Silicom Ltd (SILC) 2011 Q4 法說會逐字稿

Welcome to Silicom's fourth-quarter and year-end 2011 results conference call. All participants are 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 January 23, 2012. If you have not received a copy of today's press release and would like to do so, please call CCG Investor Relations at 1-646-201-2946 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. Kenny Green of CCG Investor Relations. Mr. Green, would you like to begin?

Thank you, operator. I would like to welcome all of you to Silicom's fourth-quarter and full-year 2011 results conference call. Before we start, I would 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 restate that information.

Actual events or results may differ materially from those projected, including as a result of changing industry market trends, reduced demand for Silicom's products, the timing development of new products and their adoption by the market and increased competition in the industry and price reductions, as well as due to risks identified in the documents filed by the Company with the SEC.

In addition, following the Company's disclosure of certain non-cap financial measures in today's earnings release, such non-GAAP financial measures will be discussed during this call. Such non-GAAP measures are used by management to make strategic decisions, forecast future results and evaluate the Company's current performance. Management believes that the presentation of these non-GAAP financial measures is useful to investors' understanding and assessment of the Company's ongoing core operations and prospects for the future. Unless otherwise stated, it should be assumed that financials discussed in this conference call will be on a non-GAAP basis.

Non-GAAP financial measures disclosed by management are provided as additional information to investors in order to provide them with an alternative method for assessing the Company's financial condition and operating results. These measures are not in accordance with or any substitute for GAAP. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release, which you can find on Silicom's website.

With us on the line today 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 the call over to the question-and-answer session. And with that, I would like to hand the call over to Shaike. Shaike, go ahead, please.

Thank you, Kenny. Good morning, everyone, and welcome to our fourth-quarter and full 2011 results conference call. We are very pleased to deliver a truly fantastic and record year, culminating with another great quarter. For 2011, we grew revenues by 30%, and our net profit by 46%, both a new record for us and a significant increase over what was a record year in 2010. In fact, over the last two years, we have actually doubled our revenues while tripling our net income, a truly fantastic achievement for any Company. Our substantial growth in revenue and profit, even against a background of uncertainty in global markets, is an undisputable confirmation of the value proposition we provide to our customers, and we are truly proud of this achievement.

Just as we've achieved on an annual basis, for the fourth quarter in 2011, our business performed exceptionally strongly and broke new records across all important financial parameters. These included record revenues of over $11 million, 11% over the same quarter last year, as well as our highest-ever quarterly net income, growing by 25% over last year and reaching $2.5 million in this quarter.

In terms of balance sheet strength, our cash level continued to grow throughout 2011. We ended the year with almost $50 million in net cash, a very strong level for a company of our size. This is a very important asset for us, providing us with a substantial level of working capital and financial flexibility.

Beyond its intrinsic value, it places us in a position of strength and demonstrates our stability over the long term when we market to customers. It also enables us to continually invest in our business and market leadership, as well as take advantage of opportunities as they arise.

Our strong revenue growth in 2011 was made up from an increasingly diversified product line, as we experienced sales growth across our entire product range, both from the long-established as well as from the newer product lines. All saw strong market traction and momentum during the year.

Our growth was also driven by strong order momentum from a broad range of all customers in all our target markets. We continued to diversify our revenue sources in 2011, with more customers in our mix. Our substantial growth is [due] to our correct read of the market trends and needs over the years, while building a differentiated positioning. Our strategy of delivering the right technology and products to fast-growing industries, while developing long-term relationships with all players, including the industry giants, has been highly successful. This underlies my belief that we will continue to grow strongly ahead of our markets as we move into 2012 and beyond.

The fundamentals of our industry remain very strong, built on the continued world-wide grow in Internet, video and data traffic. In addition, the cloud computing and virtualization trends over the past few quarters continue to grow fast, as evidenced by the strong growth in sales by the companies in those sectors.

Another trend driving increased bandwidth utilization is the on-the-go connectivity from smart phones and tablets, as well as the around-the-clock bandwidth-hungry apps, which are becoming ever more prevalent. All this is driving a growing demand for increased capacity, both mobile and fixed, which require significant network infrastructure buildouts and investments. As you can imagine, our customers that supply the infrastructure to support these trends continue to accelerate their sales into this industry.

Our strong growth ahead of our industry is driven by the market's need for robust connectivity and BYPASS adapters and the emerging demand for innovation in network appliances. We also continually sell a broader range of products to a larger number of customers, and this ongoing trend underlies our belief that our sales will continue to exceed the growth rate in our end markets during 2012.

2011 was another good year in terms of design wins, particularly with regard to the quality, and more importantly the long-term potential, of each new customer that we brought. I would like to discuss just three of them in particular. In January, we began supplying three additional products to one of our major customers, a leading provider of virtualization solutions. This customer was already ordering significant volumes from us, and adding these three new products greatly increased their scope of business with us in 2011.

This is a classic demonstration of how we continue to leverage our strong relationships with all our customers, leading to expanding sales with them. We do this by selling more products to existing divisions that we already work with and achieving new design wins with other divisions. This enables us to grow our sales strongly with quicker turnaround and at relatively low sales and marketing expense.

In July, we announced an important design win for our external intelligent BYPASS switch with a leading industry player. The IBS product line is an important product for us, and one of its most important attributes is how we have expanded our total addressable market. We are seeing strong market interest, and this win is a confirmation for IBS's potential to generate significant revenues for us over the coming years.

This win also demonstrates that all our new product lines have significant value growth potential, each of which has seen excellent market traction in 2011.

Most pointedly, in 2011 was the success of the SETAC. 2011 was very much a critical year for SETAC, and we saw well ahead of plan growth for our strategic SETAC product lines, growing revenues five times over that of 2010. Also, I think that saying it is -- the market has warmly received our solution. Throughout 2011, we had a number of SETAC wins, but most notable for us as a Company was the design win in October with one of the world's largest networking companies. This industry leader has standardized on the use of SETAC in setting up its network appliance product line.

The sheer size of this company, combined with the fact that they are standardizing with SETAC, means that the relationship offers us almost unlimited potential for sales growth over time. And as an industry trendsetter, this customer's standardization on our technology and SETAC concept is a groundbreaking achievement. It is a true demonstration of market acceptance and that our SETAC solution is becoming a natural choice for the industry.

Looking ahead, our strong and stable customer base of over 75 OEMs, many of whom are global leaders in their industries, as well as the yet-to-be-penetrated customers in our industry, remains a gold mine of significant growth potential for us.

With continued strong demand for all our product lines, exciting strategic wins with some of the industry's most important players and an extensive and growing pipeline of potential sales, we have never been better positioned. Our business is in the best situation it has ever been in, and we are primed for continued growth, which we believe will be ahead of our end markets in 2012.

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 fourth quarter of 2011 were a record $11.1 million, a growth of 12% compared with revenues of $9.9 million in the fourth quarter of 2010. Sequentially, our revenues grew by 11% from $10 million last quarter. Revenues for the full year of 2011 were at a record $39.6 million, growing 30% compared with $30.4 million as reported for 2010. I would like to emphasize that over the last two years, our revenues almost doubled, growing by 93%.

In 2011, we continued to diversify our revenue sources. We only had two 10%-plus customers in the year, which amounted to 23% of our revenues. Note that in 2010, we had three customers which were 10%-plus customers, amounting to 36. -- 36% of revenues.

Our geographical revenue breakdown for the year was as follows -- North America, 75%; Europe and Israel, 13%; Far East and Asia-Pacific, 12%. And our revenue split between BYPASS and non-BYPASS for 2011 was BYPASS, 51%, and non-BYPASS, 49%.

I will be presenting the rest of the financial results on a non-GAAP basis, which excludes the non-cash compensation expenses in respect of options granted to employees and directors. For the full reconciliation from GAAP to non-GAAP numbers, please refer to the press release we issued earlier today.

Gross profit for the fourth quarter of 2011 was $4.7 million, representing a gross margin of 42.6%. This is compared with $4 million, or 40.8% of revenue, in the fourth quarter of last year. The gross margin does vary between quarters, mainly as a result of the specific mix of products sold during the quarter.

Gross profit for 2011 was $17.2 million, representing a gross margin of 43.5%. This is compared with a gross profit of $12.9 million, or gross margin of 42.6%, for 2010.

Operating expenses in the fourth quarter were $2.1 million, or 19.4% of revenues, compared with $2 million, or 20.6% of revenues, in the fourth quarter of last year.

For the year, our operating expenses were $8.3 million, or 21% of revenues, compared with $6.8 million in 2010, or 22.4% of revenues. As you can see, our revenue grew at a faster pace than our expenses throughout 2011, and this is a solid indication of the inherent leverage in our business model.

Operating income for the fourth quarter of 2011 was a record $2.6 million, or 23.2% of revenues. This is a 29% increase over operating income of $2 million as reported in the fourth quarter of 2010, or 20.1% of revenues.

For the year, operating income was a record $8.9 million, or 22.5% of revenues, compared with $6.1 million in 2010, or 20.2% of revenues, a growth of 45%.

Fourth-quarter 2011 net income was a record $2.5 million, or 22.6% of revenues. This is a 25% increase compared with a net income of $2 million, or 20.3% of revenues, in the fourth quarter of last year.

Earnings per diluted share were $0.36 in the quarter compared with $0.29 in the fourth quarter of last year. Full-year 2011 net income was a record $8.7 million, or 21.9% of revenues, compared with $5.9 million, or 19.6% of revenues last year, representing growth of 46%. Looking at the last two years, our net income has tripled. Earnings per diluted share for 2011 were $1.24 compared with $0.86 for 2010.

Now turning to the balance sheet, as of December 31, 2011, the Company's cash, cash equivalents, bank deposits and marketable securities totaled $49.2 million, or $7.10 per outstanding share, up $2.1 million compared with the end of the third quarter of 2011 and up $3.7 million compared with the end of 2010.

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

(Operator Instructions) Ken Nagy, Zacks Investment Research.

Thanks for taking my call. Just curious, in regard to SETAC, have you seen strength across all market segments, or has there been specific strength in one area?

Mr. Green, are you there?

Sorry. Yes. Go ahead.

Okay, SETAC has been strong since its beginning mostly in the security business segment, and this is the way that it is even right now, even though we do see that it goes beyond the security market. But the security markets were the first, I would say to adopt SETAC.

Now, this is not surprising, because the security market is the main one where there is -- the fact that the I/O ports are at the front and are modular very important to this segment, sometimes more than the other segments. Because the other segments, they still need to have disks in the front, et cetera, while the security segment is only interested in the I/O ports. So our SETAC is following this trend as well.

Great. Thank you.

Amit Dayal, Rodman & Renshaw.

Thank you. Congrats on the strong quarter. In regards to the cash, $50 million, there is a significant buildup. Are there any plans or any thoughts on what might that be applied for in the near term?

It is a little bit difficult to define the words near term, but we are definitely looking -- continuously looking for opportunities in the market where this cash would become important for us, of course.

As I've said in the past, we will not be doing any transaction using this cash -- any and all cash -- just for the purpose of using the cash. But we are active in the market looking for such opportunities. So this is what we are planning right now. We will continue to look for such opportunities and will take advantage of the cash that we have should we find one.

Perfect. And it regards to setting expectations for the next 12 months, can you provide us with some color on what pace of growth business is building up at? Is it potentially in line with what you saw in 2011, faster or slower? Just some sense of where business is today.

It is a little bit difficult to say whether it would be faster or slower. But what I can say -- and I would like to emphasize that again -- is that we believe that we would grow more than our markets are growing, because our growth is actually based on two independent, I would say, parts. The first part is the market. If the market continues to do good, then we would grow with the market, because all our customers are continuing with us. We don't have any concern about customers not continuing with us, which is why as long as the market grows, we will grow with them.

On top of that, we are selling more products to these customers, we are selling to more divisions of the current customers, and we will get wins with new customers as well. So that means that we believe that we would sell over what the market is doing and that would continue next year as well.

In terms of the product mix for 2012, do you think segment-wise or geography-wise we should see similar trends?

I think SETAC will grow, just like we've said. I believe that our new products are being successful, so I believe that SETAC will grow. Obviously, the percentage of the 10-gigabit products will grow. So I think that -- I mean, geographically, maybe -- we are still pushing our chances in China and in Japan. But we are growing in all continents and all territories, so I'm not sure that we would be able to see any difference in this trend, even though there is a chance that the Eastern territories would contribute a little bit more.

From a product perspective, just like I said, I believe that the new products, what we currently define as new products, including and mostly SETAC, will have a higher percentage within our product mix compared to what we are having today.

Is there any cannibalization in terms of your new products versus the old products?

It depends on the kind of new products. Let me give you an example. 10-gigabit, so with that gigabit, you may say that eventually there would be some sort of cannibalization, because eventually 10-gigabit will start to replace the 1-gigabit. Right now, we are not yet seeing that very much, but that is obviously something which is going to happen. However, when this starts to happen, that we would start selling the 40-gigabits and then the 100-gigabits. So the new technologies are always helping us to increase our sales.

In the external BYPASS switches and in the SETAC, I don't see any cannibalization. I would say that in SETAC, sometimes -- I wouldn't even say that. In SETAC, we're selling both SETAC kits and modules. And one may argue that the modules are actually replacing cards, but actually with SETAC, we are coming to market segments that we didn't sell at all before, so eventually it would be added sales rather than cannibalization.

And just the last question on that same point. How much of a difference in margins do you see in old products versus new products?

There are some products that we would see a little bit higher margins and some other products that we will see a little bit lower. Overall, I believe that we would say more or less with the same margins possibly improve them a little bit; but I don't think there would be any dramatic changes.

Okay. Thank you so much.

Robert Sussman, [Bentley.]

Good morning. I noticed that your inventories year to year are up 37%. Is that because of the strong order book that you had coming into this year, or are you accumulating inventory for some other reason? Can you discuss that?

Yes. Well, first of all, obviously our inventory is coming up, and that is natural considering the fact that our revenues are coming up as well. Yet, in order to be accurate in my response, I would say that the specific inventory at a specific point in time is not always something that can be directly related to either increased sales or any other business parameter. That is because a significant part of our inventory is based on how accurate we were in selling exactly to what we had forecasted whether sales to something that we didn't forecast the day before. And this could be different between various quarters.

So while overall, obviously, the increase of inventory reflects the fact that we sell more and that we plan to sell more, but it is not as if at any specific point you could take the inventory and calculate of that how much we plan to sell or something like that. There are other parameters which go into that as well.

Okay. Second question is what percentage growth rate do you expect for the markets that you serve this year? I know you've indicated you would hope to grow more quickly than the market, but how quickly are the markets growing?

Well, this is -- you could go to a variety of market studies and you would not find one very defined answer on which I would be able to put my finger and say yes, this is the figure, this is how much the markets will grow.

And that is why I described our growth in these terms; because it is very difficult to say exactly how the market will grow, not to mention the fact we are actually talking about several markets here with some differences between them. And that is why what we can say is that we'll be better than the market, because it is quite difficult to provide a number and say this is how much the market will grow.

Okay. Last question. Is there any seasonality to the business?

Okay, well, while we have seen a lot of things happening, I cannot ignore the history itself. The history was that the fourth quarter was always -- not always -- but in the last years at least has been the best for us, and let's say, many times the first quarter hasn't been as strong as the fourth year. So this is not something which could be ignored.

I'm a little bit hesitant to say that we have seasonability, because sometimes -- I remember there was one year where we received several more orders in the first quarter, so it is not always like that. But statistically, I would say looking backwards that this is what happened.

Okay. Thank you very much.

Marcel Herbst, Herbst Capital Management.

Thanks for taking my question, and congratulations to you on best quarter or ever. How are you doing in terms of market share, and has anything changed in the competitive landscape?

Well, in terms of market share, so once again, one needs to distinguish between the various product lines because the situation is not the same in there. So as long as we are talking about server adapters, which are not -- I would say not BYPASS or do not have any unique features in them, then -- as you know, in that market, the market leader is actually Intel, so our market share is not that high.

I believe that it is improving even though Intel is there because more and more customers are leaning towards -- even when they are talking about standard costs, they need more connectivity and more throughput, which is why they are taking adapters which are towards the higher end, which Intel is not, I would say, interested in.

If you go to the other part of the server adapters, which is the BYPASS cards, then I would say that our market share, once you define it just as a market share, is very high right now. And actually what we are trying to do is to move customers from different configurations. It is not just competing with the card against card and getting a market share, but rather persuade customers to change their configurations into configurations which would include these BYPASS costs, rather than have them on board or rather than have some sort of a different architecture.

I would say that in SETAC, for example, considering, I would say, hardware appliances rather than standard servers as our competitors, then our market share right now is still very small, which actually indicates the potential that we have to grow forward. Because SETAC is actually competing not with other companies purposing SETAC, but rather with companies purposing customized appliances, rather that our approach, which is based on standard servers which use the SETAC case. So with that in mind, still our market share within these appliances is small, which is just an indication that we have the potential.

In the external BYPASS switch, the situation is also different, because we are focusing on the OEM portion of this market. And while the other competitors are mostly into the end-user market, we try not to compete in the end-user market. So if you look at the overall market for these components, then we don't have a significant market share. But within the OEM, I think we are getting traction and we are improving significantly. We did improve significantly in 2011 and hopefully we will continue with that moving to 2012.

Thank you. That was very helpful. Speaking of SETAC, how is your pipeline looking overall, and are there any significant deals that might come through this quarter?

The sales cycle and evaluation and everything, (inaudible) is long, longer than what we used to have with the cards. And even with the cards, it was not that short. So I cannot speak about the quarter.

But definitely, we have a significant pipeline, including several, I would say, market leaders which we are hoping to be able to achieve soon. How soon? I'm not that sure; it is also a matter of priority within these giants that you are working with.

Also as you know, Sandy Bridge servers would be released to the market by the beginning of 2012. What we think is that would be the time that companies -- several potential customers will start to evaluate SETAC-based solutions, but it is going to take time.

It seems that SETAC has adopted at a quicker pace than you originally thought it would. Do you think SETAC could become something of an industry standard and have an even bigger potential than you originally thought?

First of all, you are right that our performance with SETAC was better than what we thought. It could be more than what we thought. I mean, we've seen some developments around SETAC, I would say, which were actually not even related to what we thought about SETAC. But rather, the concept of using a kit to make a standard server perform like something different seems to be working not even only in the case of front I/O, but rather in the case of [SSDs] and several other things like that. And hopefully, we will be able to add to our revenues out of that as well.

So while -- I didn't -- I know that I did not respond directly to your questions, because we do believe that SETAC will be a significant factor in our growth, and you are asking me whether it could be even bigger than what we thought. But we do believe that it is going to be very significant anyhow; whether bigger or not, it would be very significant.

Now, on the SETAC deal that you announced in January with one of the top server vendors that is reselling it through their OEM group, can you give us an update on the progress that your partner is making there?

Okay. I would say that we have got several deals which are using this concept right now. But at the moment -- I mean, otherwise, of course, we would've announced that -- we have not received through that avenue of any major deal. But we did have and we are selling SETAC solutions to several customers which are using these services and this concept.

Okay. Now you also mentioned earlier about Asia and pushing for China and Japan. Can you give a little bit more detail on that, on how the prospects are developing for you there?

Okay. First of all, let's distinguish between China and Japan, because these are different things. I think that in China, we have been able, I would say, to get wins and get them more or less stable, I would say, for several important companies there.

But it is not the way -- the way that we work there is not very similar -- is not exactly the same, let me put it this way, compared to the wins that we have in the United States or in Europe, in terms of everything is much more project-oriented. Which is why the stability level is more important than -- we feel that right now -- let me put it this way -- up until now, we could never be sure whether, okay, so we got an order here, we got an order there. Does that mean that we will continue to get orders from these customers, or is it just a one-time project or something like that?

And I think that slowly, customers, even in China, I would say, become loyal. Because up until now, it was always price negotiation again and things like that. Right now, with many of the customers, it is no longer like that. So we start to feel the stability of the fact that things are happening there.

On top of that, we have some prospects there which we believe would happen -- would materialize into wins in 2012, which is why I believe that the growth there may be even more than the average growth.

In Japan, I think that we have announced even -- not too late ago -- that was October, I believe --

Two months ago.

Yes, two months ago, something like that -- another win with another Japanese giant. And I think that in Japan as well --Japan, as you may know, everything moves very slowly in terms of being qualified, in terms of moving to other products, et cetera. Everything moves very slowly.

But the fact is that up until now in Japan, we had only one major customer. Now we have two. And I think that's important, because there is a momentum there, which develops slowly, which is the Japanese right, I think, doing everything slowly and carefully, but also an advantage. Because once it moves, it moves, and now we have two such customers in Japan, major customers; we have more, but two major customers, rather than one, which is what we had until this announcement.

That's great to hear. Moving on to your redirector solution, in the past, you mentioned that several customers are evaluating it and that you are potentially working on a 10-gigabit version. Do you have an update on the progress there?

Okay, let me tell you a little bit about the redirector. First of all, I would like to be honest and say that with that Redirector, we were hoping to get more sales, more quickly than what we actually got. So things, evaluations, et cetera, took longer than what we thought. It seems that indeed in this case of the Redirector, there is a need to educate the market, if you may say so, because this solution was kind of unique, not something the market was used to. And indeed, the developments there were slower than what we thought.

And by the way, we had first developed -- the first product was a 10-gigabit redirector, but it was based on an order Intel chip. While now we have released just lately a newer Intel chip with the 10-gigabit (inaudible).

I think that we are in a better position right now. I think that we are getting -- after quite a long time, we are getting to a position where more customers will use the redirector. I think that we have seen, I would even say, a step function in the level of seriousness in which the customers are looking at the redirector, the level of questions they are coming to us with, the level of, I would say, consent to take the redirector and actually test it.

Because testing the redirector is not as simple as testing any one of our other products. It would require our customers to invest work in order to test it. And I think that maybe the second half of 2012 we would see some breakthroughs with the redirector.

Okay, great. And final -- my final question. Can you break out the percentage of sales this quarter that came from each 10-gigabit, encryption and SETAC?

Yes, SETAC in the quarter was about 11%; while for the entire 2011, SETAC was about 9%. Concerning the 10-giga, there was an increase in the quarter -- in quarter four, total sales from 10-giga was 34%. And for the entire 2011, it was 27%.

And encryption cards?

Encryption cards, also there was an increase throughout the last quarter. In quarter four, about 11%; while for the total for the entire year, it was 7%.

Excellent. Thank you very much.

Jeffrey Meyers, Cobia Capital.

Thanks a lot, guys, and congratulations on a nice quarter. Could you talk a little bit just about the pipeline for the external box? And also, if you have the numbers for Q4 and the year, what percent of revenue the external ones was.

So in terms of pipelines -- in terms of the pipeline, I would say that we have quite a promising pipeline of the external bypass switch boxes. In fact, this is, I would say, a pipeline which I consider to be promising for 2012. Some new customers would probably -- well, probably is -- well, it is a strong word, but still I believe that I could use it -- will probably start using our internal BYPASS switch on top of the customers which are currently using it.

We are hearing from some of our current customers that their potential use of external BYPASS switches for next year would be significantly higher than this year areas. So we believe that it's going to be significant next year. Eran, it is up to you to --.

Concerning the sales in 2011, also regarding this product, a significant increase in quarter four; quarter four was 16%. And for the entire 2011, it was 9%.

Got it. Okay. And then Shaike, if you could just talk a little bit about some of the software work you guys have been doing, like the DNA. First of all, how it's going in terms of being ready as a product. And also just some of the traction you're seeing from some of your customers.

Well, the DNA, the software which improved the performance of actually all our Intel-chips based cards, seems to be something which is very -- causes a lot of interest in the market. We have got -- I mean, I could say that we have never seen so many leads, I would say, in such a short time after releasing something like that. There is a lot of interest in that.

Some of that as already translated into sales. So we have definitely sold cards which use the DNA software with it, and we think that it would be much more than that.

Furthermore, I would like to add that the DNA software is also something which improves the performance of the redirector card as well. So now, we are proposing the redirector card enhanced by the DNA drivers. And that is a part of the reason as to why I am optimistic regarding the redirector in 2012, because the combination of these two seems to be even more promising than just the redirector itself. This is something, it is still relatively new, but I feel very, very good about it.

Now, are you selling cards with the DNA drivers for a higher price or are you just using them to get into some places where you weren't previously?

We are selling these cards with a higher price.

Got it. Okay. Thanks a lot, guys.

Don McKiernan, Landolt Securities.

Thank you, and congratulations on a tremendous quarter and year. You talked earlier about a deal in October. Did you see any revenue from that deal in the fourth quarter?

Yes, even though they were not very significant, but we did.

And how would you characterize the revenue opportunity in 2012 from this customer?

I think that it will be ramping up, and become -- just like we've said, I believe, in the press release, this would be something which would ramp up -- [discussing] the specific costs that are part of this deal by itself to about $1 million. Hopefully for the longer term, we are looking at this customer to give us more opportunities, rather than these cards that we are selling to it right now.

Okay. And an update on the patent application for SETAC. First, where is it, kind of where does it stand? And secondly, is it really critical to your business opportunity with that product line?

Well, first of all, it is still in process. We've been asked some questions, responding to them. Second thing is that while at the beginning that we felt that this was critical, right now it is not that critical. I think that the industry is not aware of the fact -- both the industry and the competition both are now aware of the fact that SETAC is Silicom's. So right now, I don't think that the patent is so important to us, because we are identified with SETAC by the industry as well as by the competition. So I'm not so -- it is not that much of the issue to us right now. SETAC is ours and everyone knows it already.

How many customers for SETAC and how many are in the pipeline?

How many customers? I don't have the accurate number, because there are several small customers in there. I would say that we have 15, something like that, customers. And there are many in the pipeline, at least a similar number.

All right. Thank you.

Walter Ramsley, Walrus Partners.

Thank you. Congratulations on a great year. That was terrific. I have a few questions. In the fourth quarter, was the book-to-bill ratio greater than one?

Book-to-bill ratio. Well, I believe that it was -- we do not calculate it exactly like that. It was approximately one, let me put it this way, because I'm not sure about the real calculation.

Let me add something to that. The reason that we are not calculating that very much is because in the past, it did not seem to be that important. Because the orders that we are receiving are not very long-term orders. It is not as if our quarter right now is covered or even becoming close to be covered by the orders that we have received. So in most cases, most orders that we receive are coming at the last month of the quarter. And that is why quarter-wise, the book-to-bill ratio is not that important to us.

Okay. The backlog at the end of the year, do you have a number for that?

It is kind of the same kind of the response to that. I mean, we did not consider the backlog at the end of the year to be an important parameter. We've never given any backlog data up until now, because it is not important; what we see at the beginning of the quarter has never been important to us. The important month of the quarter is the last quarter.

Okay, I understand. Just kind of wondering in general then if the macroeconomic situation has caused your customers to be a little more cautious in their ordering patterns. Have you seen anything like that?

Indeed, this is something that would not be observed by backlogs, but rather at the actual orders that we received in the last quarter. And obviously, it is difficult for us to tell, because we are down in the food chain.

What we can tell you is that we've received enough orders to generate revenues which are record revenues of all time. How exactly that correlates with the macro economy, I cannot say for sure. I can say that we have been good, as you could see, in the last quarter, but not necessarily it is correlated with the macro economy.

I see. Okay. Looking forward to the year ahead, do you have any budgetary plans for increasing your sales and marketing spending or your R&D spending, or are you going to hold them relatively consistent?

We do not have any plan to dramatically increase any of these expenses. As the Company grows, we do increase at a certain level both the R&D expenses and the sales and marketing expenses as well. Nothing dramatic, but I believe that as long as we go ahead with our plans, selling more, then the expenses will grow as well.

Okay, and then just one final thing. The income tax rate for the year was only 7.5%. What do you think it is going to be this year?

You mean next year, in (multiple speakers) --

Well, right, 2012.

Okay, so first of all, as you said, the tax percentage in 2011 was around 7%. In 2012, it will be higher than that. I would say that it would be around 10%.

Okay. Thanks very much for taking the questions. Congratulations again.

[Ronald Mullins,] Segmark.

In view of the recent sales expansion and the expected future growth, plus your longer-term hope to reach $100 million in sales, are you thinking of possibly adding another site for manufacturing or assembly in the United States or China or some other area?

Well, let me put it like that. Silicom is using subcontractors for, I would say, a significant portion of the manufacturing. And these subcontractors that we are using, we are using more as we grow. Now these subcontractors, some of them are in the East.

I do not see a situation right now where we would add a location like that in the United States. And in any event, I do not see ourselves making such allocation as Silicom's facility, but rather using more subcontractors in these areas.

Thank you.

(Operator Instructions) [George Mirama.]

Good morning. I had a question about your visibility. Given that you have been increasing your -- you have more Tier 1 customers and more SETAC customers, does that over time improve your visibility of quarter-to-quarter or year-to-year revenues?

I think that the type of customers is exactly the same type of customers, and I don't think that it would improve our visibility. What is helping us, to a certain extent -- once again, not within a quarter, but as an overall situation -- is the fact that we are having more and more wins. I mean, more products, more customers, more divisions within the product. And the larger the mix, the less we are exposed to a risk of having problems with any specific customer.

So overall, I think that I feel much better in terms of, yes, we will grow as long as the market grows and even better than that. But in terms of from a quarter to quarter, I don't think it is going to make a change, a difference.

Okay. And from an earlier question, did I hear correctly that you have something in the order of 15 customers that are evaluating SETAC in the pipeline?

Yes, something like that.

Something like that, okay.

(multiple speakers) they are in the pipeline. It is not -- I said that we have 10 to 15 customers using SETAC already. And I said that there was a similar number of customers which are in the pipeline right now.

Okay. And with the OEM server platform refresh cycle in 2012 with new Intel chipsets, do you expect that to create some movement in SETAC? And also what sort of SETAC growth projections do you have for 2012?

As I said, I believe that this change would encourage customers to start evaluations. Because up until now, there were several customers who said, okay, well let's wait for the time that Intel releases Sandy Bridge, and that we could really buy Sandy Bridge platforms and servers and do that.

So I think that this would make these customers who were interested in SETAC take -- for some of them -- take the first steps and move ahead into evaluation. As I've said before, the sales cycle is quite long. So what kind of percentage growth in SETAC sales we would see in 2012, it is a little bit difficult to predict right now, but I think there would be a positive impact for that as well, for sure.

All right. Thank you, Shaike.

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 (inaudible) website, (inaudible). 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 the aim of bringing you another record year with the continued ultimate goal of increasing value for shareholders over the long term. We look forward to hosting you on our next call in three months' time. Good day.

Thank you. This concludes Silicom's fourth-quarter and year-end 2011 results conference call. Thank you for your participation. You may go ahead and disconnect.