Silicom Ltd (SILC) 2008 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Silicom's 2008 results conference call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given to the question and answer session. As a reminder, this conference is being recorded January 26, 2009.

You should have all received by now the Company's press release. If you have not received it, please call GK Investor Relations at 1646 201 9246 or view it in the news section of the Company's website www.silicom.co.il.

I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft would you like to begin please?

Thank you. Good morning and good afternoon. I would like to welcome all of you to Silicom's fourth quarter and full year 2008 results conference call.

Before we start, I would like to draw your attention to the following safe harbor statements. This conference call may contain projections or other forward-looking statements regarding future events, or the future performance of the Company. These statements are only predictions and may change as time passes. Silicom does not assume any obligations to update that information [after the event] or results may differ materially from those projected including as a result of changing industry and market trends, the huge demand for our products, the timely development of our new products and their adoption by the market, increased competition in the industry and price reduction, as well as future risks identified in the document filed by the Company with the SEC.

With us today on the call are Mr. Shaike Orbach, Silicom CEO and Mr. Eran Gilad, Silicom CFO. As usual, Shaike will begin with an overview of the results, followed by a Eran, who will provide the analysis of the financials, who will then turn over the call to the question and answer session. And with that I would like to hand over the call to Shaike. Shaike please.

Thank you Ehud. Good morning everyone; welcome to our fourth quarter and full year 2008 results conference call. We are pleased with both the results of this quarter and the results of 2008 as a whole. This is especially true, given the background of the worsening global macroeconomic environment which we all experienced throughout 2008.

To summarize our results, revenues for the fourth quarter of 2008 were $6.5 million, and for the year we achieved $25.6 million. Net income for the fourth quarter was $1.6 million which actually represents our highest ever net margin level of 25.1%. For the year we had a net income of $4.6 million, again, a number we are particularly pleased with given the challenging macro environment.

Our cash position remained very strong and, in fact, was further strengthened in the fourth quarter. We ended the quarter with $39.2 million in net cash and equivalents adding $1.8 million to our positive operating cash flow.

I stressed last quarter, and repeat now, that this very strong cash position bodes well for us, especially given the current macro environment. It places us in a particularly good position to preserve the strength of our business and our first-rate customer support. It also provides reassurance to our existing and potential customers of our long-term stability and our ability to provide them with ongoing support on our products. It also enables us to maintain the investments in our technological and product leadership, enhancing our competitive advantages.

Finally, it provides us with an ability to swiftly take advantage of any potential opportunities in the marketplace that may arise. However, I would like you to know that at the same time, we are not being complacent, and we recognize that the sharp global slowdown is, and will continue, to negatively affect our target markets and, subsequently affect us. Whilst to a certain extent, our ability to add new customers, as well as upsell additional products to our current customers, somewhat enables us to weather the effects of the downturn.

Silicom, like many other companies in our sector, is seeing very limited visibility going forward into 2009. Yet, our Company remains strong, our structure is sound, and expense footprint is at the right level for executing on all our short and long-term goals.

Overall, we are proud of our achievements in 2008 and the fourth quarter. We believe that our differentiating advantages and stability will help us continue to drive business with both new and existing customers building the business over the long-term.

Now, I would like to discuss some of the specifics of the quarter and highlight some encouraging developments.

A few days ago we announced a large order of $1.1 million from one of the world's three largest server manufacturers for our multiport gigabit Ethernet server adapters, for use in one specific project, which is scheduled to be delivered in the first quarter. This particular project win is the culmination of a long process, but I am proud to say that our investment in time and effort succeeded.

This is a very important order for us for three reasons. Firstly, it is a top-tier server manufacture providing us with an excellent and new customer reference. Secondly, it provides Silicom with a very strategic entry point into this customer and increases our potential for additional orders at this industry giant. Finally, the fact that we passed all the customer's stringent due diligence, addressing both technical aspects and financial aspects is a strong third party confirmation of our technological and service capabilities.

We continue to successfully penetrate other new customers, as well as introducing new products to the market. Some of our new products incorporate the largest generations of silicone developed by the major vendors that we work with. Some of these cards, utilizing these cutting-edge technologies are already in evaluation and even qualification by several customers, including some leading customers with significant potential for us. While the sales cycle is typically long, we believe that at least some of these opportunities will materialize into significant accounts over the long-term.

Overall, we are proud of our achievement in 2008, especially against the backdrop of worsening global economic environment throughout the year. The combination of our strong global and diverse customer base, our strong balance sheet, our continuous offering and developing of new products, as well as our pipeline of new and potential customers, provides us with confidence in our ability to emerge the current market downturn a stronger, bigger and more diversified Company over the long-term.

With that, I will now hand over the call to Eran Gilad, our CFO, for a more detailed review of the fourth quarter and the full year results, after which we will open the floor for questions. Eran?

Thank you, Shaike, and hello everyone.

The revenue for the fourth quarter of 2008 was $6.5 million, a 6.5% sequential increase over revenues of $6.1 million, as recorded in the third quarter of 2008, and 13% decrease year-over-year compared with revenues of $7.5 million recorded in the fourth quarter of 2007.

Our geographical revenue breakdown for the fourth quarter remains about similar to last quarter, and was as follows; North America 33%; Asia Pacific 26%; Europe and Israel 11%. Our geographical revenue breakdown for 2008 was; North America 67%; Asia Pacific 25%; Europe and Israel 8%.

The breakdown of revenue between BYPASS and non-BYPASS for the quarter was; BYPASS approximately 70%; non-BYPASS approximately 30%. The breakdown of revenue between BYPASS and non-BYPASS for 2008 was; BYPASS approximately 60%; non-BYPASS approximately 40%.

Revenues for the full year 2008 were $25.6 million, representing a year-over-year decrease of 5% from the $26.8 million reported for 2007. We had three customers contribute over 10% to our revenues during 2008. Their respective contribution was 22%, 14%, and 10%.

Gross profit for the fourth quarter of 2008 was $2.5 million, representing a gross margin of 38.2%. This is compared to $3 million, or 40.2% in the fourth quarter of last year, and $2.4 million, or 39.4%, last quarter.

Operating expenses in the fourth quarter was $1.2 million, compared with $1.3 million in the fourth quarter of last year, and $1.7 million last quarter. The main reason for the decline over the previous quarter was due to the increase in value of the US dollar by around 11% against the Israeli shekel, in which most of our expenses are denominated, as well as an unusually low level of variable expenses in the quarter.

Operating income in the fourth quarter of 2008 was $1.3 million, or 19.8% of revenues, compared with $1.7 million, or 22.3% of revenues, reported in the fourth quarter of last year. Operating income for the year 2008 was $3.6 million, compared with $5.8 million for 2007. Operating margins for the year was 14%, compared with 21.5% in 2007.

Fourth quarter net income was $1.6 million, or 25.1% of revenues. This is a strong improvement over last quarter, in which we achieved a net income of $944,000, or 15.4% of revenues, while, in the fourth quarter of last year, we achieved a net income of $1.8 million, or 24.3% of revenues.

Earnings per diluted share were $0.25 in the quarter, compared with $0.14 in the prior quarter, and $0.28 in the fourth quarter of last year. Full year 2008 net income was $4.6 million compared with $6.3 million in net income last year. Earnings per diluted share for 2008 were $0.69, compared with $1 for 2007.

Now turning to the balance sheet, our net cash and equivalents at the end of the fourth quarter totaled $39.2 million. This represents an increase of $1.8 million [as we attributed] to positive operating cash flow compared with the end of the third quarter of 2008, which totaled $37.4 million, and $32.9 million as of the end of 2007. Our current strong cash position represents a level of $5.86 per basic share.

That ends my summary, and we would be happy to take any questions.

Operator?

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. (Operator Instructions). The first question is from Alex Kurtz from Merriman. Please go ahead.

Good morning, guys, and congratulations on the strong quarter.

This is the second straight quarter of sequential growth in your top line. I hear what you're saying about a tough macro environment, but is there some stability returning to your key customers?

It's very difficult to tell what will happen with the customers, going forward. Even in times where visibility was assumed to be much better for our customers, there were significant differences between their forecasts and what actually happened. So it is really very difficult. We are --

But this is the second quarter of sequential growth for you, so obviously demand is improving among your core customers. Is that correct?

If you are asking whether this fourth quarter represents an improvement of our major customers then I would say that, to a certain extent, yes. But there are many factors into it. For example, if there is a customer who has bought fiber [comps], which are per project, not necessarily -- we cannot know how this is associated with the forecast.

I wouldn't say, out of the results that we have in this quarter, that our customers are stable and will not experience any ups and downs. And what is, going forward, our visibility is really low with regard to what would happen with our customers, moving forward.

Okay. Well, let me ask you this; is visibility heading into Q1 worse or better than visibility heading into the fourth quarter of 2008?

I would say that it's about the same.

Okay. And can you tell me how many units were shipped during the quarter?

Just a minute. Eran?

Yes. During the quarter, we sold 20,000 units, of which about 10,000 are BYPASS and 7,000 or 8,000 non-BYPASS.

Okay. And just, can you give us a little bit more color -- my last question here, a little bit more color on the Tier 1 server vendor that you won a contract with? What kind of products are you going into, and why were you selected over competing solutions? Thank you very much.

Okay. Well, as we mentioned in the press release, this is a major server manufacturer, of course. And we were selected for a special project that they have, with a significant quantity of units.

I think that the reason for our selection was a combination of, I would say, standard features that we present, including both the technical reliability support, as well as financial stability, but also in terms of flexibility to customize. Because this product, which is the product that we are supplying them with, it's a dual port card, it's one of our [stand-up] cards. And this is good for us because it means that, even when the product is not a very sophisticated product, they still selected us. But it had to be, or it has to be, customized. They wanted it to be held in a more rugged way inside their platform, and that was something that we could do. Actually, we said we could easily do that, and that added to the reasons for which we have been selected.

Obviously, we were able to provide a competitive price as well. So, taking all these combined, and the time that we have invested in that, these were, I believe, the reasons for our selection.

Okay. Thank you very much.

The next question is from Jeffrey Meyers of Cobia Capital. Please go ahead.

Thanks a lot, guys. My question is on OpEx. You said there were two reasons; one, would just be the move in the shekel versus the dollar, and I didn't catch the other one, what you said unusually low --?

Correct, unusually low level of variable expenses.

Got you. And you would you expect, going forward, those will come back to a more normalized level, or you think this is something that will stay low going forward?

First of all, it is, of course, depends on the dollar rate. Assuming, more or less, the same level of dollar as was in quarter four, we expect that the level of operating expenses will be something between the level of quarter four to the level of quarter three; I would say something around $1.6 million.

Got you. Okay, great. Maybe you could just give me a little progress report how things are going with the [4,100 one-off] position customer. Are you shipping out still for the forecast, or are you shipping already because they're getting pulled through in the field?

Well I can tell you that this customer, his forecast is changing once a week, and it's changing to all directions. So it's really difficult to answer whether we're shipping with respect to the forecast. I think that this customer now has really low visibility, just like we have, and therefore the forecast that we have at any given moment at this point is not indicating anything, because of the changes in the forecast. So obviously we are now getting prepared to ship per the current forecast, but his forecast is changing rapidly, going to many direction. So we still don't know; we believe that the visibility that they have is very low as well.

Okay. And did you add any new customers this quarter outside of the server manufacture?

Yes we have. Responding to your question, yes we have. Now none of these at the moment is still very dramatic, however, one of these customers is now, typically -- I'm not 100% sure that I can say that we have added this customer because the phase that we are in right now is a qualification phase. But once the qualification phase is concluded, and that may take some time, then this could be a significant customer.

Another customer that we added, we added on the basis of our ability to provide solutions, individualization environment which is important for the technical perspective, even though the size of this customer is not very big. So these are just two examples of what we have, and we have added customers this quarter.

Okay. And then lastly, the redirector card. When do you expect to start seeing revenue from that one?

Well as I said when we started with the redirector, the sales cycle for that one is a long one. But I can say that we are moving forward and the main customer, who is now evaluating this card, is starting to say, or has been able to overcome some programming issues in his system in order to integrate this card. He is now seeing good results and we are hopeful, so we are moving forward with that. As I said, this is a kind of unique product, not typical in the market which is why the sales cycle would be even longer than usual, but we are definitely making progress there.

Good, thanks a lot guys.

(Operator Instructions). The next question is from Marcel Herbst from Herbst Capital Management. Please go ahead.

Good morning. Congratulations to the strong quarter.

Thank you.

I wanted to know how your prices are holding up in the economy. Do you see any margins being affected going forward?

Well there is a price pressure, but I must say that the price pressure is not unique to the current slowdown or macro environment. We are being continuously pushed by our customers to reduce prices. Some of them, they have a standard mechanism by which every quarter they push us to reduce the prices. And we do reduce prices continuously and, at the same time, we are continuously pushing our vendors to reduce their prices, which is why we are able to maintain the gross profit as it is right now. We have not seen any change from that perspective in the last quarter.

Okay. Have you seen any activity out of your large customer in China?

We have seen activity, but it's not a dramatic activity. We're still waiting for the other big projects that they said. We are receiving orders, continuous orders, from that customer, and that means that as long as we're dealing with (inaudible) this customer is now buying from us. Only the quantities in the last quarter and earlier quarters have not been so significant as before because this customer is working project by project and he has not yet been able to receive the other big project that we were supposed to receive. So we do see activity from this customer as well as from other customers in China

We do make progress in China but in this quarter, and in the previous quarter, this progress was not something very dramatic that we can say that it's a breakthrough or anything of that sort.

Okay. What percentage of revenue came from the 10 gigabyte technology this quarter?

I think it was approximately 6% this time which is a little less than last quarter, but we don't think that less is the trend in view. We're pretty sure that the 10 gigabit will grow.

Okay. Now with almost $40 million in cash and equivalents you got more cash than your valuation; what do you plan for the use of your cash?

Well, as I said, there are two parts to that. First of all, it is important that we have this level of cash. As I mentioned with respect to the Tier 1 server manufacturer, I think that maybe one of the first things that they look at is how financially stable the company that they work with is. And with this level of cash they're satisfied, so this is important as it is.

Now I'm not saying that necessarily it has to be $40 million, and if it's $5 million less, then we would be disqualified, which is why we're continuously looking for opportunities also in the market. And when I say that, even though I know that I repeat this every quarter, but we do that. We really do look for opportunities, investigate them, and once, and if we find such an opportunity, we will move forward. We would like to be in a position that if we identify such an opportunity, we're able to move very quickly and materialize this opportunity into something real. So these are the two issues, I would say, that the cash is helping us with.

Excellent, thank you very much.

The next question is from Mr. [Gerry Frank]. Please go ahead.

Good morning, thank you. I read the 20-F from last year and it says that the long-term marketable securities as namely US Government and corporate debt. I'm just wondering, what percent of that roughly $16 million has mortgage related debt or auction rate securities, or high risk debt like maybe General Motors type debt, or what type of debt is that?

The answer is very simple, zero.

I didn't hear.

I'm saying that the answer is very simple; we don't have such securities at all.

Okay. So the $16 million of long-term marketable securities is very liquid and there's no high risk mortgages or auction rate securities or anything that's very risky?

All the short-term and long-term securities are US bonds, [high rated].

Okay, super. That was my only question, thank you.

Before I ask Mr. Orbach to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available in three hours on the Company website www.silicom.co.il. Mr. Orbach, would you like to make your concluding statement?

Yes, thank you operator. Thank you everybody for joining the call. I would like to conclude by saying that we will continue to work hard with our ultimate goal of increasing value for our shareholders over the long-term.

If you do have any questions, or need information please feel free to contact our Investor Relations team, GK Investor Relations. We look forward to hosting you in our next call in three months' time. Good day.

Thank you. This concludes the Silicom fourth quarter 2008 results conference call. Thank you for your participation, you may go ahead and disconnect.