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What's Behind Credo's Strong Margins and Profitability Gains?
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Key Takeaways
Credo Technology reports record Q3 FY26 revenue of $407M, up 52% sequentially and over 3x year over year.
CRDO margins surged, with gross margin at 68.6% and operating margin expanding to 49.6% on a strong mix.
Credo sees over 50% FY27 growth, driven by AI demand, ZF optics ramp and hyperscaler expansion.
Credo Technology Group Holding Ltd (CRDO - Free Report) reported strong third-quarter fiscal 2026 margins and profitability gains driven by several factors. The company attributes its performance to the continued build-out of large-scale AI clusters, where increasing system complexity has made reliability, power efficiency, latency and total cost of ownership critical. Its purpose-built SerDes technology, vertically integrated system-level model and advanced telemetry capabilities have enabled deep strategic partnerships and differentiated solutions. Strong demand for its active electrical cables (AECs), which provide significantly higher reliability and lower power consumption compared to optical alternatives, has also supported growth.
Additionally, expanding customer diversification, with multiple hyperscalers contributing more than 10% of revenue, has strengthened visibility. Growth across its IC portfolio, including retimers and optical DSPs, along with continued progress in new product pillars, such as ZeroFlap optics, ALCs and OmniConnect gearboxes, further reinforces long-term margin expansion.
For the third quarter of fiscal 2026, the company delivered record financial performance, with revenue reaching $407 million, up 52% sequentially and more than tripling year over year. Non-GAAP gross margin was 68.6%, exceeding the high end of guidance and reflecting favorable product mix and operational execution. Non-GAAP operating income rose significantly to $201.8 million, driven by strong top-line growth, while operating expenses increased at a slower pace (up 35% sequentially), resulting in operating margin expansion to 49.6%, a 327-basis-point sequential increase. Non-GAAP net income reached approximately $208.8 million, rising 63% sequentially and nearly quadrupling year over year, with net margin at 51.3%. Management highlighted that this strong profitability was primarily driven by substantial revenue growth across hyperscale customers, combined with disciplined scaling of operating expenses and continued gross margin strength.
The long-term non-GAAP gross margin framework remains 63-65%, with recent quarters running at or above the top end, with the fiscal fourth quarter guided to 64-66%. The combination of resilient margins, disciplined OpEx scaling and strong liquidity supports continued operating leverage as fiscal 2027 sequential growth compounds off a much larger revenue base.
For fiscal 2027, management expects mid-single-digit sequential growth through the year, resulting in more than 50% year-over-year growth. Management expects a considerable production ramp of ZF optics beginning in the first quarter of fiscal 2027. Credo’s PCIe retimer program remains on track for design wins in fiscal 2026 and revenue contributions in the next fiscal year.
Taking a Look at Competitors’ Margin
Marvell Technology’s (MRVL - Free Report) fourth-quarter fiscal 2026 performance underscores its accelerating momentum in AI-driven growth. The company posted record revenues of $2.22 billion, up 22% year over year and 7% sequentially, with its data center segment soaring 21% year over year. Non-GAAP EPS surged 33% year over year to 80 cents, reflecting significant operating leverage as non-GAAP operating margin expanded 200 basis points to 35.7%. This performance highlights Marvell’s ability to convert AI and cloud demand into robust financial results, positioning the company to gain share in a rapidly expanding $94 billion total addressable market by 2028. Management guided first-quarter fiscal 2027 revenues of $2.4 billion plus or minus 5%. The non-GAAP gross margin is projected to be in the 58.25-59.25% range.
Broadcom Inc. (AVGO - Free Report) faces significant competition in most of its operating markets that negatively impacts top-line growth. Pricing pressure also keeps margin under pressure. For first-quarter fiscal 2026, non-GAAP gross margin was 77%, down 210 basis points year over year. For the second quarter of fiscal 2026, Broadcom expects revenues of $22 billion, indicating 47% year-over-year growth. AI revenues are expected to surge 140% year over year, driven by strong demand for custom AI accelerators. AI networking is expected to accelerate in the second quarter of fiscal 2026 and grow to 40% of total AI revenues. Non-AI revenues are expected to increase 4% year over year. Gross margin is expected to be flat sequentially at 77%.
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What's Behind Credo's Strong Margins and Profitability Gains?
Key Takeaways
Credo Technology Group Holding Ltd (CRDO - Free Report) reported strong third-quarter fiscal 2026 margins and profitability gains driven by several factors. The company attributes its performance to the continued build-out of large-scale AI clusters, where increasing system complexity has made reliability, power efficiency, latency and total cost of ownership critical. Its purpose-built SerDes technology, vertically integrated system-level model and advanced telemetry capabilities have enabled deep strategic partnerships and differentiated solutions. Strong demand for its active electrical cables (AECs), which provide significantly higher reliability and lower power consumption compared to optical alternatives, has also supported growth.
Additionally, expanding customer diversification, with multiple hyperscalers contributing more than 10% of revenue, has strengthened visibility. Growth across its IC portfolio, including retimers and optical DSPs, along with continued progress in new product pillars, such as ZeroFlap optics, ALCs and OmniConnect gearboxes, further reinforces long-term margin expansion.
For the third quarter of fiscal 2026, the company delivered record financial performance, with revenue reaching $407 million, up 52% sequentially and more than tripling year over year. Non-GAAP gross margin was 68.6%, exceeding the high end of guidance and reflecting favorable product mix and operational execution. Non-GAAP operating income rose significantly to $201.8 million, driven by strong top-line growth, while operating expenses increased at a slower pace (up 35% sequentially), resulting in operating margin expansion to 49.6%, a 327-basis-point sequential increase. Non-GAAP net income reached approximately $208.8 million, rising 63% sequentially and nearly quadrupling year over year, with net margin at 51.3%. Management highlighted that this strong profitability was primarily driven by substantial revenue growth across hyperscale customers, combined with disciplined scaling of operating expenses and continued gross margin strength.
The long-term non-GAAP gross margin framework remains 63-65%, with recent quarters running at or above the top end, with the fiscal fourth quarter guided to 64-66%. The combination of resilient margins, disciplined OpEx scaling and strong liquidity supports continued operating leverage as fiscal 2027 sequential growth compounds off a much larger revenue base.
For fiscal 2027, management expects mid-single-digit sequential growth through the year, resulting in more than 50% year-over-year growth. Management expects a considerable production ramp of ZF optics beginning in the first quarter of fiscal 2027. Credo’s PCIe retimer program remains on track for design wins in fiscal 2026 and revenue contributions in the next fiscal year.
Taking a Look at Competitors’ Margin
Marvell Technology’s (MRVL - Free Report) fourth-quarter fiscal 2026 performance underscores its accelerating momentum in AI-driven growth. The company posted record revenues of $2.22 billion, up 22% year over year and 7% sequentially, with its data center segment soaring 21% year over year. Non-GAAP EPS surged 33% year over year to 80 cents, reflecting significant operating leverage as non-GAAP operating margin expanded 200 basis points to 35.7%. This performance highlights Marvell’s ability to convert AI and cloud demand into robust financial results, positioning the company to gain share in a rapidly expanding $94 billion total addressable market by 2028. Management guided first-quarter fiscal 2027 revenues of $2.4 billion plus or minus 5%. The non-GAAP gross margin is projected to be in the 58.25-59.25% range.
Broadcom Inc. (AVGO - Free Report) faces significant competition in most of its operating markets that negatively impacts top-line growth. Pricing pressure also keeps margin under pressure. For first-quarter fiscal 2026, non-GAAP gross margin was 77%, down 210 basis points year over year. For the second quarter of fiscal 2026, Broadcom expects revenues of $22 billion, indicating 47% year-over-year growth. AI revenues are expected to surge 140% year over year, driven by strong demand for custom AI accelerators. AI networking is expected to accelerate in the second quarter of fiscal 2026 and grow to 40% of total AI revenues. Non-AI revenues are expected to increase 4% year over year. Gross margin is expected to be flat sequentially at 77%.
CRDO Price Performance, Valuation and Estimates
Shares have gained 184% in the past year compared with the Electronics-Semiconductors industry’s growth of 102.7%.
Image Source: Zacks Investment Research
Regarding the forward 12-month Price/Sales ratio, CRDO is trading at 9.48, higher than the Electronic-Semiconductors sector’s multiple of 7.14.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for CRDO earnings for fiscal 2026 has been revised up over the past 60 days.
Image Source: Zacks Investment Research
CRDO currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.