Q1 2021 Silicom Ltd Earnings Call
Which can be combined into networks for superior performance.
This approach is driving innovation and just as importantly, reducing network cost significantly for operators.
These trends play strongly in our favor by facilitating the need for our smart platforms in smart cards for cloud telcos and Oems.
Furthermore, over and creates opportunities for combinations of our products and expertise within the mobile infrastructure and enables us to leverage our unique and integrated capabilities of networking acceleration FPGA and smart platforms.
Correctly forecasted this strength over the past few years, we directed our R&D investments as well as our sales and marketing efforts with increased focus and additional strategy fine tuning in 2021.
We are now seeing the fruits of those investments with successful customer penetration throughout the relevant product line that address those those strength.
To illustrate our success following soon after our major top five global Telco design win in January for our virtual ran tech accelerator cards for the new network build out in February we want a second <unk> design win with another customer for the same cards.
This new design winners of further confirmation of the power of the <unk> built out and the disaggregation trend, which is accelerating our growth the cash.
Customer and other leading U S service provider and <unk> player is pioneering its stand alone <unk> network based on Disaggregated open ran on architecture, and we use our quality of its networks distributed units.
In January our first of telco win Kendall than excited industry wide interest in our five G&A Bling technologies.
Growth enthusiastic feedback with our solution has confirmed our approach in the sup.
Superiority of our technology and we are currently engaged in many discussions with multiple players.
This also includes expanding our two existing penetration and scoring further design wins in our initial customers. The distributed unit suppliers and the Hyperscale is theyre cooperating with.
We believe that our innovative and cost effective product our deep <unk> system level understanding our used long cooperation with them and the expanding relationships. We have and are building with all the key telcos Hyperscale server manufacturers in the <unk> players.
The position us for long term success in these high potential markets.
Beyond our existing achievements and the possibilities to date today, we see the potential to drive further accelerated growth with the explosive growth we see in the <unk> edge and cloud infrastructure markets ahead, and leveraging on the close cooperation.
With cooperation in joint go to market activities with Intel we.
We have decided to some of the increase our investment in R&D in 2021.
As you have seen in our financial results R&D expenses were $4 $8 million in the quarter being slightly more aggressive the unusual compared with our traditional approach.
Given the opportunities. We believe this increased R&D investment is prudent and will pay off nicely in the future for the remainder of 2021, we feel comfortable with this level of R&D expenses.
I would like to briefly address our even star collaboration and other examples of where the potential that over on <unk> presents for us and for our needs to invest more in R&D.
A healthy ecosystem of open run vendors plays an important role in accelerating the deployment of simplified flexible and efficient run technologies a.
A few weeks ago, we announced our even star distributed unit collaboration with Facebook connectivity and other even stopped partners addressing the operator demand for best of breed unbundled distributed units that meet three GPP and over and specifications to facilitate the rollout of <unk>.
Open run in <unk> and <unk> networks.
The even star program aims to accelerate the adoption of open ran solutions across the industry.
On the new collaboration with Facebook and other even stopped partners allows us to provide operators with groundbreaking functionality, bringing the network flexibility and performance to a whole new level.
Such as advance of loads in times of colonization and highly competitive price points.
This cooperation demonstrates that our ability to integrate the various functionalities required within the distributed unit is indeed considered as an important asset by the industry.
As you can see moving into 2021 and beyond Silicon is very well positioned the markets that we address are performing strongly and are expected to continue with the significant growth in capex investments.
The strength within these markets supported the areas that we have invested in over the last few years, they support our cloud penetration efforts through smart cards.
The one in <unk> related efforts through smart platform and now they also support our smart platform at <unk>.
<unk> and smart cards, together and separately for the huge 40 slash <unk> over on base mobile infrastructure market.
Many of our new potential telco design wins have much greater scale and potential than what we have traditionally experienced and more than that each design win we have already achieved and continued to achieve represents an opportunity for sustained long term revenues once we establish a relationship with the customer.
And this is also of why our recent success in wins are indeed, so important.
Before moving on to our guidance I'd like to address the global shortage of electronic components, which I'm sure you're all aware of and which we already discussed last quarter.
Practically as of today, we feel this shortage with all of our suppliers.
Stress that this is an industry wide issue affecting everyone in a very significantly.
The extent of the component shortages are two of level, we have never seen before and analysts expect it to persist at least for the rest of plenty of 'twenty one.
Components lead times are increasing and scarcity is increasing prices and in some cases, we see lead times of 12 months or even longer.
Given careful planning and prudent inventory management, we've been able to resolve most second quarter component shortage issues and the impact for the second quarter will be minimal.
Looking further out to our deliveries during the second half of the year. Our efforts today will also help us alleviate some of the issues.
However.
The remains component shortages and we are working hard to resolve these as best as we can to meet the strong and growing demand for our product.
I note that the longer lead times could have an impact if the mix of actually ordered the product differs significantly from the focus the mix and could delay the possible upside we would gain from faster than forecasted ramp of ramp ups of existing design wins as well as the additional <unk>.
Potential from design wins in our pipeline.
There is also the concern that despite our meticulous and early planning vendors that are currently scheduled to deliver on time will decorate as we move forward, we see this happening more and more.
Yes.
I would like to add debt on our side is the caliber of our larger customers, which are thirsting for our products and our close working relationship with them is pushing us up the components priority list. We will also leverage our strong relationship with the vendors, especially into.
Yeah.
We will of course keep you up to date of this.
Okay.
I would like to spend the few moments discussing our guidance.
For the second quarter of 2021, we expect revenues of between $29 million on $30 million, which at the midpoint represents strong year over year revenue growth of 28% the third quarter in the row with above 30% growth.
Given our very long and growing list of design wins generating ongoing orders, our solid baseline of activities and strong market fundamentals with our focus on some of the fastest growing markets in the networking space.
We are well positioned for strong growth in 2021 and beyond.
While the current component shortage add some uncertainty into the second half of the year, we reiterate our guidance range for the year of 120, and one and $130 million.
Before summarizing and moving over to Iran. As I said earlier, we have a strong cash position, providing us with significant financial flexibility, giving us more than enough working capital.
Enables us to continue to invest internally in our R&D efforts ultimately fueling the lot of growth of our business.
Furthermore, it also allows us to share the rewards of our continued profitability and cash generation with our shareholders and today. The board of directors authorized the third one of your share repurchase plan, allowing silica silica to purchase up to $50 million of our ordinary shares in the market.
Our current one year of $50 million buyback plan will expire this month to the.
Date during the last few years, we've purchased approximately 870000 shares of political for a total of about $30 million.
Okay.
In summary, as I've shared with you the disaggregation of the coupling trends continued to gain traction and are significantly increasing silicon potential.
Our long list of design wins, our partnerships with the market major players.
Our extensive collaboration with Intel and our current long and deep pipeline.
Provide us with much optimism going forward with continues to growth.
Consequently, we expect the day coming few used for Silicon will see performance well ahead of what we've achieved over the past few years and that we will continue to achieve ongoing revenue growth at a double digit compound annual growth rate for several years ahead.
With that I will now handover the call two of run for a detailed review of the quarter's results around please go ahead.
Thank you <unk> and Hello, everyone.
Revenue for the first quarter of 2021 were.
$29 million day.
Year over year increase of 31% compared with revenues of $22 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, 59%, Europe, and Israel, 33% far east and the rest of the world 8%.
During the last 12 months, our top three customers together accounted for about 35% of our revenue.
I will be presenting the rest of the financial results on a non-GAAP basis.
Each excludes the noncash compensation expenses in respect of options and <unk> 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 2021 was $10 1 million.
Presenting a growth margin of 34, 7% were in the range of our gross margin guidance of 30% to 36% and compared to the gross profit of $7 3 million or gross margin of 33% in the first quarter.
Of 2020.
The variance in the gross margin is the function of the specific product mix sold in the quarter.
Operating expenses in the first quarter of 2021 were $7 $1 million compared with 5.7.
$7 million in the first quarter of 2020, most of the increase in R&D related and as <unk> mentioned.
As planned and represents our continued significant investment in developing new products IP and technology.
Operating income for the first quarter of 2021 were $3 million, an increase of 90% compared to operating income of $1 6 million.
As reported in the first quarter of 2020.
Net income for the quarter were $3 million, an increase of 31% compared to $2 $3 million in the first quarter of 2020.
Earnings per diluted share in the quarter were 42 cents.
This is a year over year increase of 36% compared with EPS of <unk> 31.
As reported in the first quarter of last year.
Now turning to the balance sheet as of March 31, 2021, the company's cash cash equivalence and marketable securities totaled $78 $1 million with no debt or $11 30.
Per outstanding share.
During the quarter, we further executed our second $15 million Donna.
Share buyback plan, which we started on may 4th 2020 during the first quarter, we purchased approximately 86000 shares at the.
The total cost of $4 million.
That ends my summary, and we.
We would all be 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 two if you.
Using speaker equipment kind of lift the handset before pressing the numbers of questions will be pulled in the order. They are received please standby while we pull from your question.
The first question is from Robert Sussman of Bentley Capital. Please go ahead.
Thank you can you give us you've got all of these design wins that have been coming in.
And I'm wondering when the ramp to really see a significant sequential increase.
Revenues ignoring the.
Of the component shortage problem.
The second quarter is normally considerably stronger than the first yet your guidance is for the quarter to be relatively flat. So can you talk about the timing of these design wins, including where you were with the two CP.
The design wins, I think one of which has volume the other one has not started yet.
So I'll try to respond both of about the older design wins as well as the new design wins and the.
And also respond a little bit about the quarter.
Yeah.
Okay.
So first of all I mean, there are no significant news with the older design with just like you said I mean, one of them is up and running we're still look hoping it would grow even more but right now I mean, I don't have any update on debt remarks. So it is of significant accounts for us.
The which is more or less I would say at these times flat every quarter, maybe with the well.
I would say it's flat right now the other one is not ramping up as of yet they have their own issues.
Can tell you that.
We're discussing it with them.
And I would say well I mean, it seems as if they would like to ramp up soon but now.
We're seeing that we have this component issues.
And I'm not sure whether this really would happen or not.
The because we would not have and we were not having any forecast from them.
For the upcoming quarters, so even though they are interested right now.
The I'm not sure of it really is going to happen.
So now to the annuity of design wins, the new design wins.
And that we just announced in January and February.
I think for both of them, we would see revenues this year.
And these revenues.
Our supposed to contribute to our growth in the following quarters.
And what I would say is that well our guidance for the second quarter.
Even guidance why does a little better than what we have actually been able to achieve in the first quarter.
And it takes into consideration these new design wins as well as the issues that we're having from the component shortages.
So I would say that if we were not in this situation, we would probably be able to show a little bit more in the second quarter.
But overall I would say that these new design wins would take an impact mostly in the second half of the year of little bit in the second quarter as well.
And still on the second quarter is going to be 30%.
Both representing 30% growth year of any more or less.
Okay. One short follow up on that thank you. That's very helpful. When do you think we'll start to see meaningful revenues from the <unk> wins.
So as I said, I mean, <unk> wins, we will start the fee revenues from them, mostly in the second half of the year.
And again.
Let me say that I mean.
In order to clarify the situation with the with the shortages.
As well as the.
The the wind.
So what we're what we're telling you of for the second quarter is based on what we're focusing on the one side and what we are having solutions for in terms of the components shortages. So we are I would say quite confident obviously there is never 100% cash.
Dividends, but we're quite confident that we would achieve these levels.
For second quarter for the full.
Third and fourth quarter, I would say that.
This is what our plans are taken into consideration the shortages.
Situation, but.
We're still hoping we would be able to resolve some of these issues.
But in terms of revenue as we're thinking.
That we would be able to growth due to deal.
With that being said you need to remember that the telcos that we're talking about are not very predictable over not being very predictable in the past so it's not that easy.
To predict exactly what's going to happen and what we are doing is actually averaging our approach on these wins, but based on the information that we're having right now the.
The latest <unk> wins would contribute.
The.
I would say quite.
I don't know what the amount would be but they would not be negligible in the second half of the year.
Okay. Thank you so much.
The next question is from Alex Henderson of Needham <unk> Company. Please go ahead.
Thank you very much.
A couple of questions about COVID-19, let me start off with.
Sort of the trajectory of the growth.
You've obviously got the supply constraints that are impacting the numbers not only in the June quarter, but I assume that you're suggesting in the back half of the year.
As we look at the back half.
Each of the function of the high end of the band.
Constrained by the availability of components in that.
Holding it down.
It would be the conditions that would cause the low end of the band.
Obviously with the.
On the 9 million plus in both of the first two quarters the low end of the band.
The bank.
Accounts.
Is it would it be decommissioning.
On the commitment that would require you to hit the low end of the debt can you talk a little bit about what.
Are you thinking is at either end of the day.
Yeah, I mean, I think that taking us to the lower end of demand.
It would be the.
Two things, mostly decommissioning just like you said.
And the other side.
Once again, when I'm, saying the competing on the same day committing based on forecasting so we have forecast and based on the forecast.
We believe we would be at the higher end.
But if our vendors with the COVID-19 or if what would happen in that happens a lot of time and that is that our forecast is made out of many accounts typically it never happens 100 percentage or exactly in accordance with our with our forecast, but because there are several accounts day.
Sure some of them are actually lower than expected others are higher than expected.
And they compensate for each other so as long as there is no component shortages. That's okay. Because what is low the other one of high but now if one of them is low and the other is high so the lull we don't get the high if we're not able to deliver because of the component shortages that would take us to the low end.
The high end I would say in that case, if everything goes according to the plan that would be the high end I mean, the could even theoretically that could be a higher end, but I wouldn't speak about this higher and mostly because of these components issues because if there is sudden.
Higher Ed right now it may be very difficult for us to deliver just because of the component issue.
Okay.
So before I get on the.
Part of his question.
You Stephanie.
Definitely deserve some credit the airport.
Having now I think your analyst meeting the.
20 years.
At the company this year so.
Really.
<unk> demonstrated.
Shipment to the.
Millicom.
Think of that obviously plays very nicely to the stability of the company.
The leadership.
So I just wanted to congratulate the thank you on that.
Yeah.
Going back to the outlook a little bit the could you talk about the SD Wan side of it.
We are hearing.
Other companies.
Obviously enterprise spending is rebounding quite sharply on.
On a global basis.
Moreover, because.
The disoriented people starting to come back.
So the incremental spending around the campus.
Moreover, as that happens it's not good understanding of the people coming back, but a lot of people are saying.
Remote net in terms of is resulting in very sharp increases in.
And profit growth.
Across what is described as hot.
Networks.
And that's resulted in surprisingly strong spending on campus edge in data centers. So.
Does that not translate into incremental demand for your SD Wan business.
Sounds like that's going to accelerate over the next couple of quarters.
What are you seeing on that side of the business.
We are also seeing increased demand.
In the SD Wan.
Space, we're definitely seeing that and we're seeing that from both from our existing customers as well as from.
I would say customers, which are in the pipeline.
And with that.
That the Ho.
Hopefully we would get very soon.