Eltek Ltd. Q1 FY2026 earnings call

• Overall Financial Performance • Q1 2026 revenues came in below management expectations, driven by backlog conversion timing, ongoing logistics and supply chain constraints, and negative foreign exchange impacts, rather than weak underlying customer demand. • A larger share of Q1 shipments came from older backlog orders with lower average pricing, while newer higher-value advanced product programs are scheduled for delivery later in 2026 and into 2027, pulling down Q1 average selling prices and profitability. Management notes Q1 results do not reflect the business's normalized long-term margin profile. • Total backlog more than doubled from the start of 2026, including two large publicly announced orders with deliveries spread across 2026 and 2027, providing strong revenue visibility for future growth.

• Operational Challenges • Ongoing global logistics disruptions and regional complexities created material sourcing and transportation constraints that limited production volume and the company's ability to absorb fixed operating costs. • Air freight capacity between the Far East, Europe, and the U.S. remains constrained, and certain chemicals can no longer be shipped via air, reducing logistical flexibility. Extended sea freight transit times and raw material shortages have lengthened supply cycles. • Strong demand for fiberglass materials from the fast-growing AI hardware infrastructure sector is driving a global shortage of this key input. • The weakening of the U.S. dollar against the Israeli shekel increased the company's Q1 operating loss by approximately $1.3 million compared to the year-ago quarter. The company has adjusted pricing for relevant fiberglass products and implemented allocation quotas to protect supply continuity and margins.

• Capacity Expansion Progress • The first new production line has been delivered and partially installed. Installation was delayed after the supplier's team left Israel temporarily due to the ongoing conflict with Iran, but the team returned to Israel the day before the call and installation has resumed. • Management expects installation to be completed in the coming weeks, after which the multi-month production qualification process will begin. The line will be ramped up to commercial production following successful qualification, with both new lines expected to be operational by the end of 2026. • The process of bringing in foreign workers to address local labor market constraints continues to advance, which will support planned production growth and operational efficiency once completed.

The transcript does not break out financial performance by separate product segments, only reporting consolidated results for the first quarter of 2026. Consolidated revenues totaled $10.4 million, down from $12.8 million in the year-ago first quarter. The company reported a gross loss of $1.9 million, compared to a $2.2 million gross profit in Q1 2025. Operating loss was $3.3 million, against an operating profit of $0.7 million in Q1 2025. Net loss totaled $2.9 million ($0.42 per diluted share), compared to net income of $1 million ($0.15 per diluted share) in the prior year quarter. EBITDA loss was $2.7 million, compared to positive EBITDA of $1.2 million in Q1 2025. Cash used in operating activities was $0.4 million, with total cash and cash equivalents of $11.1 million as of March 31, 2026 and no outstanding debt.

• Management reaffirms its prior full-year 2026 revenue guidance of $60 million to $65 million, and maintains its long-term target gross margin of 26% to 28% once the capacity expansion is completed and assuming no further unfavorable U.S. dollar devaluation against the Israeli shekel and no additional unforeseen negative shocks.
• No formal timeline for returning to normalized profitability is provided, as this depends on multiple uncertain external factors, but management expects improved financial performance as capacity expansion progresses and near-term external constraints ease.
• Management confirms it has not changed its core strategic direction or long-term capacity expansion plans despite near-term delays from the regional conflict.

• Continued unfavorable movement in the U.S. dollar / Israeli shekel exchange rate would further pressure profitability, particularly for existing backlog orders locked in at exchange rates less favorable than current levels.
• The global fiberglass shortage driven by strong AI infrastructure demand will continue for the foreseeable future. The company must pay a market premium to secure sufficient allocation, and passing this full premium through to customers has been challenging, with customer pushback on price increases compressing near-term margins.
• Ongoing regional conflict in Israel can disrupt logistics, raw material delivery (especially for time- and temperature-sensitive raw materials), and production line installation, creating recurring operational uncertainty.
• Persistent global logistics disruptions and constrained air/sea freight capacity continue to extend supply cycles and limit production output.
• Quarterly revenue and profitability volatility will continue due to variable backlog conversion timing, so short-term quarterly results may not reflect long-term underlying performance.

Q: When can investors expect the company to return to normalized 26-28% gross margins, and why is price raising difficult despite strong PCB demand for AI? What additional U.S. orders might the company secure, and will the backlog include flex PCB products? / A: Normalized margin timing depends on many unknown factors, including the duration of the Israeli conflict, labor market conditions, and exchange rate stability, so management cannot provide a specific forecast. The company has already adjusted prices for recent shekel devaluation, but cannot price for unforeseen future exchange rate moves. The company confirmed that if the USD stabilizes, capacity expansion completes, and low-margin old backlog is cleared, the 26-28% gross margin target remains achievable. The company has already won a large U.S. defense contract in competition with other suppliers, is actively pursuing additional AI and enterprise orders from the U.S. and Europe, and the backlog mix includes both rigid and flex PCB products, though existing older orders are locked in at less favorable exchange rates.

Q: Can you elaborate on ongoing raw material sourcing and logistics challenges, when will these issues be resolved, and does your pricing model account for the fiberglass premium driven by AI demand? / A: The core global challenge is a widespread fiberglass shortage caused by AI sector demand, where AI customers are willing to pay higher prices than traditional PCB producers. To secure enough supply, the company has agreed to pay these higher market prices, opening the current allocation bottleneck. The second, Israel-specific challenge is transporting temperature-sensitive, limited-shelf-life fiberglass to Israel amid conflict-related flight disruptions, which could reoccur if conflict escalates again. The company has no choice but to pass this premium onto customers, though this process is difficult and has faced customer pushback; the fiberglass shortage is expected to continue into the future, impacting the entire PCB industry globally.

Q: What is the updated timeline for the new production line installation and qualification, after the previous target of end of H1 2026? / A: Original installation was interrupted when the supplier's international team left Israel immediately after the start of the conflict with Iran, creating a 6-7 week delay. The team only returned the day before the call, so the prior target of a running line by July 1 is no longer achievable, though no new specific target date is provided.