Silicom Ltd

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?

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.

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.