Silicom Ltd. Q3 FY2024 earnings call

• The third quarter results were in line with expectations. Sales were impacted by excess inventory built up by customers in prior years due to worldwide supply chain disruptions, but improvement is expected to continue through 2025 and be fully resolved by the end of that year. - The strategic plan targets an EPS above $3 with revenues of $150 million to $160 million. The business is appropriately sized at the end of 2024 to support long-term growth with expenses aligned to the plan. - Tight control over expenses is maintained with minimal increase planned in 2025 and beyond. Recent sales and R&D activities aim to expand the pipeline, acquire new customers, and drive future revenue growth, resulting in a broad and deep pipeline of opportunities. - The strong balance sheet, with $125 million in working capital and marketable securities including $77 million in cash deposits and highly rated bonds with no debt, ensures adequate investment in the business.

In the third quarter of 2024, Silicom reported revenue of $14.8 million and a net loss of $1.7 million. Geographically, over the last 12 months, North America contributed 78% of revenues, Europe and Israel 16%, and the Far East and Rest of the World 6%. The three customers with revenues over 10% accounted for about 36% of total revenues in the last 12 months. Gross profit for the third quarter was $4.2 million, resulting in a gross margin of 28.8%, which is at the lower end of the expected 27% to 32% range, and is expected to increase towards the upper end as revenues grow longer term. Operating expenses in the third quarter were $6.5 million, down from $7.4 million in the third quarter of 2023. The net loss for the third quarter was $1.7 million, and the loss per share was $0.28. As of September 30, 2024, working capital and marketable securities amounted to $125 million, including $44 million in high-quality inventory, $6 million in accounts receivable net of accounts payable, and $77 million in cash, cash equivalents, and highly rated marketable securities with no debt. During the first three quarters of 2024, $8.6 million was used to repurchase 560,000 shares.

• For the fourth quarter of 2024, revenues are expected to remain between $14 million and $15 million. - In 2025, low single-digit revenue growth is expected due to lingering impact from customers' excess inventory issues. - For 2026 and beyond, with orders from the pipeline materializing and customers ramping new products featuring Silicom's offering, strong annual compound growth of between 20% and 30% is expected. - A service provider customer selected a range of Edge products for all deployment scenarios, with early deployment starting in 2025 and potential several million dollars in business in 2026. - A network equipment OEM selected the high-speed 400-gig FPGA smart card for deployment, with initial deliveries in the first quarter of 2025 and ramp-up in 2026 driving potential multi-million dollar annual revenues.

• Silicom's increasing dependence for substantial revenue growth on a limited number of customers. - Difficulty in commercializing and marketing products and services. - Maintaining and protecting brand recognition. - Protection of intellectual property. - Competition. - Disruptions to manufacturing, sales, and marketing activities. - Impact of wars in Israel and Ukraine, rising inflation, changing interest rates, volatile exchange rates, and continuing or new effects from the COVID-19 pandemic.

Q: In terms of your current revenue run rate what -- how is that -- can you comment on the mix across different verticals in terms of the current revenue run rate? Is the service provider still the main vertical? Or are you seeing enterprise or other traction there?

A: So I think in general we see -- we don't see a huge difference from what we've seen in the past. I don't have the exact percentage in front of me, but it's a mix a mix of OEMs and service providers. In the OEMs, we see strong segments like cybersecurity is very strong network monitoring. Obviously, we have the SASE and SD-WAN markets for our Edge boxes. So I think that's kind of the mix we're seeing. And we see -- I mean both opportunities in all of them but also actual revenue coming from all of them.

Q: In terms of your inventory at your key customers here, any progress on orders? And what's driving your confidence in your rebound, as we exit 2025 there? And is there any risk to obsolescence from your product that's on hand with your customers?

A: So, yes, I mean, we -- as you said, it's a process that we will continue seeing in 2025, as well. And the way we are monitoring it, it's simply speaking with the customers and they're sharing with us the numbers and we see -- sometimes we see the orders come in. So we understand that okay, now they're done with this part number, they need more of that. So as we see more and more come in, we speak with the customers so we know how it goes. As I mentioned previously on this call, some of them are selling slower than they expected. So we -- but they still sell. I mean, it's not that they're not selling the product. It's just that due to the shortages in previous years, they had to buy more and they thought they will sell it faster. The overall situation is they're still selling, but slower than expected. And I'm assuming that most of it will be done in 2025. That's our assumption.

Q: In terms of modeling here, how should we think about your cash burn through late next year? And are the current OpEx levels, what you think you need to maintain to sustain the business?

A: So from an OpEx perspective, we expect to be pretty much flat maybe a slight increase, not something significant. We think we have the right team, the right size of the team in order to support our future growth. So, we don't think we will need to make significant changes to that not up, not down. And in terms of revenue, we mentioned, we expect a very slight increase maybe single-digit growth next year. We expect GP also to remain the same. So I think from that, we know pretty much where we expect to be.