Silicom Ltd (SILC) 2009 Q3 法說會逐字稿

Welcome to Silicom's third-quarter 2009 results conference call. All participants at present in 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 October 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 1-646-201-9246 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?

Thank you. Good morning, and good afternoon to everybody. I would like to welcome all of you to Silicom's third 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 the results of changing industry and market trends, reduced demand for our products, the timely development of our new products and the reduction by various markets, 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 on the line today are Mr. Shaike Orbach, the CEO and Mr. Eran Gilad, the CFO. As usual, Shaike will begin with an overview of the results followed by Eran, who will provide the analysis of the financials. We'll 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 conference call. We are pleased to report another profitable quarter, but even more importantly a return to growth in line with our expectations of a return to growth before the end of 2009.

This is an encouraging achievement, and is built on the renewed purchasing of some of major customers and the success of our efforts to secure new customers. Our industry faced a tough start to 2009 and like everyone, this affected Silicom. However, we maintained a positive net income and cash flow profitability throughout this downturn period, an achievement we are quite proud of.

During the third quarter, indications from our customers suggest that their target markets are reawakening. We do hope that current positive market trends will continue in the coming quarters, bringing with them continued growth in our top line and bottom line results for both the short term and long term.

I'd like to add that the general underlying trend driving our market remains strong, and the industry is becoming ever more reliant on larger and more powerful service and network appliances, implying an even greater need for our products. This is down to the need of handling the growing data loads, as global demand for bandwidth continues to increase unabated. All this underlines my overall optimism regarding both Silicom's and our industry's long-term prospects.

We ended the quarter with a very strong cash position at $41.7 million, which was contributed to by our positive operating cash flow in the quarter of $500,000. As I have mentioned in the past, our strong cash position places us in the particularly good position to continually build on the strength of our business and maintain our first-rate customer support.

It also enables us to further strengthen our technological and product leadership, enhancing our competitive advantages. Just as importantly, it provides us with an ability to swiftly take advantage of any potential opportunities that may arrive. One quarter ago, we introduced the SETAC, the SErver to Appliance Converter, extending our offering for existing customers while even more importantly opening the door to promising new customers and market segments.

The SETAC enables us to significantly expand our client base by targeting new types of customers through our offering of a full network appliance platform solution. So far, we are seeing a strong market need and interest in this solution, and underlies our optimism on the SETAC's long-term potential to drive our growth significantly.

To update you on our recent progress, as we told you last quarter we have secured our first customer for the SETAC, which is a leading European provider of security solutions. And we have delivered the first prototypes, although we have already received requests to provide evaluation units and proposals by a number of important potential customers, demonstrating the high level of interest that we see. As you can see, we very much expect the SETAC to become a new significant driver for our long-term revenues.

In summary, based on recovering markets and exciting new product line and broader addressable markets we feel well positioned and increasingly confident to continue delivering growth, and our new products underscore our optimism with regard to our ability to build the Company to the next level. The combination of our global and diverse customer base, our strong balance sheet, our profitability and cash generation, our continuous offering and development of new products, as well as our pipeline of new and potential customers, all provides us with confidence for the quarters ahead.

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. Revenues for the third quarter of 2009 were at $4.6 million, compared with revenues of $4 million as recorded in the prior quarter. Our geographical revenue breakdown for the quarter was as follows -- North America, 80%; Asia-Pacific, 12%; Europe and Israel, 8%. The breakdown of revenue between bypass and non-bypass for the quarter was bypass approximately 55%; non-bypass approximately 45%.

Gross profit for the third quarter of 2009 was $1.8 million, representing a gross margin of 39.1% at the higher end of our normal range. This is compared to $1.6 million or 39.8% of revenue in the prior quarter.

Operating expenses in the third quarter was $1.5 million, similar to the $1.5 million as recorded in the previous quarter. Operating income in the third quarter of 2009 was $333,000 or 7.2% of revenues. This is more than double the operating income reported in the prior quarter of $152,000 or 3.8% of revenues.

Our income tax expense in the quarter was $178,000 and even though it is higher than in previous quarters, Silicom's statutory tax rate remains unchanged. The fluctuations in the effective tax rate are affected by a number of factors including changes in the balance of deferred tax assets.

Third quarter 2009 net income was $346,000 or 7.5% of revenues. This is compared with a net income of $256,000 or 6.3% of revenues in the prior quarter. Earnings per diluted share were $0.05 in the quarter, compared with $0.04 in the prior quarter. Now turning to the balance sheet, our net cash and equivalents at the end of the third quarter totaled $41.7 million.

This represents an increase of $0.5 million attributed to positive operating cash flow compared with the end of the prior quarter of 2009, and an increase of $2.5 million attributed to positive operating cash flow compared with the end of 2008. Our current strong cash position represents a level of $6.22 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 Jeff Meyers of Cobia Capital. Please, go ahead.

Great. Thanks a lot, guys. So, first question is on the redirector product. Did you have any production shipments this quarter, and how did the order book look for the upcoming quarters?

We have shipped production units this quarter. We have a certain backlog for additional products, production units for the current quarter -- I mean, for the fourth quarter. We have shipped in the third, and we have a backlog for the fourth right now. We hope that the quantities would get even more than they are right now.

At the moment, this product is released only for, I would say, one type of appliance with our customers. And the plan is -- our major customer who is using that, and the plan is for that customer to release the use of this product for its other appliances as well. So, we hope that there would be a growth in quantities of this product as we move forward.

Okay. And then just a housekeeping question, I guess. What percent of revenues this quarter came from 10-gig products?

Eran?

10-gig was about 12% in the quarter.

Okay. And in terms of the external units, did you have any revenues from those this quarter and how are the prospects looking for those?

We had revenues from external units in this quarter and that product also looks as if it's going to grow. I'm not yet sure about the rate of growth.

Got you. Okay. And in terms of the customer you guys announced I think it was last quarter, the application acceleration customer, how is that ramp coming along?

That's a part of -- when we said that a part of the growth in this quarter and our confidence regarding the next quarter is new customers that we secured, that was mostly this specific customer -- not only, but mostly.

I got it. Right. And then the last question is, in terms of any other type of customer, maybe storage or are you seeing any prospects yet from that side of things?

We have some -- we have at least two companies which are, I would say, mid-level of importance in the storage business which are now in our pipeline. We have not yet secured this account. We don't have what we used to call a design win there, but they are a profit right now. And that's for 10-gig.

Right. Okay. So just one more quick question. In terms if you look at a year ago, you guys are -- revenues are kind of below where they were a year ago. Is that still some inventory correction at some of your larger customers that's going on, or what would you attribute that to?

Well, there -- the most -- I think that the major part of that is that even though we have indications that the markets are awakening, they're still not at the level that they used to be a year ago. I mean, hopefully, they will grow. And if they grow and if, indeed, customers will buy at the rate that they had forecasts for about a year ago, then we would be back and even more than what we were last year.

Got you. Okay. Great. Thanks, guys.

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

Hello. On SETAC, you announced one new customer. I just want to clarify your earlier comment. Do you have additional customers --?

At the moment -- at the moment there is one customer which is committed to SETAC. What I said that is that, in addition to this one additional customer, which actually was the customer with whom the concept was built. So it was natural to have this first customer at the beginning because it was him with whom we built the concept.

Now he takes some more time to get more customers because they were new to the concept when we approached them with this concept. But, we are encouraged because several of them have already asked for either evaluation units, which means that they are very interested in that or even proposals -- I mean, price proposals. Again their demonstrating their interest and sometimes both. So, that's why we think that it's going to be good -- it's going to be very significant for us.

And competitively, is there anything else out there that would compete with SETAC directly?

Well, directly -- we need to define the word directly in here. But we looked at the competitors as what we called hardware appliances. These were appliances which were proprietary made in order to present some of the advantages of the proprietary design such as the front loading and the modularity of the concept.

So these guys were offering the industry a solution which had several advantages while, on the other side, it had several disadvantages. And therefore, a part of the industry went with these kind of solutions of, I would say, proprietary solutions. I would say having a higher priority for the advantages comparing to the disadvantages.

Whenever a customer made this decision to go with these proprietary designs, we actually had nothing to propose there -- or almost nothing to propose there. So now we came with a concept which shows these customers that there is possibility to have these advantages of hardware appliances without giving up the advantages of the standard service.

So now, suddenly we have the access to all these customers to whom we could not sell anything before. And actually, the competitors there are those guys who have proposed hardware appliances.

Okay. And the revenue per unit or whatever would be higher than your bypass and non-bypass products. Is that correct?

You mean the revenue from SETAC?

Yes, right. Right.

The revenue from SETAC could -- would be, I would say, higher in any event. And, in some cases, it would turn out to be much higher than just the revenues of the card and that's in those cases where the customers would like to have the full platform coming from us.

But even if the customers would not want to have the full platform from us, it still would have first the cost component that he used to have from us. And in addition to that, the SETAC solution part of that. So in any event, it would be bigger than just bypass cards and non-bypass cards, and in some times it could be much bigger.

And the gross margin would be comparable or higher?

No, I don't think that the gross margin there would be higher. We're not yet sure. With the current customer that we're having, the gross margin is the same as we're having right now. We could see some scenarios even that the gross margin would be a little less than what we have today because it's a slightly different market segment. But that would be especially, in those cases, where the revenues themselves would be much higher.

Okay. And then quickly, the number of bypass and non-bypass cards that you have sold -- the actual number. I know you gave the percentages earlier. And then also quick comment on China and the US server customer that you secured back in January, I think it was. Any progress on either of those fronts?

Okay. I'll start with the first question. Total number of bypass cards was about 7,600, and total number of non-bypass cards was about 6,400.

Okay. Regarding the two other questions, first of all China. China -- I do feel that we're making progress. It is not the kind of progress which is demonstrated by the one major PO, just like we had about a year ago or something like that. At that time, it was $1.8 million PO.

So while there is still a possibility to get these kind of POs, the progress that I'm talking about right now, it's not this kind of progress, but rather moving forward, getting new accounts, and selling more to current accountants who are heading them. And I think we're growing in China, and we're starting to get the levels which become important.

It's not yet -- I think that the potential -- there is a long way to go before I can say that, yes, I am satisfied with what's going on in China. But I am satisfied with the trend right now. In this quarter and the previous quarter, I think that we can see not only in the results, but also in the pipeline and whatever is happening. I think that we're making progress there.

With respect to the server company, as we have said when we announced that, when we announced that that was a specific project. It was not something that was going on as a project. That being said, we continuously speak with this customer. There is a potential for additional projects, and we presume that such projects will happen. But I cannot say right now at which date that's going to happen.

Thank you.

(Operator Instructions)

The next question is from Marcel Herbst of Herbst Capital Management. Please, go ahead.

Hello. Good morning. In the PR you mentioned that your experience with the SETAC product so far confirms your initial market assessments. Can you elaborate on what your initial market assessment is, particularly as it relates to the annual revenue potential of the new product?

Well, we -- what we meant when we said that what we are seeing is in accordance with what we've expected, is not yet associated with the revenues level, which still too early to predict. What we were talking about is regarding the level of expectation of the product because -- exception, I would say, of the product. Because that's what -- that was the most important thing for us.

I mean, before the quarter, we were at the point where we were just starting to disclose and to present this concept to customers and integrators. And while everyone says it's interesting, it's interesting, you need to see more than that in order to really be sure that customers are really interested in buying that.

And the news that I'm bringing to you this time is that we have made another step, which I consider to be a very important step. And that means that customers, not only integrators, for which is simply to say -- but rather customers are saying, yes, we would like to have a SETAC unit or unit for evaluation. Or, yes, we would like to get the price proposal from you and then evaluate that.

That shows that these customers were not just, I would say, being polite, telling us, yes, interesting -- really interesting. But rather when they're now considering their next steps going into additional appliances, they are really willing and interested in evaluating SETAC for these opportunities.

Now these are all customers which, without SETAC, we wouldn't have been there at all. So, these would be additional revenues if we are successful to go ahead with SETAC for that. And that's what I meant when I said that we have some sort of a confirmation to our expectations regarding SETAC.

It is still too early to predict the annual revenues of that. The sales cycle of SETAC is quite long. But I mean, I believe that we have said that for the long-term, this could be very, very significant. This could -- SETAC and -- SETAC could very well more than double the revenues of the Company. Yes, and if triple and even more than that. Meaning for the long term once this really becomes a success.

Oh, that sounds certainly very exciting. Now looking at just your first customer, when do you expect production revenues to kick in with that first customer?

I would expect that to happen in the first half of next year.

Awesome. Thank you so much.

Thank you.

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 three hours on the website [www.veydon.co.il].

Mr. Orbach, would you like to make your concluding statement?

Yes, thank you, Operator. Thank you, everybody, for joining the call. I'd 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 month's time. Good day.

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