Silicom Ltd

Ladies and gentlemen, thank you for standing by. Welcome to the Silicon Third 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 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. Ehud Helft of EK Global Investor Relations. Mr. Helft, would you like to begin, please?

Yeah, thank you, Operator. I would like to welcome all of you to Silicon's third quarter 2022 results conference. Before we start, I'd like to draw your attention to the following safe harbor statement. This conference call contains projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and may change as time passes. 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 dependency for 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 they will rely increasingly on customers which provide solutions in these evolving markets, resulting in an increasing dependency on a smaller number of larger customers, difficulty in commercializing and marketing silicon's products and services, maintaining and protecting brand recognition, protection of intellectual property, competition, disruption to our manufacturing and development, along with general disruption to the entire world economy, relating to the spread of the novel coronavirus, COVID-19, and other factors identified in 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 course. Such non-GAAP measures are used by management to make strategic decisions, focus future results, and evaluate the company's current performance. Management believes that the presentation of these non-GAAP financial measures is useful to investor understanding and assessment of the company's ongoing cooperation and prospects for the future. Unless otherwise stated, it should be assumed that financial discussion in this conference call will be on a non-GAAP basis. Non-GAAP financial measures disclosed by management are provided additional information to investors in order to provide them with an alternative method for assessing our financial conditions and operating results. These measures are not in accordance with or substitute for GAAP. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release, which you can find on Silicone's website. With us on the line today are Mr. Leon Eisenman, President and CEO, and Mr. Ran Gilad, CFO. Liron will begin with an overview of the results followed by Iran 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 like to hand over the call to Liron. Liron, go ahead please.

Thank you, Haoud. I would like to welcome all of you to our financial results conference call discussing our third quarter 2022 results. We are very pleased to report a very impressive quarter with strong revenues, margins, and profit growth across the board. This is all a clear demonstration of the power and leverage inherent within our business model. We reported very good performance with revenue growth up 19% year-over-year to $39.2 million. Our high quarter-end backlog continued to demonstrate the high demand for our products. The strong operating leverage within our business model allowed our revenue growth to translate into much higher profit growth. because we did not record a corresponding growth in our expenses. This is demonstrated by our operating margin expanding to an impressive 18.4% for the quarter versus 12.8% last year. All this led to our 71st quarter of continued profitability with net income of $6.9 million, up a very strong 91% year-over-year with earnings per share at over $1, a sequential increase of 45%, over Q2 of 2022. I want to stress that we achieved all this and our performance would have even been better had it not been for the ongoing global component shortages crisis, which still continues to impact our revenue to some extent in the third quarter. As you know, we have worked hard over the past year to overcome this situation. Our solid results show that we have indeed been successful and proved our ability to mitigate the issues and deal with continued challenges. Looking ahead, The good news is that in recent months, the global component shortages has now stabilized and we start to see minor improvements. We are working on the basis of an improvement in component availability during the first half of 2023, despite the fact that the shortage for certain parts may continue till the end of 2023 or even beyond. Over the past year, we have used our cash position currently at $43 million to build up our inventory levels to support demand and protect us from shortages and non-commits by cheap vendors. We see this continued strong cash position as a strategic asset and significant competitive advantage. It allows us to serve our existing customers better, delivering products which are not readily available, while attracting new customers and new business which have difficulty finding products elsewhere. With signs of some lessening in component shortages, we expect that peak inventory levels are now behind us. While those levels are still at a higher level than what we would normally need, we do expect to gradually decrease those levels due to availability improvements from several of our component vendors. As our results clearly demonstrate, from our perspective, we continue to see no let-up in the demand from our end markets. The exceptionally strong market demand that we are experiencing is broad and is across our full product range. But more importantly for us, we believe that we have seen a significant growth in our total addressable market potential. As our edge product, initially targeted for SD-WAN markets, became a clear growth driver for us, we realized that the same products are attractive for many broader applications and markets, giving the features, performance, cost, and flexibility advantages. As a result, we now have a record pipeline of design wins and opportunities for our edge products in multiple varied markets, as well as interest from potential new customers for our products. Telcos, service providers, enterprises, cyber and networking companies, and cloud players are using our edge products for applications as they spread as SD-WAN, virtual CPE, telco-dedicated routing, secure access service edge, and more. And an example of this trend is the design win we announced in August. This was an initial $3 million new design win, in order from a U.S.-based leading provider of cloud-based secure access service edge solutions. This fast-growing cloud cybersecurity leader will use our customized edge platforms to provide both wired and wireless connectivity to its end customers. This customer explained to us that they chose us due to our combination of product functionality, price, rapid customization capabilities, and support, directly meeting their needs for the next generation systems and applications. This win for our edge products represents proof of their value for multiple markets and represents a significant expansion of our addressable markets. The value of our edge product is well beyond SD-WAN alone, our original target market for this innovative technology. Our edge products offer the exact functionality features and cost that telcos, service providers, enterprises, cyber and networking companies, and cloud players need for their next generation systems and applications. Coupled with our ability to deliver rapid customizations, onboarding, and ramp-up support positions us ideally for SASE and other markets that use edge platforms. This is all the more demonstrated by the large and growing pipeline that we have built from a variety of significant design wins and opportunities. As I mentioned, we now see that the total addressable market for our edge product is much larger than we initially planned, and we And as we grow our share, we expect them to contribute significantly to our future growth. Our existing wins, our continued high backlog, combined with the potential opportunities in our pipeline, underline our optimism that our achievements so far are just the tip of the iceberg. Looking ahead, in terms of the guidance for the coming fourth quarter and full year 2022, we expect to show continued growth with revenues at between $43 million and $45 million, which at the midpoint represent growth of approximately 21% over that of the fourth quarter of 2021. This guidance implies full-year revenues of $148 million to $150 million, and at the midpoint, 16% over that of 2021 revenues. I would note that we continue to take into account the continued compound 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 higher. In summary, we remain very pleased with our performance in the third quarter of 2022, with strong year-over-year growth in revenue and a significant acceleration in our profit growth, proving the operating leverage inherent in our business. In fact, we are very pleased that our operating margin of 18.4% and net margin of 17.5% achieved in this quarter suppresses the target margins indicated in the long-term model that we have been including in our investor presentations for a few years. Our exceptionally strong backlog provides us with continued visibility in our revenue growth over the quarters ahead. More broadly, the success of our edge product and its broader application into multiple markets, well beyond what we imagined earlier on, means that our total addressable market today is significantly greater than our previous estimates, and this makes me increasingly bullish with regards to our prospects over the mid and long term. With our total addressable market larger than ever, a record pipeline, and a stronger than ever momentum, we have never been better positioned and look forward to multi-year expansion. With that, I will now hand over the call to Eran for a detailed review of the quarter's results. Eran, please go ahead.