Q3 2023 Silicom Ltd Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the seller Com third quarter 2023 results conference call. All participants are present in listen only mode. Following management's formal presentation instructions will be given for the question and answer session.
A reminder, this conference is being recorded you should have all received by now the Companys press release, if you have not received it please contact <unk> 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 <unk>.
<unk> Com dash USA Dot com I would now like to hand over the call to Mr. Kenny Green of Ek Global Investor Relations. Mr. Green would you like to begin. Please. Thank you operator I would like to welcome all of you to Silicon third quarter 2023 results conference call.
Before we start I would 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 silicones, increasing dependence for substantial revenue growth on a limited number of customers in the evolving cloud based SD Wan NFC and edge market, the speed and extent to which <unk>.
<unk> are adopted by these markets.
The likelihood that silicon will rely increasingly on customers, which provide solutions in these evolving markets, resulting in an increasing dependence on a smaller number of larger customers difficulty in commercializing and marketing of silicones products and services, maintaining and protecting brand recognition protection of intellectual property competition disruption.
The manufacturing sales and marketing development and customer support activities the impact of the war in Ukraine on the one Israel rising inflation rising interest rates volatile exchange rates and commodity prices as well as as well as any continuing or new effects, resulting from the COVID-19 pandemic and the globe.
Economic uncertainty, which may impact customer demand to exercise greater caution and selectivity with a short term investment plan as well as other factors discussed in our annual report on form 20-F, and other documents filed by the company that may be subsequently filed by the company 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 earnings release, such non-GAAP financial measures will be discussed during this call national GAAP measures are used by management to make strategic decisions forecast future results and evaluate the company's current performance management believes that the.
Some of these non-GAAP financial measures are useful to investors understanding and assessment of the Companys ongoing core operations and prospects for the future.
Otherwise stated it should be assumed that financials discussed in this conference call will be on a non-GAAP basis non.
non-GAAP financial measures disclosed by management and provided as additional information to investors in order to provide them with an alternative method for assessing our financial conditions and operating results. These measures are not in accordance with or a substitute for GAAP.
Full reconciliation of non-GAAP to GAAP financial measures are included in today's earnings release, which you can find on silicones website.
With us on the line today are Mr.
Ron will be gone will begin with an overview of the results followed by Iran, who will provide the analysis of the financials. We will then turn the call over to question and answer session and with that I would now like to hand, the call over to Iraq and Iran. Please go ahead.
Thank you Kenny.
Welcome to our financial results conference call discussing our third quarter 2023 results.
Our third quarter's revenues was $31 million. This is inline with the expectations that we announced last quarter in terms of profitability. We reported third quarter net profit of $2 $1 million and third quarter earnings <unk> 30 per diluted share.
I would like to spend a few moments discussing the very limited visibility. We are currently experiencing in the market.
Factors currently at play which are impacting us as well as our expectations for the show them in the short and mid term.
As I'm sure you remember since the global Covid shut down three years ago in 2020 supply chains around the world became tied with very limited availability, especially with electronic competence silicon like many auto companies leverage its strong balance sheet to prudently increase and maintain high inventory levels of competence. This was to ensure that we could continue to build the products that are.
Customers need in a timely way maintains strong business continuity and most importantly, keep our clients happy with continued top quality service provision.
Similarly over the past two years, our customers order at a high level of our products from us. So they can manufacture products for the customers in turn and this ordering a good portion for inventory drove above average demand and high backlog for our products in both 2021 and 2022.
However, the second half of 2023 has seen a reversal in this trend the supply chain tightness has abated and customers, which has built up significant inventories are now drawing on their existing stock of our products, where possible and currently do not need to order significant quantities from us and other impact is related to industry and economic headwinds facing.
Our customers that began to affect our revenue in the last quarter consistent with the rest of our industry. We expect the microeconomics uncertainty to persist into 2024, which impacts our customers' investment ability. This is leading to holding off and longer decision, making processes or new projects as well as delays and slowing in the investment.
And the limitation of existing infrastructure projects.
Recent design wins are ramping up significantly more slowly than initially anticipated those projects are proceeding cautiously diverging from the original time nice forecasted by our customers.
Given the volatile environment over the past few years with everything that has happened since COVID-19 as well as global economic downturn. We are also seeing some changes in our industry, which also presents new challenges as well as new opportunities you know why.
He is already a very low visibility environment.
To provide you with just two examples.
Due to supply chain and component shortages issues many companies in our industry faced manufacturing difficulties in recent years as a result, those companies are now taking a strategic review of the entire operation processed as a result of that may be a decision to change their decision, making processes and integration practices with that the selection of the specific server adapter vendor.
Which will be used for building their systems, maybe moved from the company to its integrator. While this may present, an opportunity for us with companies, which currently do not use our server adapters.
The challenge with existing customers that we will face one such customer will exhaust the exits inventories guarantee has.
During the last years the ownership of few companies in our industry has changed throughout the series of mergers and acquisitions such ownership changes May result in significant changes in the identity of the decision maker and they also result in a change in the customers' business focus again, such changes may present, an opportunity as well as the challenge to silicon one such cost.
We'll exhaustive access inventory however for now it's very further reduces our already very low visibility.
Taking all those factors into account, we expect to see Q4 revenues between 20 and $21 million.
Looking further to next year, giving a very limited visibility and the factors I just discussed we expect 2024 to be challenging year. However, we strongly believe that we will return to double digit growth in 2025.
Given those recent impacts revenue, we've already begun to take several actions to manage discretionary cost and align spending with the current environment. We are adjusting our expenses footprint to the right level relative to our expected revenue level, ensuring that we maintain investments in activities, which will bring silicon future growth, while preserving technological knowledge and cut.
Relationships those actions should allow us to reduce the negative impact on our non-GAAP earnings per share without compromising our long term objectives. We believe that the actions. We are taking now a well proven long term experience in managing our expenses and our strong cash position, which currently stands at $67 million will allow us to maintain a very strong balance sheet through this.
Through the challenging period ahead of us.
In parallel we intend to increase our focus on the sectors that have allowed us to grow so well in the recent past and those that we believe will remain primary growth drivers for us into 2025 and beyond server adapters, including specific FPGA based and hardware acceleration smart Nic and Ed systems, we've already begun to evaluate it.
We have already begun evaluation of all of our research and development and sales and marketing programs with the intention to increase our investments in our focus areas and stop our investments in any other focus areas. We are optimistic about 2025, we believe that by 2025, we will convert some large projects in our pipeline into new design wins and the ramp up.
Of existing ones would generate more meaningful revenues. Despite the current challenges over the immediate term our mid to long term outlook remains positive. Our aim is to return to double digit revenue growth and recovery in 2025 underpinned by a strong and continually growing list of design wins, many of which are with some of the world's leading players in telco and networking space.
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I would like to share with you a few examples of the additional revenue potential inherent in our impressive roster of design wins and in our <unk>.
Potential design win pipeline that underlies our expectations for 2025 recovery.
Within this long list, we can easily identify identify about 20 design wins, a few we've already won and not yet the domestic production stage and others that are in the last stages of our potential design win pipeline each having a sales addition potential of between a half a million and a few million dollars by 2025, those design wins with leading networking security and <unk>.
<unk> providers are for advanced server adapters, and Ed system products, our strategic focus areas beyond that we're continuing to expand our business with a leading U S based provider of enterprise to loop communication services with which we have already won a few active design wins and we expect to win more in the coming year. This opportunity by itself has an additional sensible.
And you have about $10 million in 2025, and Furthermore, we are expecting to transition for the proof of concept stage through the mass production sales stage four two design wins, we've already won with two leading SaaS companies with the sales potential of approximately $10 million in 2025.
It started grows and given our both customers dominant position within the subsea market, we expect strong future growth in sales to those customers. Our balance sheet remains very strong and has been the outcome of a very well planned and executed strategy over many years as I said, our net cash position currently stands at $67 million with no debt each.
That's an increase of $4 million during the third quarter, a strong cash position remains a key strategic asset and enables us to continue investing in the long term and overcome challenging periods ahead of us 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 strong cash position, we intend to continue to repay.
Our shares under the 15 million share repurchase plan that we announced six months ago.
I would like to take a moment to address the situation in Israel.
We were all absolutely horrified by the terrible attack and kidnapping of ordinary citizens in the south of Israel, which led to the current war by Israel against Hamas and Gaza All silicone employees have been affected in a very personal way given the small size of our country. We all have friends and families that were directly impacted by this attack.
Many of US have sons and daughters that are in the Israeli Army, we all pray for the victims as well as their families friends and loved ones, we've been directly or indirectly impacted.
We are resilient people and unfortunately, you have much experience in working overcoming challenging times.
I wish to reaffirm two our employees partners and shareholders that our operations and manufacturing has not been impacted in Israel or anywhere else in the world. Despite our personal reading naturally the safety of our employees remains our highest priority.
Finally, I also want to personally thank each and everyone with reach out to us to express their support and best wishes.
To summarize telecom is navigating a much more challenging short term environment across many fronts I want to stress, though that silicon as well positioned as a key player in our industry and given the growing potential within our design win roster, a long and deep pipeline and our continually growing total addressable market I am optimistic on our long term future, especially from.
2025 and beyond.
We believe that our drivers for long term demand remain intact as we navigate the current situation. We remain highly focused on our first priority target of maintaining our market leadership developing new products that will act as growth drivers and lead to design wins over many years delivering on technology, roadmaps and ultimately ensuring customer satisfaction.
At the same time, we continue to carefully manage the company expenses and cash position with that I will now hand over the call to Iran. For a detailed review of the quarter results, Iran. Please go ahead.
Thank you in Iran, and Hello, everyone.
Revenues for the third quarter 2023 were $31 million.
23% decrease compared with revenues of $39 $2 million as reported in the third quarter of last year.
Our geographical revenue breakdown over the last 12 months was as follows North America, 82%.
Europe, and Israel, 16% far east and rest of the world 3%.
During the last 12 months, we had 210% plus customers and our top three customers together accounted for about 35% 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 RSC was granted to directors officers and employees acquisition related adjustments as well as lease liabilities financial income.
Yeah.
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 of 2023 was $9 3 million, representing a gross margin of 31, 1% and compared to a gross profit of $14 $1 million or gross margin of 36%.
In the third quarter of 2022.
The Io portion of edge systems sold in the quarter combined with recent oil price pressure from customers, mainly a result of the macro economy slowdown pushed this quarter's gross margin below our expected range of between 32 and 36%.
We are currently investigating the specific impacts of virus.
Factors on our future gross margin and intend to provide an updated gross margin expected range with the release of the next quarter results.
Operating expenses in the third quarter of 2023 were $7 $4 million compared to $6 $9 million reported in this third quarter of 2022.
Operating income for the third quarter of 2023 was $1 $9 million compared to operating income of $7 $2 million as reported in the third quarter 2022.
Net income for the quarter was $2 1 million compared to $6 $9 million in the third quarter of 2022.
Earnings per diluted share in the quarter were 30. Since this is compared with earnings per diluted share of $1. All in one sense as reported in the third quarter of last year.
Now turning to the balance sheet as of September 32023, the company's cash cash equivalence and marketable securities totaled $67 $3 million with no debt or $10.11 per outstanding share.
During the third quarter silicon per chance to approximately 144000 shares at a cost of $3 $9 million under the 15 million share repurchase plan, we announced earlier this year.
Indeed in total silicon is purchased in aggregate.
$48 million in share buybacks in recent years.
As mentioned by your own based on our strong balance sheet and improved cash position. We instead, we intend to continue repurchasing our shares at full pace.
That ends my summary.
I would like to hand back over to the operator for the 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 kind of lift the handset before pressing the numbers questions will be pulled in the order. They are a seat. Please standby while we poll for your <unk>.
<unk>.
Uh huh.
Yeah.
The first question is from Alex Henderson of Needham and company. Please go ahead.
Great. Thanks, operator.
Hey, guys. So.
A lot of moving parts here.
And we started to see the upper.
And of that.
With respect to.
Ability to sustain profitability I think you guys have had.
Record.
Over an extremely long time of maintaining profitability even in the.
Toughest of events.
Yeah, when I put in the midpoint of the guide for the fourth quarter.
And don't change anything else in the model.
Even with a 33% gross margin.
Yes.
Slight loss per.
For sure.
Based on the prior operating structure.
So as we're looking into the fourth quarter and into the 2004 timeframe is it fair to say that you guys are going to do whatever it takes to not produce a loss on a quarterly basis and sustain your profitability track record.
Hey, Alex.
So maybe I'll start with and.
I would say or on an annual basis, we still plan to be I would say break even.
Or or profitable right that that's our goal on an annual basis and it does not mean that we will do everything we need to do in order to be there because our plan based on the analysis. We've done is that we can continue and develop the products that we need and continue to do everything that we need to do in order to grow the company in 2025 and beyond.
And we don't want to sacrifice that that's extremely important for us, but we took steps we took a lot of steps in order to manage our cost to make sure that even at the our estimated 2024 numbers or the plan that we have in mind, we will be able to still be on an annual basis be breakeven or.
Profitable.
Right so.
It does sound like you think that there is a risk that you could go to a loss position on a quarterly basis.
Over that timeframe is that a fair statement.
As possible when we are looking at mainly on the on the annual level and as we I mean, as we said during the first part of this meeting as we go into this situation was $65 million in the bank, we feel comfortable with it. So overall, we feel that we're getting into this situation in a reasonably good.
Good position.
Yeah. So so there is a risk.
Losses on a quarterly basis, okay. So.
In that context.
You know obviously, the yen has fallen out of bed.
And you know opex.
Should benefit from Covid.
Yes sure.
<unk> has fallen out of bed.
It's down quite a bit partly because of the conditions.
Macro conditions, partly because of interest rates, partly because of the war.
That should help your numbers when will that.
Start to benefit to the to the cost side.
Yeah.
The basically already I mean in Q3, we've seen again there was some increase from Q2, but the impact of the.
The last two weeks, obviously, we're not something you've seen in the end of Q3.
Numbers.
But but overall, we think get it obviously it will impact the numbers from Q4 and beyond.
Okay.
D.
The company made a couple of comments on the call here.
One was the GM.
Potential reset and the other one was a strategic review of your customers.
What portion of the customer base do you think.
Risk of a strategic review.
Potentially shifting.
To integrators and.
How much of a lag with that create.
In your.
And the timing of purchases.
If that.
If that occurs with those customers.
Can you can you quantify a little bit around that what portion of your business is related to it.
I don't know how to give a number but I would say is it's it's not very big but it's also not negligible I mean, we've seen those as trend not necessarily decisions. It already been made completely because those in some cases those are debates that are happening in certain companies.
Some cases it may be a decision that has been made but were not implemented yet and as we know sometimes decisions are being taking an eventually not fully implemented but but we see it as some kind of of you know.
Phenomena that we see with several customers.
Because of what happened during the Covid and the shortages in competencies so.
I hope that answers the question.
Well actually it doesn't give me a lot of information of I was hoping you could give a little more granularity.
10%, 15%, 25% of your customers are contemplated in that kind of a transition.
Zero to 5% because it really is an important point.
It's a large percentage of your customers I E 15 20, 25%.
That could cause some delay in the timeline.
They're ramping of their projects so we.
We can't analyze this externally you need to give us some sort of.
Detail around it.
Youre right I would say that.
We would estimate that about $5 million annually.
Okay. So it's not a it's not a large factor.
More modest factor, yeah, and it's still I would say this is at risk of I mean, it's not that we're losing those filings.
But the $5 million isn't moving the needle when youre having a.
10, $15 million to $20 million swing in the fourth quarter.
So.
Yes.
That parameter rises.
G M side of it.
Can you give us a little bit more detail on what you think the reason for that 31% number wasn't.
Is that a function of.
Manufacturing variances as a function of.
Change in pricing.
What caused that and how much at risk or is our model, which is sitting at 32 nine and gross margins of 24 should we be thinking of $31 32 or.
Is that still 32, nine still an okay kind of.
Ms.
And I know you don't want to give specific guidance, but.
Need to give us some some some some some guide rails here.
So number one is and that Ron spoke to that is the mix of products as we see that more.
<unk> products are being sold compared to the overall revenue that we have in the company and those products usually have lower GP. Then then we see the impact more and more.
We also feel price pressure from customers.
Economic situation and are in the.
The situations that have changed now that components are readily available and it's very easy.
So I mean, we do feel the price pressure from foreign companies.
So those are the main main two factors I would say for that it's not that something changed in.
You know dramatically the way, we manufacture I mean, it's pretty much the same but the D or the overall two factors of price pressure and the mix of product is causing that.
So in it.
In the.
Interim between now and when you can give us a more.
Complete guidance on what you think that guideline should look like for gross margin.
From the prior guide I think was about 32 to 36.
Is it reasonable to think that the modeling that we're currently carrying up to 32 nine.
Is a viable number.
Or should we be.
Thinking of a range of 31% to 33 kind of thing which case.
Need to make some adjustments.
So we're looking to that I mean, that's what Iran is and as Bob talked about is that we're looking into that we're investigating where trying to analyze that as best as we can and we are we would provide an update once we feel that we know what we what is the range we can get.
Laura we really need some some guidance here youre doing a major reset here on these numbers.
Thank you need to step up to the plate and give us at least a preliminary form.
On whether that band has to come down at least over the short term.
Okay.
It will be lower that's probably something we can say right now but.
But I think it will be irresponsible to give a number without doing the full analysis on our side understanding exactly what we think it will be and once we do that we will come in and provided.
Alright.
So.
Let's talk about the commentary about the.
Growth rate.
24 being a difficult.
Difficult year.
And then returning to growth.
Sure.
This is down quite substantially from recent levels.
And are you running at the fourth quarter it call it 80 $80 million to $85 million.
And run rate revenue.
Is that.
Kind of what we should be thinking about in the first half of our 24 and then.
It's one thing to say 24 will be difficult, but is it a full core full year of 24 or do.
Do we start to recover in the back half.
Again, we really need some guidance here given the.
Scope of what your reset looks like here.
I think the investors deserve that.
Yeah.
Problem is the visibility and the very low visibility that we have.
And the economic headwinds that we're seeing all around the world. This is impacted and it's not allowing us to see that.
Clear picture for all of 2024, not even for the first quarter was 24 I cannot tell you exactly what I'm expecting to see them and and yes, it's it's very limiting us from coming in and saying something very different take on 'twenty 'twenty four apart from the fact that yes, we think it would be a challenging year due to all the reason that.
I provided before.
Yeah.
Okay.
I tried thanks.
Yeah.
The next question.
Its problem.
Ross Taylor of E. R. S investment partners. Please go ahead.
Thank you and second the idea that obviously is assuming you can get.
Saudi to investors the better things will be for shareholders at.
At the end of the quarter, what was the inventory level.
63 <unk>.
On the balance sheet.
$63 million.
Oh.
Right now you have $63 million in inventory do you think that inventory is all is money good inventory.
Okay. So what we're looking at is a case, where you've got $63 million in inventory of $67 million in cash, which is last time I checked adds up to $130 million.
With the stock trading in the mid Sixteens right now you've got an enterprise or a market cap of about $112 million, which basically indicates that the market is saying that you have your business has a negative value X the inventory and cash.
Couple of questions a philosophical question, which.
<unk>.
Silicon even when it was kind of hitting on all cylinders struggled to get.
A valuation that would match what one would think it was worth on the numbers.
To some level of reasonable profitability in the past you were making when you were doing in the low twenties revenues, you were making about a buck and a half a share.
How do you see the future when you have a market that literally basically says that the company itself as an operating entity is not worth less its actually worth less than zero.
We are running the company and the way that we believe will generate the most value to our shareholders in the long term and that means that we need to keep developing products, we need to keep focused on our customers we need to make sure that we manage our costs in a way that will allow us.
To make the investments we need in order to achieve all of that and.
And that's what we plan to continue doing.
How much do you see needing to invest over the next year.
In this effort.
Not sure that I fully understand the question but.
I mean, the investment that we do will be across the board, we need to develop products, we need to have salespeople going and searching new customer new opportunities and maintaining our customers. We need project managers to make sure everything runs we need the operations people.
Need to run the company and we need to invest in inventories if we need to do that so I mean in all of those aspects when we decided on the cost.
Cost savings program that we did in order to reduce our cost we took all of that into account to make sure that we are a company that we that is laser focused on the areas that we define.
As our growth areas in any area, which is not in this focus area was reduced in order to make sure that we are focused on the areas that would get us to grow back again in 2025 and beyond.
Okay and at this stage do you have a lot of you have had a lot of wins you continue to put winds up but yes, what youre seeing is youre seeing difficulty in getting those wins to convert to revenues.
Well I think that the few famous points in history, when things went wrong, but yeah I mean, the crisis in silicon has been in business for many years.
Asleep.
Yes, I mean, we were dealt in the past with such situations.
And in previous times, we did not enter into this position with $65 million in cash but they're.
Every crisis is different every situation is different.
And we're entering with a position that will allow us to go back to grow in 2025.
Yeah, well, obviously the sooner you can get investors and shareholders information on how you see things obviously.
The industry is itself a package can be hard to to give us insight, but as I've said it seems the market right now is pretty much given up hope in this company.
And it strikes me as there was a tremendous amount of value in this business. It's made good money in the past it should be able to make good money in the future.
Just a matter of you being able to I think you know.
Vince Brent.
The market information to show US that this is an inning not again, so that it will pass and we'll move forward.
Thank you very much.
Thank you.
Yeah.
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.
Before I ask Mr. Ivan then to go ahead with his closing statement I would like to remind participants that a replay of this call will be available by tomorrow until it comes website www dot silicon that USA dotcom.
Mr. Eisenberg would you like to make your 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.
Good day.
Thank you. This concludes silicon third quarter 2023 results conference call. Thank you for your participation you May go ahead and disconnect.
Okay.
Yes.
Yeah.
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Okay.
Okay.
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