Silicom Ltd

Ladies and gentlemen, thank you for standing by. Welcome to the SELICOM third quarter 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 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 of EK Global Investor Relations. Mr. Green, would you like to begin, please?

Thank you, operator. I would like to welcome all of you to Silicon's third quarter 2023 results conference call. Before we start, I would 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 Silicon's increasing dependence 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 Silicon will rely increasingly on customers which provide these solutions in these evolving markets, resulting in an increasing dependence on a smaller number of larger customers, difficulty in commercializing and marketing of Silicon's products and services, maintaining and protecting brand recognition, protection of intellectual property, competition, disruptions to manufacturing, sales and marketing, development and customer support activities, the impact of the war in Ukraine and the war in Israel, rising inflation, rising interest rates, volatile exchange rates and commodities prices, 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 exercising greater caution and selectivity with their short-term IT investment plans, as well as other factors discussed in our annual report on Form 20F and other documents filed by the company that may be subsequently filed by the company from time to time with the Securities and Exchange Commission. 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 core operations 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 and 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. Full reconciliation of non-GAAP to GAAP financial measures are included in today's earnings release, which you can find on Silicon's website and With us on the line today are Mr. Liron Aizman, President and CEO, and Mr. Eran Gilad, CFO. Liron will begin with an overview of the results, followed by Eran, who will provide the analysis of the financials. We'll then turn the call over 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. Welcome to our Financial Results Conference Hall, discussing our third quarter 2023 results. Our third quarter's revenues were $30.1 million. This is in line with the expectations that we announced last quarter. In terms of profitability, we reported third quarter net profit of $2.1 million and third quarter earning of $0.30 per diluted share. I would like to spend a few moments discussing the very limited visibility we are currently experiencing in the market, the factors currently at play, which are impacting us as well as our expectations for the short and midterms. As I'm sure you remember, since the global COVID shutdown three years ago in 2020, supply chains around the world became tight with very limited availability, especially of electronic components. Silicon, like many other companies, leveraged its strong balance sheet to prudently increase and maintain high inventory levels of components. This was to ensure that we could continue to build the products that our customers need in a timely way, maintain strong business continuity, and most importantly, keep our clients happy with continued top-quality service provisions. Similarly, over the past two years, our customers ordered a high level of our products from us so they can manufacture products for their customers in turn. And this ordering, a good portion for inventory, drove above average demand and high backlog for our products in both 2021 and 2022. However, the second half of 2023 has seen a reversal in this trend. The supply chain's tightness has abated and customers which have built up significant inventories are now drawing on their existing stock of our products where possible. and currently do not need to order significant quantities from us. Another impact is related to industry and economic headwinds facing our customers that began to affect our revenue in the last quarter. Consistent with the rest of our industry, we expect the microeconomics uncertainty to persist into 2024, which impacts our customers' investment ability. This is leading to holding off and longer decision-making processes on new projects, as well as delays and slowing in the the investment and implementation of existing infrastructure projects. Some recent design wins are ramping up significantly more slowly than initially anticipated. Those projects are proceeding cautiously, diverging from the original timelines forecasted by our customers. Given the volatile environment over the past few years, with everything that has happened since COVID, as well as global economic downturn, we are also seeing some changes in our industry, which also possess new challenges, as well as new opportunities in what is already a very low visibility environment. To provide you with just two examples, due to supply chain and component shortages issues, many companies in our industry face manufacturing difficulties in recent years. As a result, those companies are now taking a strategic review of their entire operation process. A result of that may be a decision to change their decision-making processes and integration practices. With that, the selection of the specific server adapter vendor, which will be used for building their systems, may be moved from the company to its integrator. While this may present an opportunity for us with companies which currently do not use our server adapters, it may present a challenge with existing customers that we will face once such customer will exhaust the access inventory it currently has. During the last years, the ownership of few companies in our industry has changed throughout a series of mergers and acquisitions. Such ownership changes may result in significant changes in the identity of a decision maker and may also result in a change in the customer's business focus. Again, such changes may present an opportunity as well as a challenge to Silicon once such customer will exhaust its access inventory. However, for now, it further reduces our already very low visibility. Taking all those factors into account, we expect to see Q4 revenues between 20 and 21 million dollars. Looking further to next year, given our very limited visibility and the factors I just discussed, we expect 2024 to be a challenging year. However, we strongly believe that we will return to double-digit growth in 2025. Given those recent impacts to revenue, we've already begun to take several actions to manage discretionary costs and align spending with the current environment. We are adjusting our expenses footprint to the right level relative to our expected revenue level, ensuring that we maintain investments in activities which will bring Silicon future growth while preserving technological knowledge and customer relationships. Those actions should allow us to reduce the negative impact on our non-GAAP earnings per share without compromising our long-term objectives. We believe that the actions we are taking now, our well-proven long-term experience in managing our expenses and our strong cash position, which currently stands at $67 million, will allow us to maintain a very strong balance sheet through the challenging period ahead of us. In parallel, we intend to increase our focus on the sectors that have allowed us to grow so well in the recent past and those that we believe will remain primary growth drivers for us into 2025 and beyond. Server adapters, including specific FPGA-based and hardware acceleration SmartNICs and edge systems. We have already begun evaluations of all of our research and development and sales and marketing programs with the intention to increase our investments in our focus areas and stop our investments in any out-of-focus areas. We are optimistic about 2025. We believe that by 2025, we will convert some large projects in our pipeline into new design wins, and the ramp-up of existing ones will generate more meaningful revenues. Despite the current challenges, over the immediate term, our mid- to long-term outlook remains positive. Our aim is to return to double-digit revenue growth and recovery in 2025. underpinned by a strong and continually growing list of design wins, many of which are with some of the world's leading players in telco and networking space. I would like to share with you a few examples of the additional revenue potential inherent in our impressive roster of design wins and in our potential design wins pipeline that underlies our expectations for a 2025 recovery. Within this long list, we can easily identify about 20 design wins, a few we have already won, and not yet at the mass production stage, and others that are in the last stages of our potential design wins pipeline, each having a sales addition potential of between half a million and a few million dollars by 2025. Those design wins, with leading networking security and service providers, are for our advanced server adapters and edge system products our strategic focus area. Beyond that, we are continuing to expand our business with a leading U.S.-based provider of enterprise telecommunication services, with which we have already won a few active design wins, and we expect to win more in the coming year. This opportunity by itself has an additional sales potential of about $10 million in 2025. And furthermore, we are expecting to transition from the proof of concept stage to the mass production sales stage for two design wins we have already won with two leading SASE companies, with a sales potential of approximately $10 million in 2025. As SASE grows, and given our both customers' dominant position within the SASE market, We expect strong future growth in sales to those customers. Our balance sheet remains very strong and has been the outcome of a very well-planned and executed strategy over many years. As I said, our net cash position currently stands at $67 million with no debt. It represents an increase of $4 million during the third quarter. Our strong cash position remains a key strategic asset and enables us to continue investing in the long term and overcome challenging periods ahead of us. As we have shown, we are very happy to share the rewards of our continued profitability and cash generation with our shareholders. Based on our strong cash position, we intend to continue to repurchase our shares under the 15 million share repurchase plan that we announced six months ago. I would like to take a moment to address the situation in Israel. We were all absolutely horrified by the terrible attack and kidnapping of ordinary citizens in the south of Israel, which led to the current war by Israel against Hamas in Gaza. All Silicone employees have been affected in a very personal way. Given the small size of our country, we all have friends and know families that were directly impacted by this attack. Many of us have sons and daughters that are in the Israeli army. We all pray for the victims, as well as their families, friends, and loved ones who have been directly or indirectly impacted. We are resilient people and unfortunately have much experience in working, overcoming challenging times. I wish to reaffirm to our employees, partners, and shareholders that our operations and manufacturing have not been impacted in Israel or anywhere else in the world, despite our personal grieving. Naturally, the safety of our employees remains our highest priority. Finally, I also want to personally thank each and everyone who has reached out to us to express their support and best wishes. To summarize, Silicon is navigating a much more challenging short-term environment across many fronts. I want to stress, though, that silicon is well positioned as a key player in our industry, and given the growing potential within our design wind roster, our long and deep pipeline, and our continually growing total addressable market, I am optimistic on our long-term future, especially from 2025 and beyond. We believe that our drivers for long-term demand remain intact as we navigate the current situation We remain highly focused on our first priority target of maintaining our market leadership, developing new products that will act as growth drivers and lead to design wins over many years, delivering on technology roadmaps, and ultimately ensuring customer satisfaction. At the same time, we continue to carefully manage the company expenses and cash position. With that, I will now hand over the call to Eran for a detailed review of the quarter results. Eran, please go ahead. Thank you.