Silicom Ltd

Ladies and gentlemen, thank you for standing by. Welcome to the Silicon First Quarter 2024 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 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 first quarter 2024 results conference call

Before we start, I would like to draw your attention to the following Safe Harbor Statement. This conference call contains forward-looking statements. Such statements may include but are not limited to anticipated future financial operating results and Silicon's outlook and prospects. Those statements are based on management's current beliefs, expectations, and assumptions, which 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. These may 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 a substantial amount of revenue growth on a limited number of customers, the speed and extent to which Silicon solutions are adopted by relevant markets, 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 war in Israel 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 exercise in greater caution and selectivity of short-term IT investment plans. The factors noted are not exhaustive. Further information about the company's businesses, including information about factors that could materially affect Silicon's results of operations and financial condition, are discussed in the annual report filed in Form 20F and other documents filed by the company that may be subsequently filed by the company from time to time in the Securities and Exchange Commission. Therefore, there can be no assurance that actual or future results will not differ significantly from anticipated results. Consequently, investors are cautioned not to rely on these forward-looking statements. Cinecom does not undertake to update any forward-looking statements as a result of new information or future events or developments, except as may 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. Such non-GAAP measures are used by management to make strategic decisions, forecast future results, and evaluate the company's current performance. Management believes 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 are provided as additional information to investors in order to provide them with an alternative method for assessing financial conditions and operating results. These measures are not in accordance with or a substitute for GAAP. Full reconciliation of non-GAAP financial measures are included in today's earnings 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 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 like to hand the call over to Liron. Liron, please go ahead. Thank you, Kenny.

Welcome, everyone, to our financial results conference call for the first quarter of 2024. As we move through 2024, As many of you know, we are currently in the midst of significant headwinds, all coming together at the same time and strongly impacting our revenues. While I discussed them in detail last quarter, the factors affecting us are, number one, excess customer inventory of our products, which were previously built up during post-COVID and component shortages era when the supply chains were tight. Number two, macroeconomic and an industry slowdown generally delaying IT infrastructure investments and ultimately slowing down or pausing customer orders of our products. And number three, in some cases, customer-specific factors, causing them to delay or not to make new purchases under existing design wins. In light of those factors, as we explained last quarter, we launched a five-year strategic plan whose goal is to generate significant value for our shareholders, even under the new market reality of today. Our five-year strategic plan is aimed at returning Silicon to gradual and steady top-line and EPS growth with a financial long-term objective to increase our earnings per share to about $3 in 2028. A key element is to use our $80 million plus cash position to increase shareholder value through an aggressive share buyback, which would reduce share count, while leveraging our strong balance to ensure our long-term growth potential remains intact. Our plan calls for purchasing 1.6 million shares during 2024 and 2025, which represented approximately a quarter of our full share count as of when we announced it. In the first quarter, we repurchased approximately 250,000 shares, representing a return to shareholders at a cost of $4.1 million. The Board of Directors has approved a new repurchase plan for the coming year, and our aggressive buyback will continue. I would like to stress that our very strong balance sheet and cash position allows us to continue business investment at an adequate pace without compromising our future. It supports a broad and deep pipeline as well as allows us to continue with our core R&D efforts while not being significantly impacted by a loss of a few million dollars over the upcoming transition period. At the same time, an important factor in our strategic plan was to stabilize OPEX at a level that on the one hand maintains continuous support and adequate investment into our main growth drivers, while on the other hand, conservatively balances our expenses footprint with today's expected revenue level under the current market environment. We continue to strongly believe in the long-term potential of our main product lines, namely server adapters and edge systems, and this includes investments in the development of two strategic new product families with significant revenues potential that we believe will increase our future success. A further step in our strategic plan was to shift focus for sales and marketing efforts to a broader range of potential design wins, including smaller ones, which have the potential to ramp up quicker and ultimately bring greater diversification to our revenues. We therefore made changes to our salespeople compensation package to create the right incentives. We are already seeing the initial momentum of small to medium design wins, and we see a broader pipeline of future potential design wins. In terms of our financial performance, For the first quarter, we reported revenue of $14.4 million within our expected guidance range that we shared last quarter. On the bottom line, we reported a net loss of $2.4 million. Despite this loss demonstrating the strength and quality of our working capital, we generated an impressive positive operating cash flow of over $13 million, contributing to our very strong net cash position of over $80 million, which I discussed earlier. I want to stress that our current working capital and marketable securities, as of the end of Q1, is $133 million, with a very high quality of inventory amounting to $46 million, accounts receivable, net of accounts payables of $7 million, as well as the $80 million in cash. All this represents about $21 per share. Looking towards the near term, we expect that second quarter 2024 revenues will be between $15 to $17 million. We continue to expect that our 2024 revenues will be at about $70 million, impacted mainly by the headwinds and issues I mentioned earlier. We believe that the excess customer inventory in global economy headwinds will ease as we move forward throughout 2024, and thus, second half revenues will be higher than those of the first half. Looking further out towards 2025 and beyond, we are modeling an approximate 20% compound average annual growth from 2024 baseline over the course of the five-year plan. We expect that this growth will come from the ramp-up of already achieved SD-1 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 adapters and edge products, with leading networking security and service providers globally. This growth rate does not consider potential significant individual upsides that we may experience from very large projects like the ones we had in the past, which may provide additional incremental growth for our business. To summarize, as you know, our environment is much more challenging going into 2024 for all players in the industry. I want to stress that Silicon is very well positioned as a key player in our industry. With over $80 million on the balance sheet, a deep pipeline, and a design win roster, I'm confident that our long-term growth story remains intact and we will achieve renewed growth starting from 2025 and beyond. 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 by enhancing it through an aggressive buyback and a strong reduction in share count over two years. We have a very dedicated and 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 transformation in 2008 and 2017, just to name a few. I strongly believe that the targets that I outlined are attainable by Silicone. I'm optimistic in our ability to successfully execute on this five-year plan and bring earnings per share in excess of $3 by 2028. With that, I will now hand over the call to Eran for a detailed review of the quarter results. Eran, please go ahead.