This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Ladies and gentlemen, thank you for standing by. Welcome to the Silicon Second Quarter 2022 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 company's press release. If you have not received it, please contact Silicon's investor relations team at EK Global Investor Relations at 1-212-378-8040 or view it in the news section of the company's website, www.silicon-usa.com. I would now like to hand over the call to Mr. Kenny Green, EK Global Investor Relations. Mr. Green, would you like to begin, please?
spk00: Thank you, operator. I would like to welcome all of you to Silicom's second quarter 2022 results conference call. Before we start, I would like to draw your attention to the following Safe Harbor statement. This 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. Silicom does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of Silicon's increasing dependence on substantial revenue growth on the 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 smaller number of larger customers, difficulty in commercializing and marketing Silicon's products and services, marketing and protecting brand recognition, protection of intellectual property, competition, shortages of component supply, disruptions to our manufacturing and development, along with general disruptions to the entire world economy relating 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 disclosures of certain non-GAAP financial measures in today's earnings release, such non-GAAP financial measures will be discussed during this call. These non-GAAP financial 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 core operations, prospects for the future, Unless otherwise stated, it should be assumed that the financial measures 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 financial measures are included in today's press release, which you can find on Silicon's website. With us on the line today are Mr. Liron Eisenman, President and CEO, and Mr. Eran Gilad, CFO. Liron will begin with an overview of the financial results, followed by Eran, who will provide the analysis of the financials. We will then turn over the call to the question and answer session. And with that, I would now like to hand the call over to Liron. Liron, please go ahead.
spk07: Thank you, Kenny. I would like to welcome all of you to our financial results conference call discussing our second quarter 2022 results. This is my first quarter as CEO of Silicon after working for many years as COO of Silicon and CEO of our North American subsidiary. I would like to thank the board for their confidence in my abilities to lead Silicon ahead. Shaike Obach, our former CEO, still remains involved in Silicon as executive vice chairman. My aim is to continue and build upon the success he has brought to Silicon over the many years. Now to provide a short summary of the results of the quarter. We are very pleased with our continued solid performance for the second quarter of 2022. The second quarter was a period of growth in revenues, margins, and EPS driven by stronger than ever demand for a product coupled with attention to operational efficiency. We demonstrated 13% revenue growth year over year to $34 million at the center of our expected guidance range for the second quarter. Furthermore, Quarter-end backlog stands at record levels for silicon. Our revenue growth continues to reflect the accelerating transition of mainstream players from industrial and online retail giants to telcos and service providers to disaggregated and decoupled networks driving demand for silicon's enabling solution. With significantly improved gross operating margins, we are very pleased to report our 70th quarter of continued profitability with net income of $4.7 million which was up 61% year over year. All of that resulted in earnings per share of 70 cents, a very significant 67% increase year over year. We are all the more pleased with those results, despite the continued background of ongoing component shortages and tight supply chains. And had it not been for the shortages, revenues for us would have been strongly higher. We're maintaining a strong delivery rate in the face of the global shortages, primarily through determined product and operational innovation and careful inventory management. As you know, we have worked very hard to overcome the global component shortages situation, using more readily available components where possible and improving our internal manufacturing processes, maximizing what we're able to manufacture and deliver to customers. Our strong year-over-year growth in revenue, solid improvements in gross and operating margins, and ultimately strong profit growth shows that we have indeed been successful. The good news is that to us, it appears that the global component shortages has now stabilized and is not worsening. And we are working on the assumption of an improvement in component availability during the first half of 2023. The exceptionally strong market demand for our product is broad and is across our full product range. While last quarter we discussed reaching our highest ever backlog, as of Q2 end, our backlog increased further. I want to point out that our inventory growth has been a strategic move on our part. It was driven by the high market demand that we are experiencing and record backlog level on one hand and the global component shortages on the other. The strongly increased inventory is designed to support the expected level of upcoming product sales in coming quarters and to ensure we maintain internal availability of components and parts. We see this inventory position as a strategic asset and significant competitive advantage. It allows us to serve our existing customers better, delivering products which are not easily available today, while attracting new customers and new business which have difficulty finding products elsewhere. In today's market, this strategy will provide an excellent long-term return. In terms of our forward expectations, we believe that our inventory will peak in the coming few months, and we will allow it to start declining towards year-end, depending on the development in the ongoing component shortages. We continue to capitalize on the most significant transitions of IT architecture in recent history, the trends of disaggregation and decoupling, the markets to which those trends play into the most notably, the current fast-growing edge market and the developing 5G or market, both markets in which we have very strong capabilities and a competitive edge. The edge market in general, including the SD-WAN segment of that market, already contributes significantly to our revenues which is further demonstrated by one of our recent twins and remains in growth phase. The 5G orange market is still in the early introduction phase. In the last several years, we have built a full circle of major U.S. and European telcos adopting our product as part of their desegregation methodology. This success makes us optimistic about our future potential, especially with telcos and service providers, which have been endorsing the desegregated and decoupling approach. We believe it's still early days in the leading market sectors that we're active in. Discussion continues with a broad variety of telcos, networking equipment providers, and partners regarding exciting new opportunities. I would like to discuss the recent design win we announced in May. An existing customer, one of the largest vendors in the SD-WAN market, placed a new $15 million in initial purchase order for SD-WAN smart platform. At the same time, the customer informed us that they expect to order at the level of $25 million per year for the next several years. We see this win as a vote of confidence in our company and its products, reflecting our product innovation, quality, features, and performance, as well as the unparalleled level of the service that we provide to our customers. This acceleration of our business with one of the major customers reflects booming global demand for SD-WAN solutions, whereby companies of all types, from telcos to industrials to retail, are increasingly adopting. As we predicted when we initiated our SD-WAN strategy five years ago, this space is now becoming mainstream, with the growing momentum of disaggregated and decoupled architectures driving more and larger design wins for silicon in each and every quarter. We believe, and feedback from the market confirms, that this trend will continue, positioning us as a growing provider of must-have enabling building blocks for today's and tomorrow's data networks. In terms of our guidance for the third quarter, we expect to show continued growth with revenues at between $38 and $40 million, which at the midpoint represents growth of approximately 18% over that of the third quarter of 2021. I would note that this growth rate takes into account the continued component shortages situation and our estimates as to the level of our success in indeed mitigating it. Had there been no such situation, our forecast would have been significantly higher. Given the sheer size of our pipeline and the speed at which our markets are growing, we believe we remain positioned for strong multi-year growth. In summary, we remain very pleased with our performance in the second quarter and the first half of 2022. Even despite the ongoing component shortages, we continue to stand by our expectations. More broadly, our focus on some of the fastest growing markets in the networking space, which are developing under the trends which we had correctly predicted and positioned ourselves for, as well as our canned long and deep pipeline makes us further optimistic. Looking forward, given the all-time record level of our pipeline and our reputation as a canned deliver provider despite challenges, all compounded by the speed with which our target markets are developing, we are well positioned for continued double-digit compound growth rates in the years ahead. With that, I will now hand over the call to Eran for a detailed review of the quarter results. Eran, please go ahead.
spk03: Thank you, Liron, and hello, everyone. Revenues for the second quarter of 2022 were $34.2 million, compared with revenues of $30.3 million as reported in the second quarter of last year. Our geographical revenue breakdown over the last 12 months were as follows. North America, 69%, Europe and Israel, 25%, Far East and rest of the world, 6%. During the last 12 months, our top three customers together accounted for about 25% of our revenues. I will be presenting the rest of the financial results on a non-GAAP basis, which excludes the non-cash compensation expenses in respect of options and RSUs, granted to directors, officers, and employees, acquisition-related adjustments, as well as lease liabilities, financial income. For the full reconciliation from GAAP to non-GAAP numbers, please refer to the press release we issued earlier today. Gross profit for the second quarter of 2022 was $12.3 million, representing a gross margin of 36%, at the top of the range of our gross margin guidance of 32 to 36% and compared to a gross profit of $10.8 million or gross margin of 35.8% in the second quarter of 2021. The variance in the gross margin is a function of the specific product mix sold in the quarter. Operating expenses in the second quarter of 2022 were $7.3 million compared to $7.3 million reported in the second quarter of 2021. Operating income for the second quarter of 2022 was $5 million, representing an operating margin of 14.6% and an increase of 39% compared to operating income of $3.6 million, as reported in the second quarter of 2021. Net income for the second quarter was $4.7 million, representing a net margin of 13.8%, and an increase of 61% compared to net income of $2.9 million in the second quarter of 2021. Earnings per diluted share in the quarter were 70 cents, a 67% increase compared with EPS of 42 cents as reported in the second quarter of last year. Now, turning to the balance sheet, as of June 30, 2022, the company's cash, cash equivalents, and marketable securities totaled $48.1 million, with no debt, or $7.17 per outstanding share. That ends my summary. I would like to hand back over to the operator for question and answer session. Operator?
spk01: 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 we are using speaker equipment, kindly lift the handset before pressing the numbers. 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.
spk06: Well, let me start off not with a question, but rather with a statement. Leroy and I understand you've been... a major driver of the company's development of the newer products and direction of the company that has been so successful. And it certainly seems like a, a clear, uh, correct move to, to, to, uh, uh, bring you up to the CEO job and congratulations on that. It's, it's clearly well-deserved.
spk07: Thank you very much, Alex.
spk06: I am more than welcome. Um, so, uh, I wanted to just talk a little bit about the cost side of the equation a little bit. Obviously, the strong dollar is a major challenge to international revenues based in dollars because of the price increase it implies to customers. But you also benefit tremendously from the weak shekel and other currencies where your OPEX are. So I'm looking at the numbers for the June quarter, and they're actually down 370K on June. OPEX, which we had not really expected that kind of decline. So I was wondering if you could talk about whether that's a temporary blip and that it'll be up again as we go into the second half of the year. Actually, what do you think about the declines in all three items, R&D, sales and marketing, G&A?
spk07: Yeah, absolutely. So, I mean, the impact here really is the dollar. And since it's hard for us to predict what will be with the dollar in the future, we don't know to answer that right now. But I can say our structure remains pretty much the same. We're not increasing too much or definitely not decreasing. If we'll have significant design, we may increase more. But right now the structure is pretty much the same and the impact is the dollar itself.
spk06: So we should be using about the same level of spending in the back half of the year as in the front half of the year or in the June quarter?
spk07: Yeah, I would expect that. Again, the function would be the dollar itself, but from a level of investment in silicon, yes, the answer is it's going to be the same.
spk06: So assuming a flat dollar, it should be sequentially fairly stable. Okay. Going back to the gross margins, obviously you had a nice pop, 36%. Obviously that's driven predominantly by mix. Should we be assuming it returns back towards that 34% trend? 34.5% level that you've been doing the last four or five quarters and normalizes in the back half?
spk07: So we still expect to be in the same range. We've always been in 32 to 36. This quarter specifically, there was a mix of products that caused it to go a little bit higher, but we still believe we're in the same range of 32 to 36.
spk06: All right. Broadly speaking, Macro headwinds are the primary issue that people are dealing with. In a lot of the networking companies from Cisco and Juniper Extreme, just as an example, they're running backlogs that run anywhere from 40% to 100% of annual product revenues, and that gives them a lot of insulation. I know you guys have had a lot of wins. but it really isn't a hard backlog in the same way that it is for the systems companies. Those components are driven by projects and programs that could easily be deferred, delayed, or stretched. Can you talk a little bit about the implications of the macro versus the projects that you have? How firm are they? What are the major project leaders been telling you about their intention to continue to deploy on schedule or maybe slow down those deployments because of the macro environment? And specifically, how much of that's U.S.-centric projects versus international?
spk07: So at the moment, we do not see any immediate impact, for one. I mean, specifically on Q3 and even more than that, we don't see an immediate impact But we are feeling the heartbeat and monitoring the status all the time. We're discussing with our customers very openly on that. We're hearing what they see. And at the moment, at least what we see is we don't see an impact at the moment. And we think that our highest ever backlog also shows that the demand and the fact that the last quarter we said it's the highest quarter, and now we say again that we have the highest ever backlog again. So that means that the orders that came in are continuing to come in And from what we see and what we talk with our customers today, they continue and their plan is to continue with the plans that we have with them.
spk06: Just to clarify on the backlog, a lot of companies are providing the backlog numbers in order to get a sense of how large it is relative to the scope of their business. Is it plausible to think that you're looking at 20% to 50% of annual product sales in backlogs?
spk07: While we don't provide the exact numbers, I can tell you that the growth from previous quarter was quite significant, but we're not providing those exact numbers.
spk06: All right. One more question on the shekel and exchange rates. Can you just talk about how you're hedged, both in terms of your operating costs as well as receivables?
spk03: The answer is very simple. We do not edge anything.
spk06: Right. So you immediately benefit from the sharp decline in the shekel, and that's why your OPEX has come down.
spk03: Exactly.
spk06: Any thoughts on changing the tax rate or interest income line share count as we move forward?
spk03: No, no change. Indeed, the tax percentage in the quarter was somewhat lower compared to the average, but we still believe in the around 15% range.
spk06: All right, great. I'll cede the floor at this point, but we'll come back into the queue, so if there's an additional opportunity to talk.
spk00: Operator, let's move on to the next question.
spk01: The next question is from Jeff Myers from Colbia Capital. Please go ahead.
spk05: Hi, guys. Thank you. Congratulations on the next quarter. Just had a quick question. Did you guys buy back any stock during the quarter? And if so, how much?
spk03: Yes, the buyback plan ended in April this quarter. How much in total the third buyback plan? It was about $12.5 million.
spk05: I see. And is there a thought to renew that, I guess, going forward?
spk07: So when we look at our cash and what's the best use for that cash, at the moment we feel that the best thing to do with that is to build it into our inventory so we can be in the best position we can in order to build products and provide them to our customers. So that is our plan at the moment.
spk05: Got it. Okay.
spk01: Thank you, guys.
spk00: Let's move to the next question. Yes.
spk01: The next question is from Sean Boyd of Nexmark Capital. Please go ahead.
spk02: Good morning. Can you hear me okay?
spk00: Yeah.
spk02: Great. I understand we're not putting exact numbers here on the backlog, but perhaps you can help us with bookings. Given what's going on in the macro over the past couple quarters here, are your bookings and your excitement in your pipeline continuing to be as strong as they were, or is that ebbed at all, and how do you think that rolls out into Q3? Thank you.
spk07: So, yeah, I mean, we, as I said before, we discuss with our customers consistently. We're very obsessed with speaking with our customers to feel what they're doing. And now especially that we're traveling a lot again and meeting our customers face-to-face, we even feel it more. And we see that, yes, we see the pipeline. We believe it's very strong. And we believe that all the design that we collected over the last few quarters, which are starting to ramp up, some more and some less, will continue to ramp up, so we believe very strongly in our pipeline and in our backlog.
spk02: Okay, very good, very good. So taking that kind of to the next level and thinking about that product, you know, going through the P&L and starting to see shipments there. On the component constraints, you mentioned that the situation has stabilized, no longer worsening. Now maybe we're just kind of at a bad level but not getting better. Can you give us more color on that? What exactly are you seeing that tells you that? What gives you the confidence that we'll start to see those constraints ease? I guess if I heard it right, you think they're easing later in Q3 and Q4, but any more color you can give us specifically on that would be helpful.
spk07: So first of all, we don't see that easing yet. We see that it's not getting worse, and our assumption is that it will remain until the end of the year. At least it will remain as it is right now. We hope that we'll start seeing improvement in 2023, but at least for 2022, our assumption and what we see right now is that it's going to be hopefully flat and not worse. And the way that we understand the market is, again, it's a lot of work talking with suppliers, talking with supplier suppliers, talking with silicon vendors, talking with other manufacturers in the market. talking with distributors, just trying to understand what they see in their backlog. Do they see push-outs still? Are they seeing the lead times of the components going down or up or flat? And based on all of that, we kind of get an understanding of what we believe is going to happen in the component market. And our assumption, as I said, for now is that 2022 will not get worse and that we are now going to be, let's say, about flat with the lead times and the availability of the products. And in 2023, we hope to see improvement.
spk02: Got it. Okay. And just last question along this line is, so far, have you had any cancellations? Have you had any customers where you have major wins where they've given the weaker macro and just the time delays that are caused by these component constraints where they've basically pulled off and they said, okay, we're going to revamp these plans. We're going to go elsewhere, or we're just not going to do this program.
spk07: Definitely not for the brick problems. We may have some insignificant here and there, but none of our major design wins is nowhere near the situation.
spk02: Very good. Thank you for the additional color, guys.
spk00: Thank you, Sean. Thank you.
spk01: The next question. is a follow-up question from Alex Henderson of Needham & Company. Please go ahead.
spk06: Great. I was hoping to talk a little bit about the employment environment that you're in, to what extent you're seeing churn in staffing. I assume that it's very stable because that's the history of the company, and I know people tend to be there a long time, but have you seen any acceleration in churn, and When do you have annual bonus increases? What are you doing on the compensation side? Obviously, the strong dollar is also creating inflation in various geographies that needs to be offset with compensation. So how should we think about the compensation going up given the backdrop?
spk07: We are very pleased with the situation. I mean, we do not see significant churn even at all, I would say. I mean, compared to what we see from around us in certain companies, we're very pleased with that. And from a bonus perspective, compensation perspective, we continue with the policy that pretty much we always had and continuing to understand where we are compared to the market. but we don't expect to see any significant impact on that or the P&L or anything of that sort.
spk06: The annual compensation reviews and escalation generally is in March quarter, is that correct?
spk07: Usually we do it at year end, but it depends on the year. I mean, we definitely do it at year end, but it changes from year to year sometimes.
spk06: All right. Going back to the components side of it, can you talk a little bit about what's going on with your FPGA products? Are you seeing any traction with those? I know that this semi-market's been complicated, but it's hard for us to put that into context with your FPGAs. Has there been any improvement there?
spk07: I mean, there's definitely a few developments there. We continue our very close work with Intel on that. We have some opportunities that came maybe as part of COVID, and as we mentioned, some other suppliers are unable to provide products to their customers, so they're turning to us. So definitely there are some opportunities here, some wins we've managed to do over the last few months. and we expect there to be growth, but the growth should be smaller than some other areas of our business, but we definitely see growth there as well.
spk06: Another question around the trajectory of the top line. Historically, you've had a pretty nice pop into the fourth quarter and then a seasonal, much softer March quarter. Clearly, the supply constraints make that seasonal pattern a little bit more less likely. Should we be thinking about the fourth quarter as being more of a continuation of the sequential pattern over the course of the year and maybe not as much of a pop in the fourth quarter or as much of a decline in the first quarter? How should we be thinking about that piece of the equation, which is, I think, more supply chain driven than demand driven?
spk07: We expect it to continue, I would say, pretty much at the same rate. We do not see A huge pop coming in. As I said, we do not expect the supply chain situation to ease completely in Q4 and suddenly we'll have all the components that we need to build all the products that we want. So we think there's going to be growth. It's going to be pretty much at the same level that we've seen so far. Significant ease in supply chain we do not expect before 2023. So I expect this trend to continue of growth as pretty much similar to what we've seen so far.
spk06: Well, so that seasonality into the first quarter, the sequential decline that you've historically seen, which has been relatively steep, is that something that we should anticipate again? Or is that, you know, the lack of a full availability of parts make that smoother into the first quarter?
spk07: I think it's too early for us still to say at the moment about Q1 what our expectations are.
spk06: All right. I'll see the floor. Thanks.
spk01: The next question is from Robert Johnston from Harold Investment. Please go ahead.
spk04: Good morning. Would you mind talking a little bit more about the two product areas and what you're seeing there demand-wise? And also, could you talk a bit more about the competitive landscape and what you're seeing there?
spk07: Sure. Yeah, so first of all, I'll talk about the edge. So the edge is probably one of the highest or fastest growing domains that we have. We've seen it growing quite significantly over the last few years, and we think that's going to be one of our main drivers for growth in the next few years as well. And there we see that we definitely have an advantage, our close relationship with the silicon vendors, our very professional team, our ability to supply products in this very crazy environment of supply issues, which forces us to solve problems all the time, including engineering problems, doing redesigns. As we go, all of that has put us in a very good position to continue our growth. We believe we also have a lot of innovation in that area, which makes customers want to work with us. And we see that with more and more design wins in this area. And we definitely believe this will continue. As for the other area, I'm assuming that you're referring to the 5G or run. That market is developing. It's really in the early stages. As everyone knows with everything, all the reports in the media, et cetera, that many telcos are now in the phase of POCs or initial deployment. So we're definitely part of a lot of those. And we think it will also grow over the next few years. But for that market, it's a little bit earlier even than the edge market that I discussed a few minutes before.
spk04: Terrific. And competitively in the two markets, anything incremental?
spk07: I mean, definitely we see the advantage. I mean, I think in the edge market specifically, we have become a very known name. Everyone knows it. Silicon in that domain, whenever there's an RFP or anything of that sort that are bidding, we are there. We have a broad range of products. We have a strong roadmap. Same goes for the 5G and Oran market. So we feel very strong about it.
spk04: And so your customers are looking for a single source product multiple sources and how are they doing Silicon versus other providers in terms of having a consistent supply?
spk07: Well, definitely we're not the only one in the market and there is competition there but our close relationship with the Silicon vendors and the fact that in many cases we are the first to the market and that we are very innovative in our products that we come with gives us an advantage and obviously our obsession with making our customers happy and the fact that we are able to supply and go a long way in order to provide our customers with products are positioning us well, but definitely there is competition there.
spk04: Okay. Pricing, is it stable or is it going up with a shortage of components or?
spk07: So we, I mean, we're not making significant changes to that, but as you can see from our margins, we are still in the same range. We think we will remain in the same range. So no significant impact due to that.
spk04: Yeah. You can see that, but, you know, competitively, I was wondering what you were seeing there.
spk07: It's a challenging environment, definitely, and We're not the only ones suffering from that. Our competition is in a similar situation. So all of us are trying to do the best. And I think that is also a situation right now where the customers are measuring who are those customers or suppliers who are able to deliver and they can trust in the long term. But yes, it's a very challenging environment from a price perspective, from a supply perspective. And I think it will remain so at least until the end of the year and then later on as well.
spk04: Great. Last question, just on the 5G ORM. I mean, it's just starting to hit mainstream, but early. I mean, what is your thought in terms of when it starts to ramp up? Is it component availability? Is it just Timing, what do you think is going to be the milestone to really enable this market to start to ramp up a bit more?
spk07: I think it's a combination. I mean, on the one side, it's components. But I wouldn't say this is the limiting factor. It's a technology that is ramping up. There's the CapEx versus OpEx approach here that many telcos are very interested in and want to adopt. and I don't think there's a single telco in the world who is not looking into 5G and Oran. Some of them in more advanced stages, some less. Some are looking at the very big guys to see what they're doing and try to follow them later on. But it's still, as I said, it's still a little bit early days for that. 2023 will be bigger, but I think we will start seeing more and more deployments 2023, 2024, and beyond. Thank you very much. Thank you.
spk01: 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 pull for more questions. The next question is a follow-up question from Sean Boyd of NextMark Capital. Please go ahead.
spk02: Thanks for the follow-up. I'll keep it brief. So real quick on the inventory build, can you just talk a little bit about what's in there and the trajectory of that? I think you'd indicated we should start to see that drop by the end of the year, but what exactly have you built up in there and how's that helping in terms of, you know, kind of deep working through these component constraints?
spk07: Sure. So most of it is electronic components because that's where we've been struggling the most. It's not parts which have shortly time that we can build quickly and and metal parts or other things that are easy to get. It's the electronic parts that the entire industry is fighting to get. Some of those parts have a lead time of 60 weeks and more. And our strategy has been to build this inventory so we can react and support our customers. So that's mainly what you'll find in the inventory. And we think that we are now around the peak, I would say, of the inventory. And depending on how the market will evolve, but if it will continue as we expect it right now to be kind of flat until the end of the year and then ease towards 2023, we think that towards the end of the year, we will start seeing a dropping. And at some point, we're probably going to go back to normal levels. But right now, we think it's still going to be a little high for a while longer and then go down.
spk02: Got it. And we'll certainly help the old working capital. Last question from me is your incremental operating margins. Just rough math has me at about 25% incremental operating margins last year, and then it certainly bounces around quarter to quarter, but for the first half of this year versus first half of last year, about the same. Is that a good number to be thinking about going forward, or can we think about something even higher? Because if these If we get through component constraints and design winds start to really ramp, it seems like scale would help. So if we just talk about those 25% incremental operating margins.
spk07: And we have some leverage in the model, but we need to look at the dollar and other factors in order to really understand where it's going. Okay.
spk02: Good enough. Thanks so much, gentlemen.
spk07: Thank you.
spk01: The next question is from Alex Henderson of Needham & Company. Please go ahead.
spk06: Yeah, just one more quick one. So one of the key metrics is decommits from supply chain. Have you seen any over the last quarter, and have you seen any during the current quarter? What's the situation relative to supplier decommits?
spk07: Yeah, those still exist, definitely. I mean, when we are saying that the situation is flat with supply chain, it does not mean that we're not getting push-outs. It just means that the number of push-outs we're getting is not higher than what we got in previous quarters. But still, I mean, we're in situations that from time to time we get a decommit on a certain component and now we not start to find a solution for that either by an alternative or redesign. or proposing a different product for the customer. And, yeah, it still happens from time to time, and we still expect it to continue and happen until the end of the year, and maybe even a little bit towards 2023, but maybe at lower rates at that point. But still, this is a reality, and it's an uphill battle every day to deliver the product to our customers.
spk06: All right. So at this point in time, in the third quarter, decommits have been –
spk07: as expected no no surprises there so far well every decommit is a surprise probably but uh but it's not a surprise as to how many decommits we get i would say thank you there are no further questions at this time before i ask mr eisenman to go ahead with his closing statement
spk01: 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?
spk07: Thank you, operator. Thank you, everybody, for joining the call. We wish you all health, and we look forward to hosting you on our next call in three months' time. Good day.
spk01: Thank you. This concludes... Silicon's second quarter 2022 results conference call. Thank you for your participation. And we go ahead and disconnect.
Disclaimer