The Offering

Company Overview

Credo Technology Group is a pioneer in providing secure, high-speed connectivity solutions, enhancing power and cost efficiency as data rates and associated bandwidth requirements rise rapidly across the data infrastructure sector. The company's technologies alleviate bandwidth bottlenecks besides augmenting power, security, and credibility. Its connectivity solutions are designed for optical and electrical Ethernet applications, including the emerging 100G (Gigabits per second), 200G, 400G, and 800G port markets.

Source: IPO Prospectus

Key Highlights

Uses of Fund:  The company plans to use the net proceeds from this offering for working capital and other general corporate purposes. The company may also use a portion of the net proceeds for acquisitions or strategic transactions.

Dividend Policy: The company has never declared or paid cash dividends on its common stock. Furthermore, it does not intend to declare or pay cash dividends on its shares shortly. The company's current strategy is to keep all available money and any future earnings to support operations and finance the expansion of its core business.

Extensive Innovative Solutions Supplier: Credo’s solutions portfolio includes HiWire AECs, Optical DSPs, Line Card PHYs, SerDes Chiplets for Multi-Chip Module (MCM) package integration and SerDes IP licensing. These products and innovative technologies enable customers with numerous bandwidths, power, cost, security, reliability, and end-to-end signal integrity requirements.

Industry Tailwinds: The rapid growth in data and related data traffic across the network is creating bandwidth barriers and bottlenecks, creating the need for solutions that can enable faster connectivity speeds. Credo is in the early stage of penetrating an ample opportunity and is also set to benefit from strong secular tailwinds in the data infrastructure market.

Strong Competitive Strengths: The company's key competitive strengths include a strong SerDes Intellectual Property (IP) portfolio, proven demand from Tier 1 customers - engaged with five of the top seven hyperscalers, and customer base includes more than 20 blue-chip clients, best-in-class technology, a culture of continuous innovation, an innovative team, and an experienced leadership team.

Strategic Growth Strategy: To support its mission of providing secure, high-speed connectivity solutions, the company intends to focus on the following strategic areas: extending its leadership in SerDes technologies, expanding its portfolio of products and IP solutions, attracting and acquiring new customers, and extending and deepening relationships with existing clients.

Financial Highlights (Figures are in US Dollar)

Source: IPO prospectus

• During the FY20 and FY21 (ended April 30, 2021), the company generated $53.8 million and $58.7 million in total revenues. During H1FY20 and H1FY21 (ended October 31, 2021), Credo reported $25.5 million and $37.2 million in total revenues.
• Product sales and product engineering services revenue accounted for 31.44% and 63.13% of total revenues in FY20 and FY21, respectively, while IP license and IP license engineering services revenue accounted for 68.56% and 36.87% of total revenues in FY20 and FY21, respectively.
• During H1FY20 (ended October 31, 2020) and H1FY21(ended October 31, 2021), product sales and product engineering services revenue accounted for 58.42% and 76.42% of total revenue, respectively, while IP license and IP license engineering services revenue accounted for 41.58% and 23.58% of the total revenues.
• The company's gross margin declined from 85.64% in FY20 to 65.21% in FY21. Its gross margin for the six months ended October 31, 2021, was 56.88%, down from 66.07% for the six months ended October 31, 2020.
• Credo has a weak bottom line, with a loss of $27.5 million in FY21 compared to a net income of $1.3 million in FY20. Furthermore, it has a net loss of $16.67 million in H1FY21, compared to a loss of $19.3 million in H1FY20.
• As of April 30, 2021, and October 31, 2021, the company had $103.8 million and $71.0 million in cash and cash equivalents, respectively, and working capital of $125.3 million and $111.9 million, respectively. Most of the company's cash is used to fund operations and invest in research and development to support its growth.

Key Management Highlights

Source: IPO Prospectus

Risk Associated (High)

Investment in the IPO of "CRDO" is exposed to a variety of risks such as:

Higher dependency on limited customers: A considerable amount of the company's revenue is dependent on a small number of customers, and the loss of, or significant drop in sales to, one or more of its considerable customers could have a detrimental impact on the company's topline and operating results.

Short term purchase agreements: Credo does not have long-term purchasing commitments from its clients, and if they cancel or amend their purchase orders, the company's operating results may suffer.

Intense competition: The company faces tough competition and anticipates that competition will rise in the future. If it fails to compete effectively, it could adversely impact its business and operating results.

Conclusion

The company is an innovator in offering secure, high-speed connectivity solutions that assist its customers in improving power and cost efficiency as data rates and corresponding bandwidth requirements expand exponentially throughout the data infrastructure market. Furthermore, the company could profit from the data infrastructure market's secular solid tailwinds. Similarly, Credo believes that it has a significant opportunity to increase its client base and intends to accelerate new customer acquisition throughout the geographies it serves and enter new market segments by scaling its sales and marketing capabilities.

However, the company has a history of net losses and has an accumulated deficit, and it may also incur net losses in the future. Further, Credo's future success will largely depend on its ability to execute its strategies successfully.

Therefore, based on the above rationales, we have assigned the IPO of Credo Technology Group Holding Ltd with a “Neutral” rating, which implies that the attractiveness of this IPO appears to be low given the associated risks and the current market scenario and this might be suitable for investors with a high-risk appetite [basis further evaluation]. 

*Please note that an IPO can be postponed or put on Hold at the discretion of the company or regulatory authority.