Silicom Ltd

Ladies and gentlemen, thank you for standing by. Welcome to the Sillicom third quarter 2021 results conference call. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Sillicom's investor relations team at GK Investor and Public Relations at 1-212-3800. 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 GK Investor Relations. Mr. Green, would you like to begin, please?

Thank you, Operator. I would like to welcome all of you to Silicom's third quarter 2021 results conference call. Before we start, I would like to draw your attention to the following Safe Harbor statements. 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. 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 our increasing dependence of substantial revenue growth on a limited number of customers in the evolving cloud-based SD-WAN, NFV, and edge markets, the speed and extent to which solutions are adopted by these markets, the likelihood that we will rely increasingly on customers which provide solutions in these evolving markets, resulting in an increasing dependence on a small number of larger customers, difficulty in commercializing and marketing Silicon's products and services, maintaining protecting brand recognition, protection of intellectual property, competition, disruptions to manufacturing and development, along with general disruptions, to the entire world economy related to the spread of the novel coronavirus and other factors identified in the documents filed by the company with the SEC. 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. Such non-GAAP measures are used by management to make strategic decisions, forecast future results, and evaluate the company's 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 corporations 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 condition and operating results. These measures are not in accordance with or a substitute for GAAP. A full reconciliation of non-GAAP to GAAP measures are included in today's earnings release, which you can find on Silicon's website. So with us on the line today, we have Mr. Shaika Orbach, CEO, and Mr. Eran Gilad, CFO. Shaika will begin with an overview of the results, followed by Eran, who will provide an analysis of the financials. We will then turn the call over for the question and answer session. And with that, I would now like to hand the call over to Shayka. Shayka, please go ahead. Thank you, Kenny.

I would like to welcome all of you to our conference call to discuss our third quarter 2021 results. We are very pleased with our solid results, which demonstrate ongoing growth in line with our targets. We reported a 9% sequential growth and year-over-year growth of 16% in revenues to $32.9 million in the quarter. We are all the more pleased with this performance because despite the serious component shortage and supply challenges that everyone in our industry is experiencing, 2021 remains on track for us. This means that we are addressing the challenge as well, and overall, we've been successful. In fact, Demand for our products and services is actually ahead of what we can currently physically deliver. I will discuss the component shortage crisis in more detail in a few moments. We reported our 67th quarter of continued profitability with net income of $3.6 million, up 23% year-over-year, and earning per share was at 52 cents, an increase of 27% year-over-year. In fact, in the past nine months, while revenue grew 25% year over year, our operating profit has increased by 61%. This demonstrates the strong operating leverage inherent in our business model, in that we can grow revenue strongly while expanding our expenses at a significantly lower pace. The pent-up market demand for our products and services, as well as the operating leverage, positions us exceptionally well to enjoy additional profitable growth as the supply shortages are resolved. In terms of shareholder value creation, our strong balance sheet, our ongoing profit and cash generation allowed us to continue our current $15 million share buyback program, and we purchased $3.2 million in silicon shares in the quarter. I note that that since we started our share buyback programs in May 2019, we have purchased $35.5 million in silicon shares. At the end of the quarter, we had over $66 million in net cash on the balance sheet. Our business growth strategy, focusing on some of today's fastest growing networking market segments, continues to progress. Our ongoing investment in R&D over the many years has enabled us to provide the right products and solutions at the right time as our customers today now demand them. During the third quarter, we saw growing demand from both SD-WAN and 5G, 4G over-end players. An example was the recent key win with one of the world's largest networking equipment providers, which we expect to become one of Silicon's largest ever customers. This customer selected a version of our platform, which was customized for their branded SD-WAN solution. They choose our solution due to the degree to which we demonstrated increased flexibility, control, and networking power to their end users' disaggregated networks. This key win confirms the added value our products and platforms bring to SD-WAN networks of all architectures, both traditional as well as decoupled and disaggregated. Our growth in the SD-WAN space, which began with branded solutions and then moved to the decoupled and disaggregated market, has now come full circle with our demonstrated leadership in that space, and has led to this top networking company selecting our solutions for its branded networks. We have already received significant initial purchase orders with clear plans to ramp quantities. The leadership that we have established in the SD1 space, in both branded and disaggregated markets, continues to bring us a steady stream of design wins. Beyond this key design win, And with the continuous market growth, there were other new customers and design wins that we did not announce. Broadly, we continue to see a good conversion rate of our long, deep, and healthy pipeline into new design wins in the SD-WAN market segment, and the accumulation of such wins is fueling our growth. In parallel to our success in the SD-WAN space, while at an earlier stage of development, we're seeing the positive developments in the O-RAN market track a similar path. The markets share the technological trends of shifting towards disaggregation and decoupling, and they also share a similar type of customer. For example, telcos and service providers that we already have strong relationships with, and in many cases, existing SD-WAN design wins with. The ORAN concept enables telco and mobile operators to decouple key network components, including radio units, distribution units, and central units, enabling best-of-breed and standardized components from diverse vendors, which can be combined into networks for superior performance. This approach is driving innovation and importantly reducing network costs significantly for operators. Because of the benefits, operators are increasingly adopting O-RAN standards in their new 4G and 5G infrastructure deployments. We believe O-RAN is only at the beginning of its growth cycle and is quickly gaining momentum. Our early pace in winning design wins in O-RAN has been at a higher level than it was in the early days of SD-WAN. This makes us very optimistic about achieving our goal in the O-RAN market. Similar to the success we have already experienced in SD-1, we aim to replicate and hopefully supersede that in Oran. While we have already gained initial Oran revenues, most of the significant potential is still ahead of us when mass deployments start. With our already achieved wins in this space, and with the traction that we see for all our products in this market, we believe that our solutions will become significant enablers for Oran use, and consequently will generate significant revenues as we move forward. Our belief is that Oran, as well as SD-WAN, will be significant growth contributors to silicon over the coming years. As I did last quarter, before moving on to our guidance, I wanted to update you on our experiences facing the global shortage of electronic components and materials, which has been intensifying since early 2021 and will probably be with us at least until the end of 2022. Similar to all our peers, we continue to experience these component shortages across all our suppliers, including our major vendors, and this is an increasingly challenging issue for us, as well as everyone in the industry. We are experiencing extremely long lead time for many components, as well as decommission areas by many of our vendors, which need to delay their deliveries to us due to unexpected delays in their manufacturing process. And in many cases, we even see vendors terminating the production of components entirely And that even happens with components for which there are no replacements in the market, and we consider this challenge as our highest priority these days. To mitigate all these risks, we're taking a broad array of action items. We continuously escalate any situation with our vendors, pushing to get parts as early as possible, explaining why our part in their allocations should be more significant. We leverage our financial strength. buying any available stock of components, both from the vendors and in the free market, sometimes paying more for these components in order to expedite delivery. We are working with our customers to replace products, the delivery of which is challenging with other products. We are implementing redesigns to some products to achieve optimized availability. And obviously, when we design new products, our first criteria is for component availability optimization. To date, we've been successfully meeting our growth targets, even despite the challenging environment. I want to add that based on the strong demand for our products, with no component shortages, we could have easily superseded our initial expectations and demonstrated even higher growth in 2021. Moving forward, while we predict that the difficulties in the market will even intensify, at least for the course of 2022, we believe that the significant increase in demand for our products, which is happening at a rate which is higher than what we originally thought, as well as the many actions we've taken in order to overcome the shortages, will once again help us to maintain high growth rates over the coming years. Of course, we will keep you updated on the issue. I would like to now discuss our guidance. For the fourth quarter of 2021, we continue to expect revenues at between $34 million and $36 million, which at the midpoint represents 2021 growth of approximately 18% over that of 2020. Looking more broadly, we expect that the coming new years for silicon will see performance ahead of what we have achieved over the past few years, and that we will continue to achieve ongoing revenue growth at a double-digit compound annual growth rate for several years ahead. In summary, our momentum is strong. We continue to bring important design wins, which position us exceptionally well for building on our growth in the coming quarters. In fact, given the scale of our recent design wins, the future potential, even starting from 2022, is greater than what we have traditionally experienced. We see a sustained long-term revenue growth path as we cement and broaden our relationship with some of the world's largest companies. More broadly, our long and growing list of design wins Generating ongoing orders, our solid baseline of activities and strong market fundamentals, with our focus on some of the fastest growing markets in the networking space, as well as our current long and deep pipeline, makes us ever more optimistic. With that, I will now hand over the call to Eran for a detailed review of the quarter's results. Eran, please go ahead.