Earnings Call Transcript - SILC Q1 2025

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Silicom First Quarter 2025 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 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?

Kenny Green, Investor Relations

Thank you, operator. I would like to welcome everyone to Silicom's quarterly results conference call. Before we begin, I want to highlight the Safe Harbor statement. This call contains forward-looking statements which may include anticipated future financial and operating results as well as Silicom’s outlook and prospects. These statements are based on management's current beliefs, expectations, and assumptions, which may be affected by various business, political, environmental, regulatory, economic, and other factors. These factors are subject to known and unknown risks and uncertainties, many of which are beyond Silicom’s control, and could lead to actual results differing materially from the expected outcomes. Risks include Silicom’s reliance on a limited number of customers for substantial revenue growth, the adoption of Silicom solutions by relevant markets, challenges in commercialization and marketing, maintaining brand recognition, protecting intellectual property, competition, disruptions in manufacturing and customer support activities, and broader economic uncertainties such as inflation, interest rate changes, and the ongoing effects of the COVID-19 pandemic. The list of factors is not exhaustive. For more details on factors that could significantly impact Silicom's operations and financial condition, please refer to the company's annual report on Form 20-F and other filings with the Securities and Exchange Commission. Therefore, there can be no guarantee that actual future results will not differ significantly from anticipated results, and investors should not place undue reliance on these forward-looking statements. Silicom does not commit to update any forward-looking statements due to new information or developments unless required by law. Additionally, we will discuss certain non-GAAP financial measures in today’s earnings release; these measures are used by management for strategic decisions and assessing the company's performance. Management believes that these non-GAAP measures are helpful for investors to understand the company's ongoing operations and future prospects. Unless stated otherwise, the financials discussed today will be on a non-GAAP basis. Non-GAAP financial measures are supplementary information for investors to help gauge the company's financial condition and results, and are not a replacement for GAAP measures. A full reconciliation of non-GAAP to GAAP measures is included in today’s earnings 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 who will analyze the financials, and then we will open the floor for questions. Now, I will hand the call over to Liron. Liron, please go ahead.

Liron Eizenman, President and CEO

Thank you, Kenny. I would like to welcome everyone to our conference call to discuss the results of the first quarter of 2025. We are pleased with our start to 2025, which reflects solid execution and progress in line with our strategic plan aimed at bringing renewed revenue growth, profitability and ultimately increase shareholder value. In addition, we saw significant design win momentum and made strong progress growing our mid and long-term pipeline. The quarter demonstrates that we are advancing and achieving meaningful milestones with various customers and projects, and all this makes us more optimistic that we will drive an acceleration in revenue growth in 2026 and beyond. In terms of the financial results, we delivered revenues of $14.4 million, which were in line with our targets and delivered gross margin and operating expenses in line with our strategic plans. Our balance sheet has therefore continued to remain very strong. Our working capital and marketable securities amounted to $119 million, including $77 million in cash, deposits and highly rated bonds with no debt. All this represents about $21 per share. This ensures we can maintain adequate investment in our business and its growth engines even in this very volatile market without compromise. From a strategic perspective, I’m very happy to report that we are on track with our plan to return to solid double-digit growth rates materializing gradually from 2026. To remind you, the long-term financial goals of our strategic plan are to deliver an EPS above $3 based on revenues between $150 million and $160 million. The most tangible indicator of our progress is the impressive number of design wins closed during the quarter and the breadth and depth of our design win opportunity funnel. Our renewed focus on our core product lines coupled with a deep relationship with our customers and potential new customers has created a solid pipeline enabling our future growth potential. So far in 2025, we have already seen success in converting this pipeline to design wins, the main indication for the progress of our strategic plan. We expect to continue to convert this pipeline to further design wins throughout 2025. In our previous call, we discussed our target of achieving between seven and nine new design wins in 2025, and we are well on track. Since the beginning of the year, we have been awarded three important new wins, two with cybersecurity leaders and one with a global network test equipment company, which together encompasses our full product range, from smart mix and FPGA-based product to our advanced edge systems. All three are repeat customers of ours that already rely on Silicom products to give their system performance edge. And all three have decided to expand their business with us as they embark on a new project. I want to highlight those recent design wins in more detail. Number one, a U.S.-based global provider of advanced network testing equipment solutions selected our 100-gigabit network interface cards for the next-generation platform. This customer placed an initial purchase order to cover its new product introduction needs, and we expect mass deployment to begin in early 2026. Once the product ramps up, we expect the total business with this customer to be $2.5 million per year. We are very proud that this global giant turned to us for a performance edge and it speaks volumes about the innovation at the heart of our high-performance mix and our reliability as a design partner. Customers such as this represent the backbone of our business with the potential to secure new design wins with a shorter sales cycle process, contributing to a growing base of revenues. Number two, we also won a design win with a U.S.-based cybersecurity leader, choosing our latest Alterra-based 400-gig FPGA smart card for its new network monitoring offering. The customer placed an initial order with us and at full ramp-up, we expect revenues will reach $3 million per year. This design win represents the successful conclusion of many months of collaborative effort with the customer. As a full service supplier, we worked closely with the customer to meet their needs and performance requirements to deliver them as a complete solution, fully integrated and tested within a server. This demonstrates the added value of Silicom’s engineering talent who customers often view as an extension of their own R&D team. This win demonstrates the importance of the full package that we offer, a uniquely broad product line based on advanced technology, hands-on collaboration with the customer and rapid development and delivery capability. Number three, a major U.S. cybersecurity customer of ours awarded us a design win for a customized version of a wireless connectivity-enabled Silicom edge system, incorporating a Silicom network interface card for the next generation of one of its leading product lines. Our ability to carry out the required customization quickly and to provide both the ad system and the network interface card that are incorporated within the system together with our deep wireless know-how were key factors in securing the win. We expect demand to continue to build for our ad systems, smart network interface cards and innovative products that integrated to becoming a key driver of our future growth. Initial orders have been received and we expect to start to ramp up during the second-half of 2025 with revenues of $2 million per year at the full run rate. This win expands the relationship that Silicom has been building with a client for several years, ramping up the range of products sold from network interface cards to complex edge systems. Those types of wins are now our focus, building steady, long-term and trusting relationships that give rise to multiple deals leveraging a reliable diversified revenue stream from an expanding base over the long-term. The relationships are based on deep trust built over a long period of time and show slow, but solid growth, supporting the success of our strategic plan. The power of each design win is not only to generate its own stream of recurring revenues, but also to open the door to multiple additional opportunities. This combination, along with the growing number of potential new customers, who are currently evaluating and testing our product underlines our confidence in achieving our target for seven to nine design wins during 2025. While our recent design wins will have a minor positive impact on our financial results in 2025, we believe those and others that we expect to sign in the coming months will form the foundation for significant growth in 2026. I note that if the opportunities in the pipeline ramp faster than expected, we could achieve the goals of our strategic plan significantly sooner than currently projected. Our pipeline of opportunities at the input of our design win funnel is very broad across all our products, including Edge systems, Smart NICs, and FPGAs and include both new and existing customers. This pipeline includes leading names in the cybersecurity service provider and networking industries, highlighting the strength and appeal of our technology offering. We believe that during the coming years, we will see more and more opportunities turn into design wins and we are constantly adding further opportunities at the entry point of the funnel. This is the main engine behind our strategy for growth. I want to highlight our new investor presentation available on our website, which includes examples of many opportunities in our pipeline. It also shows examples of the opportunities that made it through the funnel and became design wins, driving revenue growth. We are seeing the positive impact of our strategic plan, expanding the pool of future opportunities with small to medium design wins, as well as potential deals in the range of double-digit millions of dollars in annualized revenue. Considering the impressive pipeline and by executing all aspects of the strategy, we continue to believe that we will achieve the main goal of our strategy to create significant value for our shareholders with EPS of about $3 based on revenues in the range of $150 million to $160 million over the long-term. A fast ramp-up of a few of the potential deals we have in the pipeline may help us to achieve this goal much faster than currently indicated in our strategic plan and we are fully focused on making this happen. Looking ahead, in terms of guidance, we continue to project low-single-digit growth for 2025 with double-digit growth expected for 2026. For the second quarter, we expect between $14.5 million and $15.5 million in revenue. In summary, we are pleased with our progress. We are very optimistic about our ability to continue to execute on our growth plan and fully focus on meeting our goal of creating value for our customers and for our shareholders. We are advancing towards our mid and long-term goals with a robust pipeline that positioned us well for double-digit growth from 2026 onwards. As I've mentioned, we aim to achieve seven to nine design wins in 2025, of which three have already won, which demonstrates we are well on track. Looking further ahead, our focus remains on delivering long-term shareholder value, targeting an EPS above $3 on annual revenues of $150 million to $160 million. As I said, a faster ramp-up of a few of the potential deals we have within the pipeline may help us to achieve this goal faster. We have a solid design win roster, full of Tier 1 customers, coupled with a superb product and a robust pipeline of opportunities. We have a strong financial foundation with a solid balance sheet. With a very dedicated and loyal team possessing decades of experience in the hardware business, we are optimistic about our ability to execute our strategic plan and meet our goals. We look forward to reporting on our progress as we continue executing on our growth strategy. With that, I will now hand over the call to Eran for a detailed review of the quarter's results. Eran, please go ahead.

Eran Gilad, CFO

Thank you, Liron, and good day to everyone. Revenues for the first quarter of 2025 were $14.4 million, similar to the $14.4 million reported in the first quarter of last year. The geographical revenue breakdown over the last 12 months was as follows: North America, 78%; Europe and Israel, 14%; Far East and Rest of the World, 8%. During the last 12 months, our two 10%-plus customers together accounted for about 24% 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, taxes on amortization of acquired intangible assets, as well as lease liabilities, and 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 2025 was $4.4 million, representing a gross margin of 30.3%, compared to a gross profit of $4.1 million or gross margin of 28.5% in the first quarter of 2024. As discussed previously, our short to mid-term expected gross margin range is between 27% to 32%. And as our revenues grow from current levels over the longer term, it is expected to increase towards the upper end. Operating expenses in the first quarter of 2025 were $6.7 million, compared with $6.8 million reported in the first quarter of 2024. Operating loss for the first quarter of 2025 was $2.4 million, compared to an operating loss of $2.7 million as reported in the first quarter of 2024. Net loss for the quarter was $2.1 million, compared to a net loss of $2.4 million in the first quarter of 2024. Loss per share in the quarter was $0.37. This is compared with a loss per share of $0.38 as reported in the first quarter of last year. Now turning to the balance sheet. As of March 31, 2025, our working capital and marketable securities amounted to $119 million, including $14 million in high-quality inventory, accounts receivable net of accounts payable of $3 million, and $77 million in cash, cash equivalents, and highly rated marketable securities with no debt. That ends my summary. I would like to hand back over to the operator for questions-and-answer session.

Operator, Operator

Thank you. Ladies and gentlemen, we will now start the question-and-answer session. The first question comes from Ryan Koontz of Needham & Company. Please proceed.

Ryan Koontz, Analyst

Hi, thanks for the question. It's great to hear about the progress with your new design wins. Are there specific milestones you're monitoring for those design wins after securing the initial orders and contracts with customers? I'm not asking for specific details, but at a high level, what kind of milestones are you tracking, and how do you feel about the progress of those wins as we look ahead over the next few quarters? Thank you.

Liron Eizenman, President and CEO

So every design win is a little bit different. But in general, there’s – once we get the win, there's the first stage where we probably need to do some customization for the customer, maybe some development. So that's obviously one milestone we need to keep track of is our internal process of the development and customization, make sure with the customer, everything is clear on the specs and what they're supposed to get and when. Once we already were shipping samples or shipping the first shipment to the customer, we want to see they're happy. We want to see we get their green light for mass production, but that's another very important milestone. And the third one is when we start mass production, start shipping them the products, we work very closely with them to see that they are happy with that, that they're selling it to their customers. Their customers are happy. That's – I would say, the third main milestone. But every project is a little bit different.

Ryan Koontz, Analyst

That's great. Thanks for that and it sounds like one of your design wins is with an Alterra design? Are you seeing an increased mix and requirement from customers to roll FPGA-based NIC cards or interface?

Liron Eizenman, President and CEO

We are experiencing significant demand across all of our main product lines, including FPGAs, where Alterra is a key partner for us. There is considerable interest in that market, evidenced by a design win we announced earlier this year. Recently, we also revealed a strategic partnership with Eideticom, which enables us to develop a product crucial for cybersecurity and other network vendors. This product aims to protect their equipment and solutions for both current needs and future post-quantum encryption, which will become increasingly important. We are actively investing in this area and are witnessing substantial traction.

Ryan Koontz, Analyst

Great. And maybe one more, if I could. What are your thoughts around tariffs and how that gets implemented? Is that something you expect your customers to pay? Or will you have to pay that and maybe have to at a line item around tariffs, what you're thinking around the tariff situation. I know it's fluid right now, but any kind of baseline would be helpful.

Liron Eizenman, President and CEO

Yes, it is very fluid at the moment. Currently, Silicom does not see any immediate impact. Our products are exempt from tariffs due to their classification, and we are closely monitoring the situation to see how it develops. We are considering different models and potential changes, but as it stands, our products remain exempt and we do not see immediate demand. We stay in contact with our customers to understand their perspectives and will continue to track any developments. We are prepared to respond if necessary when new information arises.

Ryan Koontz, Analyst

Okay, that’s great. That’s all I got. Thank you.

Operator, Operator

The next question is from Christopher of DNB. Please go ahead.

Unidentified Analyst, Analyst

Yes, thanks for taking my question. Yes, just having a look at some of the design wins you have in your pipeline with the ad data infrastructure, storage network and kind of saying $10 million per year, sorry. Just trying to understand like what kind of applications you are seeing here more specifically driving this kind of step change in your growth in the next years, compared to historical levels?

Liron Eizenman, President and CEO

I would direct you to our investor presentation for insights on our pipeline, which is categorized into three main product lines: Smart NIC, FPGA products, and edge systems. We are experiencing significant demand across all these areas. In cybersecurity, for example, there's a real need for new products, as higher networking speeds and more acceleration and offloading from the main CPU are necessary. As encryption, decryption, and compression become more complex, the main CPUs face increasing pressure. Additionally, our edge systems are responding to growing demand, as we provide higher-end solutions alongside lower-end systems for customers. We’ve witnessed several design wins over the past year, indicating strong demand for networking solutions. We collaborate closely with our customers, earning their trust both in R&D and mass production. They consider us the right partner and continue to bring us additional business. For instance, the last three design wins we announced came from existing customers who are relying on us for more projects, which highlights that much of our pipeline is driven by our current clientele rather than just new customers.

Operator, Operator

The next question is from Don McKiernan of Landolt Securities. Please go ahead.

Don McKiernan, Analyst

Thank you. Did you already give an update on your share buyback program and what occurred during the quarter?

Eran Gilad, CFO

We moved forward during the first quarter, we purchased a few dozen thousand shares. It's the update.

Don McKiernan, Analyst

So just like 36,000 shares is all you bought back?

Eran Gilad, CFO

Can you repeat your question?

Don McKiernan, Analyst

Yes. How many shares did you buy in the quarter and at what average price?

Eran Gilad, CFO

First of all, I would say that during the last 5 quarters, starting 2024, we purchased over 700,000 shares. The portion in quarter 1 was a little bit less than 100,000 shares.

Don McKiernan, Analyst

Okay. Why wouldn't you buy more or the market conditions just didn't allow you? What can you explain?

Eran Gilad, CFO

This is a result of the activity in the market each day. When the volume is not so high, it means that the portion that we are able to purchase is limited.

Don McKiernan, Analyst

Right. And how much do you have left in your current in terms of dollars your current share buyback program?

Eran Gilad, CFO

During, I would say that during the last year, we purchased over $8 million.

Don McKiernan, Analyst

And what's left, $7 million then, $7 million left.

Eran Gilad, CFO

How much is left? About $8 million.

Don McKiernan, Analyst

Okay. Thank you. And my next question, last question. 1.5 years ago, when revenues declined, some of your major customers were still working off excess inventory on some of your larger opportunities. Has that passed? Are they going to start reordering their larger quantities? Or are those opportunities gone away.

Liron Eizenman, President and CEO

I’m sorry, I couldn't hear the first part of the question. Can you repeat?

Don McKiernan, Analyst

Yes. I believe about 1.5 years ago, you had some large opportunities in closed design wins and those customers have built up excess inventory during COVID, and they were working off those inventories on large deployments and they were going to then come back and reorder product from you once they worked off their internal inventories.

Liron Eizenman, President and CEO

We mentioned that some of our customers have excess inventories, and we are seeing some relief from that situation. We anticipate this trend will continue into 2025. Some customers are starting to purchase items they had previously not bought for a while. However, I wouldn’t say this issue has completely resolved; it has only partially improved. We expect it to keep evolving throughout 2025, and we should see an increase in demand returning. Each project and situation is unique, and I'm not in a position to guarantee that all customers will return; it truly depends on their individual circumstances. We can't predict exactly how the recovery will unfold due to technological advancements and changes within various companies. We hope many customers will resume purchasing more from us; we maintain communication with them, but the outcome varies case by case. We acknowledge that there are uncertainties and some customers may not return. This is something we are closely monitoring. There are good and bad years; some customers respond positively while others do not, and we continue to track their situations in hopes of a business uptick. I hope that provides clarity to your question.

Don McKiernan, Analyst

Yes. Thank you and good luck. Thank you.

Liron Eizenman, President and CEO

Thank you.

Operator, Operator

There are no further questions at this time. Before I ask Mr. Eizenman to provide his closing statement, I want 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?

Liron Eizenman, President and CEO

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 three months. Good day.

Operator, Operator

Thank you. This concludes Silicom's first quarter 2025 results conference call. Thank you for your participation. You may go ahead and disconnect.