Silicom Ltd. (NASDAQ:SILC) Q1 2023 Earnings Call Transcript

Silicom Ltd. (NASDAQ:SILC) Q1 2023 Earnings Call Transcript May 1, 2023

Silicom Ltd. beats earnings expectations. Reported EPS is $0.61, expectations were $0.6.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Silicom First Quarter 2023 Results Conference Call. All participants are at present in listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. You should have all received by now the company’s press release. If you have not received it, please contact Silicom’s Investor Relations team at GK Global Investor Relations at 1-212-378-8040, or view it in the News section of the company’s Web site www.silicom-usa.com. I would now like to hand over the call to Mr. Kenny Green of GK Global Investor Relations. Mr. Green, would you like to begin, please?

Kenny Green: Thank you, Operator. I would like to welcome all of you to Silicom’s first quarter 2023 results conference call. Before we begin, I’d like to draw your attention to the following Safe Harbor statement. This conference call contains projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions, and may change as time passes. Silicom does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of Silicom’s increasing dependency for substantial revenue growth on a limited number of customers in the evolving cloud-based SD-WAN, NFV, and Edge markets.

The speed and extent to which solutions are adopted by these markets, the likelihood that Silicom will rely increasingly on customers which provide solutions in these evolving markets, resulting in an increasing dependency on a smaller number of larger customers, difficulty in commercializing and marketing Silicom’s products and services, maintaining, protecting brand recognition, protection of intellectual property, competition, disruptions to manufacturing, sales and marketing, development, and customer support activity, the impact of the war in the Ukraine, rising inflation, rising interest rates, volatile exchange rates, and commodities prices, as well as any continuing or new effects resulting from the COVID-19 pandemic, and the global economic uncertainty, which may impact customer demand through their exercising greater caution and selectivity with a short-term IT investment plans, as well as other factors discussed in our Annual Report on Form 20F, and other documents filed by the company that maybe subsequently filed by the company from time to time with the Securities and Exchange Commission.

In addition, following the company’s disclosure of certain non-GAAP financial measures in today’s earnings release, such non-GAAP financial measures will be discussed during this call. Such non-GAAP measures are used by management to make strategic decisions, forecast future results, and evaluate the company’s future and current performance. Management believes that the presentation of these non-GAAP financial measures is useful to investors’ understanding and assessment of the company’s ongoing core operations and prospects for the future. Unless otherwise stated, it should be assumed that financials discussed today in this conference call will be on a non-GAAP basis. Non-GAAP financial measures disclosed by management are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results.

These measures are not in accordance with, or a substitute for GAAP. A full reconciliation of non-GAAP to GAAP financial measures are included in today’s earnings release, which you can find on Silicom’s Website. With us on the line today are Mr. Liron Eizenman, President and CEO; and Mr. Eran Gilad, CFO. Liron will begin with an overview of the results, followed by Eran, who will provide the analysis of the financials. We will then turn the call over to the question-and-answer session. And with that, I would now like to hand the call over to Liron. Liron, please go ahead.

Liron Eizenman: Thank you, Kenny. I would like to welcome all of you to our financial results conference call, discussing our first quarter 2023 results. We are very happy to report on a great start to 2023. We grew our first quarter revenues, seasonally the weakest quarter of the year, to $37.2 million, representing a 16% increase over the first quarter of last year. Our continued year-over-year growth is all the more impressive against the (ph) of a more challenging environment, with ongoing component shortages in some cases, and an uncertain economic environment. For Silicom, the strong operating leverage within our business model allowed the revenue growth to translate into accelerated profit growth, demonstrated by 41% in operating income to $4.8 million, and highlighted by the improved operating margins at 12.8% this quarter versus 10.5% in the first quarter of last year.

The continued success led to our 73rd quarter of uninterrupted profitability, and we reported first quarter earnings per share up 38% year-over-year, to $0.61 per diluted share. Our success in the quarter emphasizes the continued robust and broad interest across all our target markets, especially for our Edge product. It showcases the market’s recognition of the distinct value proposition that we at Silicom have cultivated over many years. It is built on our high-performance offering, dependable delivery, rapid customization, and unparalleled support capabilities. Our achievements underscore the clear market demand for our innovative product and solutions. Looking at our balance sheet strength, we continue to improve our cash position, which currently stands above $53 million with no debt.

Our strong cash position is a key strategic asset and enables us to capitalize quickly on opportunities. In today’s market especially, it provide us with a significant competitive advantage, enabling sufficient working capital to serve our customers better and attract new customers. Furthermore, it allows us to share the reward of our continued profitability and cash generation with our shareholders. In light of this, today, the Board of Directors authorized a new one-year share repurchase plan, allowing Silicom to purchase up to $15 million worth of our ordinary shares in the market. Our successful sales efforts in recent quarters have resulted in an impressive roster of design wins which continue to grow. During the quarter, we announced new design wins, highlighting Edge units SD-WAN, SASE, and unified communication use cases.

And this underlines our growing estimate of the total addressable market for our Edge products, our primary growth engine today. In January, we announced a new design win from a leading SD-WAN vendor, a Fortune 500 company with global presence. They selected the customized version of one of our 5G-integrated High-Runner Edge Networking product for its unique features and flexible connectivity. Our selection by this SD-WAN leader, after an extensive search and negotiation process, confirms our value proposition and is another proof point of the significant growth potential we see in our Edge product family. A few weeks later, in February, we announced a design win with a new customer, a leading unified communication solution provider for one of our customized Edge Compute boards.

The board will be integrated into the customer’s advanced uCPE platform, providing them with edit functionality, including support for virtual network functions. Order totaling $2.5 million have been placed to date, with some products already delivered. And later in February, we secured a new design win for our innovative Edge Networking product, with a top secure access service edge vendor. This was our second significant win in the high-growth SASE market during the period of six months. The initial deployment order will be delivered during the first-half of 2023. And we are further collaborating with that customer on a wireless Edge Networking solution to support additional use cases, which has the potential to expand and grow our business with them into additional areas.

Those recent wins demonstrate that our momentum in Edge networking is now broadening well beyond the SD-WAN space, with growing interest from customers seeking enhanced performance and flexibility for the next generation networks. Our unique value proposition, including the broadest portfolio of Edge networking offerings, attractive price points, exceptional customization capabilities, as well as our close working relationship with Intel is compelling for all types of market shares, not just solution vendors, but also telcos, service providers, and more. As I mentioned, the success we have seen in recent months has led us to increase our internal expectations of the overall Edge market potential for Silicom. This is based on the strong momentum we see in this sector, as well as Silicom’s key position as the go-to technology partner in this accelerating Edge networking market.

More recently, few weeks ago a tier 1 U.S.-based cyber security vendor awards us two NIC design wins for an advanced offload acceleration card and an FPGA SmartNIC, demonstrating that our traditional product lines NIC and server adaptors continue to play an important role in our growth. Our products will be integrated into the customer’s next generation solutions helping secure and optimize networks and applications for customers, which are some of the world’s largest organizations. Our customer plan is to ramp-up deployment in the second-half of 2023 with first deployment starting next year in 2024. Our impressive roster of design wins with the world’s leading vendors attest to the innovation of our technology across the board. Our broad portfolio, our unique full-service package, and our reputation as the go-to source for performance-enhancing solution, strategy of offering a diverse range of product that addresses our customer’s critical needs, and emphases the ongoing relevance of our traditional product lines in driving our growth.

Looking at our design wins pipeline as we move through 2023, it remains exceptionally solid and broad. Today, we can see significant promise with some of the potential design wins at advanced stages of the discussion, which could accelerate our revenue growth in the coming years. To highlight and provide some color on some of the potential wins we are working on. First, a tier 1 cyber security leader is considering the use of few of our innovative feature-rich products that we developed and continue developing as an expansion of our product line. We believe that we are well-positioned as one of the only vendors in the world with core competencies and capabilities to develop those products for this customer. Furthermore, those advanced products will increase our competitiveness and further enable us to win additional business with other customers.

Second, a prominent SD1 vendor is interested in adopting our Edge product as their next generation SD1 platform. Third, a service provider is interested in utilizing our low-end Edge CPE for a new use case, which will enable them to deliver new features to their customers and reducing . While a few of those projects still require more design and testing activities in the coming months, we expect the deployments will begin towards the end of 2023 and in 2024. Our growth strategy was always built on wining more and more design wins and adding them to our growing roster of design wins. This is how we increase our revenue and market share further cementing our position as an industry leader. The above projects are just examples of our healthy and quality pipeline of potential future design wins.

All in all, Silicom today remains positioned as a key player in our industry. And we continue to be increasingly excited about the opportunities that lay ahead of us. In terms of guidance for the second quarter, we projected our revenue for the second quarter of 2023 will range between $38 million and $39 million. While we are mindful of possible headwinds from a weaker global market macroeconomic environment and outlook, we are very pleased to provide this guidance which at the midpoint of the range represents 13% year-over-year revenue growth over the second quarter of 2022 and a solid double digit year-over-year growth for the first-half of 2023. In summary, we are very happy to report a strong start to 2023 with solid year-over-year revenue growth with increased growth at the bottom line.

Our success is built on diverse and significant interest from our target markets particularly for our innovative Edge products, and showcases the market appreciation of our unique value proposition including high performance offerings, reliable delivery, and exceptional support capabilities. The exceptionally solid interest from new and existing customers for our latest solutions indicate that the total addressable market for our Edge networking product is larger than we initially speculated and underlines our expectations for the long-term growth. We maintain an impressive roster of top tier customers and design wins many of which are in the initial ramp up phase. Additionally, our robust pipeline of future design wins bodes further significance and accelerated growth potential for us.

With that, I will now hand over the call to Eran for a detail review of the quarter results. Eran, please go ahead.

Eran Gilad: Thank you, Liron, and hello everyone. Revenues for the first quarter of 2023 were $37.2 million, up 16% compared with revenues $32.1 million as reported in the first quarter of last year. Our geographical revenue breakdown over the last 12 months were as follows: North America 76%, Europe and Israel 19%, Far East and rest of the world 5%. During the last 12 months, we had one 10% plus customer and our top three customers together accounted for about 30% of our revenue. I will be presenting the rest of the financial results on a non-GAAP basis, which excludes the non-cash compensation expenses in respect of options and RSUs granted to Directors, Officers and employees, acquisition related adjustments as well as lease liabilities financial income.

For the full reconciliation from GAAP to non-GAAP numbers, please refer to the press release we issued earlier today. Gross profit for the first quarter of 2023 was $11.9 million, representing a gross margin of 32% and compared to gross profit of $11.1 million, or gross margin of 34.5% in the first quarter of 2022. The variance in the gross margin is a function of the specific product mix sold in the quarter and remains in line with expected range of our gross margin guidance of between 32% and 36%. Operating expenses in the first quarter of 2023 were $7.1 million below $7.7 million, reported in the first quarter of 2022. Operating income for the first quarter of 2023 was $4.8 million, an increase of 41% compared to operating income of $3.4 million reported in the first quarter of 2022.

Net income for the quarter was $4.2 million, an increase of 38% compared to $3 million in the first quarter of 2022. Earnings per diluted share in the quarter were $0.61. This is a year-over-year increase of 38% compared with EPS of $0.44, as reported in the first quarter of last year. Now, turning to the balance sheet, as of March 31 2023, the company’s cash, cash equivalents and marketable securities totaled $53.5 million with no debt, or $7.92 per outstanding share. That ends my summary. I would like to hand back over to the operator for question-and-answer session. Operator?

Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. The first question is from Alex Henderson of Needham & Company. Please go ahead.

Alex Henderson: Great, thanks, and congratulations on a good print. The conditions are obviously challenging out there, a number of companies have been struggling to make their numbers or sustain the momentum in their numbers, and obviously that’s not the case for you guys, which is impressive. I was hoping you could talk a little bit about the predictability of your backlog. There’s obviously companies that have backlog that are in systems that are generally pretty solid to the extent that people rarely double order systems, but on the other side of the coin, when it comes to sub-assembly components and customer on-prem gear that’s for the Edge, it’s a little bit dicier environment. Some of the service providers in particular have a poor track record of managing their inventory.

So, can you talk a bit about the degree to which you see your backlog of business here, visibility to the orders being different than as I just described it? I think you guys have some non-cancelable provisions, and may have a little bit better visibility on some of the systems than some of the Edge guys. Could you talk a little bit about that, please? Thanks.

Liron Eizenman: Sure. So, first of all, thank you for the warm words. And you’re right, the way that we conduct our business is such that, indeed, orders are not cancelable, and we are talking a lot with our customers to understand their inventory positions and their plans going forward. And we do not believe that we are in a situation of double-booking or risk to those orders. And in general, when we’re looking at Q2 with the guidance as we provided, it’s obviously based on the orders that we have and the orders that we expect to get. So, we feel comfortable with that number. And in general, we see that — maybe as summary to your question, we don’t see a huge risk with the backlog that we have right now.

Alex Henderson: Can you talk a little bit about how visible it is going into the back-half? I know you don’t want to offer guidance for the back-half at this point, but do you have visibility into the second-half of the year, and then is it consistent with normal trends? How should we think about moving into the back-half of the year?

Liron Eizenman: Currently, we do not provide guidance for the second-half of the year. Traditionally, we always give one quarter ahead, and we’re doing the same now. So, we don’t have much to add on that right now.

Alex Henderson: Okay. And then could you talk a little bit about your approach to hedging, what extent you’re hedged against forward-looking, and the like? The shekel, obviously, has been quite weak as a result of political turmoil.

Eran Gilad: The effect of the shekel or the dollar was quite minor this quarter. It was a positive effect, but it’s very marginal numbers.

Liron Eizenman: Just adding to that, we’re not hedging. And we’ve never done it, and we’re not hedging against shekel.

Alex Henderson: Perfect. Thanks.

Operator: There are no further questions at this time. Before I ask Mr. Eizenman to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available, by tomorrow, on Silicom’s Web site, www.silicom-USA.com. Mr. Eizenman, would you like to make your concluding statement?

Liron Eizenman: Thank you, Operator. Thank you, everybody, for joining the call and for your interest in Silicom. We look forward to hosting you on our next call in three months’ time. Good day.

Operator: Thank you. This concludes Silicom’s First Quarter 2023 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.