Q2 2020 Silicom Ltd Earnings Call
Rates over long term processes and even in one of the toughest quarter. This enables us to be resilient, allowing business at silicon to continue almost as usual.
We continue to invest much time and effort in bringing new design wins in all our target market and the flow of such wins is indeed reflected in our results.
While the environment remains uncertain the underlying fundamentals of our target markets continue to be attractive and present high growth potential in Pos pandemic world.
Throughout Silicoms history spanning over decades, we have successfully navigated through many market cycles, our foresight and investments in the right area, especially in the past few years and positioning ourselves ahead of the various technology trends as they appear have enabled us to consistently emerge each time a better.
And a stronger company.
We believe that this will be the case again as the world emerges out of the copied 19 pandemic.
I would like to spend a few moments discussing our guidance. If you remember following first quarter Twentytwenty results release in April we decided to withhold providing upcoming quarter guidance because visibility at that point was very limited.
While remaining cautious due to the continued uncertainty of the market environments current improved visibility enables us to project sequential double digit growth in revenues for the third quarter of Twentytwenty as compared with the second quarter of Twentytwenty with revenues expected between 26 to 20.
$7 million.
Given our long and growing list of design wins generating orders, a healthy cash balance solid baseline activities and strong market fundamentals moving in our direction, we're well positioned and increasingly optimistic about our long term prospects.
As such we continued to project that once our market return to normal we will achieve ongoing revenue growth at a double digit compound annual growth rate for several years ahead.
Okay.
Before summarizing and moving over to a run I note that as of Q2 end Silicom has a record of $93 million in net cash, which was an increase of $13 million during the quarter, providing us with significant financial flexibility. It gives us more than enough capital to contain.
When you our internal investment in R&D to maintain and build our competitive lead. It also allows us to continue or business development activities. As we originally planned ultimately fueling the long term growth of our business at the same time it gives more than enough working capital to whether the current environment through.
Furthermore, it also allows us to share the rewards of our continued profitability and cash generation with our shareholders.
During the quarter, we completed our first $50 million one year buyback plan meeting the target set by our board, which was announced on May 2nd 2019. We also made progress on our new second buyback plan of further $15 million within a year, which was approved by our board and announced on eight.
30 of this year.
In summary, while the second quarter was not easy for anyone.
For Silicom, we believe the worst is now behind us and given the improved visibility we look forward to double digit sequential growth in the third quarter. Furthermore, the pandemic and work from home trend has had the impact of significantly accelerating the SD Wan NFI security and Fiveg network build outs.
Yes, as telcos and cloud providers or X telcos and cloud providers all markets were silicom is centrally position.
Our optimism has increased and I reiterate that once markets return to normal we expect the coming few years for Silicom will be much greater than what we have achieved over the past few years with that I will now handover the call to a run for a detailed review of the quarter's results.
Please go ahead.
Thank you show care and the low every.
Revenues for the second quarter of Twentytwenty were $23 million Dcs compared with revenues of $25.4 million as reported in the second quarter of last year.
Our geographical revenue breakdown over the last 12 months were as follows North America, 70% Europa newsroom, 23% far east and restore the world 7%.
During the last 12 months, our top 310% customers together accounted for about 40% of our revenues.
I will be presenting the rest of the financial results on a non-GAAP basis, which excludes the noncash compensation expenses in respect of options and RSU grants to directors officers and employees as well as acquisition related adjust.
For the full reconciliation from GAAP to non-GAAP numbers. Please refer to the press release, we issued earlier today.
Gross profit for the second quarter of Twentytwenty was $7.8 million, representing a gross margin of 34% compared to gross profit of $8.8 million or gross margin of 34.6% in the second quarter.
Or 2019.
Operating expenses in the second quarter of Twentytwenty were $5.9 million compared with $5.9 million in the second quarter of 2019.
Operating income for the second quarter of Twentytwenty was $2 million compared to operating income of $2.8 million as reported in the second quarter of 29 team.
Net income for the quarter was $1.8 million compared to $2.9 million in the second quarter of 2019.
Earnings per diluted share in the quarter were 26 cents compared with 38 cents as reported in the second quarter of 2019.
Now turning to the balance sheet as of June 30th Twentytwenty, The company's cash cash equivalents bank deposit and marketable securities were at all time, fiery and totaled $93.2 million with no debt or $30.
And 12 cents per outstanding share.
That ends my summary, and we would be all happy to take any questions.
Operator.
Thank you ladies and gentlemen at this time, we will begin the question and answer session. If you have a question. Please press star one if you wish to cancel your request. Please press star too. If you are using speaker equipment kindly lift the handset before pressing the numbers two questions will be pulled in the.
Order they are seed please standby, while we pull for your question.
The first question is from Alex Henderson of Needham and company.
Please go ahead.
Thank you very much hey, guys.
So.
I do certainly.
Drilling too much in the broader macro environment.
Clearly the stuff that you highlighted.
Such that the win by the edge computing alike are very robust.
In our benefiting from some of the trends promote moment like Conversely.
A lot of the traditional appliance so on that go into what I would describe as your traditional business.
Our under pressure on.
The CE marked it looks like it's not seeing decline roughly 10% to in terms of appliance sales.
Can you talk about what portion of your.
Business is coming from the new segments in what portion is coming from more traditional businesses and what the trajectory you're seeing in the traditional pieces.
So to give me some baseline.
Thanks.
Okay I'll try to give some color over the situation we do not.
Provide specific information about traditional versus new especially as they begin in some ways I would say two to merge together in a way I mean, just as an example.
If you talking about customers than some customers that use to be AIDC also there are no doing.
The one and.
Sometimes the same products from our perspective are being used for both so it's a little bit difficult to say, but I mean, I still would like to respond to your answer to your question. Given you. Some I would say information or color about what's happening in general So what is happening in June and Youre right.
With what you described right now I mean overall the standard appliance business seems to be decreasing.
And on the other side, obviously, the SD Wan NFC and their mobile networks and deployment seems to be increasing that's obviously accuray and we see this decline however that being said I would like to say that even in the traditional markets, we do have opportunities because.
Sometimes specific projects are being launched as an example, the one project that we have been awarded to the design win that I was talking about.
So d. this actually belongs to our a traditional lineup projects of product, but still I mean, it is an opportunity and the fact that overall.
Demand for capacity in the network is growing has some influence in some areas even when our traditional products are being used so while in general I would say, yes. There is a decline, but we are looking for these opportunities and once we for example.
Both deliver against this a design win that I mentioned before so we may see here and there are opportunities were this decline is compensated by DS and new opportunities that were suite, where that we're seeing so overall, yes. There is a decline and we base our growth on the growth of the growing markets rather.
Then on the traditional market.
Which is declining, but we're still finding opportunities even within the traditional market.
Great. Thank you that's.
Paul.
So.
Can you talk a little bit about whether there's any input patients from the consolidation thats going on in years to wind market has been.
The numbers.
Companies that were acquired over the last couple of months so that.
Changing landscape little bit.
You've been.
Maybe pulled into some of these larger enterprises does that.
Give you an opportunity to build out some relationships with those companies in a way that we get changed some of their more traditional businesses.
You might not have penetrated before it has to change the on the momentum in those businesses that.
Required.
I would say that for us day impact.
It is not significant I wouldn't say that there is no impact at all because I mean for example, one company, which was acquired the relationship there was not that I would say deep while if you look at the company that acquired this company that we have a better relationship with this company. However, I would.
I'd be hesitant to say that this is really significant that due to these acquisitions. Thanks.
For us would change dramatically I think that we do have quite a solid pipeline with the SD Wan and four and also for you CP mostly towards as the one.
But I don't think that decrease.
The acquisitions or whatever would have a significant impact it would be more tactical rather than something that I will define as strategic.
One more question, if I could see us tier one service provider market.
There are indications that.
Those programs that those companies aren't.
In pretty good growth in Europe the win business.
Can you update where you are.
The two tier ones that you've been trying to.
To penetrate.
So I would say that with one of them, we are growing and we're doing better and they are ramping up even though I would tell you that and even this one is not ramping up at the rate that we were hoping for and we hope that this would improve as we move forward, but one of them is pretty significant for us.
Right now the other one is still going forward, but very slowly.
I would also say that being said that on the other side we're getting.
I would say smaller design wins.
Even as was not as we speak but we're getting more design wins, which are related to us the ones not all of them out that dramatic or big we do not announce any design win that we get but SD one is definitely something which is growing internally.
Okay I'll say this movement.
If there any additional questions. Please press star one.
If you wish to cancel your request. Please press star to please standby, while we pull for more questions.
The next question is from Alex Henderson of Needham and company Alex. Please go ahead.
Well good luck.
Capacity, we're not going to get other questions.
Can certainly add a few more.
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One of the obvious questions.
On the interest income line.
To the extent to.
Great to pound near zero globally.
And as you are building cash should we be expecting continued contraction in interest income.
Net and.
How should we think about that line.
Finally.
Okay era.
Hi, I'm not sure understood. Your question can you repeatedly.
All.
Great globally on towards zero.
Even as you're building tax should we should we be report spent.
With that line continues to trend lower on a year over year basis full year.
First of all what you're saying is correct the interest rates are.
Our lower compared to a year ago and two years ago.
Currently it does not.
Our financial income, but definitely it will impact our financial.
Income a.
I would say from too.
2021.
Yeah.
In other words I expect that the.
Our financial net income in 2000.
As of next year will be.
It will start to be lower compared to this year in the previous year.
Similarly can you talk a little bit about.
Where you are on exchange rates.
As the.
The end of last quarter, we were in a situation.
In exchange rate plummeted, but looks like its recapped virtually all of that decline.
Is that to pretty much where it was.
Hi, So 1.2 numbers.
Are you thinking about two fold into construction.
Okay first of all indeed.
Dick differences in exchange rates affected us in quarter two there.
Effect was.
Negative, but not dramatically definitely not dramatically the net effect.
On our operating expenses.
Net negative effect on our.
Operating expenses was less than one onto K dollars, which is indeed, not dramatic number and the inhibition.
Was a net negative effect effect on our financial income, but again not a dramatic number.
I would say about 100 carry more or less.
So going forward given the rebound in the exchange rate. So do you expect to.
Moderate the hiring how do you see.
<unk>.
Spending.
Intentions going on in terms of Stanton levels.
Okay, if the exchange rates remained more or less towards in the.
At quarter to owing to tell ongoing twentytwenty.
It means that we will see similar effect.
And on our next few quarters, which means.
Nothing dramatic.
We do not edge our expenses, we do not edge anything.
And.
Again in most quarters, they affect whether positive or negative is not something dramatic it can be 100 K dollars 100.
50, k. dollars not more not more not less than that.
Nothing from US again going back to the question. The question was how do you expect to to think about your hiring.
Aspects for the back half of the year up.
Oh no impact.
So so can you give us some sense of what you're hiring expectations.
We go into the back half, which is really internet.
Well first of all them into the hiring expectation is not going to be a dramatic.
Anyhow.
And Opex operation expenses as we see them right now may go higher a little bit, but it's not going to be dramatic in any event.
Yes.
Equity.
The guidance for the third quarter in improving visibility normally fourth quarters unseasonably strong this quarter over the years it looks like you've gotten back to growth this quarter.
Is it reasonable to think that the.
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Given all the macro uncertainties that the.
Improvement in the room there is too.
The new projects institutional market to the more normalized.
Environment like what you should be.
We'll be quite conservative assumptions for that.
And then this is this is what we're hoping for.
And anyone.
Larry on the maybe relative to gross margins.
What does that.
And in any commentary on mix relative to our lending gross margins were still I think we will we are still within the 30 to 36.
Boundaries.
Not being able to tell in advance where exactly we would be within these boundaries.
But revenues, yes, I mean, we believe we are on the right track right now and we believe that.
And the fourth quarter.
Wouldnt would indeed be better.
Right. Okay. Thank you very much.
Any other questions.
The next question is from Harris Levered time.
Please go ahead.
Hi.
Two questions first talk a buyback how many shares to buyback and what was the average price during the quarter.
And then on the weren't on working capital can you just talk a little bit about what normalized levels are for some agree a line item it looks like inventories were up sequentially.
And then payables one go a payable line items was up quite a bit as well, but then.
The payable line I'm looked like it was unusually low last quarter. So maybe you could just give us a little color in terms of.
Where you're working capital should be on a more normalized basis.
Okay I will start with your first question about the buyback.
Quarter, two we repurchased.
Approximately 133000 shares.
All together it amounted to $4.1 million.
And it's important for me to say that.
Part of the buyback.
There was related to closing the first plan.
And second part is related to the new plan, which we announced at the end of April so altogether the to the two plans together were at their number I said, one on 133000 shares $4.1 million Entercom, which means the approximate.
Please 30 $31 per share.
As to your question about.
The balance sheets.
Yes, there was a one a significant say reason for for the increasing.
In that balance sheet items. It is connected to an advanced payment.
We have received strong customer in the amount or say approximately $15 million.
Okay. So that so that's a so that you do work that number down as.
Your goes on basically yes definitely definitely us.
Okay and then the last question I have goes on a you know obviously, we've seen a lot of news the last few days about Intel problems, they're having.
And there are obviously part of ecosystem to any of the market to participate in are you fairly agnostic in terms of who you know that processor design goes too or are you know how how do you how do you get them versus A.M.D. versus arm or some of these other players.
As it really not have much of a direct impact on you.
Well I think that the intels issues right now.
And.
Our not meaningful to us at all and we're agnostic to that now it is true that we consider Intel as a strategic partner, but what I'm, saying is the areas in which we are partnering with a Intel.
The are not such that would be that would be would suffer from any impact.
From what a as being discussed in the news and this is not relevant for US right. Now now if you look I don't know many years ahead than this situation maybe different of course, because we cannot know what's going to happen for the very long term, which is why I would say that silicon.
It's not only working with into Intel is our most strategic partners right now, but we do have designs. We do have solutions, a we do have thoughts at processes, both with A.M.D., and obviously solutions, which are based on our processors as well.
And this is done indeed to mitigate any potential risks that may happen in the future.
Okay terrific. Thanks, Thanks for taking my question.
There are no further questions at this time.
Before I ask Mr. or back 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 Silicoms website, Www Dot Silicom dash USA dotcom, Mr or Bob would you like to make your concluding statement.
Mr or by there is additional question would you like to take it yes sure.
The next question is from.
Sergei must mascaro. Please go ahead.
Hello, and you hear me.
Yes, we can.
Okay. My thing. So this is the first quarter that you have not secure new design we.
These due to that and then it impacts.
I mean does the impact has or good half in the future an impact your ability to secure new design wins.
Okay. Let me I may have not made myself clear enough, we definitely have secured design wins during this quarter.
More than one.
And but I mean, our policy right now is that we do not necessarily announced all the design wins that were securing we only announce those which we consider to be strategic a very important something which is I would say entitled to an announcement. So we have secured design win.
During the quarter, but none of these were such at this point, it's my way some design wins to begin small and then they become more important at which time, we announced them so that could happen as well.
Perfect and about the second part of my question.
Which was.
Yes, it does depend any hi, good faster than in the future an impact your ability to secure new design wins, Oh I know that was a positive first question. Okay. I understand so I would say that.
Okay.
There is a certain impact I wouldn't say that it and there is no impact at all.
Where we see this impact mostly.
When there is a need to do physical evaluation. So now brought out and sometimes the company to which we would organization to which we sandy's evaluation units are instructed to work from home a jetrion, which gave such valuations are delayed so I wouldn't say that there is no impact at all.
But I would say on the other side that.
While things maybe delayed hearing there, but we don't see any impact on the overall demand and I think that therefore eventually all these design wins that hopefully we will get it may happen a little later, but eventually we'll get them.
Okay and most specifically.
One month ago, or so Intel posted a paper, where you discussed where do they discussed the basic between you Telefonica and 61.
So can you speak about this Brazil.
Oh right now I mean, we're not we're not allowed and we cannot elaborate.
Provide any details about that.
Okay. Okay perfect and my final question is are you worried about the current itis outbreak in Israel.
Because.
I wouldn't say that this is impacting us significantly at all I mean I am.
As a citizen of the state obviously I would like the situation to improve as much as possible by on day to day life the impact on us is negligible.
Okay perfect. Thank you very much.
Thank you.
Mr or Bob would you like to make your concluding statement.
Yes. Thank you operator, thank you everybody for joining the call. We hope you are all safe and we look forward to hosting you on our next call in three months time good day.
Thank you. This concludes Silicoms second quarter Twentytwenty results conference call. Thank you for your participation you May go ahead and disconnect.
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