Silicom Ltd (SILC) 2009 Q1 法說會逐字稿

Welcome to Silicom's first quarter 2009 results conference call. All participants are present in a 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 April 27, 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 1-646-201-9246 or view it in the news section of the Company's website, www.silicom.co.il. I would like to now hand over the call to Mr. Kenny Green of GK Investor Relations. Mr. Kenny Green, please go ahead.

Thank you, operator. I would like to welcome all of you to Silicom's first quarter 2009 results conference call. Before we start, I would just like to draw your attention to the following Safe Harbor statement. 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 obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing -- including as a result of changing industry and market trends, reduced demand for our products, the timely development of our new products and adoption by the market, increased competition in the industry and price reduction, as well as due to risks identified in the documents filed by the Company with the SEC.

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

Thank you, Kenny. Good morning, everyone. Welcome to our conference call. Our revenues this quarter were heavily impacted by the severe global economy slowdown. Although we have maintained our list of existing customers intact and even added new customers during the recent quarter, it did not compensate for the general lower demand. This was particularly as a result of inventory level adjustments by customers. However, even in the face of such strong economic headwinds, we are particularly pleased with our good bottom-line performance, achieving an impressive net profit margin of 17.3%, despite the lower revenue level in the quarter.

This continues an unbroken profitability trend since 2005. We also increased our cash position to beyond the $40 million mark with positive operating cash flow in the quarter of $900,000. These achievements are testament to the efficiency of our operations and the stability of our business model in very volatile macro environment. The lower revenues were caused by a significantly reduced volume of ongoing purchase orders, particularly from a number of our customers which are in the process of drawing down their inventory stock.

While this obviously does affect our results in the short term, it does not affect our ability to maintain our profitability or impact the long-term positive trends in our business. In fact, as I believe that our current customers will deplete their now-reduced stocks soon, and given that we continue adding new customers, I would expect that we will resume our growth at some point during the second half of this year.

I would like to stress, as I did last quarter, that our very strong cash position is especially important in the current macro environment. Many of our customers only purchase from companies which are financially stable, since they need guaranteed customer support over the long haul. Our financial strength is now a significant asset and we are leveraging this strength to acquire new customers, while retaining and further penetrating existing ones.

In fact, it is poignant that not a single customer has left us. Our strong cash levels also place us in a particularly good position to preserve the strength of our business and our first-rate customer support. It enables us to maintain and even build on the investments in our technological and product leadership, enhancing our competitive advantages. Finally, it also provides us with an ability to swiftly take advantage of any potential opportunities that may arise.

With regard to our customers, the sharp global slowdown has negatively affected the markets and subsequently affects us. As I mentioned, our result this quarter was strongly impacted by a number of customers that made lower purchases from us in the quarter, especially when comparing with previous quarters' levels. It is important to know that our customers did not cease selling server products to the end customers, which includes our cost. Their sales continued, but they drew our cards from their existing stocks of inventory without making new purchase orders with us. This was in order to lower their inventory levels of our product.

However, based on their forecasts, we believe purchase volumes from these customers will pick up in the second half of the year and will again reflect the level of sales to end users. While we cannot pinpoint the exact timing, this is part of our optimism underlying our growth expectations in the second half of the year. I would also like to point out that our globally diverse customer base, as well as new customers that we add continuously partially cushioned the revenue shortfall, bringing a reasonably good and diverse level of orders, especially considering the state of the global economy.

This forms the basis of my confidence that the underlying trends in our business are positive and bodes well for the long term. Part of the reason for the strength and breadth of our customer base is our continuing innovation of new products to the market, combined with our ability to successfully penetrate new customers, as well as up-sell additional products to current customers. This is enabling us to continually increase the diversification and growth in our customer base and helping us weather some of the effects of the downturn.

In fact, a clear demonstration was today's announcement of a new customer. We were selected and received initial purchase orders for our multi-port cards from one of the world's largest manufacturers of application acceleration solutions. While we expect to start delivering more significant orders in the second half of the year, we see significant long-term potential from this customer for our business. We are delivering multi-port gigabit Ethernet adapters for their newest application acceleration appliances and all of these appliances will include at least one of our cards as standard with an option for additional cards.

In fact, based on the customers forecasts, we believe that we will eventually see revenues from this particular customer running at a level of around $3 million a year. There is also additional upside to this. Now that we have penetrated this client, we are discussing additional projects and other specialized products and we hope to be able to increase the scope of our corporation and develop our relationship further.

We are also in evaluation and qualification with several other customers, including some leading names, offering additional upside potential for us. While the sales cycle is typically long and has lengthened in the current environment, we believe that at least some of these opportunities will likely materialize into significant accounts in the coming quarters. Overall, we are proud of our continued profitability, especially against the backdrop of the severe global economic crisis. Looking ahead, we expect to continue to show profitability in 2009, despite the current environment. Just as importantly, despite our low level of orders in the current quarter, we see very promising and solid signs of renewed growth in the second half of the year.

In summary, the combination of our global and diverse customer base, our strong balance sheet, our continuous offering and development of new products, as well as our pipeline of new and potential customers all provides us with confidence in our ability to emerge the current market downturn as a better and more diversified company. Our Company remains strong, our structure is sound and we believe our expense footprint is in the right level for continued execution of our goals. With that, I will now hand over the call to Eran Gilad, our CFO, for a more detailed review of the quarter's results, after which we will open the floor for questions. Eran?

Thank you, Shaike, and hello, everyone. Revenue for the first quarter of 2009 were $5 million, compared with revenues of $7.7 million recorded in the first quarter 2008 and $6.5 million as recorded in the fourth quarter of 2008. Our geographical revenue breakdown for the quarter was as follows, North America, 32%, Asia-Pacific, 39%, Europe and Israel, 29%.

The breakdown of revenue between Bypass and non-Bypass for the quarter was Bypass, approximately 40%, non-Bypass, approximately 60%. Gross profit for the first quarter of 2009 was $1.9 million, representing a gross margin of 38.7% and in our normal range. This is compared to $3.3 million, or 42.3% in the first quarter of last year and $2.5 million, or 38.2% last quarter.

Operating expenses in the first quarter was $1.3 million, compared with $1.8 million in the first quarter of last year and $1.2 million last quarter. The main reason for the improved level of expenses compared with the first quarter of last year was primarily due to the increase in value of the US dollar against the Israeli shekel, in which most of our expenses are denominated.

Operating income in the first quarter of 2008 was $649,000, or 12.9% of revenues. This is compared with $1.5 million, or 18.8% of revenues reported in the first quarter of last year and $1.3 million, or 19.8% of revenues in the prior quarter. First quarter 2009 net income was $867,000, or 17.3% of revenues. This is compared with a net income of $1.7 million, or 22.5% of revenues, in the first quarter of 2008 and a net income of $1.6 million, or 25.1% of revenues, in the prior quarter.

Earnings per diluted share were $0.13 in the quarter, compared with $0.26 in the first quarter of last year and $0.24 in the prior quarter. Now, turning to the balance sheet, our net cash and equivalents at the end of the first quarter totaled $40.1 million. This represents an increase of $0.9 million, attributed to positive operating cash flow compared with the end of the fourth quarter of 2008, which totaled $39.2 million. Our current strong cash position represents a level of $5.98 per basic share. That ends my summary and we would be happy to take any questions. Operator?

Thank you.

(Operator Instructions)

The first question is from [Jeffrey Meyers] of Cobia Capital. Please go ahead.

Great. Thanks, guys. So in terms of your customers drawing down inventory, do you know what their inventory levels are today or you're thinking, I guess, they're going to come back later in the year because of the purchase orders that they're giving you?

We don't know exactly what the level of inventory is, but what we do know is what they tell us. And I'm saying they. Some of them are telling us in details, others in less details, but generally they are telling us their forecasts for moving forward, and we understand from what they're telling us that actually right now they have stock enough, which is why they're not placing purchase orders right now.

But, when we look at their forecasts, moving forward we understand that by that time their forecast will be -- their inventory will be depleted and they will start again placing purchase orders. So we understand from the information that they are telling us that this is what's happening. We don't have the accurate level of inventory that they have.

Right, okay. Next question, you mentioned a new customer for application acceleration. I guess I was under the impression that you guys had already all the big customers in application acceleration. Maybe you could -- I don't know if you can give any more details on who this might be or how to think about that.

Not sure that I understood the question.

I thought you had already all of the large customers in the WAN optimization space, so who is the new customer?

Well, of course we cannot identify the new customer by name, but what I can say, we have I would say most of those handling WAN optimization and all those who are -- and actually all of these who are handling strictly WAN optimization. As you could see in our definition in this case, we didn't say WAN optimization, but rather application acceleration. It's not exactly the same. What we're saying here, that it's not necessarily WAN application acceleration.

So this is not exactly the same type of an appliance, even though there is a lot of commonality. One thing that I can tell you to explain the detail or the difference in here, the cards that we are providing to this customer at the moment are not Bypass costs. This means that this is not necessarily a branch which is connected via the WAN, where everything is in line, which means these appliances are not necessarily in-line appliances and therefore they do not necessarily need Bypass cost, but still it is application acceleration.

I see. Is it a network monitoring kind of application?

No, it's not network monitoring, it's application acceleration.

I see. Okay. In terms of the intelligent Redirector card that you've mentioned in the past, maybe you could give a kind of progress update on that.

What I can say about that is that we are moving forward and I feel, at least, that we are getting closer. We are now in a situation where our main potential customer for that is getting close to start agency testing, which means all the certification for safety -- all the standard issues, which means that we are very close to the end with all the testing associated with this kind of a card.

And as I mentioned in the past, the sales cycle for this card is longer than the usual cards because of the higher level of complexity here, but we are done with these complex issues, so right now we are actually moving forward in a more procedural part of that and hopefully once we're done with that we'll start to see savings.

I see, okay. And then the last question for you, in terms of your Fortune 100 customer, any update on when they might be getting into the fiber card business?

Well, I can say that in general when the crisis or the slowdown started, they slowed down all the new launches that they were going to have and now they're starting to talk back about that, and I don't have any date right now as to when they're going to launch that or when they're going to conclude the qualification in that. But we do get signals that they are, I would say, back in business.

I see. Okay, great. Thanks a lot, guys.

Thank you.

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

Hello. Do you have the number of units that you've sold in Bypass and non-Bypass. I know you gave the revenues for it, but --

Okay, yes, we sold about 8,000 Bypass cards and about 18,000 non-Bypass cards.

18,000, okay. And any business out of China yet? I know you had some in the first quarter last year and then it kind of dried up.

We are continuing working in China. We didn't have any one-time, big orders like we had a year ago, but I feel that we are making progress in China, but just like in every other place, and maybe even more so there, because the way they do business is kind of different, I feel that we are making progress there.

And the large server deal that you announced in January, it was going to go for a couple of months. Is there any update on that customer in terms of will that now expand into some additional opportunities?

The update is, number one, that the customer is very happy with us, satisfied, and he is speaking about additional opportunities, but it may take time.

Right. And your pipeline traditionally has been 100-plus companies, sort of in the prospect area. Is that still the case?

That's still the case, yes.

Okay. Any competitive pressure that cropped up here recently that you didn't have in the past?

Any competitive pressure? Competitive, no. I wouldn't say that there is any specific competitive pressure that you didn't feel in the past. I can say, though, that there is a pricing pressure, because right now everyone is trying to save any single dollar possible. It's not that this didn't happen in the past, but we can feel it more right now. We are applying the same kind of pressure to our vendors, of course.

And in the 10-gig space, I think you've given us a view of the percentage of the revenue on a quarterly basis. Can you do that again?

Percentage of 10-gig?

Yes, percentage of 10-gig was about -- just a minute, please. Was about 6%.

And I would like to add to that, that once again, while in the revenues themselves you cannot -- you see that it's becoming significant, but you don't feel the change from quarter to quarter, but when I look at the prospects and the pipeline that we're having, I am pretty sure that 10-gig will grow.

Thank you for answering my questions.

Thank you.

(Operator Instructions)

There are no further questions at this time. 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 within 48 hours on the Company's 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 on our next call in three months' time. Good day.

Thank you. This concludes Silicom's first quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.