AI connection chip manufacturer Credo released its third-quarter results and guidance for the next quarter, both exceeding Wall Street expectations. However, the trend of narrowing profit margins has raised investor concerns, causing the stock price to drop over 12% in after-hours trading, before narrowing the decline and turning positive during the conference call.
On March 2, after U.S. stock market hours, Credo announced its revenue for the third quarter of fiscal year 2026 (ending January 31, 2026) surged 201% year-on-year to $407 million, with adjusted earnings per share of $1.07, both surpassing analyst expectations.
At the same time, the company provided a midpoint revenue guidance for the next quarter of $430 million, slightly higher than the market expectation of $428.5 million.
Wall Street Journal mentioned that when Credo released its preliminary revenue expectations for Q3, it expressed strong confidence in future growth prospects. The company stated at that time:
<blockquote>
Looking ahead to the end of fiscal year 2026 and into fiscal year 2027, Credo expects fourth-quarter revenue to achieve mid-single-digit sequential growth, which will drive over 200% year-on-year growth for this fiscal year (fiscal year 2026).
</blockquote>
However, the company's gross margin is clearly declining. The non-GAAP gross margin for the third quarter was 68.6%, while the midpoint guidance for the fourth quarter has dropped to 65%, disappointing some investors with the downward trajectory of profit margins.
Credo's stock price fell over 12% in after-hours trading, but then reversed and strengthened from its low point.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b3901d2b-8db3-4603-8eee-0e07c912dfcf.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b3901d2b-8db3-4603-8eee-0e07c912dfcf.png"/>
<h2>Five Consecutive Quarters of Triple-Digit Growth</h2>
Credo's adjusted earnings per share for the third quarter were $1.07, higher than the FactSet analyst expectation of $0.91.
Additionally, revenue of $407 million represented a year-on-year increase of 201%, with a sequential growth of over 50% compared to the previous quarter, also exceeding the upper end of the company's prior forecast range ($404 million to $408 million).
This marks the fifth consecutive quarter for Credo to achieve triple-digit revenue growth, and analysts expect this high growth rate to continue for at least one more quarter.
Company CEO Bill Brennan stated in a statement that the AEC (Active Copper Cable) and IC (Integrated Circuit) businesses continue to grow, while the company announced the opening of new market space worth billions of dollars through three new product lines: ZeroFlap optical devices, ALC (Active LED Cables), and OmniConnect.
Brennan said:
<blockquote>
We are confident in our ability to innovate and grow within the continuously expanding AI infrastructure landscape.
</blockquote>
<h2>Declining Gross Margin Becomes Market Concern</h2>
Despite strong revenue growth, the compression of profit margins remains a major concern for investors digesting the results.
The GAAP gross margin for the third quarter was 68.5%, while the non-GAAP gross margin was 68.6%. However, the company's guidance for the fourth quarter indicates that the midpoint GAAP gross margin will drop to 64.9%, with the non-GAAP gross margin around 65%, a sequential decline of nearly 4 percentage points
The company expects adjusted operating expenses for the fourth fiscal quarter to be between $76 million and $80 million.
Analysts believe that the systematic narrowing of profit margins during periods of rapid revenue expansion typically indicates changes in product structure or customer bargaining relationships, which often triggers a market reassessment of future profit quality.
<h2>Acquisition of CoMira to Upgrade AI Architecture</h2>
On the same day it released its quarterly report, Credo announced the acquisition of CoMira Solutions, further strengthening its technological layout in AI systems.
According to the company, CoMira focuses on link layer, error correction, and security semiconductor technologies, which will support Credo in developing more advanced system-level solutions for scale-up and scale-out AI architectures. The parties did not disclose the transaction amount.
Analysts believe this acquisition, along with several new product line expansions previously announced by Credo, points to the same strategic logic. In the context of accelerated AI infrastructure development, it aims to continuously broaden the addressable market size to maintain high growth expectations

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Credo's Q3 revenue surged 201% year-on-year to $407 million, with adjusted earnings per share of $1.07, both exceeding analyst expectations. Meanwhile, the company's guidance for next quarter's revenue has a midpoint of $430 million, slightly higher than the market expectation of $428.5 million. However, the non-GAAP gross margin for the third quarter was 68.6%, while the guidance for the fourth quarter has dropped to 65%, and the downward trend in profit margins initially led to a decline of over 12% in after-hours trading, before the stock price reversed and strengthened

- Credo reported a 201% year-over-year revenue increase for Q3 of fiscal year 2026, reaching $407 million, exceeding Wall Street expectations.  
- Despite this growth, the company's gross margin is projected to decline, causing investor concerns and a drop in stock price by over 12% initially.  
- The acquisition of CoMira Solutions is aimed at enhancing its AI architecture capabilities, aligning with Credo's strategy to capitalize on the expanding AI infrastructure market.

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"Light Interconnection Giant" Credo's Q3 revenue surged by 200%, but declining profit margins raised concerns, dropping over 12% in after-hours trading before turning positive | Earnings Report Insights