Q1 2022 Silicom Ltd Earnings Call
If the results followed by Ron who will provide the analysis of the financials. We will then turn over the call to the question and answer session.
And with that I would now like to handover the call to shaky accurately.
Thank you al.
I would like to welcome all of you to our financial results conference call discussing our first quarter 2022 results.
I would first like to welcome Lee <unk> and mentor call for the first time.
As of July one <unk>.
He will transition to the position of President and CEO , replacing me and I will become executive Vice chairman of the board.
Over the past six years as part of a carefully structured long term transition plan I have worked closely with neuron and I have every confidence in his ability to capitalize on our strong market position and bring silicon to the next level in its long term development.
Your honor serving key executive roles within our company currently as CEO and CEO of our North American subsidiary Silicon, Inc. <unk>.
Ron was the visionary behind telecoms edge networking solutions strategy and was instrumental in driving the company to its leadership position in the SD Wan edge platform's market.
While I will continue to work very closely with Myron as part of my new role I wish you much luck in the new position.
Sure.
Now to the results of the quarter.
We are pleased with our start to 2022 with strong first quarter results, demonstrating 11% revenue growth year over year to $32 million.
This is at the center of our expected target range of between 31% and $33 million.
We reported our 69th quarter of continued profitability with net income of $3 million and earnings per share at 44.
Okay.
We are all the more pleased to continue demonstrating growth. Despite a continued background a significant component shortages and tight supply chains, which are significant headwinds and the impact is being strongly felt across our entire industry. It is clear that given the continued high market demand.
<unk>, which is well in excess of supply analysts do not expect the shortage to abate during the current year.
We continue to place significant effort into maximizing what we're able to manufacture and deliver meeting as much of the high demand for our product as possible and I will further address the efforts were taken later on in the call.
And indeed, the exceptionally strong market demand is.
His broad areas across our full product range. This includes our server adapters SD Wan slash edge devices as well as in <unk> slash overrun product.
This has now led to the highest ever backlog in silicones history and this underlies my optimism that we have a significant runway of expected growth ahead of us.
Given such high market demand and record backlog levels on one hand, and the component shortages on the other to support expected product sales. We took we took the strategic decision to significantly increase our inventory levels.
As you may notice our inventory today stands at about $95 million, which is an increase of almost $20 million in one quarter.
Using our strong cash position to build our inventory levels to support current demand, while protecting us from shortages and non commit by chip vendors will continue to remain a strategic priority for us.
Our ability to do this is a significant competitive advantage for us.
It allows us to serve our existing customer base delivering products, which are not easily available today, while attracting new customers and new business.
I believe that in today's market. This strategy will provide the highest long term return on our existing cash position.
We continue to capitalize on the trends of disaggregation and decoupling, which are among the most significant transitions of architecture in recent history.
The markets to which these trends play into are the fast growing SD Wan market and developing <unk> or end market.
These are both key strategic markets in which we continued to demonstrate and build on our very strong capabilities and positioning.
The SD Wan market today contributes tens of millions of dollars to our revenues and is in a growth phase while the <unk> market is still in the early introduction fees. Our ongoing success in SD Wan makes us optimistic about our potential in the <unk> market, which had been endorsing the.
Disaggregated and decoupling approach.
Our existing wins, our highest ever backlog combined with the potential opportunities in our pipeline <unk>, our optimism that our achievements. So far are just the tip of the iceberg.
I would like to discuss some of the new recent wins, we announced in.
In February we added a new tier one European telco customer to our growing list of top tier telco clients. This new customer selected a customized version of our edge networking platform and placed a 1 million dollar purchase order forecasting a ramp up to an annual approximate run rate of 5 million.
Per year.
We want this design win through our partnership with a leading provider of SD Wan software. We chose our hardware is the highest performance compliment to each next generation offerings.
This follows our May 2021 design win with a global Telco Giants Telefonica and a few other design win with USD, one telcos and service providers.
The win confirms our strong positioning in the SD Wan ecosystem and demonstrates the competitive advantages of our edge network solutions strategically it emphasizes the value of our strong cooperation in partnerships with many SD Wan software vendors in the current era of hardware and software decoupling.
Last month, we announced a major edge networking design win from an existing customer a leading U S communication service provider for customized high runner edge networking products, we delivered $3 million in equipment for this project first phase and received second phased purchase.
Orders totaling a further $3 million to be delivered this year the.
The customer forecast that the total value of the design win really reach approximately $15 million.
This is another demonstration of the proven ability of our edge products to increase network throughput and decreased latency, which are key differentiated differentiating advantages for us.
I'd like to provide more color on how we've been addressing the component shortage.
We have already been living under the issue for a year and our achievements of continued revenue growth stable gross margins and continued profit growth under these conditions demonstrate that we are overcoming many of the problems successfully which is why we remain optimistic.
The steps, we've taken and continue to take are as follows.
One as you have seen we have leveraged our strong balance sheet to build up our inventory of raw materials. These are backed by customers existing <unk> and commitments buying available stock of components, both from the vendors and in the free market and expediting delivery if need be.
We are working with customer tube, we are working with customers to optimize product availability and providing them with alternative solutions for example, replacing product of which the deliveries challenging with other product with better availability.
And finally, we have been redesigning our products to use more available components to achieve optimized availability.
Obviously, when designing new products. Our current initial criteria is optimizing for a component availability.
Moving forward.
Why do we predict that the shortages will persist for the coming year. Despite it given that.
Our experience and success in dealing with the issue.
Combined with a very strong market demand for our connectivity.
Solutions and our broad range, an increasingly large design wins all support our expectations for continued solid double digit growth rate for 2022 and beyond.
Okay.
Which brings me to our guidance for the second quarter of 2022.
For the second quarter of 2022, we expect revenues at between $33 million and $35 million, which at the midpoint represents growth of approximately 12% over that of the second quarter of 2021.
I would like to note that these growth rates represent our estimates as to the level of our success in indeed mitigating the components situation is there.
No such situation our forecast would have been much higher.
In summary, we remain very pleased with our performance to date and 2022 has started well. This is despite the supply chain difficulties in shortages, even despite the shortages we continue standby our expectations that given the current strong.
In the market, we expect to see double digit compounded revenue growth for the coming few years, which will accelerate once the global supply chain issues are finally resolved.
Our expectations are built on the base of our recent major design wins the scales of each is well ahead of what we have traditionally experienced. Furthermore, our backlog is at the highest level. It has historically been for silicon and all of this provides us with strong revenue visibility over many quarters.
And use.
More broadly our focus on some of the fastest growing markets in the networking space, which are developing either the trends, which we had correctly predicted and positioned ourselves for as well as our core and current long and deep pipeline makes us further optimistic.
With that I will now hand over the call to 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 2022 were $32 1 million compared with revenues of $29 million as reported in the first quarter of last year.
Our geographical revenue breakdown over the last 12 months, whereas follows North America, 69%, Europe , and Israel, 20% far east and rest of the world 6%.
During the last 12 months, our top three customers together accounted for about 30% 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 our skus granted to directors officers and employees.
Physician 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 2022 was $11 1 million.
Representing a gross margin of 34, 5% in the upper half of the range of our gross margin guidance of 32% to 36% and comp.
<unk> to gross profit of $10 1 million.
While gross margin of 34, 7% in the first quarter of 2021.
Variance in the gross margin is a function of the specific product mix sold in the quarter.
Operating expenses in the first quarter of 2022 were 777.
Seven $7 million compared to $7 1 million.
Reported in the first quarter of 2021 .
Operating income for the first quarter of 2022 was $3 4 million.
An increase of 12% compared to operating income of 3 million reported in the first quarter 2021 .
Yeah.
Net income for the first quarter was $3 million.
A similar level compared to $3 million in.
In the first quarter of 2021 .
Earnings per diluted share in the quarter were <unk> 44 cents.
Compared with EPS of <unk> 42.
As reported in the first quarter of last year.
Now turning to the balance sheet.
As of March 31, 2022, the company's cash cash equivalence and marketable securities totaled $43 1 million.
With no debt or $6 47.
Outstanding share.
During the quarter, we further executed on our third $15 million.
Share buyback plan, which we started on may 4th 2021.
During the first quarter, we purchased approximately 78000 shares at a total cost of $3 $3 million.
That ends my summary.
I would like to ambac over to the operator for question and answer session.
<unk>.
Thank you ladies and gentlemen at this time, we will begin the question and answer session is you have a question. Please press star one if you wish to cancel your request. Please press star two if you are using speaker equipment kind of lift the handset before pressing the numbers questions will be followed on the order. They are received please standby while we poll for your questions.
Okay.
Okay.
I repeat if you and I have a question. Please press star one.
Yeah.
The first question is from Matt Desert.
Needham <unk> company. Please go ahead.
Hey, guys, Matt on for Alex here, Thanks for taking our questions wondering if you could start off by talking about the latest on supply with growing macro concerns in China.
And other systems companies seeing worsening conditions for our component availability. What are you guys seeing out there if you could touch on that please.
While obviously, we do not see any improvement for now in the components situation.
Which is was very bad and is very bad.
Yes.
We may experience some more difficulties here and there but overall the situation is really bad.
However, as I've mentioned before we have taken steps ahead of time, mostly in terms of creating inventory, which would help us with the deliveries with customers. So again, we would have challenges, it's not going to be simple and well not only it's not going to be simple I'm pretty sure.
That we would not be able to deliver to our customers everything that thereafter, however, I think that.
Looking at overall industry situation than we are relatively in a good place still challenging but relatively in a good place.
Okay.
That's great and bringing it back to the inventory yet you're talking about that large 20 million sequential increase can you just touch on.
Your ability to continue to build that out and the opportunity and growth that that portends for you guys.
Well first of all.
I would say that indeed this is our strategy and we are planning to continue with that strategy as much as possible. Obviously once we're doing that we're carefully looking at every other parameter within the company.
To be able to do that but we are taking advantage of our strong positioning I would say and the strategy remains like that which means we will continue to take on the inventory, which by the way is committed as I mentioned I mean, we have the largest ever backlog position.
Ever in the history of the company, so which helps us in moving forward with that strategy and we plan to continue with that while being careful making sure that all other company parameters are maintained at the required level.
Great and then has there been any slippage or disruption at all to the timeline and ramping of these contract wins that you guys have.
Ed.
Ramp disruptions to what I didn't hear the last few words of your of your question.
To the contract and design wins that you guys have been going on now.
We don't feel any disrupt any disruptions at all to the contracts and do their design wins the only disruptions.
The challenges that you were feeling is these days in the supply chain, which obviously creates challenges in deliveries, but from a business perspective getting new.
The design wins, getting new <unk> et cetera, we don't feel any disruptions at all.
And there is can you talk about the propensity to buy particularly in EMEA and APAC given the macro.
Turns that are going on over there have you seen any any delta in demand from from those theaters.
Well first of all as you could note.
The most I believe approximately 70% of what we're selling is to the United States. So obviously there was no impact there.
The.
EMEA.
Represents 20 something percent is significant part of that is in Israel. So I wouldn't say that there was no impact at all but it is not something which is impacting.
<unk> business.
Great Great and then lastly.
On the CEO transition it seems like wire and been instrumental to the SD Wan strategy can you talk about the plans for that transition and any thoughts or changes.
The strategy in that perspective going forward.
Well I believe that.
At least I mean.
Talking to Iran. I believe that we are you are not going to see any change in strategy seems to me that you run believes in the same strategy that I believe that the board of director believed in so I don't see any change in.
Strategy in that respect.
I think that the lira and would do a really excellent job.
I think that.
The timing is even perfect because right now.
With this huge backlog that we're having and a lot of banks to execute I think that these are areas that he could be much better than me. So.
Better, but overall I would say that this is a long process. This has been a long process six years process that we structured very carefully for him to learn every part of the company.
Or it is impact of this strategy is already within our current strategy. So I would say more of the same strategically probably better results.
That's great.
And I guess, one more if I may could you just touch on obviously the shekel has been plummeting recently.
Could you just refresh us on your strategy for hedging and talk about how thats impacting U throughout the duration of the year.
Yes, sure first of all I remind everybody that we do not hedge anything.
In quarter, one indeed, we had a positive effect of exchange rate differences not significant not significant amounts but still.
A minor positive effect compared to negative sometimes.
Required significantly negative effect in previous quarters.
Great I'll see the floor. Thanks for taking my questions guys.
If there are any additional questions. Please press star one if you wish to cancel your request. Please press star two please standby, while we poll for more questions.
There are no further questions at this time before I ask Mr. Orbach 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 silicones website, www dot silicon Dash USA Dot com.
I'll start on a box where do you like to make your concluding statement, yes. Thank you.
Thank you everybody for joining the call and we wish you all health and we look forward to hosting you on our next call in three months good day.
Thank you. This concludes silicon first quarter 2022 results conference call. Thank you for your participation you May go ahead and disconnect.
[music].
Yes.
Okay.