Ladies and gentlemen, thank you for standing by. Welcome to the Silicom First Quarter 2024 Results Conference Call. As a reminder, this conference is being recorded. You should have all received the company's press release by now. If you have not received it, please contact Silicom'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.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 everyone to Silicom's first quarter 2024 results conference call. Before we begin, I want to highlight the safe harbor statement. This conference call includes forward-looking statements, which may involve anticipated future financial operating results and Silicom's outlook and prospects. These statements are based on management's current beliefs, expectations, and assumptions, and can be influenced by various factors such as business, political, environmental, regulatory, economic conditions and others, many of which are beyond Silicom's control. Consequently, actual results may differ significantly from the expressed expectations in these statements, particularly due to Silicom's reliance on a limited number of customers for revenue growth, the speed of market adoption for Silicom's solutions, challenges in product commercialization, brand recognition, intellectual property protection, competition, disruptions in operations, the impact of geopolitical issues in Israel and Ukraine, inflation, interest rates, exchange rate fluctuations, and the ongoing effects of the COVID-19 pandemic. The factors mentioned are not exhaustive. Further details regarding the company's operations and factors that may affect Silicom's financial results can be found in the annual report filed on Form 20-F and other filings with the Securities and Exchange Commission. Therefore, there is no guarantee that actual or future results will not significantly differ from those anticipated. Investors should exercise caution and not solely rely on these forward-looking statements. Silicom does not commit to updating these statements unless legally required. Additionally, non-GAAP financial measures will be discussed in today's earnings call, which management uses for strategic decisions and performance evaluation. Management believes that these measures are helpful for investors in understanding the company's core operations and future prospects. Unless noted otherwise, financials discussed will be on a non-GAAP basis. Non-GAAP measures provided by management serve as additional information for investors to evaluate financial conditions and operating results, and are not a substitute for GAAP. A full reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, available on Silicom's website. Joining us today are Mr. Liron Eizenman, President and CEO, and Mr. Eran Gilad, CFO. Liron will start with an overview of the results, followed by Eran's analysis of the financials. After that, we will move to the question-and-answer session. With that, I will hand the call over to Liron. Please go ahead, Liron.

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 facing significant headwinds, all coming together at the same time and strongly impacting our revenues. While I discussed them in detail in the last quarter, the factors affecting us are, number 1, excess customer inventory of our product, which was previously built up during the post-COVID and component shortages era when the supply chains were tight. Number 2, macroeconomic and industry slowdown generally delaying IT infrastructure investment, and ultimately slowing down or pausing customer orders of our product. And number 3, 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 5-year strategic plan whose goal is to generate significant value for our shareholders, even under the new market reality of today. Our 5-year strategic plan is aimed at returning Silicom to gradual and steady top-line and EPS growth with a financial long-term objective to increase our earnings per share to about $3.00 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 by leveraging a 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 represent 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 revenue potential that we believe will increase our future success. A further step in our strategic plan was to shift focus of our 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 which 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 million 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 and 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 5-year plan. We expect that this growth will come from the ramp-up of already achieved SD-WAN and SASE design wins, additional edge system sales to leading telco 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 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 Silicom 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 especially in 2000, 2008, and 2017, just to name a few. I strongly believe that the targets that I outlined are attainable by Silicom. I'm optimistic in our ability to successfully execute on this 5-year plan and bring earnings per share in excess of $3.00 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.

Thank you, Liron, and good day to everyone. Revenues for the first quarter of 2024 were $14.4 million, a decline from revenues of $37.2 million as reported in the first quarter of last year. The geographical revenue breakdown over the last 12 months was as follows: North America, 82%; Europe and Israel, 15%; Far East and rest of the world, 3%. During the last 12 months, we had two over 10% customers, and our top three customers together accounted for about 40% of our revenues. I will be presenting the rest of the financial results 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, as well as these liabilities, financial income. For the full reconciliation from GAAP to non-GAAP numbers, please refer to the press release we issued earlier today. Gross profit for the first quarter of 2024 was $4.1 million, representing a gross margin of 28.5%, compared to a gross profit of $11.9 million or gross margin of 32% in the first quarter of 2023. As discussed last quarter, for the near term, our gross margin is expected to be at the lower end of our 27% to 32% expected range, and as our revenues grow from current levels over the longer term, it will increase towards the upper end. Operating expenses in the first quarter of 2024 were $6.8 million, compared to $7.1 million reported in the first quarter of 2023. We believe that this level represents our expected quarterly operating expenses during the rest of the year. Operating loss for the first quarter of 2024 was $2.7 million, compared to operating income of $4.8 million, as reported in the first quarter of 2023. Net loss for the quarter was $2.4 million, compared to net income of $4.2 million in the first quarter of 2023. Loss per share in the quarter was $0.38 compared with diluted earnings per share of $0.61, as reported in the first quarter of last year. Now, turning to the balance sheet. As of March 31, 2024, the company's cash, cash equivalents, and marketable securities totaled $80.7 million with no debt. This represents an increase of $9.2 million just in the first quarter, a result of a positive operational cash flow of $13.3 million, net of share repurchase cost of $4.1 million. During the quarter, Silicom repurchased approximately 250,000 shares under our current share repurchase plan. As mentioned by Liron, based on our strong balance sheet and improved cash position, we intend to continue repurchasing our shares at full pace. That ends my summary. I would like to hand back over to the operator for the questions-and-answers session. Operator?

The first question is from Alex Henderson of Needham & Company.

A couple of questions just on the conditions in the field to start with. Can you talk to what you think the customer inventories look like in the field? How much maybe they were brought down by, and how long it will take to get back to a normalized condition within the field inventories?

Absolutely. So it's really case-by-case, customer-by-customer. On the one side, I can say we have customers that are almost back to normal. On the other hand, there are customers that it will take them longer, maybe the second half of 2024, maybe even a little bit more than that. It really depends on the customer. I can even say that we had some good and bad surprises that we've seen recently where customers that we were not expecting to place orders in Q1, placed orders in Q1 for a specific SKU. Does it mean that they completely depleted all the inventory? No, but it means that at least for certain parts they need more. But on the other hand, we also had other customers that we were expecting to place orders, but eventually they said that it would take them a little more time. It really depends on customer to customer.

Can you discuss the percentage of field inventory that may have been reduced when looking at your entire customer base? For instance, Extreme Networks mentioned a $45 million decrease in channel inventories yesterday, indicating where they stand and when they expect to achieve better balance. What can you share about the percentage of that field inventory? I assume you have some estimates on this.

We are having those discussions. Not necessarily do we know the exact percentage and it really depends from customer to customer. But I think overall we see a decrease; we see customers coming back to us and ordering, but there's also a different trend. I cannot give an exact number, and I understand it's a key factor, but right now there's no specific number I can provide.

All right. You've pivoted your go-to-market strategy to smaller deals, which have been the bread and butter of the company for as long as I can remember and I've been following you guys for a long time, and it's my understanding that those generally are fairly long process cycles from the time you win and start doing it. It takes time to get it engineered in. And then second, once it's engineered in, it takes time for those products to launch and to ramp. So how long do you think it will take for the small deal momentum to build? Is it an 18 to 24-month type cycle?

One of the main reasons to focus on small to medium design wins is that they are progressing much faster than the large design wins. We've observed several small to medium design wins recently that are starting to take off because it often only requires one engineer to qualify a card and integrate it into the server, test it, and obtain approval for purchasing. Although the quantities may not be large initially, we are seeing some movement. We've already experienced some success in this area. Additionally, small to medium design wins have the potential to grow into larger opportunities over time, even if they don't do so immediately. While the recent small and medium wins haven't yet escalated, we are seeing positive developments, and the larger projects will certainly require more time.

Is it typical for these to have cycle times of 12, 18, or 24 months?

No, for the small to medium, it's shorter than that. For the small-medium, it's usually a shorter time cycle than that. It's in the several months time frame, but it doesn't mean that they fully ramp up in this time line. It means that a decision can be made in a short period of time of several months, and then the ramp-up starts. The bigger ones are probably more, I don't know, 12 months sometimes, sometimes even more than that. But for the small to medium, it should be shorter than that.

Shifting from the small deals to the larger deals. Obviously, you had a lot of large deal momentum going into the supply chain problems. You basically signed a whole slew of deals. Clearly, some of those deals have been shelved. Some of those deals may never happen, but others are likely to still ramp, maybe with a delay in terms of the timing of the launch. Can you quantify or qualify the mechanics around those deals? To what extent you have clarity on what portion of them have really gone away and to what extent do you think the other ones might still be in the pipeline and still be ready to ramp at some point?

When I consider the major clients we have in mind, they are not entirely lost, but they are currently dealing with two significant challenges. The first is that the customer had overly optimistic expectations, which resulted in an overabundance of inventory. They anticipated a faster rollout of units, leading them to purchase more parts than necessary due to projected higher sales. This has created an excess inventory issue. The second challenge, closely tied to the first, is the impact of the global economy and a slowdown in investments in IT infrastructure. Consequently, they are unable to sell as much as they had hoped. However, we are maintaining communication with these major accounts and notable successes. They continue to deploy, even though they are not planning to place orders with us this quarter or the next, and it’s unclear when they will resume purchasing. Nonetheless, they are still moving forward with sales, albeit not at the desired pace.

Is there any portion, 3/4 or more of them are still operative? Any sense of what might have gone away versus continuing?

So right now, as I said, I don't believe any of them went away. I believe that in a time frame of one year, give or take, we will see some of those big guys coming back and generating revenue with us.

And then going back to the balance sheet, your inventory is quite a bit higher than normal relative to your revenue run rates. Can you talk a little bit about how rapidly you can bring that inventory down? What do you think the risk is that some of that inventory might be obsoleted by sitting on the shelf for too long? And kind of monetization of that? Obviously, you did a great job on the receivables here, but I think the inventory is the next piece of the free cash flow generation.

So first of all, we believe that the inventory value is real value. I mean, we believe it's high-quality inventory, and we're monitoring it. And it did decrease by $7 million this quarter. We believe it will continue to go down. I cannot give an exact number because I don't know exactly what it will go down by, but yes, we expect it to continue to go down. And despite the fact that with certain customers, they're not ordering as quickly as they said that they will, they're still ordering, and we believe they will continue to order in the future. And our purchases also from suppliers is obviously lower, and we're not increasing our inventory as well. We will just deplete our inventory until we're in a position that it goes back to a relatively normal size to our revenue business. But we don't see a risk for that. We don't see a risk for having that stock or something of that sort in significant value, not at all.

I'll see the floor. If there aren't any other questions, I'll come back and ask some more, but give somebody else a chance if they're in the queue.

The next question is from Alex Henderson of Needham & Company.

So going back into the cost-cutting moves, can you talk about what you've done in terms of the timeline of the staff cuts? Are they all now completed? Were they in for the entire quarter? How do I think about the degree to which that's already in the first quarter and alternatively, whether there's still further cuts to come benefiting future quarters?

So we completed the cuts that we wanted to do. Right now, we're not expecting significant cuts here and there maybe, but not something that should impact the numbers significantly. The cuts were made during Q4. The full impact of them, I think, was completely realized in Q1. If not, then, let's say, 90% or so. So the numbers that you're seeing right now, as Liron said earlier, is what we expect to see on the OpEx going forward.

And going forward, do you think that you're done with anything else on the cost side that might be changing going forward, or is that the completion of all your intentions on that front?

No. Not at the moment.

And then, going back to the timeline for the year, assuming the back half is considerably stronger, do you still think you'll be at the lower end of the gross margin band? If you're talking about a band of 27% to 32%, should we be in the midpoint to the lower half of the gross margins, even as we exit the year, because the baseline is so much lower than normal?

Yes. I think that's the first assumption. I think that's pretty much where we find ourselves.

And any thoughts on the tax line, whether that will be something that you're still paying out, or do you think there's any opportunity for that to zero out because this is a very low level of profitability?

Assuming 2024 will not be profitable, we expect annual income tax of approximately $0.5 million.

So pretty much similar to the first quarter for the year, maybe a little larger?

The first quarter was lower than the expected level due to one-time reasons. So I repeat, it should be approximately $0.5 million for the full year.

That's better than the $1 million plus we had in our model, so that's what I meant. Okay. I'll see the floor.

The next question is from Don McKiernan of Landolt Securities.

I think earlier in the call you mentioned a couple of maybe larger deals you're working on. My question is, are these old deals that have come back, or are these new opportunities? And if so, can you provide some color on that?

I'm not sure which big deals you're referring to that we worked on. Maybe you can clarify the question a little bit more?

Well, I guess you mentioned some larger opportunities, I think, at the early part of the call. Maybe just provide some color on that?

I'll do my best to address your question. We have made some adjustments to our sales methodology. When discussing design wins that we have already secured, which are progressing more slowly than anticipated, I pointed this out in response to Alex's question. We believe that the ramp-up will eventually occur, and we expect it to develop over the next year. If you're inquiring about the two product families we discussed, we are confident that they will represent significant opportunities for both our customers and for us in terms of revenue in the future. At this stage, we prefer to remain somewhat under the radar regarding these products. However, I can provide additional details. One of the product families is being developed in collaboration with four of our committed customers and a leading chipset vendor. The second product family enhances our Edge products by incorporating critical features that our existing customers are seeking, which are not available in standard products. This level of customization will enable deployment in environments where our customers currently face limitations. We believe this has considerable potential as well. I hope this answers your questions.

Yes, I think it was really more about two new product families rather than maybe two opportunities. So that helps a lot. Yes, thanks. And then, you have sort of a relationship with a company in the AI space. Is that panning out at all? Resulting in any opportunity for you? Artificial intelligence.

Sure. So in the AI space right now, yes, we do have a few AI vendors, key vendors we're working with. Right now, we're in the POC stage. There's no design wins yet. It's definitely one area that we're looking at. And right now, it's POC stage with a few customers. I cannot add much more than that right now, at least apart from the fact that we were hopeful maybe some of those would materialize into a product. Hailo is one of those vendors, an Israeli company as well. So we're very close to them, working with them closely. We hope it will generate maybe another pipeline of new deals as well.

There are no further questions at this time. Before I ask Mr. Eizenman 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 Silicom's website, www.silicom-usa.com. Mr. Eizenman, would you like to make your concluding statement?

Thank you, operator. Thank you, everybody, for joining the call and for your interest in Silicom. We look forward to hosting you on our next call in 3 months. Good day.

Thank you. This concludes Silicom's first quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.