Q4 2023 Silicom Ltd Earnings Call

Good evening everybody.

[music].

Ladies and gentlemen, thank you for standing by welcome to the Silicon fourth quarter and final 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. As 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 silicon Investor Relations team at U K Global Investor Relations at <unk>.

12123788040 or view it in the news section of the company's website www dot silicon.

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 yes. Thank you operator.

I would like to welcome all of you just kind of comes fourth quarter 2023 results conference call before we start I would like to draw your attention to the following safe Harbor statement.

This conference call contain forward looking statements stay.

Statements may include but are not.

Limited to anticipated future financial operating results and outlook and prospects. These statements are based on management's current beliefs expectations and assumptions and assumptions, which may be affected by subsequent business political environmental regulatory economic and other conditions and are subject to known and unknown risks and uncertainties.

Other factors many of which are outside of the telecoms control.

Which might cause actual results to differ materially from expectations expressed or implied in the forward looking statements.

Include but are not limited to telecoms, increasing dependence of substantial revenue growth on a limited number of customers the speed and extent to which the completions are adopters are adopted by the relevant market.

Difficulty in commercializing and marketing of silicon products and services, maintaining and protecting brand recognition protection of intellectual property competition disruptions to its manufacturing sales and marketing development and customer support activities. The impact of the war in Gaza and in the Ukraine rising inflation rising interest rate volatility.

Change rates as well as any continuing or new effects, resulting from the COVID-19, pandemic and the global economic uncertainty, which may impact customer demand grew at their existing rates of caution and selectivity with short term investments.

Factors noted above.

Yes.

Further information about the company's business, including information about factors that could materially affect telecoms results of operations and financial condition are discussed in our annual report on form 20-F, and other documents filed by the company.

And that May be subsequently filed by the company from time to time with the Securities and Exchange Commission. Therefore, there can be no assurance that actual future results will not differ materially from anticipated.

Consequently, you are cautioned not to rely on these forward looking statements telecom does not undertake to update any forward looking statements as a result of new infant.

Future events or developments.

As they do required by law.

In addition, following the company's disclosure of certain non-GAAP financial measures in today's earnings release, such non-GAAP financial measures will be discussed during this call.

non-GAAP financial measures are used by management to make strategic decisions forecast future yourself.

The Companys current performance.

Management believes that the presentation of these non-GAAP financial measures are useful to investors understanding and assessment of the company's ongoing cooperation and prospects for the future.

Unless otherwise stated it should be assumed that financials discussed in this conference call will be on a non-GAAP basis.

non-GAAP financial measures.

Disclosed by management are provided as additional information to investors in order to provide them with an alternative method for assessing our financial conditions and operating results. These initiatives are not in accordance with or a substitute for GAAP.

And a full reconciliation of the non-GAAP to GAAP financial measures are included in today's earnings release, which you can find web.

Website.

With us on the line today are Mr. Leon <unk>, President and CEO and Mr. <unk> Gilad CFO zero.

John will begin with an overview of the results followed by Ron who will provide the analysis.

Onshore.

<unk>.

Just a question and answer session and with that I would now like to hand, the call over to Iraq, Iran. Please go ahead.

Thank you Kenny welcome.

Welcome everyone to our financial results conference call to discuss our fourth quarter.

Ending 2023.

Revenue were $18 $8 million in the quarter, and we reported a net loss of $5 million.

Over the past few months, we have made a significant effort to conduct checks and engage in discussions with all our customers in order to assess and gain a strong handle on the situation I believe that now we do understand the situation much better including both the challenges and the opportunities in front of us.

In our previous conference calls, we have discussed two significant headwinds, which impacted our results during the second half of 2023 and that we are now facing as we move into 2024.

The first headwind is our customer excess inventory.

The global coffee shutdown in 2020 and onward supply chains around the world became tight with very limited availability of electronic component.

As a precaution our customers order at a high level of our products almost with a significant portion being for inventory purposes, and this drove above average demand and high backlog for our product, which we enjoyed in 2021 2022 in the first half of 2023.

However, as we showed in the second half of 2023, we saw a reversal of the strength supply chain tightness debated and customers, who built up significant inventory again, drawing under existing inventory stock, while reducing significantly ongoing purchases.

Second headwind, we are facing our industry related and macroeconomic factors delaying it infrastructure investments.

This is leading to a longer decision, making process of new projects and slower investment and implementation of existing infrastructure project.

As I mentioned last quarter some of the design wins, we achieved in 2022 and 2023 are ramping up significantly slower than our customers have initially anticipated when first time.

Those projects are proceeding cautiously diverging significantly from the original timeline forecast by our customers.

On top of those market headwinds there are also a few additional silicon specific issues.

Impacting revenues first we want to very large design wins in 2021 and 2022.

According to the customer's initial forecast each of those wins were expected to provide us with annual revenue of 20% to $30 million.

Both customers provided us with very large purchase orders and we've already delivered more than $10 million of each.

Still have very large inventories, which they are digesting at a very slow pace due to poor market success of their full solution. Currently there are no additional outstanding purchases purchase orders from either of those two customers.

A large customer of ours was acquired during 2023 with a new owner and management, which prefer to focus on software and following a long period of severe global supply chain and hardwood disruption. This focus of the customers shifting and this negatively impact its ongoing hardwood purchases from us.

This shift may reduce their ongoing annual purchases by $10 million.

Third Unfortunately.

Oregon has not developed according to industry expectations as well as our expectation on dose and dose of our customers. During 2022, we had a very nice early success with Orange soon among a few telcos and mobile operators, which provided us revenue of about $10 million.

However, with the lack of general success and acceptance of ore on technology, we do not anticipate further appeals in the near future.

All of the above factors combined led to our current lower level of revenues, coupled with short term uncertainty and low visibility. We have therefore made various adjustments to our operations to align with this new reality.

Following that we initiated and started working under a new five year strategic plan covering 2024 until the end of 2028.

This plan is designed to generate significant value for our shareholders, even under the new market reality of to date. This strategic plan. That's been approved by our board of directors and they want to show discipline with Juno.

In terms of our financial objectives. The main long term goal of our plan to gradually increase earnings per share to above $3 in 2028.

Operator: All right. Ladies and gentlemen, thank you for standing by. Welcome to the Silicom fourth quarter and final 2023 results conference call. All participants are present in listen-only mode.

Looking towards the near term, we believe that our 2020 for revenue will be about $70 million.

Impacted mainly by the headwinds and issues I mentioned earlier, we believe that the excess inventory and global economic headwinds will ease as we move forward through 2024, and thus the second half revenues will be higher than those of the first half.

Q1, 2020 for revenue are expected between 14 and $17 million.

We are facing a tough transition period, however, our very strong balance sheet and cash position allows us to continue its full steam ahead, supporting our broad and deep pipeline as well as continue with our with our core R&D efforts, while not being significantly impacted by a loss of a few million dollars. During this transition period.

Operator: 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 company's press release. If you have not received it, please contact Silicom's investor relations team at EKGlobalInvestorRelations at 1-212-378-8040 or view it in the news section of the company's website, www.silicom-usa.com. I would now like to hand over the call to Mr. Kenny Green of EKGlobal Investor Relations. Mr. Green, would you like to begin?

We believe that our five year strategic plan will allow us to return silicon to a gradual and steady topline and EPS growth.

In terms of our gross margin for the coming years, we expect to range between 27% to 32%. The reasons are threefold first our systems typically carry lower gross margin than our server adapters as we grow the person of edge systems in our mix of products sold which should reduce our company gross margin.

Kenny Green: Yes, thank you operator. I would like to welcome all of you to Silicom's fourth quarter 2023 results conference call. Before we start, I would like to draw your attention to the following State Harbour statement. This conference call contains fool looking statements. Such statements may include but are not limited to anticipated future financial and operating results and Silicon's outlook and prospects. Those statements are based on management's current beliefs, expectations and assumptions, which may be affected by subsequent business, political, environmental, regulatory, economic and other conditions, and are subject to known and unknown risks and uncertainties and other factors, many of which are outside of Silicon's control, which might cause actual results to differ materially from expectations expressed or implied in the forward-looking statement, and which include, but are not limited to, Silicon's increasing dependence of substantial revenue growth on a limited number of customers, the speed and extent to which Silicon solutions are adopted by the relevant market.

The market has changed from our vendors market to a buyers market or the purchasing people under staples are pushing us as well as other vendors or discounts. This is a cyclical issue and will probably improve in a year or two should inventories to be drawn down and the global economy improves.

Third our cost of goods.

The fixed cost elements. Therefore as revenue decreased our gross margin will decrease while we already put efforts into reducing the fixed portion of our cost of goods did exist.

The negative impact of this fixed cost should decrease in the coming years as we return to growth.

Thus, we believe that in 2024 and 2025, our gross margin will be at the lower part of the range and it will improve in the years following.

I want to stress that our current working capital and marketable securities as of the end of 'twenty of 2023 is $140 million.

Very high quality of inventory amounting to $51 million.

Accounts receivables net of accounts payable of $18 million as well as $71 million cash all this represents about $21 per share.

Kenny Green: Difficulties in commercializing and marketing Silicon's products and services, maintaining and protecting brand recognition, protection of intellectual property competition disruptions to its manufacturing, sales, and marketing, development, and customer support activities, the impact of the wars in Gaza and in the Ukraine, rising inflation, rising interest rates, volatile exchange rates, as well as any continuing or new effects resulting from the COVID-19 pandemic, and the global economic uncertainty which may impact customer demand through The factors noted above are not exact.

I want to address the primary elements of our five year strategic plan.

First our initial step has been to align our current expense footprint with our expected revenue level that.

We've already reduced our personnel from 310 to 240 people.

That we expect to reduce our opex in 2024 to about $27 million, assuming current exchange rates.

I want to stress that while making those expense reductions we have verified that we are maintaining sufficient investment to support future revenue growth.

Our strategic plan.

Over the coming years, we will continue to tightly control our expense level and allow only minimal increase in opex in 2025 and beyond based on the execution of our strategic plan.

Kenny Green: Further information about the company's business, including information about factors that can materially affect it when it comes to its results of operations and financial conditions, is discussed in our annual report on Form 20-F and other documents filed by the company and that may be subsequently filed by the company from time to time with the Securities and Exchange Commission. Therefore, there can be no assurance that actual future results will not differ materially from those anticipated. Consequently, you are cautioned not to rely on these forward-looking statements.

Second based on our very strong balance sheet as I discussed earlier, we plan to continue with an aggressive buyback of shares throughout 2024 and 2025. We currently plan to repurchase approximately a total of one 6 million shares over the next two years, the timing and amount of the repurchases will be subject to business and market conditions.

Kenny Green: CIVICOM does not undertake to update any forward-looking statements as a result of new information or future events or developments, as they may be required by law. In addition, following the company's disclosure of certain non-GAF financial measures in today's earnings release, such non-GAF financial measures will be discussed during this call. Such non-GAAP financial measures are used by management to make strategic decisions, forecast future results, and evaluate the company's current... Managers believe that the presentation of these non-GAAP financial measures will be useful to investors' understanding and assessment of the company's ongoing cooperation and prospects for the future. Unless otherwise stated, it should be assumed that financials discussed in this conference call will be on a non-GAAP basis. Non-GAAP financial measures are provided These measures are not in accordance with or a substitute for GAAP.

Corporate and regulatory requirements share price acquisition opportunities and other factors.

I know that at year end, we have six 4 million shares outstanding following the repurchase of 250000 shares in the fourth quarter.

Third in terms of growth, we believe that as of 2025, we would achieve about 20% compound average annual growth from 2024 based on.

This growth rate.

This growth rate does not consider potential significant upside that we may experience. Some very large projects like the ones. We had in the past such as the large IBM project in 2017, and 2018, which may provide additional incremental growth for our business.

We believe that the growth in 2025 and beyond will come from the ramp up of already achieved SD Wan and subsea design wins additional edge system sales to leading telcos and service providers and from increased revenues related to a large roster of design wins and pipeline of potential design wins for server adapter and edge products with leading networking security and <unk>.

Kenny Green: And a full reconciliation of the non-GET to GET financial measures is included in today's earnings release, which you can find on Silicon's website. With us on the line today are Mr. Leon Eisenman, President and CEO, and Mr. Eran Gillard, CFO. Iran 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 a question and answer session. And with that, I would now like to hand the call over to Liran. Liran, please go ahead.

This provides us globally.

<unk> is an important part of the strategy. The strategic plan, we will increase the focus on our core server adapter and Ed solution portfolio for which we had typically been robust fundamental demand is there.

Part of this strategy, we conducted a very detailed evaluation of all our current program and decided to discontinue to noncore or unrelated programs. Unfortunately, oren can no longer be considered as a core business for us as it is not developed according to the industry expectation as well as the expectation of both ours and those of our.

Liran: Thank you, Kenny. I welcome everyone to our financial results conference call to discuss our fourth quarter ending in 2022. Revenue was $18.8 million in the quarter, and we reported a net loss of $0.5 million. Over the past few months, we have made a significant effort to conduct checks and engage in discussions with all our customers in order to assess and gain a strong handle on the situation. I believe that now we do understand the situation much better, including both the challenges and the opportunities in front of us. In our previous conference call, we discussed two significant headwinds that impacted our results during the second half of 2023 and that we are now facing as we move into 2020. The first headwind is our Customer Access Inventory.

<unk>.

Fifth we will also return to our marketing and sales strategy, that's worked well for us in the past we will once again also focus on the smaller design wins with current annual expected revenues and the $1 million range as many of those types of accounts have the potential to become much larger accounts over the years.

This does not mean that we will not pursue and achieve larger design with an immediate $10 million plus range. However, the plan is to actively compete on smaller design wins as well and not focus only on the larger one.

This shouldn't take our revenues more diapers and long term growth more robust.

<unk> plan of our salespeople have already been adjusted to reflect this approach.

By executing all of the above aspects of strategy, taking measures designed to maximize growth and revenues controlling our expenses and putting in place an aggressive buyback plan. We believe that we will achieve the main goal of our strategy to create significant value for our shareholders. As a reminder, our target is earnings per share of almost $3.

Liran: During the global COVID shutdown in 2020 and onward, supply chains around the world became tight with very limited availability of electronic components. As a precaution, our customers ordered a high level of our products from us, with a significant portion being for inventory purposes, and this drove above average demand and high backlog for our products, which we enjoyed in 2021, 2022, and the first half of 2022. However, as we shared, in the second half of 2023, we saw a reversal of this trend. Supply chain tightness abated, and customers who built up significant inventory began drawing on their existing inventory stock while significantly reducing ongoing purchases. The second headwind we are facing is industry-related and macroeconomic factors delaying IT infrastructure investment. This is leading to a longer decision-making process on new projects and slower investment and implementation of existing infrastructure.

In 2020.

As we approach this target we believe that our EPS will improve gradually and across the milestone of one $6 EPS in 2027. Please bear in mind that those are internal targets that we are sharing with you and should not be taken as our current financial guidance.

As we proceed we would share with you our progress against those targets.

We have a very dedicated loyal management team with a lot of experience in the hardware business. Most members of our management team in Brooklyn Board of directors has been with us for many years and have already navigated our business success through many market prices and transformations in 2000, and 2008 and in 2017 just to name a few.

We strongly believe that the targets that I've outlined.

Outlined are attainable by silicon and I'm optimistic in our ability to successfully execute on this five year plan.

To summarize as you know our environment is much more challenging going into 2020 for all players in our industry.

We have a strong strategic plan in place, which focuses on ultimately bringing value to our shareholders not just by returning to revenue growth, reducing expenses and growing profitability, but also enhancing it through an aggressive buyback and a strong reduction in share count over two years.

I want to stress that silicon as well positioned as a key player in our industry and given our design win roster a deep pipeline of highly experienced management team and a new strategic plan in place I am confident that we will achieve renewed growth starting from 2025 and beyond with a long term goal of reporting over $3 per share earnings in 2020.

Liran: As I mentioned last quarter, some of the design wins we achieved in 2022 and 2023 are ramping up significantly slower than our customers initially anticipated when first signed. Those projects are proceeding cautiously, diverging significantly from the original timeline forecast by our customers. On top of those market headwinds, there are also a few additional silicone-specific issues that are impacting revenue. First, we want to win two very large design wins in 2021 and 2020. According to the customer's initial forecast, each of those veins was expected to provide us with annual revenue of $20 to $30 million. Both customers provided us with very large purchase orders, and we've already delivered more than $10 million of each. Both still have very large inventories, which they are digesting at a very slow pace due to the poor market success of their full solutions. Currently, there are no additional outstanding purchase orders from either of those two customers.

Eight.

With that I will now hand over the call to Iran. For a detailed review of the quarter results, Iran. Please go ahead.

Yeah.

Thank you Ron and good day to everyone.

Revenues for the fourth quarter of 2023 were $18 $8 million.

From revenues of $45 $2 million.

Noted in the fourth quarter of last year.

Our geographical revenue breakdown over the last 12 months, whereas photo North America, 85%, Europe, and Israel, 14% far East and rest of the award 2%.

During the last 12 months, we had one over 10% customer.

Our top three customers together.

For about 38% of our revenues.

I will be presenting the rest of the financial results on a non cash on a non-GAAP basis.

Which excludes the noncash compensation expenses in respect of auctions and <unk> granted to directors officers and employees.

Acquisition related adjustments impairment of intangible assets and related write offs as well as lease liabilities financial expenses.

Liran: Second, a large customer of ours was acquired in 2023, with a new owner and management who prefer to focus on software. Following a long period of severe global supply chain and hardware disruption, the focus of the customer is shifting, and this negatively impacts its ongoing hardware purchases from us. This shift may reduce their ongoing annual purchases by $10 million. Third, unfortunately, O-RAN is not developed according to industry expectations, as well as our expectations and those of our customers. However, during 2022, we had a very nice early success with Oran sales among a few telcos and mobile operators, which provided us with revenue of about $10 million. However, with the lack of general success and acceptance of Oran technology, we do not anticipate further POs in the near future.

Before moving on I want to highlight that due to the termination of two programs as part of the new five year strategic plan, which Ron mentioned earlier, we recorded an impairment of intangible assets and related write offs.

Charge, two GAAP cost of sales of <unk>.

Nine $6 million, which are not included in our non-GAAP numbers.

For the full reconciliation from GAAP to non-GAAP numbers. Please refer to the press release, we issued earlier today.

Gross profit for the fourth quarter of 2023 was $5 3 million, representing a gross margin of 28%.

<unk> to gross proceeds of $15 1 million or.

Gross margin.

33, 5% in the fourth quarter of 2022.

<unk> mentioned earlier, our gross margin range going forward is expected between 27 and 32% over the years 'twenty 'twenty four and 'twenty 25 with the <unk>.

Liran: All of the above factors combined led to our current lower level of revenues, coupled with short-term uncertainty and low visibility. We have therefore made various adjustments to our operation to align with this new reality. Following that, we initiated and started working under a new five-year strategic plan covering 2024 until the end of 2028. This plan is designed to generate significant value for our shareholders even under the new market reality of today. This strategic plan has been approved by our Board of Directors, and I want to share this plan with you now. In terms of our financial objectives, the main long-term goal of our plan is to gradually increase earnings per share to about $3 in 2028.

Gross margin.

<unk> increasing over this period.

Operating expenses in the fourth quarter of 2023 were $6 8 million compared to $7 $2 million reported in the fourth quarter of 2022.

Operating loss for the fourth quarter of 2023 was $1 5 million compared to operating income of $7 9 million as reported in the fourth quarter of 2022.

Net loss for the quarter was zero point $5 million.

Third to net income.

$6 $6 million in the fourth quarter of 2022.

Liran: Looking towards the near term, we believe that our 2024 revenue will be about $70 million, impacted mainly by the headwinds and issues I mentioned earlier. We believe that the excess inventory in the global economy will ease as we move forward through 2024, and thus, the second half revenues will be higher than those of the first half. Q1 2024 revenue is expected to be between $14 and $17 million. We are facing a tough transition period.

Loss per share in the quarter was seven.

This is compared with diluted earnings per share of 98.

Reported in the fourth quarter of last year.

Now turning to the balance sheet as of December 'twenty, one 'twenty two 'twenty three the company's cash cash equivalence and marketable securities totaled 71 5 million with no debt. This will represent an increase of $4 2 million.

Just in quarter four a result of the positive operational cash flow of $8 $6 million net.

Liran: However, our very strong balance sheet and cash position allows us to continue at full steam ahead, supporting our broad and deep pipeline as well as continuing with our core R&D efforts while not being significantly impacted by a loss of a few million dollars during this transition period. We believe that our five-year strategic plan will allow us to return Silicon to a gradual and steady top line in EPS growth. In terms of our gross margin, for the coming years, we expect a range of between 27% to 32%. The reasons are threefold.

Net share repurchase cost of $4 4 million.

During the quarter silicon repurchased approximately 250000 shares.

Under our current share repurchase plan in total Silicon has purchased an aggregate of $52 million in share buybacks in recent years as.

As mentioned by.

Based on our strong balance sheet and improved.

Our cash position, we intend to continue repurchasing our shares at a full pace.

That ends my summary.

I'd like to hand back over to the operator for questions and answers session.

Liran: First, our edge systems typically carry a lower gross margin than our server adapters. As we grow the portion of edge systems in our mix of products sold, it should reduce our company's gross margin. Second, the market has changed from a vendor's market to a buyer's market, where the purchasing people and their CFOs are pushing us, as well as other vendors, for discounts. This is a technical issue and will probably improve in a year or two, should inventories be drawn down and the global economy improve.

Director.

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 with the handset before pressing the numbers.

<unk> will be pulled in the order they RSC. Please standby, while we poll for your questions.

The first question is from Alex Henderson of Needham and company. Please go ahead.

Great. Thank you very much.

So a couple of.

Liran: And third, our cost of goods includes a fixed cost element. Therefore, as revenues decrease, our gross margin will decrease. While we have already put efforts into reducing the fixed portion of our cost of goods, it still exists. The negative impact of these fixed costs should decrease in the coming years as we return to growth.

Quick comments first off my condolences to all those people.

Monster job I know, how dedicated silicon employees are with.

The tenure and the tenure of those employees.

It's been a very painful move on your part.

Alright.

Just going back to the share repurchase to start with.

Liran: Thus, we believe that in 2024 and 2025, our gross margin will be at the lower part of the range and will improve in the years following. I want to stress that our current working capital and marketable securities as of the end of 2023 is $140 million, with a very high quality of inventory amounting to $51 million, account receivables, net of accounts payable of $18 million, as well as $71 million in cash. All this represents about $21 per share.

What is left.

The buyback I know you say you wanted to.

One 6 million shares over the next two years is that all fully authorized.

What's left on the buyback.

Currently we are still in it.

<unk>.

Third.

<unk> plan.

Still have the possibility possibility to go chase approximately $6 million.

And the plan.

It's scheduled to end in.

2024.

Moving forward, we will probably declare new buyback plan.

Okay.

Hey.

Liran: I want to address the primary elements of our five-year strategic plan. First, our initial step has been to align our current expenses footprint with our expected revenue level. We've already reduced our personnel from 310 to 240 people.

Declarer additional buyback in order to get to the one point.

Sure.

Okay.

And then in terms of the.

The timing of these.

<unk> cuts.

The comment was you have already reduced the staffing 310 to $2 40, which is a decline of 22% cut.

Liran: With that, we expect to reduce our OPEX in 2024 to about $27 million, assuming current exchange rates. I want to stress that while making those expense reductions, we have verified that we are maintaining sufficient investment to support future revenue growth, per our strategic plan. Over the coming years, we will continue to tightly control our expense levels and allow only a minimal increase in OPEX in 2025 and beyond, based on the execution of our strategic plan. Second, based on our very strong balance sheet, as I discussed earlier, we plan to continue with an aggressive buyback of shares throughout 2024 and 2025. We currently plan to repurchase approximately a total of 1.6 million shares over the next two years. The timing and amount of the repurchases will be subject to business and market conditions, corporate and regulatory requirements, share price, acquisition opportunities, and other factors.

Is that complete now or is there further.

Trimming going to happen in the current quarter.

And I assume that was done in the fourth quarter is that correct.

That's correct. We've done we completed all the reduction we need to do.

Not the full impact was recorded in Q4 due to the fact that it happened in Q4, but some of that debt, but we are now done with this process.

So.

When you talk about the full year run rate.

I think it was $27 million Opex I assume that.

Quarter of that.

That's the first option.

Okay.

Is there any.

Commentary in terms of the mix.

The change.

Changes in.

In Opex between.

R&D sales and marketing G&A and any thoughts on.

Where we are its heavier.

The lighter.

So I mean that the reductions we've made in general we the reduction were mainly in the operation side. So we reduced about.

I think something like 50 employees around around that number there in R&D additional than in other departments to rest.

Liran: I know that at year-end, we have 6.4 million shares outstanding following the repurchase of 250,000 shares in the fourth quarter. Third, in terms of growth, we believe that as of 2025, we will achieve about 20% compound average annual growth from the 2024 baseline. Sorry, this growth rate does not consider the potential significant upside that we may experience from very large projects like the ones we have had in the past, such as the large IBM project in 2017 and 2018, which may provide additional incremental growth for our business. We believe that the growth in 2025 and beyond will come from the ramp-up of already achieved SD-WAN and SaaSy design wins, additional edge system sales to leading telcos and service providers, and from increased revenues related As an important part of the strategic plan, we will increase the focus on our core server adapter and edge solution portfolios, for which we have typically been robust to fundamental demands. As a part of this strategy, we conducted a very detailed evaluation of all our current programs and decided to discontinue two non-core Oran-related programs.

Kind of give you the picture of where we've made the reductions and the impact of the different divisions more heavily skewed to R&D, a little less sales and marketing and G&A.

Okay.

Yes.

In terms of.

These these projects.

I mean, you called out.

The company just switch to software.

Hardware, but the longer term project have you seen other.

Outright cancellations.

We should be calling out here.

First of all it's not cancellations per se I mean, it just reduced their demand reduce their activity, but it wasn't order cancellations of something that's all.

And again, we're monitoring it we don't have an exact similar situations, where we say okay. This company was acquired and we expect it to behave the same.

But I mean everything.

Everything is possible, but I would say, but but right now we do believe we understand the situation much much better.

Okay.

Projects that were.

Programs that were discontinued was there revenue associated with those.

No.

Okay.

Is there a cost savings associated with those cancellations.

Beyond the beyond the head count.

So just basically.

Stopping those investments.

Mainly the head count.

Okay.

Okay. Thanks.

And then finally.

Liran: Unfortunately, Oran can no longer be considered a core business for us as it is not developed according to industry expectations as well as the expectations of both ours and those of our customers. Finally, we will also return to a marketing and sales strategy that worked well for us in the past. We will once again also focus on the smaller design wins with current annual expected revenues in the $1 million range, as many of those types of accounts have the potential to become much larger accounts over the years. This does not mean that we will not pursue and achieve larger design wins of the immediate $10 million plus range. However, the plan is to actively compete for the smaller design wins as well and not focus only on the larger ones.

Over the short term.

Is there.

And expectations.

The kind of $16 million to $17 million.

Trajectory for the first quarter is going to stay at that level.

The rebound.

Keith.

We ended the June quarter.

Could you give us some thoughts on kind of the slope of that recovery.

What age to age.

Yes, so first of all.

Forecasts for Q1 is 14% to 17.

And yet we believe the second half is going to be it's very going to be very loaded on the second half compared to the first half.

Expect that the inventory situation will be a little bit of a bed or maybe the economics will be a little bit better. There. So we definitely expect the second half to be better than the first half.

Liran: This should make our revenues more diverse and long-term growth more robust. The compensation plan of our salespeople has already been adjusted to reflect this approach. By executing all of the above aspects of the strategy, taking measures designed to maximize growth in revenues, controlling our expenses, and putting in place an aggressive buyback plan, we believe that we will achieve the main goal of our strategy, to create significant value for our shareholders. As a reminder, our target is earnings per share of over $3 in 2028. As we approach this target, we believe that our EPS will improve gradually and reach the milestone of $1.6 EPS in 2027. Please bear in mind that those are internal targets that we are sharing with you and should not be taken as our current financial guidance.

Yes.

So no quantification.

That Delta 40 60.

<unk>, what do you think you.

Very hard to say.

I will cede the floor.

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.

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 Ww.

W 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 for your interest in Silicon. We look forward to hosting you on our next call in three months good day.

Thank you. This concludes silicon fourth and final quarter of 2023 results Conference call. Thank you for your participation you May go ahead and disconnect.

Liran: As we proceed, we will share with you our progress against those targets. We have a very dedicated, loyal management team with a lot of experience in the hardware business. Most members of our management team in Brooklyn, both directors, have been with us for many years and have already navigated our business to success through many market crises and transformations in 2000, in 2008, and in 2017, just to name a few. We strongly believe that the targets that I outlined are attainable in Silicon Valley, and I'm optimistic in our ability to successfully execute on this five-year plan.

[music].

Liran: To summarize, as you know, our environment is much more challenging going into 2024 for all players in our industry. We have a strong strategic plan in place that focuses on ultimately bringing value to our shareholders, not just by returning to revenue growth, reducing expenses, and growing profitability, but also enhancing it through an aggressive buyback and a strong reduction in share counts over two years. I want to stress that Silicon is well positioned as a key player in our industry and given our new roster, a deep pipeline, a highly experienced management team, and a new strategic plan in place, I am confident that we will achieve renewed growth starting from 2025 and beyond with a long-term goal of reporting over $3 per share earnings in 2028. With that, I will now hand over the call to Iran for a detailed review of the quota Iran, please go ahead.

Yes.

[music].

Eran Gillard: Thank you, Leron, and good day to everyone. Revenues for the fourth quarter of 2023 were $18.8 million, down from revenues of $45.2 million as reported in the fourth quarter of last year. Our geographical revenue breakdown over the last 12 months was as follows: North America, 85%. Europe and Israel, 13%. Far East and rest of the world, 2%.

Eran Gillard: During the last 12 months, we had 1 over 10% customer, and our top 3 customers, together, accounted for about 38% of our revenue. I will be presenting the rest of the financial results on a non-cash, non-GAAP basis, which excludes the non-cash compensation expenses in respect of options and RSUs granted to directors, officers, and employees, acquisition-related adjustments, impairment of intangible assets and related write-off Before moving on, I want to highlight that due to the termination of two programs as part of the new five-year strategic plan, which Liron mentioned earlier, we recorded an impairment of intangible assets and related write-offs charged to GAP cost of sales of $9.6 million, which are not included in our non-GAP numbers.

Eran Gillard: For the full reconciliation from GET to non-GET numbers, please refer to the press release we issued earlier today. Gross profit for the fourth quarter of 2023 was $5.3 million, representing a gross margin of 28%, and compared to gross profit of $15.1 million, or a gross margin of 33.5%, in the fourth quarter of 2022. As Liron mentioned earlier, our gross margin range going forward is expected to be between 27 and 32 percent over the years 2024 and 2025, with the gross margin gradually increasing over that period. Operating expenses in the fourth quarter of 2023 were $6.8 million compared to $7.2 million reported in the fourth quarter of 2022. Operating loss for the fourth quarter of 2023 was $1.5 million compared to operating income of $7.9 million as reported in the fourth quarter of 2022. Net loss for the quarter was $0.5 million compared to net income of $6.6 million in the fourth quarter of 2022. The loss per share in the quarter was $0.07.

Eran Gillard: This is compared with diluted earnings per share of $0.98 as reported in the fourth quarter of last year. Now, turning to the balance sheet, as of December 21, 2023, the company's cash, cash equivalents, and marketable securities totaled $71.5 million with no debt. This represents an increase of $4.2 million just in Q4, a result of a positive operational cash flow of $8.6 million net of share repurchase cost of $4.4 million. During the quarter, Silicon repurchased approximately 250,000 shares under our current share repurchase plan. In total, Silicon has purchased an aggregate of $52 million in share buybacks in recent years.

Operator: As mentioned by Liron, based on our strong balance sheet and improved cash position, we intend to continue repurchasing our shares at a full pace. That ends my summary. I would like to hand back over to the operator for a questions 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 1. If you wish to cancel your request, please press star 2. If you are using speaker equipment, kindly lift the handset before pressing the numbers.

Operator: Your questions will be polled in the order they are received. Please stand by while we poll for your questions. The first question is from Alex Henderson of Needham & Company; please go ahead. Great, thank you very much. So, a couple of quick comments. First off, my condolences to all the people who lost their jobs. I know how dedicated the Silicon employees are and the tenure of those employees, and I know that must have been a very painful move on your part, but I think it's the right move. Just going back to the share repurchase to start with, so what is left on the buyback? I know you say you wanted to buy 1.6 million shares over the next two years. Is that all fully authorized, and that's what's left on the buyback now? Currently, we are still in the third buyback plan. We still have the possibility to purchase approximately $6 million.

Eran Gillard: And the plan is scheduled to end in April 2024. Moving forward, we will probably declare new buyback plans. I see, so... The Board will declare additional buybacks in order to get to the 1.6 million shares.

Eran Gillard: Exactly. Okay. In terms of the timing of these staff cuts, I think the comment was you've already reduced the staffing from 310 to 240, which is a 22% cut. Is that complete now, or is there further trimming going to happen in the current quarter? And I assume that was done in the fourth quarter? Is that correct?

Eran Gillard: We've done, we've completed all the reductions we need to do. Not the full impact was recorded in Q4 due to the fact that it happened in Q4, but some of that did, but we are now done with this process. Thank you. When you talk about the full-year run rate of $27 million in OPEX, do you assume that we could just quarter that? Yes, that's the first option.

Eran Gillard: Is there any commentary in terms of the mix of the changes? in ops-ecs between R&D, sales, and marketing, G&A, any of these thoughts on...where it's heavier, where it's lighter. So we, I mean, the reductions we've made in general, the reductions were mainly in the operations side, so we reduced about, I think, something like 50 employees around that number there in R&D, an additional 10, and in other departments, the rest. So, I mean, that kind of gives you a picture of where we made the reductions and the impact on the different divisions. More heavily skewed to R&D, a little less to sales and marketing, and G&A.

Eran Gillard: Yes. Okay. Yeah, you know, these, these projects that you've called out one where the company switches to software and away from hardware, but the longer-term project, have you seen other outright cancellations that we should be calling out here? First of all, it's not a cancellation per se, I mean, it just reduced their demand, reduced their activity, but it wasn't order cancellations of something of that sort. And again, we're monitoring it. We don't have an exact similar situation where we say, okay, this company was acquired, and we expect it to behave the same.

Eran Gillard: Everything is possible, I would say, but right now, we do believe we understand the situation much, much better. And the two projects that were, or programs that were discontinued, was there revenue associated with them? Nope. And was there a cost savings associated with those translations?

Eran Gillard: beyond the beyond the head count. Subs by www.zeoranger.co.uk. So just basically the headcount; stopping those investments was mainly the headcount. Okay, thank you. And then, finally, in the short term. You know what? Is there an expectation that the $16-$17 million trajectory for the first quarter is going to stay at that level, or will it rebound? Subs by www.zeoranger.co.uk, seasonally into the June quarter. You know, give us thoughts on kind of the slope of that recovery. 1H to 2H.

Eran Gillard: Yeah, so first of all, our forecast for Q1 is 14 to 17. And yes, I mean, we believe the second half is going to be very, very loaded in the second half compared to the first half. We expect that the inventory situation will be a little bit better. Maybe the economy will be a little bit better there.

Eran Gillard: So we definitely expect the second half to be better than the first half. So, no quantification of that. 30, 70, what do you..., very hard to say.

Eran Gillard: I'll see you at the park, thanks. If there are any additional questions, please press star 1. If you wish to cancel your request, please press star 2. Please stand by while we ask you more questions. There are no further questions at this time. Before I ask Mr. Eisenman 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's website, www.silicon-usa.com. Mr. Eisenman, would you like to make your concluding statement?

Liran: 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.

Operator: Good day. Thank you. This concludes Silicom's fourth and final quarterly 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.

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