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Item 7. Management’s Discussion and Analysis

2024-06-24 compared with 2023-06-23 · 84 added, 184 removed, 199 unchanged (57% of the section changed)

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A discussion regarding our results of operations for the fiscal year ended April 29, 2023 compared to the fiscal year ended April 30, 2022 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended April 29, 2023, filed with the SEC on June 23, 2023.

Credo is an innovator in providing secure, high-speed connectivity solutions that deliver improved power and cost efficiency as data rates and corresponding bandwidth requirements increase exponentially throughout the data infrastructure market.

Credo provides innovative, secure, high-speed and power-efficient connectivity solutions.

Our solutions target the data infrastructure market, where bandwidth requirements are increasing exponentially, driven by the accelerating deployment of leading edge Artificial Intelligence infrastructure and applications.

Our connectivity solutions are optimized for optical and electrical Ethernet applications, including the 100G (or Gigabits per second), 200G, 400G, 800G and emerging 1.6T (or Terabits per second) markets.

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Data generation has increased dramatically over the past ten years, creating new and complicated challenges in both circuit and system design.

Our proprietary SerDes and DSP technologies enable us to achieve similar performance to leading competitors’ products but in a lower cost, more highly available legacy node (n-1 advantage).

Beyond power and performance, Credo continues to innovate to solve customers’ system level requirements.

We partner with Microsoft on our HiWire Switch AEC and open-source implementation that helps realize Microsoft’s vision for a highly reliable network-managed dual-Top-of-Rack (ToR) architecture (a network architecture design in which computing equipment located within the same or an adjacent rack are, for redundancy, connected to two in-rack network switches, which are, in turn, connected to aggregation switches via fiber optic cables), overcoming complex and slow legacy enterprise approaches, simplifying deployment and improving connection reliability in the data center.

The multibillion-dollar data infrastructure market that we serve is driven largely by hyperscale data centers (hyperscalers), as well as general compute, Artificial Intelligence and Machine Learning (AI/ML) infrastructure, multi-service operators (MSOs), and mobile network operators (MNOs).

Our proprietary SerDes and DSP technologies enable us to achieve similar performance to leading competitors’ products but at a lower cost and more highly available legacy node (n-1 advantage).

Beyond power and performance, Credo continues to innovate to address customers’ system level requirements.

We partner with Microsoft on our HiWire Switch AEC and open-source implementation that helps realize Microsoft’s vision for a highly reliable network-managed dual-Top-of-Rack (ToR) architecture (a network architecture design in which computing equipment located within the same or an adjacent rack are, for redundancy, connected to two in-rack network switches, which are, in turn, connected to aggregation switches via fiber optic cables), overcome complex and slow legacy enterprise approaches, simplify deployment and improve connection reliability in the data center.

The multibillion-dollar data infrastructure market that we serve is driven largely by hyperscale data centers (hyperscalers), as well as general compute, AI/ML infrastructure, multi-service operators (MSOs), and mobile network operators (MNOs).

The demands for increased bandwidth, improved power and cost efficiency and heightened security have simultaneously and dramatically expanded as work, education and entertainment have rapidly digitized across myriad endpoint users.

Since our founding in 2008, we have achieved several significant milestones:

• From 2008 to 2012, we developed our proprietary, low-power, mixed-signal SerDes architecture which could scale from 25Gbps/lane to 50Gbps/lane and ultimately to 100Gbps/lane.

• In 2013, we began commercializing our core SerDes technology by providing connectivity solutions for the electrical and optical links in data centers.

• In 2014, we signed our first product contract with Non-Recurring Engineering (NRE) services as well as our first IP licensing contract.

• In 2016, we commenced production shipments of our Line Card PHY products.

• In 2017, we developed a 3.2Tbps chiplet for high bandwidth 12.8Tbps switches.

This chiplet included 64 lanes of 50Gbps SerDes and was built in 28nm using Chip-on-Wafer-on-Substrate (CoWoS) packaging technology from TSMC.

• In 2018, we created AECs, a new category of datacenter system products, beginning with developing 400G DDC solutions up to seven meters in length.

• In 2019, we developed new DSP SerDes architectures optimizing the performance and power trade-offs for 400G and 800G solutions targeting Line Card PHYs, Optical PAM4 DSPs, and AECs.

• In 2020, we demonstrated the industry’s first 40Gbs PAM3 SerDes in silicon.

In addition, we engineered breakthrough Line Card PHYs and Optical PAM4 DSPs with leading performance and power for 50G/lane and 100G/lane solutions.

• In 2021, we launched new AEC solutions targeting ToR-to-NIC connections.

Our solutions enabled dual-ToR server racks to seamlessly “switch” data traffic to the redundant ToR if a ToR port failed.

• In 2022, we released our 112G/lane AEC products including 400G, 800G and 1.6T varieties and expanded our AEC engagement to a second major hyperscaler, who awarded us with its next generation NIC-TOR AEC program and completed qualification.

• In 2023, we expanded our AEC engagements to include all seven of the leading hyperscalers in the world, with additional program awards and qualifications.

We design, market and sell both product and IP solutions.

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We develop standard solutions we can sell broadly to our end markets and also develop tailored solutions designed to address specific customer needs.

Once developed, these tailored solutions can generally be broadly leveraged across our portfolio and we are able to sell the part or license the IP into the broader market.

Once developed, these tailored solutions can generally be broadly leveraged across our portfolio and we are able to sell the part or license the IP to the broader market.

During fiscal 2024 and 2023, we generated $193.0 million and $184.2 million in total revenue, respectively.

Product sales and product engineering services revenue comprised 85% and 83% of our total revenue in fiscal 2024 and 2023, respectively, and IP license and IP license engineering services revenue represented 15% and 17% of our total revenue in fiscal 2024 and 2023, respectively.

Geographically, 31% and 36% of our total revenue in fiscal 2023 and 2022, respectively, was generated from customers in North America, and 69% and 64% of our total revenue in fiscal 2023 and 2022, respectively, was generated from customers in the rest of the world, primarily in Asia.

During fiscal 2023 and 2022, we generated $16.5 million and $22.2 million in net loss, respectively.

We derive the substantial majority of our revenue from a limited number of customers, and we anticipate we will continue to derive a significant portion of our revenue from a limited number of customers for the foreseeable future.

Geographically, 31% of our total revenue in both fiscal 2024 and 2023 was generated from customers in North America, and 69% of our total revenue in both fiscal 2024 and 2023 was generated from customers in the rest of the world, primarily in Asia.

During fiscal 2024 and 2023, we generated $28.4 million and $16.5 million of net loss, respectively.

We derive the substantial majority of our revenue from a limited number of customers.

We anticipate we will continue to derive a significant portion of our revenue from a limited number of customers for the foreseeable future.

We expect that as our products are more widely adopted and as our number of customers increase, customer concentration will decrease.

We sell our products to hyperscalers, original equipment manufacturers (OEMs), original design manufacturers (ODMs) and optical module manufacturers, as well as to companies in the enterprise and HPC markets.

We work closely and have engagements with industry-leading companies across these segments.

A relatively small number customers have historically accounted for and continue to account for a significant portion of our revenue.

We report revenue by customer in our financial statement disclosure based on the contracting parties who place purchase orders or sign revenue contracts with us.

See Note 3 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

However, certain of our end customers have their contract manufacturing partners place orders with us.

As a result, the contract manufacturers, rather than the end customers, are reported as our customers for financial reporting purposes.

As a supplement to our financial statement footnote disclosure, and to provide further insight into our end customer concentration, the following table summarizes our revenue by customer as a percentage of total revenue based on end customer profile, rather than based on the contracting parties who place purchase orders or sign revenue contracts with us:

April 27, 2024 April 29, 2023

Customer Z 26 % 55 %

Customer Y 20 % *

Customer B 15 % *

Customer C * 12 %

Customer E * 13 %

* Less than 10% of total revenue.

Our Business Model

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In addition to product sales and IP license revenue, we also generated revenue from providing engineering services as part of our product and license arrangements with certain customers.

Product sales and product engineering services revenue comprised 83% and 77% of our total revenue in fiscal 2023 and 2022, respectively, and IP license and IP license engineering services revenue represented 17% and 23% of our total revenue in fiscal 2023 and 2022, respectively.

Over time, we expect to generate an increased proportion of our revenue from sales of our products.

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This strategy has enabled us to become the preferred vendor to a number of our customers who, in turn, in some cases, require their suppliers, OEMs, ODMs and optical module manufacturers to utilize our solutions.

Revenue Mix and Associated Gross Margins

We are a product-focused business with a strong foundation in IP and, as such, our customers engage with us through the purchase of our products or the licensing of our IP.

In some instances, customers will engage us to develop tailored products or IP licenses to meet their specific application requirements.

We charge these customers incremental fees for this tailored development which are in addition to product sales or IP license revenue, and we recognize these additional fees as product engineering or IP license engineering services revenue.

By providing tailored engineering services to our customers, we believe we strengthen our customer relationships, enable additional sales and establish ourselves for potential long-term revenue opportunities from associated product sales or IP license revenue.

A summary of our revenue and associated gross margin by these revenue sources for fiscal 2023 and 2022 is presented below (in thousands, except percentages):

April 29, 2023 April 30, 2022

Product sales $ 141,475 $ 73,721

Product engineering services 10,780 7,741

Total product sales and product engineering services 152,255 81,462

IP license 29,444 23,309

IP license engineering services 2,495 1,706

Total IP license and IP license engineering services

31,939 25,015

Total revenue

$ 184,194 $ 106,477

Gross margin:

Product sales 46.9 % 45.6 %

Product engineering services 91.0 % 75.2 %

Total product sales and product engineering services 50.0 % 48.4 %

IP license 96.0 % 100.0 %

IP license engineering services 71.7 % 72.9 %

Total IP license and IP license engineering services

94.1 % 98.2 %

Total gross margin

57.7 % 60.1 %

Over time, we anticipate that our revenues from product sales and IP license will become a larger proportion of total revenue relative to engineering services.

We incur certain costs associated with introducing new products to market which impact the gross margin associated with product sales.

Over time, as revenue from our product sales increases, we expect these product introduction costs to decrease as a percentage of product sales revenue, resulting in a higher gross margin on product sales revenue.

Factors Affecting Our Performance

Our results of operations and financial condition have been, and will continue to be, affected by a number of factors including the following:

Design Wins With New and Existing Customers

Our solutions enable our end customers to differentiate their product offerings and position themselves to meet the demands of increasingly advanced networks.

We work closely with our end customers to understand their product roadmaps and strategies and help them develop new products.

Our goal is to develop solutions that support their product roadmap and development.

If an end customer has tested our product, verified that it meets their requirements and the customer has informed us that the end customer intends to have our customer build it into their product, we consider it a design win.

We consider design wins important to our future success.

The selection process is typically lengthy and may require us to incur significant design and development expenditures in pursuit of a design win with no assurance that our solutions will be selected.

In addition, some design wins result in significant revenue and some do not, and the timing of such revenue is difficult to predict as it depends on the success of the end customer’s product that uses our solutions.

Thus, some design wins result in orders and significant revenue shortly after the design win is awarded and other design wins do not result in significant orders and revenue for several months or longer after the initial design win (if at all).

As a result, the degree to which we are successful in achieving design wins and the speed and level at which end customers ramp

volume production of the products into which our product is designed will impact our success and financial results in future periods.

Customer Demand and Pipeline

Demand for our products is dependent on conditions in the markets in which our customers operate, which are subject to cyclicality and competitive conditions, among other factors.

We believe our relationships with the end customers of our products and the long-term implications of decisions to adopt our solutions provide us with valuable visibility into customer demand.

Furthermore, our customers generally provide us with periodic forecasts of their requirements.

This provides an opportunity for us to monitor and refine our business operations and plans.

The majority of our product sales are made pursuant to standard purchase orders.

Changes in customer forecasts or the timing of orders from customers expose us to the risks of inventory shortages or excess inventory as well as fluctuations in our results of operations.

For example, on February 14, 2023, we announced that our largest customer has reduced its demand forecast for certain Credo products for reasons we understand are unrelated to our performance.

Although we do not expect our market share with the customer will be affected, the customer’s reduced demand forecast will have a substantial negative impact on our revenue and results of operations for our fiscal year ending April 27, 2024.

Cancellations of orders could result in the loss of anticipated sales without allowing us sufficient time to reduce and manage our operating expenses.

Pricing and Product Gross Margins

Our revenue is also impacted by changes in the number and average selling prices of our products.

Our products are typically characterized by a life cycle that begins with higher average selling prices and lower volumes, followed by broader market adoption, which leads to higher volumes and average selling prices that are lower than initial levels.

Our product gross margins will be affected by the extent to which these declines are paired with improvements in manufacturing yields and lower wafer, assembly and test costs that offset some of the margin reduction that results from lower average selling prices as well as the extent to which we introduce new products with higher initial average selling prices that achieve market acceptance.

Our gross margins may also be affected by changes in the price of silicon wafers, copper cables, printed circuit boards (PCBs), testing costs and commodities, and the extent to which we are able to offset any increases in our costs through increases prices to our customers, productivity actions or other means.

Our product gross margins may also fluctuate from period to period as a result of changes in average selling prices due to new product introductions or existing product transitions into larger scale commercial volumes and manufacturing costs as well as our product and customer mix.

Product Adoption

We develop and sell leading-edge connectivity solutions for digital infrastructure which are intended to replace existing legacy solutions and support our customers’ future applications and needs.

Our success is dependent on customers adopting our new technology and preferring our solutions over competing offerings or other current or future technologies.

Technology Development

We operate in industries characterized by rapidly changing technologies, industry standards and technological obsolescence.

We work closely with our customers to understand their product roadmaps and strategies to forecast their future needs.

This helps inform our technology roadmap and development priorities.

We also monitor forecasts by industry analysts and the adoption curve of technology as well as potential competing forces which could hinder adoption of our solutions.

Our revenue growth is dependent on our ability to continually develop and introduce new products to meet the changing technology and performance requirements of our customers, diversify our revenue base and generate new revenue to replace, or build upon, the success of previously introduced products which may be rapidly maturing.

As a result, our revenue is impacted, to a more significant extent, by product life cycles for a variety of products and to a much lesser extent, if any, by any single product.

In order to remain competitive, we have made, and expect to continue to make, significant expenses in research and

development, and our research and development expenses in a particular period may be significantly impacted by specific product or engineering initiatives that we undertake to maintain our competitiveness and expand our product portfolio.

If we fail to anticipate or respond appropriately to new developments in technology, or to timely develop competitive new or enhanced products or technologies, our revenue could decrease and we could lose design wins to our competitors.

Industry Trends and Cyclicality

We continue to evaluate trends within the industry that affect our business performance.

We design and develop high-speed connectivity solutions that deliver improved power and cost efficiency for the data infrastructure market.

This market is driven by hyperscalers, HPC and 5G infrastructure.

Accordingly, our revenue and business performance are influenced by the deployment and timing of broader market adoption of next generation technologies in data centers, particularly by hyperscalers, and in the HPC and 5G markets.

The semiconductor industry is cyclical and is characterized by rapid technological change, evolving standards, product obsolescence, price erosion, and fluctuations in product supply and demand.

Any prolonged or significant downturn in our industry generally could adversely affect our business and reduce demand for our products and otherwise harm our financial condition and results of operations.

Macroeconomic Environment

Our industry is subject to uncertainty as a result of the recent macroeconomic environment, which has been characterized by rising interest rates and inflation, geopolitical instability, continuing risk from the COVID-19 pandemic and public health measures related to it, and supply chain uncertainty.

These factors are causing companies across the semiconductor industry to reduce spending and tighten inventory controls, which could negatively impact our business, financial condition, and results of operations.

We continue to monitor the impact of COVID-19 on our business.

The extent and nature of the impact of the COVID-19 pandemic on our business and financial performance will be influenced by a variety of factors, including the duration and spread of the pandemic, as well as future spikes of COVID-19 infections or the emergence of additional COVID-19 variants that may result in additional preventative and mitigative measures.

These factors may affect the timing and magnitude of demand from customers and the availability of portions of the supply chain, logistical services and component supply and may have a material net negative impact on our business and financial results.

Components of Our Operating Results

Our revenues consist of sale of our products, licensing of our IP and providing product engineering and IP license engineering services.

Our revenues consist of sale of our products, licensing of and providing engineering services related to our IP and providing product engineering services.

Product sales primarily consists of shipment of our ICs and AEC products.

IP license revenue includes fees from licensing of our SerDes IP and related support and royalties.

Product engineering and IP license engineering services revenue consists of engineering fees associated with integration of our technology solutions into our customers’ products and IP, respectively.

IP license revenue includes fees from licensing of our SerDes IP and related engineering and support fees and royalties.

Product engineering consists of engineering fees associated with integration of our technology solutions into our customers’ products.

Our customers are primarily OEMs who design and manufacture end market devices for the communications and enterprise networks markets.

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Where an arrangement includes multiple performance obligations, the transaction price is allocated to these on a relative standalone selling price (SSP) basis.

We determine the SSP based on an observable standalone

selling price when it is available, as well as other factors, including the price charged to customers and our overall pricing objectives, while maximizing observable inputs.

We determine the SSP based on an observable standalone selling price when it is available, as well as other factors, including the price charged to customers and our overall pricing objectives, while maximizing observable inputs.

When SSPs are not directly observable, we use the adjusted market assessment approach or residual approach, if applicable.

We also consider the constraint on estimates of variable consideration when estimating the total transaction price.

Our policy is to record revenue net of any applicable sales, use or excise taxes.

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We recognize deferred revenue when we have received consideration or an amount of consideration is due from the customer and we have a future obligation to transfer products or services.

Product Sales - We transact with customers primarily pursuant to standard purchase orders for delivery of products and generally allow customers to cancel or change purchase orders within limited notice periods prior to the scheduled shipment date.

Product Sales - We transact with customers primarily pursuant to standard purchase orders for delivery of products and generally allow customers to cancel or change purchase orders within limited

notice periods prior to the scheduled shipment date.

We offer standard performance warranties of twelve months after product delivery and offer limited product return rights to certain distributors.

We recognize product sales when we transfer control of promised goods in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods, net of accruals for estimated sales returns and rebates.

IP License Revenue - Our IP license revenue consists of perpetual licenses, support and maintenance and royalties.

Product Engineering Services Revenue - Some product revenue contracts include non-recurring engineering services deliverables.

We recognize revenue from these agreements over time as services are provided or at a point in time upon completion and acceptance by the customer of contract deliverables, depending on the terms of the arrangement.

Revenue is deferred for any amounts billed or received prior to delivery of services.

We believe the input method, based on time spent by our engineers, best depicts the efforts expended to transfer services to the customers.

IP License Revenue - Our IP license revenue consists of perpetual licenses, support and maintenance, engineering services and royalties.

We enter into perpetual semiconductor IP license agreements that have a fixed fee, whereby licensees pay a fixed fee for the right to incorporate our IP technologies into the licensee’s products.

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Revenue from customer support is deferred and recognized ratably over the support period, which is typically one year.

Some IP license revenue contracts also include non-recurring engineering services deliverables, which were not material for any of the periods presented.

We recognize revenue from these agreements similar to the method described under the caption “Product Engineering Services Revenue” above.

In certain cases, we also charge licensees royalties related to the distribution or sale of products that use our technologies.

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Any differences between actual royalties owed by a customer and the quarterly estimates are recognized when updated information becomes available.

Product Engineering and IP License Engineering Services Revenue - Some product and IP license revenue contracts includes non-recurring engineering services deliverables.

Revenue is deferred for any amounts billed or received prior to delivery of services.

We believe the input method, based on time spent by our engineers, best depicts the efforts expended to transfer services to the customers.

Certain contracts may include multiple performance obligations for which we allocate revenue to each performance obligation based on relative SSP.

We determine SSPs based on observable evidence.

When SSPs are not directly observable, we use the adjusted market assessment approach or residual approach, if applicable.

We also consider the constraint on estimates of variable consideration when estimating the total transaction price.

We record liabilities for amounts that are collected in advance of the satisfaction of performance obligations under deferred revenue.

Cost of Revenue

Cost of revenue includes cost of materials, such as wafers processed by third-party foundries, cost associated with packaging and assembly, testing and shipping, cost of personnel, including stock-based compensation, depreciation of equipment associated with manufacturing support, logistics and quality assurance, warranty cost, amortization of intellectual property purchased from third parties, write-down of inventories and amortization of production mask costs.

Costs of revenue includes cost of product sales revenue, cost of product engineering services revenue, cost of IP license revenue and cost of IP license engineering services revenue.

Cost of revenue includes cost of materials, such as wafers processed by third-party foundries, cost associated with packaging and assembly, testing and shipping, cost of personnel, including share-based compensation, depreciation of equipment associated with manufacturing support, logistics and quality assurance, warranty cost, amortization of intellectual property purchased from third parties, write-down of inventories and amortization of production mask costs.

Costs of revenue includes cost of product sales revenue, cost of product engineering services revenue and cost of IP license revenue.

Research and Development Expenses

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Selling expenses consist of personnel costs including salaries, benefits and share-based compensation expense, field application engineering support, samples to customers, shipping costs and travel and entertainment costs.

We expect selling expenses to increase in absolute dollars as we increase our sales and marketing personnel and continue to expand our customer engagement.

General and administrative expenses consist primarily of personnel costs including salaries, benefits, and share-based compensation, related to corporate, finance, legal and human resource functions, contractor and professional services fees, audit and compliance expenses, insurance costs, and general corporate expenses including allocated facilities expenses.

We expect general and administrative expenses to increase in absolute dollars as we grow our operations and incur additional expenses associated with operating as a public company.

These expenses as a result of operating as a public company include expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related compliance and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations and other professional services.

Additionally, as of April 29, 2023, we are no longer an “emerging growth company” under the JOBS Act and need to comply with additional disclosure and reporting requirements, including an annual management report on the effectiveness of our internal control over financial reporting and an annual attestation report on internal control over financial reporting issued by our independent registered public accounting firm.

We are also required to include additional information regarding executive compensation in our proxy statement and hold nonbinding advisory votes on executive compensation at our annual meeting of shareholders.

These additional reporting requirements may increase our legal and financial compliance costs and cause management and other personnel to divert attention from operational and other business matters to devote substantial time to these public company requirements.

Impairment Charges

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IP license 14.5 % 17.3 %

IP license engineering services 1.3 % 1.6 %

Total revenue 100.0 % 100.0 %

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Cost of IP license revenue 0.4 % 1.0 %

Cost of IP license engineering services revenue 0.4 % 0.5 %

Total cost of revenue 38.1 % 42.3 %

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Loss before income taxes (11.8) % (9.7) %

Benefit for income taxes (0.7) % — %

Provision (benefit) for income taxes

2.9 % (0.7) %

Net loss (14.7) % (9.0) %

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IP license 28,024 31,939 (12.3) %

IP license engineering services 2,495 1,706 46.2 %

Total revenue $ 192,970 $ 184,194 4.8 %

Revenue for fiscal 2023 increased by $77.7 million primarily due to increases in product sales and IP license revenues, which increased by $67.8 million and $6.1 million, respectively.

The increase in product sales revenue was primarily due to an increase in the volume of unit shipments of AEC cables, which contributed more than 90% of the increase in product sales revenue.

The AEC sales increase was primarily driven by the introduction of the AEC product category in fiscal 2021 and ramping of our AEC solutions at our first hyperscale data center customer in fiscal 2023.

The increase in IP license revenue was primarily driven by high-dollar IP licenses delivered to a customer that resulted in revenue recognition of $21.5 million during fiscal 2023, compared to $11.6 million revenue recognized during fiscal 2022, from the same customer.

Revenue for fiscal 2024 increased by $8.8 million primarily due to increases in product engineering services revenue of $9.1 million.

The increase in product engineering services revenue was primarily due to Credo entering into two new non-recurring engineering contracts, one of which was entered into in fiscal 2024 and which saw significant ramp-up in the year, resulting in revenue recognition of $15.5 million.

The increase in product sales revenue was driven by growth in Chiplet and Optical products, offset by a modest decline in AEC products.

As a result, the product mix was more diverse in fiscal 2024 than in fiscal 2023.

Cost of Revenue

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Cost of product engineering services revenue 2,225 972 128.9 %

Cost of IP license revenue 1,179 — N/A

Cost of IP license engineering services revenue 706 462 52.8 %

Cost of IP license revenue 816 1,885 (56.7) %

Total cost of revenue $ 73,539 $ 78,000 (5.7) %

Cost of product sales revenue increased by $35.1 million in fiscal 2023 primarily due to higher product sales during the same period, which resulted in the higher product sales revenue as discussed above, and a $4.2 million increase of write-downs for excess and obsolete inventory.

Cost of IP license revenue in fiscal 2023 related to costs incurred for delivery of a milestone during the first quarter of fiscal 2023 on an IP licensing and development contract.

Cost of revenue decreased by $4.5 million primarily due to $4.6 million decrease in cost of product sales revenue.

The decrease was driven by improvement of our product sales gross margin from 46.9% in fiscal 2023 to 51.4% in fiscal 2024 as a result of increased product sales that drove the economies of scales.

Gross Profit and Gross Margin

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Gross margin 61.9 % 57.7 %

Gross margin decreased by 2.4 percentage points in fiscal 2023 primarily driven by an increase in our product sales revenue as a percentage of overall revenue as noted above given that our product sales has lower gross margin in relation to other revenue streams.

Product sales gross margin increased by 1.3 percentage points in fiscal 2023 primarily from our product sales business gaining scale.

We expect to see a long-term benefit from improvements in our operating leverage as our business continues to gain scale.

Gross margin increased by 4.2 percentage points in fiscal 2024 primarily driven by (a) an increase in our high-margin product engineering services revenue as a percentage of overall revenue;

and (b) an increase of product sales gross margin as noted above.

Research and Development

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Research and development expenses for fiscal 2024 increased by $18.8 million compared to fiscal 2023.

The increase was due primarily to a $9.8 million increase in personnel costs as a result of new hires for product development, an $8.3 million increase in share-based compensation expense driven by increased amortization expense from new equity awards granted to employees, a $3.6 million increase in design activities and higher engineering activities relating to testing and laboratory supplies for new product development, a $3.6 million increase in depreciation expense driven by increased computer equipment and software and laboratory equipment utilized in research and development activities, and a $1.4 million increase in information technology and facilities costs.

The increase was due primarily to a $7.0 million increase in personnel costs primarily as a result of new hires for product development, an $8.0 million increase in share-based compensation expense driven by increased amortization expense from new equity awards granted to employees, a $2.2 million increase in depreciation expense driven by increased computer equipment and software and laboratory equipment utilized in research and development activities, and a $1.5 million increase in information technology and facilities costs.

Selling, General and Administrative

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Selling, general and administrative expenses for fiscal 2024 increased by $11.9 million compared to the same period in fiscal 2023.

The increase was due primarily to a $3.8 million increase in personnel costs as a result of higher selling, general and administrative headcount, a $0.9 million increase in professional services spending, a $1.3 million increase in facility-related costs, a $1.6 million increase in director and officer insurance cost as a result of being a public company and a $5.6 million increase in share-based compensation expense driven by increased amortization expense from new equity awards granted to employees.

The increase was due primarily to a $2.6 million increase in personnel costs as a result of higher selling, general and administrative headcount, a $7.0 million increase in share-based compensation expense driven by increased amortization expense from new equity awards granted to employees, a $1.1 million increase in legal expenses and a $0.6 million increase in software licenses.

Impairment Charges

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% of total revenue 0.4 % 1.3 %

Impairment charges incurred in fiscal 2023 and 2022 were primarily related to the impairments on property and equipment that did not reach production qualification.

Benefit for Income Taxes

Impairment charges incurred in fiscal 2024 and 2023 were primarily related to the impairments on property and equipment, and third-party IP license that did not reach production qualification.

Provision (benefit) for Income Taxes

Year Ended % Change

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(in thousands, except percentages)

Benefit for income taxes $ (1,367) $ (37) 3594.6 %

Provision (benefit) for income taxes

$ 5,624 $ (1,367) (511.4) %

% of total revenue 2.9 % (0.7) %

Benefit for income taxes in fiscal 2023 increased by $1.3 million compared to the same period in fiscal 2022.

The increase was primarily due to an increase in tax benefit of share-based compensation in fiscal 2023, compared to that in fiscal 2022.

Provision for income taxes in fiscal 2024 increased by $7.0 million compared to the same period in fiscal 2023.

The increase was primarily due to the establishment of a full valuation allowance to offset U.S.

deferred tax assets in fiscal 2024.

Liquidity and Capital Resources

Our activities consist primarily of selling our products, licensing our IP, providing IP customization services and conducting research and development of our products and technology.

Since our inception through April 29, 2023, our operations have been financed primarily by net proceeds from our IPO, the sale of convertible preferred shares and ordinary shares prior to our IPO, and cash generated from our customers.

As of April 27, 2024 and April 29, 2023, we had cash and cash equivalents of $66.9 million and $108.6 million, respectively, and working capital of $485.6 million and $297.2 million, respectively.

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See also Note 7 to our consolidated financial statements included in this Annual Report on Form 10-K for a further discussion of our cash requirements under non-cancelable purchase obligations.

We believe our existing cash and cash equivalents and other components of working capital will be sufficient to meet our needs for at least the next 12 months.

Our future capital requirements will depend

on many factors, including our growth rate, the timing and extent of our sales and marketing and research and development expenditures, customer demand and the continuing market acceptance of our solutions.

In the event that we need to borrow funds or issue additional equity, we cannot assure you that any such additional financing will be available on terms acceptable to us, if at all.

We believe our existing cash and cash equivalents and other components of working capital will be sufficient to meet our needs for at least the next 12 months and in the longer term.

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our sales and marketing and research and development expenditures, customer demand and the continuing market acceptance of our solutions.

In the event that we need to borrow funds or issue additional equity, we cannot be assured that any such additional financing will be available on terms acceptable to us, if at all.

If we are unable to raise additional capital when we need it, our business, results of operations and financial condition would be adversely affected.

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(in thousands)

Net cash used in operating activities $ (24,615) $ (30,832)

Net cash provided by (used in) operating activities

$ 32,737 $ (24,615)

Net cash used in investing activities $ (249,485) $ (130,941)

Net cash provided by financing activities $ 175,276 $ 4,885

Cash Flows Used in Operating Activities

Net cash used in operating activities was $24.6 million for fiscal 2023.

The cash outflows from operating activities for fiscal 2023 were primarily due to $16.5 million of net loss and $50.4 million of cash outflows for working capital purposes, partially offset by $42.4 million of non-cash items.

Cash Flows Provided by (Used in) Operating Activities

Net cash provided by operating activities was $32.7 million for fiscal 2024.

The cash inflows from operating activities for fiscal 2024 were primarily due to a net loss of $28.4 million adjusted for the following non-cash items:

share-based compensation expense of $39.0 million, depreciation and amortization of $13.8 million, and other non-cash items of $9.0 million.

This was offset by $0.7 million of cash outflows for working capital purposes.

The cash outflows from working capital for fiscal 2024 were primarily driven by (a) an increase in accounts receivable of $10.1 million primarily due to increased sales in the fiscal 2024 compared to fiscal 2023 and timing of collection;

(b) an increase in inventory of $24.4 million to support unfulfilled backlog and related new product ramps;

and (c) an increase in other non-current assets of $8.0 million primarily due to refundable deposit payments for manufacturing commitments and an increase in deferred tax assets position.

(b) and an increase in contract assets of $12.1 million primarily driven by certain IP licensing and engineering services arrangements where certain billing milestones had not yet been reached but the criteria for revenue had been met.

This was offset by a decrease in inventory of $15.8 million primarily driven by tightened production management and increased product sales compared to fiscal 2023.

Net cash used in operating activities was $24.6 million for fiscal 2023.

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Cash Flows Used in Investing Activities

Net cash used in investing activities of $249.5 million in fiscal 2024 was attributable to purchases of property and equipment of $15.7 million and investments in certificates of deposit of $169.8 million, partially offset by maturities of investment in certificates of deposit of $403.6 million.

Purchases of property and equipment primarily relate to mask sets purchases for new products introduced or in process of being introduced, and computer equipment and software used for research and development purposes.

Net cash used in investing activities of $130.9 million in fiscal 2023 was attributable to purchases of property and equipment of $21.7 million and investment in certificates of deposit of $159.2 million, partially offset by maturities of investment in certificates of deposits of $50.0 million.

Purchases of property and equipment primarily related to mask sets purchases for new products introduced or in process of being introduced, and computer equipment and software used for research and development purposes.

Net cash used in investing activities of $17.6 million in fiscal 2022 was attributable to purchases of property and equipment, including third-party licenses.

Purchases of property and equipment primarily related to mask sets purchases for new products introduced or in process of being introduced, and laboratory equipment used for research and development purposes.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities of $4.9 million for fiscal 2023 was primarily attributable to $5.5 million in proceeds from exercises of employee share options and the issuance of shares under our employee share purchase plan.

Net cash provided by financing activities of $204.2 million in fiscal 2022 was primarily attributable to $194.2 million in proceeds from our IPO, net of underwriting discounts and commissions and offering costs, $2.7 million in proceeds from exercises of share options and $7.2 million in proceeds from the issuance of convertible preferred shares, net of issuance costs.

Net cash provided by financing activities of $175.3 million for fiscal 2024 was primarily attributable to $173.4 million proceeds from issuance of ordinary shares in connection our follow-on public offering, net of offering costs, $7.1 million in proceeds from exercises of employee share options and the issuance of

shares under our employee share purchase plan, offset by $3.1 million in payments for long-term technology license obligations.

Net cash provided by financing activities of $4.9 million in fiscal 2023 was primarily attributable to $5.5 million in proceeds from exercises of employee share options and the issuance of shares under our employee share purchase plan.

Critical Accounting Estimates

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The determination of the SPP for certain of our IP requires fair value estimate under income approach, involving the estimation of future cash flow expected to be generated from the IP.

The determination of the SSP for certain of our IP requires an estimate of the fair value under the income approach, involving the estimation of future cash flow expected to be generated from the IP.

Our policy is to record revenue net of any applicable sales, use or excise taxes.

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We analyze the probability of vesting of each tranche of the warrant based on the demand forecast from the customer.

When we determine that it

is probable that a tranche of the warrant will vest and we recognize the related revenue, the grant date fair value of the associated tranche will be recognized in shareholders’ equity and the underlying expense will be amortized as a reduction of revenue in proportion to the amount of related revenue recognized.

When we determine that it is probable that a tranche of the warrant will vest and we recognize the related revenue, the grant date

fair value of the associated tranche will be recognized in shareholders’ equity and the underlying expense will be amortized as a reduction of revenue in proportion to the amount of related revenue recognized.

Inventory Valuation

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However, if estimates regarding customer demand are inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses or gains that could be material.

Share-Based Compensation

Share-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service vesting period.

We amortize share-based compensation expense for time-based awards under the straight-line attribution method over the vesting period.

The fair value of each restricted share unit is estimated based on the market price of our ordinary shares on the date of grant less the expected dividend yield.

We estimate the fair value of share purchase awards on the date of grant using the Black-Scholes option-pricing model.

Forfeitures are recorded when they occur.

Previously recognized expense is reversed for the portion of awards forfeited prior to vesting as and when forfeitures occur.

Recent Accounting Pronouncements

For more information, see Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

JOBS Act Accounting Election

On the last business day of our second quarter in fiscal 2023, the aggregate market value of our shares held by non-affiliate shareholders exceeded $700 million.

As a result, as of April 29, 2023, we are considered a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and we ceased to be an emerging growth company as defined in the JOBS Act.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis