Silicom Ltd. Q2 FY2025 earnings call

• Silicom executed ahead of its strategic plan in the second quarter of 2025, with strong Design Win momentum. Since the start of the year, 5 major new Design Wins have been achieved with important new and existing customers, tracking ahead of expectations. - In the second quarter, 3 significant Design Wins were secured: one with a Fortune 500 cloud-based service provider for FPGA and Smart NIC, one with a global network test equipment leader for 100 gigabit NICs, and one with a U.S.-based edge networking provider for advanced Edge system. These demonstrate the breadth of the product portfolio, depth of customer relationships, and ability to foster new ones. - A Design Win with a U.S.-based edge networking provider for a customized edge device is expected to have initial deployments by year-end 2025 and full ramp-up in 2026, with additional potential projects. - A major Design Win with a Fortune 500 cloud-based service provider in North America for FPGA, Smart NIC solution has initial deliveries planned for late 2025 and full ramp-up in 2026 with $4 million annual revenue potential. - A new Design Win with a global leader in advanced networking testing equipment for 100-gig NIC has initial purchase orders placed with mass deployment expected in early 2026 and $2.5 million revenue potential at full ramp-up.

In the second quarter of 2025, Silicom reported revenue of $15 million, which was 4% ahead of the $14.5 million in the second quarter of 2024. Geographically, over the last 12 months, North America contributed 74% of revenues, Europe and Israel 16%, and the Far East and rest of the world 10%. There was one customer accounting for about 15% of revenues that was a 10% plus customer. Gross profit for the second quarter of 2025 was $4.8 million, resulting in a gross margin of 31.9% compared to a gross profit of $4.3 million and a gross margin of 29.7% in the second quarter of 2024. Operating expenses in the second quarter of 2025 were $7.2 million, up from $6.7 million in the second quarter of 2024. Net loss for the quarter was $2 million, compared to a net loss of $0.9 million in the second quarter of 2024, and loss per share was $0.35 versus $0.14 in the previous year. As of June 30, 2025, working capital and marketable securities totaled $116 million, including $41 million in high-quality inventory and $80 million in cash, cash equivalents, and highly rated marketable securities with no debt.

• Growth for full year 2025 is expected to be in the low single digits, with double-digit annual growth rate materializing gradually from 2026. - Revenues for the third quarter of 2025 are expected to range from $15 million to $16 million. - The overall goal is to create significant value for shareholders with EPS of above $3 on revenues between $150 million and $160 million. A faster deal closure or ramp-up of ongoing projects may accelerate the timeline.

• Increasing dependence for substantial revenue growth on a number of limited customers. - Speed and extent to which Silicom solutions are adopted by relevant markets. - Difficulties in commercializing and marketing of products and services. - Maintaining and protecting brand recognition. - Protection of intellectual property. - Competition. - Disruptions to manufacturing and sales and marketing, development and customer support activities. - Impact of war in Israel and in Ukraine. - Rising inflation, changing interest rates, volatile exchange rates. - Any other continuing or new effects resulting from the COVID-19 pandemic and global economic uncertainty which may impact customer demand.

Q: Nice updates on the Design Wins. I wanted to ask about some of your end markets here. I mean, the biggest one appears to be the security market, and that's a key driver for several of your Design Wins across several your sectors here. Are you seeing changes in that market in terms of share shifts among your customers or this recent big acquisition that went down for Palo Alto for Cyber. Do you see consolidation or those affecting your opportunities, either improving or declining opportunities there?

A: So yes, I mean, you're right, the security market is a very important market for us. And we don't see any impact of that. If anything, we just see the cybersecurity market keeps growing and growing by pretty much every research, I think, and we see evaluation of companies and we see revenues of companies. So we are very happy that we are part of this market, and we don't see anything of that sort due to any consolidation right now.

Q: Great. And I had a follow-up to that, too, about -- I saw that the ADC market also is another important area, and you saw F5's results last night, but they're seeing a real shift away from software-based solutions over -- back to hardware actually. And I wonder if that affects many of your opportunities in the ADC market, as they move to hardware-based solutions a little more predominantly.

A: I mean -- yes, I mean, the F5 results last night, I think, is a very good maybe reference to see that many, many companies are looking at hardware more and more. I mean -- and we have many new products coming up for this market, if it's post-quantum ciphers, which is a very important thing that will become basically mandatory in the near future. And we have a solution for that to accelerate that over hardware made solutions. In the SASE market, we have many customers as well. And you see this networking plus security market exploding pretty much. Everyone needs hardware, different type of hardware, more acceleration on the hardware side as traffic becomes more challenging, encrypted and quantum encrypted in some cases. We see needs for special switches, and we're definitely working in that area to have interesting products later this year. So we see there's a lot of excitement for us in this market and the opportunities that will come up. And definitely, not only software, as we said, definitely on the hardware side for this market.

Q: Great. And then lastly, just touching on AI. We're seeing a lot of shifts in the kind of big public cloud builders away from traditional cloud infrastructure over to AI clusters, just really large CapEx shifts. And I wonder if that affects many of your market opportunities. I saw you have a very large AI data infrastructure opportunity there and how you think about how AI affects your TAM going forward?

A: I think it can affect it significantly, and we are looking at that market. We already have several products that fit into this market. And we are thinking more and more and seeing that this -- that the new AI architectures in training and inference, both on the edge and both on the data center requires certain acceleration in certain systems that we are able to build, specifically on FPGA. FPGA could be dramatic here in order to provide solutions that simply do not exist today. And we think we have the right team and the right know- how how to build those products. We're already discussing with potential customers. So this could become significant as well for Silicom.

Q: Great. Maybe one last one, if I can squeeze it in. Just the competitive environment, are you seeing any shifts there or any impacts on your gross margin expectations for the business?

A: Not so much. Nothing I think we should report at the moment.