Q2 2023 Silicom Ltd Earnings Call
Okay.
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Ladies and gentlemen.
Thank you for standing by welcome to the Silicon <unk> second quarter 2023 results Conference call. All participants are at present in listen only mode. Following management's formal presentation instructions will be given for the question and answer session. As a reminder, this conference is being recorded you should have all received by now the Companys press.
Please if you have not received it please contact silicon Investor Relations team at U K Global Investor Relations at one to one to $3 788040 or view it in the news section of the company's website www dot silicon that's USA dot com.
I would now like to hand over the call to Mr. Ehud Helft.
E K Global Investor Relations, Mr Health would you like to be yes. Thank.
Thank you operator, I would like to welcome you to Silicon second quarter of 2023 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.
These statements are only predictions and may change as time passes silicon does not assume any obligation to update that information.
Actual events or results may differ materially from those projected.
Including as a result of silicones, increasing dependency for substantial revenue growth on the limited number of customers in the evolving cloud based SD Wan NFC and edge markets, the speed and the extent to which solutions are adopted by these markets.
<unk> did you come we will rely increasingly on customers, which provide solutions in this evolving market.
Is that in an increasing dependency on a smaller number of larger customers you.
You should get you in commercializing and marketing of silicones products and services.
Turning and protecting brand recognition protection of intellectual property competition.
Extraction, so our manufacturing sales and marketing development and customer support activities the impact of the war in Ukraine rising inflation rising interest rates, what are the type of exchange rates and commodity prices.
Does any continuing or new effects, resulting from the COVID-19, pandemic and the global economy uncertainty, which may impact customers' demand.
So are there exit exercising greater cautions and selectivity with their short term investment plan as well as those other factors discussed in our annual report on form 20-F, and and how does that commenced filed by the company and it may be six ships substantially funded by the companies from time to time with the Securities and Exchange Commission.
In addition, following the Companys disclosure of certain non-GAAP financial measures in today's anybody's such non-GAAP financial measures 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.
<unk> believes that the presentation of these non-GAAP financial measures is useful to investor understanding and assessment of the company's ongoing corporation and prospects for the future.
Unless otherwise stated it should be assumed that financials is its financials discussed in this conference call will be on a non-GAAP basis.
non-GAAP financial measures disclosed by management are provided as an additional information to investors.
To provide them with an alternative method for assessing our financial conditions and operating results.
Measures are not in accordance with or substitutes for guests.
And for a reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release, which you can find on silicones website.
And now with US today on the call study, one I didn't run president and CEO and Mr. <unk> the CFO .
Beginning with an overview of the results followed by Ron who will provide the analysis of the financials.
We'll then turn over the course of the question and answer session and with that I would like to hand over the country. We're in Europe . Please.
Thank you Kenny.
I would like to welcome all of you to our financial results conference call discussing our second quarter 'twenty. Three results. We are happy to show a good set of second quarter 'twenty three results.
We grew our second quarter revenue to $38 1 million in line with our expectations. It was at 12.
For some increase over the second quarter of last year, we are indeed happy with those results, especially against the background of a more challenging economic environment and more limited visibility, which I will discuss in a few minutes.
Our continued success has led us to more than 18 years or more precisely 74 quarters of uninterrupted profitability and we reported second quarter earnings of 66 cents per diluted share.
Our strong balance sheet has been the outcome with a very planned and executed strategy by the management as we discussed a few quarters ago.
Apply chain issues improved we continue to decrease our inventory.
In this quarter, we further decreased our inventory by $10 million moving towards a normalized level of inventory that matches current competence lead times also as discussed a few quarters ago, we continue to improve our cash position, which currently stands at $63 million with no debt.
Which represents an increase of $10 million during the second quarter, a strong cash position remains a key strategic asset and enables us to capitalize quickly on opportunities as we have shown we are very happy to share the rewards of our continued profitability and cash generation with our shareholders based on our improved cash position and our expectation is to continue to.
Be profitable during the coming years, we intend to accelerate the pace at which we repurchase our shares under the $15 million share repurchase plan that we announced three months ago.
Our strategic decision to focus on the edge market as a primary growth driver continues to bring us further design wins during.
During the quarter, we announced that we were selected again by a leading U S enterprise telecommunications service provider to develop an innovative edge networking product for them. The customer placed initial orders of around $5 million and delivery will follow the successful completion of the development and testing processes this customer expects to orders.
To scale up over the next several years as the product enters mess deployment.
The fact that this leading telco service provider turned to US is very gratifying and we are excited about the potential of the new use cases it brings to market.
Part of the long term sales to this customer we believe this product will be attractive to a broader customer base, adding to the strong momentum, which has been building for our edge product lines.
This win confirms our value proposition and is further evidence of the significant growth potential we see in our edge product family, our momentum and edge networking is clearly broadened well beyond the SD Wan space with growing interest from customers seeking to enhance performance and flexibility for their next generation networks. It demonstrates the unique value prop.
Position of our full service model and the broadest portfolio of edge networking offerings, namely our innovative best in class products at attractive price points rapid development and customization capabilities, our partnership approach and uncompromising total support.
In parallel we continue to achieve design wins for the acceleration server adapter products in April a tier one U S based cyber security vendor awarded us with two Nic design wins, one for an advanced encryption offload acceleration card and the other for an FPGA based smart Nic both will be incorporated into two of the customers next generation solutions.
Which are sold to some of the world's largest most technologically advanced companies to secure and optimize their networks and applications in the cloud on premise already edge, we expect that those design wins will start ramping up towards broad deployments in 2020 for those two design wins demonstrate the innovation underlying our technology our broad portfolio.
And the uniqueness of our full service package as well as our reputation for performance booster solution. It also underscores the ongoing power of our server adapter product lines to continue playing an important role a.
A few weeks ago, we announced the first in a new line of edge AI products under a partnership with Halo, a leading artificial intelligence cheesemaker. According to Polaris market research in 2022, the global edge AI hardware market was what was valued at $1 2 billion.
And is expected to grow at 21% compounded annual growth rate to $8 billion by 2032.
Our new edge AI product line integrates halos AI accelerators in the silicones existing edge platforms solving performance challenges for Ajay I use cases, as a result, silicones products, we'll be able to offer visual processing and AI inference at the edge, it's a uniquely attractive price performance ratio by integrating AI into our products.
We are making it cost effective to move behavior analytics human intrusion detection facial recognition and vehicle analytics to the edge opening up many new use cases potential revenue streams for our customers. In fact, we are already engaged in proof of concept and in discussions with customers on various use cases, we are excited about the opportunity that's being created.
By the meteoric growth of Adi and especially its need to solve training and interference networking problems to fully deliver on its promise. The architecture that we've built for this product can easily be extended for use with other AI chip vendors like Nvidia and others. The requirements of the specific use cases determined to write cheap for the products.
I would now like to spend some time discussing the factors impacting our guidance and outlook for the third quarter.
As I'm sure you remember since the global Covid shutdown in early 2020 supply chains around the world became tight with very limited availability of like 'twenty competence silicon like many auto companies with strong balance sheets at the time took the correct decision to significantly increase and hold high levels of inventory of raw confidence this was to ensure.
Sure that we can build a product that a customer need in a timely way maintained strong business continuity and most importantly, keep our clients happy similar.
Similarly over the past two years, many of silicon customers, having to an order at a high level of our products. So they can manufacture products for their own customers and this ordering in thoughtful inventory drove above average demand and backlog for our products in both 2021 and 2022 as.
As we enter the second half of 2023 supply chains are no longer tight and our customers are lowering their inventory levels, reducing their backlog and drawing one of their existing stock of our products where possible.
As a result revenues we had originally projected for the third quarter have been pushed out to later this year or next Furthermore, I want to add that because of the broad expectation of a slowing macro economy. Some of the recent design wins, which we had earlier expected to ramp up quickly in 2023 are proceeding more cautiously and are ramping up slower than.
We had the region D discussed in plan with a customer I highlight that they have not closed and we are still seeing growing revenues from those design wins justice is at a slower pace than what we had originally expected taking.
Taking all those factors into account Q3 is expected to be slower quarter, and our expectations, our revenues between 30 and $31 million.
While the factors I mentioned earlier impact impacts our revenue expectations in 2023, and we also have an effect on our first half of 2024 results. We believe that we are currently under shipping end market demand across our business and the overall longer term picture remains strong with debt, we remain positive that our fundamentals and long term growth story.
Men's intact.
Despite the current challenges we are facing our mid to long term outlook remains positive. This is underpinned by a strong and continually growing list of design wins, many of which are with some of the world's leading players in the telco and networking space, while given the macro environment. The ramp ups of recent design wins tend to be slower than that.
Regionally, our regional expectations I stressed that we have not experienced any significant cancellations of programs or displacement by a competitor.
To highlight some of the recent design wins during the last 18 months two leading companies are U S communication service provider in the large SD Wan vendor granted us the three significant design wins all three design wins are still at the early ramp up stage and thus our revenue from those wins in 2023 will be less than half of the full annual potential of those deals.
While the ramp up is nice.
Is indeed slower than what we originally expected when signing with them. The full potential indicated by the customers represents strong long term potential for silicon and significant further room for growth.
Furthermore, our work with two leading started players is just beginning to ramp up having already shipped over $3 million worth of product in the first half of 2023 as sassy grows and given both our customers' dominant position within the subsea market, we expect strong future growth in sales to those customers.
In addition, we continue to see strongly growing opportunities like like a J I and other markets within the broader trend of disaggregation and decoupling I want to spotlight, one particular future opportunity that we're working on we have been developing a line of white label switches further expanding our total addressable market.
White label switches are open network switches that separate the hardware and software running on off the shelf chips, which offer strong customization abilities. Key features include the ability to build on commodity hardware utilizations of Asics from established vendors and the operation of an open network operating system the <unk> for <unk>.
<unk> four component in software defined networks, enabling network Programmability, which is a distinct advantage over traditional switches based on our expertise IP and know how we networking hardware acceleration in etch platforms, coupled with superior customer relationships and market recognition, we are perfectly positioned to benefit from this market.
Those switches are gaining broader for COVID-19.
Popularity for the high end performance simplicity user choice Freedom Fest innovation and cost effectiveness with all of those advantages. We are currently pursuing a significant design win with the potential to you once the cyber security customer, adding to our reasons for optimism about the future. All in all we have every reason to be optimistic.
A stick silicon as well positioned as a key player in our industry and given the growing potential within our design win roster are long and deep pipeline and a continually growing total addressable market, including the recent addition of edge AI and white label switches, we continue to increasingly to increasingly excited about the opportunities that lay ahead of us.
In summary, despite the tougher environment. We are facing we are happy with our second quarter 'twenty three results.
When smoothing out the over ordering in 2020 in 2021 and accounting for the digestion of inventory starting in the second half of 2023, we would still have shown solid growth over the past three years. The total addressable market for our edge networking products is much larger than we had initially estimated only a few years ago and underlies our.
Expectations for continued growth over the long term beyond that we maintain an impressive roster of top tier customers and design wins, many of which are only in the initial ramp up stages and a robust pipeline of future design wins, all significant further growth potential for us we believe that our drivers for long term demand remained firm.
The impact as we navigate the current situation we remain highly focused on our first priority targets of long term growth by achieving new design wins, delivering on our new product and technology, roadmaps and ensuring customer satisfaction at the same time, we continue to carefully manage the company to maintain profitability and cash generation.
With that I will now hand over the call to Iran. For a detailed review of the quarter's results Iran. Please go ahead.
Okay.
Thank you Ron and Hello, everyone.
Revenues for the second quarter of 2023 were $38 $1 million up 12% compared with revenues of $34 $2 million.
Noted in the second quarter of last year.
Our geographical revenue breakdown over the last 12 months, whereas follows North America, 79%, Europe , and Israel, 17% far east and rest of the world 4%.
During the last 12 months, we had 110% plus customer.
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 cash compensation expenses.
Specht of auctions and <unk> 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 second quarter of 2023 was $12 3 million, representing a gross margin of 32% and compared to a gross profit of $12 $3 million or gross margin of 36%.
In the second quarter of 2022.
The variance in the gross margin is a function of the specific product mix sold in the quarter and both remain in line with the expected range of our gross margin guidance of between 23 and 36%.
Not not 23, sorry, <unk> 32 and 36%.
Operating expenses in the second quarter of 2023 were $7 $5 million compared to $7 $3 million reported in the second quarter of 2022.
Operating income for the second quarter of 2023 was $4 $8 million compared to operating income of $5 million as reported in the second quarter of 2022.
Net income for the quarter was.
$4 5 million compared to $4 $7 million in the second quarter of 2022.
Earnings per diluted share in the quarter was 66 cents D.
This is a year over year decrease of <unk> compared with EPS of <unk> 70 cents.
As reported in the second quarter of last year for the first half year of 2023, our earnings per diluted share were.
$1 27, an increase of 13 cents compared with EPS of $1 $14 as reported in the first half last year.
Now turning to the balance sheet as of June 32023, the company's cash cash equivalents and marketable securities totaled.
$63 $3 million with no debt or $9 31 per outstanding share.
During the second quarter Silicon purchased approximately 25000 shares at a cost of zero point $9 million under the new $15 million share repurchase plan, we announced during the quarter.
In total silicone was purchased in aggregate.
$44 million in share buybacks in recent years.
As I mentioned <unk> based on our strong balance sheet improved cause was.
Improved cash position and our expectations to continue to remain profitable during the coming years, we intend to accelerate the pace at which we repurchase our shares.
That ends my summary, I would like to hand back over to the operator for question and answer session.
Alright.
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.
Alright. Thanks.
So.
A couple of baseline questions here, so clearly the question on <unk>.
The revenues are needs to be asked.
Is the steep decline in expectations for the September quarter.
Cleaning up the inventory to a large degree.
Or is there going to be a process of cleaning up.
Will retain this type of level of revenues.
All through the March and into the June quarter of next year, what do you think the slope.
Of that clean up looks like.
When do you expect that youll be able to get back to year over year growth.
Is that all the way out into the.
September quarter of next year.
So we still have the low visibility situation I would say I mean, it's hard to say and it's also different from one customer to the other.
It's very hard for me to answer that question right now, but I think we are at least several quarters here.
Some customers more some customers left that we will see the situation of.
Over inventories still.
So the December quarter, historically has had a pretty significant seasonality to it.
And I get it that there is an inventory correction going on but.
Do you expect.
A little bit of a seasonal pop sequentially in the December quarter, or do you expect that the inventory drawdown will offset fully offset the seasonality in the December quarter.
I think I would have to stay similar to the previous question. It's hard for me to say I mean, the it's not a I don't know if the regular seasonality will be in effect you are not it really depends on a specific customers.
And their level of inventories, it's hard for me to say.
Question is from from perspective of an exercise of US are forecasting it would you prefer us to assume there is no seasonality.
I think it's a it's a question that I don't have the best answer for I think we were tracking it very closely at the moment the visibility is still very very limited.
And I don't know if I can offer a very good answer here.
Okay, well what about on the cost side of the equation.
The.
Downdraft here is pretty pronounced it looks like it's going to be running for at least three or four quarters.
Given that.
Outlook.
What should we be thinking about in terms of your ability to.
Addressed the cost side of the equation, so that the profitability doesn't get hit too badly.
From a GP perspective, we're not expecting any change so that remains as Ron said before 32.
236.
On the Opex side, we're definitely planning to continue and continue investing I mean from our perspective. The long term growth is the key issue here that we want to continue growing in the long term. We believe we have Ive mentioned before some very good design wins that were waiting to accelerate we're working we have a very good pipe.
And in order to support all of that we need to keep investing.
Okay. So.
We're talking about a $30 million plus in <unk> and.
And opex for the year is that kind of the rightful range of our expectations.
I think it makes sense.
Alright and.
Just going back to.
The question of baseline.
You make the comment that the last.
Year or two have been.
Artificially enhanced by people building inventory and now you're saying that they're under spending.
What do you think the real baseline is that you'll be growing off of.
As we get past this process.
What should the 23 full year revenue be if there was no correction or preferred if you prefer the $150 million was that really.
10, $15 million to $20 million worth of.
Inventory build or how do we think about what the baseline is on a quarterly basis. As you are saying that $30 million to $31 million in the September quarter is well below so I'm, assuming it's somewhere up in the $35 million range plus is that right.
Maybe I think it's reasonable to say this number I think overall when we're looking at trying to analyze the situation obviously its not only inventories I mentioned before also the economic let's say concerns et cetera that are also in that makes it a little bit hard to distinguish between the two but again.
When we analyze the data we looked at at least $10 million plus that were pushed out from this quarter per our expectations that customers would pool. So.
35 may be a little more could be as well, but it's very hard to say in exact number given that it's a mix of reasons here.
Alright ill cede the floor. Thanks.
Yes.
Yeah.
If there are any additional questions. Please press star one if you wish to cancel your request. Please press star two.
These standby, while we poll for more questions.
Okay.
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. The 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.
Thank you a concluding statement.
Thank you operator, thank you everybody for joining the call and for your interest in Silicon. We look forward to hosting you on our next call in three months time.
Good day.
Thank you. This concludes silicon <unk> second quarter 2023 results conference call. Thank.
Thank you for your participation you May go ahead and disconnect.
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