow $61.7M, CapEx $23.2M)

• Cash and equivalents: $813.6M (QoQ +$333.9M, mainly from the ATM offering)

• Inventory: $150.2M (QoQ +$33.5M)

Outlook (Q3 / FY26)

• Revenue: $335–345M (QoQ +27% at the midpoint)

• Gross margin: 64–66%

• Opex: $68–72M

• Shares outstanding: 194M

• Full-year outlook: FY26 revenue +170% YoY, net margin around 45%

Product Updates

1. AEC (Active Electrical Cable)

• The main growth engine: four hyperscalers each contribute more than 10% of revenue, and a fifth has begun shipments.

• Use cases: expanding from inter-rack to rack-to-rack (within 7m) connections.

• Up to 1000× the reliability of optical modules at half the power, making it a "de facto standard" for AI clusters.

• 25G/50G/100G per lane in volume production; 200G per lane expected to ramp from FY27.

• Architecture-neutral: supports Ethernet / PCIe / UALink / NVLink.

• Main supplier BizLink has stable capacity today, but the company noted that the advanced-node wafer supply chain will start to tighten in 2026.

2. IC Solutions (Retimer / Optical DSP)

• Optical DSP:

  • Driven by 50G/100G per lane; the 200G Bluebird demo drew strong market feedback.

  • Complementary to the AEC architecture, targeting the 800G–1.6T market.

• Ethernet Retimer: integrates MACsec and gearbox functions, supporting AI servers and switch fabrics.

• PCIe Retimer:

  • Design-ins in FY26, volume production from FY27.

  • Offers a best-in-class reach × latency × power combination.

3. Zero-flap Optics (ZF Optics)

• Aims to deliver optical modules with "AEC-class stability".

• Integrates with customers' network software, using link telemetry + automatic recovery to proactively prevent link flaps.

• Already in live trials with a US hyperscaler; a second is expected to receive samples in 2H FY26.

• Application range: extends across all data center distances (1m–1km).

• Expected to contribute revenue from FY27.

4. Active LED Cable (ALC)

• An active optical cable technology using Micro-LED as the light source.

• Power on par with AEC, but with a thinner cable and reach up to 30m, suited to row-scale connections.

• Acquired Hyperloom (Canada) to strengthen R&D;

  • Pilot production in FY27, volume ramp in FY28.

  • TAM expected to be more than twice that of AEC.

• The company sees it as the next-generation extension of AEC, with full control from design to packaging.

5. OmniConnect Gearbox (memory interconnect chip)

• The first-generation product, Weaver, has been jointly announced with a lead customer.

• Built on 112G VSR CertiS, it breaks the memory-to-compute bottleneck.

• By replacing HBM with DDR, it can deliver 30× the capacity and 8× the bandwidth.

• The first customer's XPU will support 2TB of memory capacity for AI video generation and autonomous-driving inference.

• Expected to contribute revenue from FY28, targeting a multi-billion-dollar market long term.

Looking Ahead

• Five growth pillars: AEC, ICs (DSP/Retimer), ZF Optics, ALC and OmniConnect Gearbox.

• TAM above $10B (three times what it was 18 months ago).

• Near term: AEC and DSP continue to ramp;

  Mid term: ZF Optics / PCIe / OmniConnect enter qualification;

  Long term: ALC / scale-up optics create new growth curves.

• Protocol & medium agnostic: mixes copper and fiber solutions depending on the application.

• R&D investment keeps rising: FY26 Opex +50% YoY, mainly from engineering headcount and new product development.

Q&A Highlights

• AEC vs. ALC TAM: ALC will offer comparable power and reliability, a thinner cable and longer reach,

  and the number of links could be 10× today's scale-out.

• Customer mix:

  • In Q2, the four major hyperscalers accounted for 42%, 24%, 16% and 11% respectively;

  • the fifth has started shipping and is expected to reach 10% in FY27.

• Supply chain:

  • BizLink is the main AEC assembly partner;

  • wafer-level capacity will be a shared challenge across the industry.

• CertiS architecture:

  • 112G VSR can integrate 1,200 SerDes (120Tb/s) on a single reticle, with reach up to 10 inches.

  • It is the core of OmniConnect and future near-package optics.

• View on CPO:

  • Reliability and serviceability remain bottlenecks; Credo does not expect large-scale adoption in the near term.

  • AEC/ALC/ZF Optics run on a timeline parallel to CPO but are more practical.

• Gross margin outlook:

  • Long-term range of 63–65%.

  • Overall margins stay high as optical system products grow as a share of the mix.

• IP licensing and competitive strategy:

  • Has begun licensing AEC IP to third parties to expand the market while protecting its patents.

  • Emphasizes "leading on speed and quality" as its core competitive advantage.

Risks and Watch Points

• High customer concentration (top four account for about 93%).

• Process and capacity risk: 12nm is the mainstream node; tight supply at advanced nodes (<7nm) could raise costs.

• Product cadence challenge: ZF Optics, ALC and OmniConnect timelines span FY27–FY28 and require sustained execution.

• Pricing / margin pressure: top-tier customers have strong bargaining power.

• Regulatory and geopolitical risk: tariff changes and uncertainty over US-China tech export policy.

Bottom Line

Credo is evolving from an "AEC one-hit wonder" into a connectivity powerhouse advancing on five platforms.

AEC remains the main cash-flow engine, while DSP/Retimer builds technical depth,

and Zero-flap Optics, Active LED Cable and OmniConnect open long-term blue oceans in optical and memory interconnect.

As AI clusters move toward "million-GPU scale,"

Credo has built a solid moat on reliability + energy efficiency + a protocol-neutral architecture,

driven in the mid term by Zero-flap Optics × ALC,

and in the long term by OmniConnect Gearbox, expanding into new frontiers in XPUs and memory.