Q3 2022 Silicom Ltd Earnings Call
Okay.
[music].
Ladies and gentlemen, thank you for standing by welcome to the Silicon third quarter 2022 results Conference call. All participants are present in a 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.
By now the Companys press release, if you have not received it please contact silicon Investor Relations team at E. K Global Investor Relations at one to one to 3788040 or view it in the news section of the company's website www dot silicon Dash USA Dot com.
I would now like to hand over the call to Mr. Ehud Helft of G of Ek Global Investor Relations. Mr. Helped would you like to begin please.
Thank you operator, I would like to welcome all of you to Silicon third quarter 2022 results conference call.
Before we start 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.
<unk> does not assume any obligation to update that information actual events or results may differ materially from those projected including as a result of our increasing dependency for substantial revenue growth on a limited number of customers in the evolving cloud based SD Wan NFC and edge market.
He is an extent to which solutions are adopted by these markets. The likelihood that you will rely increasingly on customers, which provide solutions in each of our end market, resulting in an increasing dependency on a smaller number of larger customers.
Difficulty in commercializing and marketing <unk> products and services, maintaining and protecting brand recognition protection of intellectual property competition disruption to our manufacturing and development along with general disruption to the entire world economy.
Waiting to the spread of the novel Corey.
One of our highest COVID-19, and other factors identified and decrement filed by the company with the SEC.
In addition, following the company disclosure of certain non-GAAP financial measures in today's earnings release, such non-GAAP financial measure will be discussed during this call.
Such non-GAAP measures are used by management to make strategic decisions focus future results and evaluate the companys current performance.
Management believes that the presentation of these non-GAAP financial measures is useful to investor understanding and assessment of the company's ongoing cooperation and prospects for the future.
Unless otherwise stated it should be assumed that financial discussing this conference call will be on a non-GAAP basis non-GAAP financial measures discussed the management I'll provide additional information to investors in order to provide them with the adaptive methods for assessing our financial conditions and operating results.
These measures. These measures are not in accordance with a substitute for GAAP.
For a reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release, which you can find on telecoms website.
With us on the without underlying today, you sell your own eyes.
President and CEO and he said ranking us as CFO .
I will begin with an overview of 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 like to hand over their cost in Europe . John go ahead.
Thank you.
I would like to welcome all of you our financial results conference call discussing our third quarter 2022 results. We are very pleased to report a very impressive quarter with strong revenues margins and profit growth across the board. This is all the clear demonstration of the power and leverage inherent within our business model.
We reported a very good performance with revenue growth up 19% year over year to $39 2 million.
Our quarter end backlog continued to demonstrate the high demand for our products.
The strong operating leverage within our business model allows our revenue growth to translate into much higher profit growth because we did not record a corresponding growth in our expenses. This is demonstrated by our operating margin expanding to an impressive 18, 4% for the quarter versus 12, 8% last year.
All of this led to our 71st quarter of continued profitability with net income of $6 9 million.
A very strong 91% year over year with earnings per share at over $1, a sequential increase of 45% over Q2 of 2022.
I want to stress that we achieved all of this and our performance would even been better had it not been for the ongoing global component shortages crisis, which still continues to impact our revenue to some extent in the third quarter.
As you know we have work hard over the best U to overcome this situation our solid results show that we have indeed been successful and prove our ability to mitigate the issues and deal with the continued challenges.
Looking ahead. The good news is that in recent months the global component shortages, there's no stabilize and we start to see minor improvements.
We are working on the basis of an improvement in component availability during the first half of 2023. Despite the fact that the shortage for certain parts may continue till the end of 2023 or even beyond.
Although the best year, we have used our cash position currently at $43 million to build up our inventory levels to support demand and protect us from shortages and non committed by cheap vendors.
We see this continued strong cash position as a strategic asset and significant competitive advantage. It allows us to serve our existing customers better delivering products, which are not readily available, while attracting new customers and new business, which have difficulty finding products elsewhere with signs of some lessening and component shortages.
We expect that the peak inventory levels are now behind us while those levels are still at the higher level than what we would normally need we do expect to gradually decrease those levels due to availability improvements from several of our covenants vendors.
As our results clearly demonstrate from our perspective, we continue to see no letup in the demand for more end market.
The exceptionally strong market demand that we are experiencing is broad needs across our full product range, but more importantly for us. We believe that we have seen a significant growth in our total addressable market potential at all.
Edge product initially targeted for SD Wan market became a clear growth driver for us we realize that the same products are attractive for many broader applications in markets given the features performance cost and flexibility advantages.
As a result, we now have a record pipeline of design wins and opportunities for our edge products in multiple varied market as well as interest from potential new customers for our products.
Telcos service providers enterprises, cyber and networking companies and cloud players are using our edge products for applications as the spread is SD Wan virtual CPE telco dedicated dropping secure access service edge and more and an example of this trend is the design win we announced in August .
This was an initial 3 million new design wins and order from a U S based leading provider of cloud based secure access service edge solutions.
First growing cloud cyber security leader will use our customized edge platforms to provide both wired and wireless connectivity to its end customers.
This customer explained to us that they chose us due to our combination of product functionality price rapid customization capabilities and support directly meeting their needs for the next generation systems and applications.
Swing for our edge products represents proof of their value for multiple markets and represents a significant expansion of our addressable markets the value of our edge product is well beyond SD Wan alone our original target market for this innovative technology.
Our edge products offered the exact functionality features and cost the telcos service providers enterprises, cyber and networking companies and cloud drives need for their next generation systems and applications. This coupled with our ability to deliver rapid customizations onboarding and ramp up support positions us ideally for subsea and other market.
<unk> that use edge platforms.
This is all the more demonstrated by the large and growing pipeline that we have built from a variety of significant design wins and opportunities as I mentioned, we now see that the total addressable market for each product is much larger than we initially planned and we seek and we and as we grow our share we expect them to contribute significantly to our.
Future growth.
Our existing wins, our continued high backlog combined with the potential opportunities in our pipeline underlying our optimism that our achievements so far adjusted deepest the iceberg.
Looking ahead in terms of the guidance for the coming fourth quarter and full year 2022, we expect to show continued growth with revenues at between $43 million and $45 million, which at the midpoint represents growth of approximately 21% off of that of the fourth quarter of 2021. This guidance implies full year revenues.
$148 million to $150 million.
And at the midpoint, 16% of the death of 2021 revenues.
I would note that we did we continued to take into account the continuous component shortages situation and our estimates as to the level of our success and indeed mitigating it had there been no such situation our focus would have been higher.
In summary, we remain very pleased with our performance in the third quarter of 2022 with strong year over year growth in revenue and a significant acceleration in our profit growth improving the operating leverage inherent in our business. In fact, we are very pleased that our operating margin of 18, 4% and that's margin of 17 point.
5% achieved in this quarter suppresses the target margins indicated in the long term model that we have been including in our investor presentations for a few years.
Our exceptionally strong backlog provides us with continued visibility in our revenue growth over the quarters ahead.
More broadly the success for our edge product and its broader application into multiple markets well beyond what we mentioned earlier on means that our total addressable market today is significantly greater than our previous estimate and this makes me increasingly bullish with regards to our prospects over the mid and long term.
With our total addressable market larger than ever.
Pipeline and a stronger than ever momentum, we have never been better positioned and look forward to multiyear expansion.
With that I will now hand over the call to Iran. For a detailed review of the quarter's results Iran. Please go ahead.
Thank you <unk> and Hello, everyone.
<unk> for the third quarter 2022, we're expecting.
$13 million.
Hello up 19% year over year, compared with revenues of $32 9 million as reported in the third quarter of last year.
Our geographical revenue breakdown over the last 12 months, whereas follows North America, 70%, Europe , and Israel, 24% far east and rest of the world 6%.
During the last 12 months, our top three customers together accounted for about 25% 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 auctions and <unk> granted to directors officers and employees of <unk>.
<unk> 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 third quarter 2022 was $14 1 million.
Renting a gross margin of 36%.
Top of the range of our gross margin guidance of 32% to 36% and compares to a gross profit of $11 $3 million or gross margin of 34, 3% in the third quarter of 2021.
The variance in the gross margin is a function of the specific product mix sold in the quarter.
Operating expenses in the third quarter of 2022 were $6 $9 million compared to $7 $1 million reported in the third quarter of 2021.
Operating income for the third quarter of 2022 was $7 $2 million, an increase of 72% compared to operating income.
$4 2 million as reported in the third quarter of 2021.
Net income for the third quarter was $6 $9 million, an increase of 91% compared to $3 $6 million in the third quarter of 2021.
Earnings per diluted share in the quarter were $1.01 compared with EPS of <unk> 52 cents is reported in the third quarter last year.
Now turning to the balance sheet.
As of September 30th 2022, the company's cash cash equivalents and marketable securities totaled $43 2 million with no debt for $6.44 per outstanding share.
That ends my summary.
I would like to hand back over to the operator for question and answer session 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 are using speaker equipment kindly, what's the handset before pressing the numbers questions will be pulled in the order. They are received please standby while we poll.
For your questions.
The first question is from Alex Henderson of Needham and company. Please go ahead.
Yes.
Thanks.
So you guys are a persistently.
This making me feel like I can't forecast are like.
Crushing my numbers every quarter. So thanks, so much for that great.
Great job Super Super print.
Well I wanted to just start off with the obvious which is.
The quarter was strong the guide is a reasonably strong you're still supply constrained can you give us any quantification of the magnitude of the supply constraints in backlog.
I mean is it a slice or is it a low four or is it a bread truck.
Uh huh, how much new business.
The.
Outlook was how much better would the outlook be if you had the ability to ship what you wanted to ship in the quarter.
So first of all thank you for the warm words.
Before we start.
I would say that it's first of all it's an evolving situation right now. It's the situation is I would say changing on a daily basis. It is improving to some extent not some old vendors in northern all parts.
It depends really depends sometimes you may use that the company is doing better, but we just need a specific thoughts on them in that specific part has got these hard to get it's hard to to give numbers exactly on how much it's impacting but definitely it's impacting I mean, if there was no shortages at all we would it be that's much higher numbers.
And same goes for the.
Looking forward looking forward at the same we have visibility we have a big backlog as we said, but it's a daily battle to continue and get more parts and more parts, but roughly I would say it's in the millions.
Okay.
Or kind of a question on the other direction, though you have a lot of major project wins.
And those project wins are projects that.
Your partners that you're selling to need to ramp.
And in this environment.
You know where.
The economies of Europe in particular, but also in the U S and internationally.
You know are under a lot of dress. So what is the risk that some of these large projects are good.
Stretched out delayed downsized.
Versus the magnitude of the product.
The partnerships that you have you've got so many of the minutes it seems like even if some of them are.
Flattened or are delayed you would be able to offset that but can you talk to.
Kind of a higher bar.
Balancing macro pressures on project timing versus the magnitude of the wins that you've.
We've been able to bring down.
Yeah, absolutely. So definitely we are ramping up on several design wins right now and what we're doing is working very very closely with the customers to understand what they need to be compared to their original plans.
Can say that in the short term, we almost see no risk.
In the longer term.
Yes, who knows I mean, we.
We were tracking that global economies I think it's unclear yet where it's going but what we can do is talk with our customers. All the time understand exactly what their plans are and so far as I said at least in the in the very short term, we see almost no impact.
So I think coming out of the last quarter going into the back half of the year you talked about.
Visibility at least through year end is it at this point are out into the middle or back half of the June quarter that you have visibility to that demand.
So we I would say that is very customer specific in some cases, we are able to gain more visibility in some cases, they gave us a little less but in general we have visibility deep into 2023, but not until the end of 'twenty two and three.
Alright, great.
Gross margin.
High end of the band in the last two quarters are above the midpoint of the band in the first quarter, our seasonally weakest quarter of the year.
What should we be thinking here is the result of that is that a function of.
The environment, and you're able to get better margins or is it a mix issue with what's going on on.
The gross margins and how should we be thinking about it for the fourth quarter.
First of all it's a it's a result of a very hard work I would say by the team to try and maintain this GM, but in general it is a function of the mix of products that we sold during this quarter very happy with this result, obviously and then the hard work done by the team and we still keep our guidance between 32% and 30.
Thanks.
Alright, and then on the Opex It was a little surprised that it declined now two quarters in a row.
I would assume that some of that has to do with the.
The shekel.
Versus the dollar, but I would also expect that Theres, some project timing and things of that sort of particularly on the R&D line.
Which is down from $5 1 million to $4 4 million.
Can you give us a little bit of guidance on what we should be thinking as we go into the fourth quarter.
I put that in for that matter any sense of what your plans are for 2023 at this point.
So you're right about the dollar versus the shekel, but actually.
It's actually even more stronger on the dollar versus the Danish kroner as you know, we we ever team in Denmark, and that's also impacting even I would say percentage wise higher than than the dollar versus the shekel.
But there are a few I'd say one time items in the R&D expenses that are causing the reduction as well in terms of looking forward, we still when we look at those numbers and on an annual basis, we still look at the opex at around $30 million a year.
And that's what we expect for 2023.
Alright, and so in the fourth quarter should we assume that rebounds.
The $5 million range or is it going to stay at the lower levels.
Yeah sure.
It's impossible.
To read that.
Sorry can you repeat the question.
Yeah, just for the fourth quarter.
R&D going too.
No rebound here in the fourth quarter.
There was a chance for that I think it's hard for US to note also that we don't know what exactly what happened with the the dollar versus the shekel versus the growth.
I think for 2022 as I said, we are looking at around $30 million for for Opex and for 2023 for around $33 million.
Okay 33.
Got it.
It helps clarify it okay going down to the to the interest line you've got.
Rising interest rates and very large cash balance sheet, great cash flow.
Should we start to see the interest income go up meaningfully.
You know over the next two three quarters as a result of the <unk>.
Short term our instruments are rolling to higher interest rates.
Like what might that look like say by the middle of next year on the interest line.
First of all as you mentioned exchange rate differences is a big factor in the financial income number.
And in Q1.
Three there was a positive effect of exchange rate differences due.
The real the real financial income should be.
100, K or even a little bit less than 100 K.
So assuming no effect.
The exchange rate differences and no other one one time items.
The real the real financial income is up to 100 K.
And no benefit from rising interest rates.
No because.
The part of our investment currently is not so high so even if we reinvest.
Yeah.
If even if we reinvest our available funds.
The impact will not be significant.
Alright.
That's understandable and any guide on the tax rate for next year, it's like 15%.
Sort of a baseline that we're comfortable with that still yes.
As we could see.
The tax rate in quarter, three was quite quite low approximately 10% and for the first three quarters. It was about 12%.
It was it is a little bit low due to onetime reasons.
And which will not affect our long term guidance, our long term guidance remains at the range of 15%.
As we look at two or so next year I'll give them more closely.
Or do you use this year and the backlog the constraints.
Is it reasonable to think that we could do grows.
You know on par or even better than <unk> to.
The 22 right.
We believe so I mean, a lot of unknowns.
It's the time.
I mean, a lot of things that are unknown at the moment that the global shortages. If it really will go down in 2023 is it because we expect that if the global economy will.
B as some people say or not.
From our perspective, when you look into the visibility.
And and we look at the projects that needs to ramp up and our discussions with customer. We do believe that we will continue with double digit growth. That's what we believe that's what we're working towards that's our assumptions from from planning perspective. So we believe very much that it's going to be the case.
Great I'll cede the floor. Thanks.
Yeah.
Okay.
Okay.
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.
The next question.
As a follow up question from Alex Henderson. Please go ahead.
Oh no no other questions in the queue.
Okay, well so can you talk about the pipeline of.
Deals that you've got in.
And the headlights that havent been signed yet.
Particularly around some of the verticals.
Open ran.
I think it's one that some people I've talked to who are on the stock are really interested in.
Just can you just give us some.
Some some sense of what that pipeline.
Potential deals look like.
Yeah. So first of all where we see the biggest growth from our perspective is D edge definitely.
As I pointed out in the earlier part of the call. We said that the products that we initially thought are going to be for SD Wan, maybe not only but mainly I actually we see that our addressable market is much much bigger than that if it's a if it's a C or if it's.
Telco routing or if its other applications, we see more and more and more demand for that more and more products that our customers are asking us to design for them and we see the growth coming from that perspective, very very very strong yeah. If we looked at our for example, our enhanced internet that's another.
Domain that we are becoming more active in all of that together is really driving our belief that this is our main growth driver.
And and we believe that that's where our future lies.
Yeah.
So.
Just going back to the question in terms of the number of projects that you are chasing that haven't been turned yet is it.
Larger than your historical pipeline.
The same as your pipeline.
Pretty clear that the edge, there's lots of different parameters.
Yeah, it's much higher I mean, if you look at the pipeline.
Not all of that as you said not sign maybe but in serious discussions with customers. We have many projects some of them bigger some of them smaller, but a lot of lot of discussions and a lot of potential wins.
Can you talk about five G a little bit.
It's still an area that is getting a lot of attention or is that.
Been subsumed by these other opportunities.
First of all this is an area, where we are generating revenues today, we have a few design wins or they're already fully ramped up some of them some of them going to ramp up.
In General this is an area that we're very happy with.
In general I would say worldwide not related to silicon specifically Fibs you, Iran is not in.
As deployment to date.
And as we I believe is it will get more mature. It will also mean for silicon more business, but at the moment, it's still a little bit premature.
Alright.
And then looking out.
Into next.
Next year so.
You guys have.
Taken a.
Kind of a differential tacked on.
The gross.
Profit approach by not including costs.
It's associated with or revenues associated with parts that have been.
Priced.
Significantly above normal.
Levels.
Worked with your customers to allow them to to buy those products and two to help fund those products not way it doesn't distort either your revenue or gross margin am I reading that correctly.
Yeah.
So as we go out in 2023, and you start working through your inventory.
Are you expecting that inventory to have any charges or.
Yeah.
Cost variances associated with it or are you.
Able to pass on any carry.
So having a higher prices in the current environment than what you've made are paid for the product, let well your inventory to help or hurt your gross margins are in 'twenty three.
So the way that we understand we have a big team focus really on death or managing those risks in the way that our system built in order to make sure that we're not taking unnecessary risk here. We do not believe that this should have an impact or I'd say minor impact if at all.
Uh huh.
Certainly.
Brought up the security vertical.
As an area that you're expanding into in terms of new wins with can you talk to what portion of the security markets or what portion of your business is going into the security market.
I cannot say a specific.
Percentage, but in general I would say that both for more classic.
Both of them are more classic.
Products and also for our new products, because we know that for example.
Saturday, which I mentioned earlier is actually a domain that came from networking and added more security features on it so vendors that used to be networking operate vendors are now the networking and security vendors. So that is also part of the reason that we're seeing growth in cyber but in general we also had a or more.
Traditional products in cyber as well.
And as can be seen on our investor presentation, which will be offloaded.
Very shortly.
During the last 12 months the portion of cyber security was approximately 30%.
So that's that's got to be a higher growth segment of your business I would assume right.
I wanted to talk a little bit about seasonality just to.
To make sure that.
We haven't.
Correct and our head in this environment historically the December quarter has been.
A seasonal spike typically up three four or $5 million in revenues, but also the largest quarter of the year in terms of the EPS.
EPS it sounds like given your guidance on Opex.
36% gross margins that you posted in the mid mid two quarters.
Got.
We will not be the case this year.
For the fourth quarter.
But then again the March quarter is typically seasonally much weaker typically down by a third or more.
Is that likely to be the scenario again in 'twenty three how do we think about that seasonal.
Pattern.
Next two quarters.
We do expect to see this is another thing I mean, we we do expect I don't know about this quarter, we see a D&O or full quarter would see at the end of the quarter, but definitely we expect Q1 of next year to be usually how we see Q1 every year it would be going down a little bit.
I'm being up from there.
Alright.
I hope there's some some other people queued I don't have any more questions for you.
Thank you.
The next question is from Shawn Boyd of next Mark Capital. Please go ahead.
Good morning can you hear me okay.
Good morning.
Great gentlemen, just two from me the first is related to.
The.
Market expansion on edge, the edge products and how you originally were targeting the SD Wan market now we've got some additional markets beyond that can you talk to the size of these opportunities versus the SD Wan market I know that you know.
Some of the early wins there we were thinking revenues could be in the tens of millions a year eventually.
Now obviously.
But what do these other markets look like in terms of scope and size.
For what we see those markets could be bigger even maybe doubled the size of what we've seen from SD Wan.
Saturday I think those numbers are even public because there was some analysts tried to estimate the size of the subsea market compared to the SD Wan market proportionately, we should be our market share should be similar so that means that we see opportunities to with new markets that could be even double the size of the SD Wan market for us.
Okay.
Very good very good and so maybe just coming to that example that you brought up earlier talking about the August design win 3 million from a U S provider of cloud based security.
What you know.
How does the ramp with that piece of business look like.
$3 million helped me on kind of for year, one year two year three just rough ranges here would be great.
Yeah.
So first of all I have to say that it's also a little bit constrained by supply as we said because they would be very happy to get many products quickly here to get going we do believe that those $3 million as you know it's a very initial order in the annual revenue from that could even be bigger than that the first order that we received.
We're working with them, there's still some left phases off of introducing.
<unk> the product on there and some global certification that we need to do but definitely we see the ramp up already starting but it would probably be sometime in 'twenty three before they're fully ramped up.
Okay.
Got it okay. That's helpful.
<unk> line of questioning.
Really on margins.
I get that there is certainly a small currency benefit right now top expenses your incremental operating margins.
If we look at it quarter over quarter year over year, we're running well in excess of 40%. So can we think about each incremental piece of business you are adding dropping 40 plus percent to the bottom line, you know give or take.
Okay.
That's fair.
I mean from a.
From a gross margin, we still believe that we're going to be the same range. As we always said 32 to 36 definitely on the operating margin. Eventually if we will be able and we hope we will and as we said we believe we have some levers you will continue to increase our revenue.
And with the same level of expenses, obviously that would be very good news and then we will materialize on the leverage that we believe that we're showing.
But time will say, we will see as we go along.
Got it.
Okay.
Congrats on the quarter and that's it for me. Thank you gentlemen, thank you very much.
Yes.
There are no further questions at this time before I ask Mr. Eisenberg 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 silicon website, Www dot silicon Dash USA Dot com, Mr. Eisenberg would you.
Like to make your concluding statement.
Thank you operator, 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 time good day.
Okay.
Okay.
[music].