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spk00: Ladies and gentlemen, thank you for standing by. The conference will begin shortly. Thank you. Thank you. Ladies and gentlemen, thank you for standing by. Welcome to the Silicon fourth quarter and final 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?
spk04: Yes, thank you, Operator. I would like to welcome all of you to Silicon's fourth quarter 2023 results conference call. Before we start, I would like to draw your attention to the following State Harbor statements. This conference call contains forward-looking statements. Such statements may include but are not limited to anticipated future financial operating results may be affected by subsequent business, political, environmental, regulatory, economic, and other conditions, and are subject to known and unknown risks and uncertainties and other factors, many of which are outside of Silicon's control, which might cause actual results to differ materially from expectations expressed or implied in the forward-looking statements. and which include, but are not limited to, Silicon's increasing dependence for substantial revenue growth on a limited number of customers, the speed and extent to which Silicon solutions are adopted by the relevant market, difficulty in commercializing and marketing of Silicon's products and services, maintaining and protecting brand recognition, protection of intellectual property competition disruptions to its manufacturing, sales, and marketing, development, and customer support activities, the impact of the wars in Gaza and in the Ukraine, rising inflation, rising interest rates, volatile exchange rates, 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 their existing greater caution and selectivity with short-term IT investments. The factors noted above are not exhaustive. Further information about the company's business, including information about factors that could materially affect the look-up results of operations and financial conditions, are discussed in our annual report in Form 20F and other documents filed by the company, and that may be subsequently filed by the company from time to time with the Securities and Exchange Commission. Therefore, there can be no assurance that actual future results will not differ materially from anticipated results. We are cautioned not to rely on these forward-looking statements. Silicon does not undertake to update any forward-looking statements as a result of new information or future events or developments, except as they be required by law. 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. 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 will be useful to investors' understanding and assessment of the company's ongoing cooperations 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. And a full reconciliation of the non-GAAP to GAAP financial measures are included in today's earnings release, which you can find on Silicon's website. With us on the line today are Mr. Leon Eisenman, President and CEO, and Mr. Eran 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 the call over to the question and answer session. And with that, I would now like to hand the call over to Liron.
spk03: Liron, please go ahead. Thank you, Kenny. Welcome, everyone, to our financial results conference call to discuss our fourth quarter ending 2023. Revenue were $18.8 million in the quarter, and we reported a net loss of $0.5 million. Over the past few months, we have made a significant effort to conduct checks and engage in discussions with all our customers in order to assess and gain a strong handle on the situation. I believe that now we do understand the situation much better, including both the challenges and the opportunities in front of us. In our previous conference call, we have discussed two significant headwinds which impacted our results during the second half of 2023 and that we are now facing as we move into 2024. The first headwind is our customer access inventory. During the global COVID shutdown in 2020 and onward, supply chains around the world became tight with very limited availability of electronic components. As a precaution, our customers ordered a high level of our products from us, with a significant portion being for inventory purposes, and this drove above-average demand and high backlog for our products, which we enjoyed in 2021, 2022, and the first half of 2023. However, as we shared, in the second half of 2023, we saw a reversal of this trend, Supply chain tightness abated and customers who built up significant inventory began drawing on their existing inventory stock while reducing significantly ongoing purchases. The second headwind we are facing are industry-related and macroeconomic factors delaying IT infrastructure investment. This is leading to a longer decision-making process on new projects and slower investment and implementation of existing infrastructure projects. As I mentioned last quarter, some of the design wins we achieved in 2022 and 2023 are ramping up significantly slower than our customers had initially anticipated when first signed. Those projects are proceeding cautiously, diverging significantly from the original timeline forecast by our customers. On top of those market headwinds, there are also a few additional silicon-specific issues that are impacting revenues. First, we want two very large design wins in 2021 and 2022. According to the customer's initial forecast, each of those wins were expected to provide us with annual revenue of $20 to $30 million. Both customers provided us with very large purchase orders, and we've already delivered more than $10 million of each. Both still have very large inventories, which they are digesting at a very slow pace due to poor market success of their full solution. Currently, there are no additional outstanding purchase orders from either of those two customers. Second, a large customer of ours was acquired during 2023 with a new owner and management which prefer to focus on software and following a long period of severe global supply chain and hardware disruption, the focus of the customer is shifting and this negatively impacts its ongoing hardware purchases from us. This shift may reduce their ongoing annual purchases by $10 million. Third, unfortunately, Oran is not developed according to industry expectations as well as our expectation and those of our customers. During 2022, we had a very nice early success with Oran's sale among a few telcos and mobile operators, which provided us revenue of about $10 million. However, with a lack of general success and acceptance of Oran technology, we do not anticipate further POs in the near future. All of the above factors combined led to our current lower level of revenues, coupled with short-term uncertainty and low visibility. We have therefore made various adjustments to our operation to align with this new reality. Following that, we initiated and started working under a new five-year strategic plan covering 2024 until the end of 2028. This plan is designed to generate significant value for our shareholders, even under the new market reality of today. This strategic plan has been approved by our board of directors, and I want to share this plan with you now. In terms of our financial objectives, the main long-term goal of our plan is to gradually increase earning per share to about $3 in 2028. Looking towards the near term, we believe that our 2024 revenue will be about $70 million, impacted mainly by the headwinds and issues I mentioned earlier. We believe that the excess inventory in global economy headwinds will ease as we move forward through 2024. than those of the first half. Q1 2024 revenue are expected at between 14 and 17 million dollars. We are facing a tough transition period. However, our very strong balance sheet and cash position allows us to continue at full steam ahead, supporting our broad and deep pipeline as well as continue with our core R&D efforts while not being significantly impacted by a loss of a few million dollars during this transition period. We believe that our five-year strategic plan will allow us to return silicon to a gradual and steady top line in EPS growth. In terms of our gross margin, for the coming years, we expect a range between 27% to 32%. The reasons are threefold. First, our edge systems typically carry lower gross margin than our server adapters. As we grow the portion of edge systems in our mix of products sold, it should reduce our company gross margin. Second, the market has changed from a vendor's market to a buyer's market, where the purchasing people and their CFOs are pushing us, as well as other vendors, for discounts. This is a cyclical issue and will probably improve in a year or two, should inventories be drawn down and the global economy improve. And third, our cost of goods includes a fixed cost element. Therefore, as revenue decreases, our gross margin will decrease. While we already put efforts into reducing the fixed portion of our cost of goods, it still exists. The negative impact of this fixed cost should decrease in the coming years as we return to growth. Thus, we believe that in 2024 and 2025, our gross margin will be at the lower part of the range and will improve in the years following. I want to stress that our current working capital and marketable securities as of the end of 2023 is $140 million. net of accounts payable of $18 million, as well as $71 million cash. All this represents about $21 per share. I want to address the primary elements of our five-year strategic plan. First, our initial step has been to align our current expense footprint with our expected revenue level ahead. We've already reduced our personnel from 350 With that, we expect to reduce our OPEX in 2024 to about $27 million, assuming current exchange rate. I want to stress that while making those expense reductions, we have verified that we are maintaining sufficient investment to support future revenue growth, fair our strategic plan. Over the coming years, we will continue to tightly control our expense level and allow only minimal increase in OPEX in 2025 and beyond, based on the execution of our strategic plan. Based on our very strong balance sheet, as I discussed earlier, we plan to continue with an aggressive buyback of shares throughout 2024 and 2025. We currently plan to repurchase approximately a total of 1.6 million shares over the next two years. The timing and amount of the repurchases will be subject to business and market conditions, corporate and regulatory requirements, share price, acquisition opportunities, and other factors. I know that at year-end, we have 6.4 million shares outstanding following the repurchase of 250,000 shares in the fourth quarter. Third, in terms of growth, we believe that as of 2025, we will achieve about 20% compound average annual growth from 2024 baseline. This growth rate does not consider potential significant upside that we may experience from very large projects like the ones we had in the past, such as the large IBM project in 2017 and 2018. which may provide additional incremental growth for our business. We believe that the growth in 2025 and beyond will come from the ramp-up of already achieved SD-WAN and SASE design wins, additional edge system sales to leading telcos and service providers, and from increased revenues related to our large roster of design wins and pipeline of potential design wins for server adapter and edge products with leading networking security and service providers globally. Fourth, as an important part of the strategic plan, we will increase the focus on our core server adapter and edge solution portfolios, for which we had typically been a robust fundamental demand. As a part of this strategy, we conducted a very detailed evaluation of all our current programs and decided to discontinue two non-core Oran-related programs. Unfortunately, Oran can no longer be considered as a core business for us as it is not developed according to the industry expectations as well as the expectation of both ours and those of our customers. Fifth, we will also return to a marketing and sales strategy that worked well for us in the past. We will once again also focus on the smaller design wins with current annual expected revenues in the $1 million range, as many of those types of accounts have the potential to become much larger accounts over the years. This does not mean that we will not pursue and achieve larger design wins of an immediate $10 million plus range. However, the plan is to actively compete on the smaller design wind as well and not focus only on the larger one. This should make our revenues more diverse and long-term growth more robust. The compensation plan of our salespeople have already been adjusted to reflect this approach. By executing all of the above aspects of the strategy, taking measures designed to maximize growth in revenues, controlling our expenses, and putting in place an aggressive buyback significant value for our shareholders as a reminder our target is earnings per share of over three dollars in 2028 as we approach this target we believe that our eps will improve gradually and across the milestone of 1.6 dollars eps in 2027. please bear in mind that those are internal targets that we are sharing with you and should not be taken as our current financial guidance as we proceed we will share with you our progress against those targets We have a very dedicated, loyal management team with a lot of experience in the hardware business. Most members of our management team and board of directors have been with us for many years and have already navigated our business to success through many market crises and transformations in 2000, in 2008, and in 2017, just to name a few. We strongly believe that the targets that I outlined are attainable by Silicon, and I'm optimistic in our ability to successfully execute on this five-year plan. To summarize, as you know, our environment is much more challenging going into 2024 for all players in our industry. We have a strong strategic plan in place which focuses on ultimately bringing value to our shareholders, not just by returning to revenue growth, reducing expenses and growing profitability, but also enhancing it through an aggressive buyback and a strong reduction in share count over two years. I want to stress that Silicom is well positioned as a key player in our industry and given our design roster, a deep pipeline, a highly experienced management team and a new strategic plan in place, I'm confident that we will achieve renewed growth starting from 2025 and beyond with a long-term goal of reporting over $3 per share earnings in 2028. With that, I will now hand over the call to Eran for a detailed review of the quarter results. Eran, please go ahead.
spk01: Thank you, Liron, and good day to everyone. Revenues for the fourth quarter of 2023 were $18.8 million, down from revenues of $45.2 million as reported in the fourth quarter of last year. Our geographical revenue breakdown over the last 12 months were as follows. North America, 85%, Europe and Israel, 13%, Far East and rest of the world, 2%. During the last 12 months, we had one over 10% customer and our top three customers together accounted for about 38% of our revenues. I will be presenting the rest of the financial results on a non-cash, 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, impairment of intangible assets and related write-offs, as well as lease liabilities, financial expenses. Before moving on, I want to highlight that due to the termination of two programs as part of the new five-year strategic plan, which Liron mentioned earlier, we recorded an impairment of intangible assets and related write-offs, charged to GAAP cost of sales of $9.6 million, which are not included in our non-GAAP numbers. For the full reconciliation from GAAP to non-GAAP numbers, please refer to the press release we issued earlier today. Gross profit for the fourth quarter of 2023 was $5.3 million, representing a gross margin of 28%, and compared to gross profit of $15.1 million, or gross margin of 33.5% in the fourth quarter of 2022. As Liron mentioned earlier, our gross margin range going forward is expected at between 27 and 32% over the years 2024 and 2025, with the gross margin gradually increasing over that period. Operating expenses in the fourth quarter of 2023 were $6.8 million compared to $7.2 million reported in the fourth quarter of 2022. Operating loss for the fourth quarter of 2023 was $1.5 million compared to operating income of $7.9 million as reported in the fourth quarter of 2022. Net loss for the quarter was $0.5 million compared to net income of $6.6 million in the fourth quarter of 2022. Loss per share in the quarter was $0.07. This is compared with diluted earnings per share of 98 cents as reported in the fourth quarter of last year. Now, turning to the balance sheet, as of December 21, 2023, the company's cash, cash equivalents, and marketable securities totaled $71.5 million with no debt. This represents an increase of $4.2 million just in quarter four, a result of a positive operational cash flow of $8.6 million, net of share repurchase cost of $4.4 million. During the quarter, Silicon repurchased approximately 250,000 shares under our current share repurchase plan. In total, Silicon has purchased an aggregate of $52 million in in share buybacks in recent years. As mentioned by Liron, based on our strong balance sheet and improved cash position, we intend to continue repurchasing our shares at a full pace. That ends my summary. I would like to hand back over to the operator for questions and answers session. Operator?
spk00: 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 you 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.
spk02: Great, thank you very much. So a couple of quick comments. First off, my condolences to all the people who lost their job. I know how dedicated the Silicon employees are with the tenure and the tenure of those employees. And I know that must have been a very painful move on your part, but I think it's the right move. Just going back to the share repurchase to start with, So what is left on the buyback? I know you say you wanted to buy 1.6 million shares over the next two years. Is that all fully authorized and that's what's left on the buyback now?
spk01: Currently we are still in the third buyback plan. We still have the possibility to purchase approximately $6 million. And the plan is scheduled to end in April 2024. Moving forward, we will probably declare new buyback plans. I see.
spk02: So the board will declare additional buyback in order to get to the 1.6 million share? Exactly. Okay. In terms of the timing of these staff cuts, I think the Comment was you've already reduced the staffing from 310 to 240, which is a 22% cut. Is that complete now, or is there further trimming going to happen in the current quarter? And I assume that was done in the fourth quarter? Is that correct?
spk03: That's correct. We've done, we've completed all the reduction we needed to do. Not the full impact was recorded in Q4 due to the fact that it happened in Q4, but some of that did, but we are now done with this process. I see.
spk02: And so when you talk about the full year run rate of, I think it was $27 million in OPEC, I assume that we could just quarter that?
spk03: Yeah, that's the first assumption.
spk02: Is there any commentary in terms of the mix of the changes in OPEX between R&D, sales and marketing, G&A? Any thoughts on where it's heavier, where it's lighter?
spk03: So we, I mean, the reductions we've made in general, the reduction were mainly in the operations side. So we reduced about, I think, something like 50 employees around that number there. In R&D, additional 10. And in other departments, the rest. So, I mean, that kind of gives you the picture of where we made the reductions and the impact on the different divisions.
spk02: More heavily skewed to R&D, a little less in sales and marketing and G&A. That's the percentage. Okay. In terms of, you know, these projects, have You called out one where the company switches to software and hardware, but the longer-term project, have you seen other outright cancellations that we should be calling out here?
spk03: First of all, it's not cancellation per se. I mean, it just reduced cancellations. their demand reduced their activity, but it wasn't order cancellations or something of that sort. And again, we're monitoring it. We don't have an exact similar situation where we say, okay, this company was acquired and we expect it to behave the same. But, I mean, everything is possible, I would say, but right now we do believe we understand the situation much, much better.
spk02: And the two projects that were, or programs that were discontinued, was there revenue associated with those?
spk03: No.
spk02: Okay. And is there a cost savings associated with those cancellations beyond the headcount?
spk03: So, just basically the headcount. Stopping those investments was mainly the headcount.
spk02: And then finally, over the short term, you know, is there, you know, an expectation that the kind of $16, $17 million kind of trajectory for the first quarter is going to stay at that level or will it rebound seasonally into the June quarter? You know, give us some thoughts on kind of the slope of that recovery. 1H to 2H?
spk03: Yeah, so first of all, our forecast for Q1 is 14 to 17. And yes, I mean, we believe the second half is going to be very loaded on the second half. Compared to the first half, we expect that the inventory situation will be a little bit better. Maybe the economy will be a little bit better there. So we definitely expect the second half to be better than the first half.
spk02: So no quantification of that delta, 4060 and 3070, what do you think?
spk03: Very hard to say.
spk02: I'll see the form, thanks.
spk00: 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 poll for more questions. There are no further questions at this time. Before I ask Mr. Eisenman to go ahead with his closing statement, 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?
spk03: Thank you, operator. Thank you everybody for joining the call and for your interest in Silicon. We look forward to hosting you our next call in three months. Good day.
spk00: Thank you. This concludes Silicon's fourth and final quarter 2023 results conference call. Thank you for your participation. You may go ahead and disconnect.
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