Silicom Ltd (SILC) 2025 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Silicom second-quarter 2025 results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

You should all have received by now the company's press release. If you have not received it, please contact Silicom's Investor Relations team at EK Global Investor Relations at 1-212-378-8040, or view it in the New's section of the company's website at www.silicom-usa.com.

I would now like to hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin, please?

Thank you, operator. I would like to welcome all of you to Silicom's quarterly results conference call. Before we start, I would like to draw your attention to the following Safe Harbor statement.

This conference call contains forward-looking statements. Such statements may include but are not limited to anticipated future financial and operating results and Silicom's outlook and prospects. Those statements are based on management's beliefs, expectations, and assumptions which may be affected by subsequent business, political, environmental, regulatory, economic, and other conditions and are subject to known and unknown risks and uncertainties and other factors, many of which are outside Silicom's control, which might cause actual results to differ materially from expectations expressed or implied in the forward-looking statements.

These include but are not limited to Silicom's increasing dependence for substantial revenue growth on a number of limited customers, the speed and extent to which Silicom solutions are adopted by relevant markets, difficulties in the commercializing and marketing of Silicom's products and services, maintaining and protecting brand recognition, protection of intellectual property, competition, disruptions to manufacturing and sales and marketing, development and customer support activities, the impact of war in Israel and in Ukraine, rising inflation, changing interest rates, volatile exchange rates, as well as any other continuing or new effects resulting from the COVID-19 pandemic and global economic uncertainty which may impact customer demand through customers exercising greater caution and selectivity with their short-term IT investment plans. The factors noted are not exhaustive.

Further information about the company's business, including information about factors that could materially affect Silicom's results of operations and financial conditions, are discussed in Silicom's annual report on Form 20th and other documents filed by the company, and that may be subsequently filed by the company from time to time with the Securities and Exchange Commission.

Therefore, there can be no assurance that actual future results will not differ significantly from anticipated results. Consequently, investors are reminded not to rely on these forward-looking statements. Silicom does not undertake to update any forward-looking statement as a result of new information or future events or developments except as may be required by law.

In addition, following the company's disclosure of certain non-GAAP financial measures in today's earnings release, such non-GAAP financial measures will be discussed during this call. Such [non] 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 are 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 the financials discussed in this conference call will be on a non-GAAP basis.

Non-GAAP financial measures disclosed by management and provided as additional information to investors 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 a substitute for GAAP. A full reconciliation of non-GAAP to GAAP financial measures are included in today's earnings release, which you can find on Silicom's website.

And with me on the line today are Mr. Liron Eizenman, President and CEO; and Mr. Eran Gilad, CFO. Liron will begin with an overview of the results followed by Eran who will provide the analysis of the financials. We'll then send the call over to the question-and-answer session.

And with that, I would now like to hand the call over to Liron. Liron, please go ahead.

Thank you, Kenny. I would like to welcome everyone to our conference call to discuss the results of the second quarter of 2025.

We are pleased with the progress made in the second quarter of 2025 and happy to report another quarter of execution ahead of our strategic plan, including strong design win momentum, success across all our product lines, and excellent cash flow.

Furthermore, we are pleased with our design win momentum which is tracking ahead of our expectations. Since the beginning of the year, we have achieved five major new design wins with the important new customers as well as existing ones, building an impressive mid- to long-term pipeline that puts us with close reach of our goal of seven to nine design wins for 2025 as a whole. We see design wins as the most tangible indicator of our progress as well as our breadth and depth of our design win opportunity fund.

The renewed focus on our core product lines coupled with deep relationship with our customers and potential new customers has created a solid pipeline, positioning us for future growth. We expect to continue to convert this pipeline to further design wins throughout 2025 and beyond.

We are successfully advancing and meeting our milestones with our various customers and projects and are increasingly optimistic about our ability to achieve double-digit revenue growth in 2026 and beyond, thereby delivering significant value for our shareholders.

In terms of the financial results for the quarter, we delivered revenue of $15 million at the midpoint of our guidance range. Our balance sheet has remained very strong. And during the quarter, we increased our cash and equivalents by $3 million. At June end, our working capital and marketable securities totaled $116 million, including $80 million in cash, deposits, and highly rated bonds with no debt, representing approximately $20 per share. This ensures we can maintain adequate investment in our business and growth engines without compromise going forward.

In the second quarter, we secured three significant design wins, one with a Fortune 500 cloud-based service provider for our FPGA SmartNIC; one with a global network test equipment leader for our 100 gigabit NICs; and one with a US-based edge networking provider for our advanced edge system. The three demonstrate the breadth of our product portfolio as well as the depth of our customer relationships and our ability to foster new ones.

Importantly, those wins span across all our major product lines: [FS] systems, FPGA SmartNICs, and high-performance NICs, reflecting the relevance of our solution across diverse market [needs]. This diversity of new design wins across product categories and customer types is a key factor in building a strong and balanced growth foundation.

A recent design win with a US-based edge networking provider demonstrating the strength of our reputation as a trusted technology partner. The customer selected our customized edge device to enhance scalability, security, and efficiency. Initial deployments are expected by year end 2025, with full ramp up in 2026. This customer is also exploring multiple additional projects, each with $1 million plus potential in annual revenues, and another customized edge product for a separate use case with the potential of $7 million at full run rate.

Following a year-long technical evaluation, we achieved a major design for our FPGA SmartNIC solution with a new Fortune 500 cloud-based service provider in North America.

This win reflects the superior performance and reliability of our technology. Initial deliveries are planned for late 2025, with full ramp up throughout 2026 and an annual revenue potential of $4 million. This design win position us as a strategic technology partner to one of the most influential players in the cloud services and industry. We view this as just the beginning of a broader relationship with opportunity to supply additional components and systems on a global scale.

We also achieved a new design win with a global leader in advanced networking testing equipment and long-standing customer of ours, selecting a 100 gig NIC for their next generation platform. This expands our relationship with this important customer as we now provide both cards and systems, positioning us to participate in the majority of their future hardware tenders. Initial purchases orders have been placed with mass deployment expected in early 2026 with a revenue potential of $2.5 billion at full ramp up.

This win underscores the innovation and reliability of our high-performance NIC portfolio and our abilities to meet stringent performance and tight cost requirements. Customers like this form the backbone of our long-term growth strategy, building steady long-term relationships that lead to multiple revenue streams down the road.

Each of those wins represents a combination of many months and even years of work. They reflect the core of our strategy, building new and deepening long-term relationships that evolve into multiple high-value engagements, creating reliable and diversified revenue streams for a broad range of Silicom products. Beyond their own recurring revenue potential, those wins open the door to additional opportunities with the same customers and provide strong referrals for new customers, further strengthening our position in key markets.

Together with the growing pipeline of potential customers evaluating our products, those achievements strengthen our confidence in meeting our target of seven to nine design wins during 2025. While their financial impact in the current year will be modest, they lay the groundwork for significant double-digit growth in years to come, with the potential to exceed our strategic goals sooner if current opportunities ramp up faster than expected.

Our pipeline of opportunities that the input of our design win funnel has never been broader with opportunities across all our product lines, including [ad] systems, SmartNICs, and FPGA spanning both new and existing customers across multiple industries. We believe that in the coming years, we expect to see more of those opportunities transform into design wins while continuously adding new opportunities at the entry point of the funnel.

I urge you to review our investor presentation, which includes examples of opportunities in our pipeline as well as examples of those that have successfully passed through the funnel and become design wins. We believe that this dynamic process will continue to accelerate.

Considering the strong pipeline, growing design win momentum, and giving a strong execution on all aspects of the strategy, we are well on track and even performing ahead of our expectations. Our overall goal is to create significant value for our shareholders with EPS of [about] $3 on revenues between $150 million and $160 million. A faster than forecasted deal closure or ramp up of ongoing projects may help us accelerate the timeline, and we are fully focused on making that happen.

Growth for full-year 2025 expected to be in the low single digits with a double-digit annual growth rate materializing gradually from 2026. We expect that revenues for the third quarter of 2025 will range from $15 million to $16 million.

In summary, we are pleased with our progress. We are executing ahead of our strategic plan and showing strong design win momentum supported by a robust pipeline across all our product lines and excellent cash flow. With a strong balance sheet, a proven track record of design wins with top tier customers, and an experienced, highly dedicated team, we are confident in our ability to continue executing on our strategic plan.

As such, we are even more optimistic about our ability to achieve double digit revenue growth in 2026 and beyond, thereby delivering significant value for our shareholders. We remain focused on creating value for both our customers and our shareholders. We look forward to updating you on our progress as we move through the second half of 2025.

With that, I will now hand over the call to Eran for a detailed review of the quarter results.

Eran, please go ahead.

Thank you, Liron, and good day to everyone. Revenues for the second quarter of 2025 were $15 million, 4% ahead of the $14.5 million reported in the second quarter of last year. The geographical revenue breakdown over the last 12 months was as follows. North America, 74%; Europe and Israel, 16%; Far East and the rest of the world, 10%. During the last 12 months, we had one 10% plus customer, which accounted for about 15% of our revenues.

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 and RSUs granted to directors, officers and employees, taxes on amortization of acquired intangible assets, as well as lease liabilities, financial expenses.

For the full reconciliation from GAAP to non-GAAP numbers, please refer to the press release we issued earlier today. Gross profit for the second quarter of 2025 was $4.8 million, representing a gross margin of 31.9% compared to a gross profit of $4.3 million or gross margin of 29.7% in the second quarter of 2024. While I note that our short to midterm expected growth margin range remains between 27% to 32%, we are very pleased with achieving a gross margin at the higher end of this range ahead of our strategic plan model.

Operating expenses in the second quarter of 2025 were $7.2 million compared with $6.7 million reported in the second quarter of 2024. Our operating expenses in the quarter were higher than expected due to the relatively weaker US dollar. The currency in which we report versus the Israeli shekel and the Danish krone, the main currencies in which a large portion of our expenses are generated.

Operating loss for the second quarter of 2025 was $2.4 million compared to an operating net loss of $2.4 million as reported in the second-quarter 2024. Net loss for the quarter was $2 million compared to a net loss of $0.9 million in the second quarter of 2024. Loss per share in the quarter was $0.35. This is compared with loss per share of $0.14 as reported in the second quarter of last year.

Now turning to the balance sheet. As of June 30, 2025, our working capital and marketable securities amounted to $160 million, including $41 million in high-quality inventory and $80 million in cash, cash equivalents, and highly rated marketable securities with no debt.

That ends my summary. I would like to hand back over to the operator for the questions and answers session. Operator?

(Operator Instructions) Ryan Koontz, Needham and Co.

Great, thanks, and nice updates on the design wins. I want to ask about some of your end markets here. Some of what we have -- the biggest one appears to be the security market, and that's a key driver for several of your design wins across several your sectors here.

Are you seeing changes in that market in terms of share shifts among your customers or this recent big acquisition that went down for Palo Alto for cyber -- yeah, do you see consolidation or are any of those affecting your opportunities, either improving or declining opportunities there.

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

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

I mean, yeah. The FY results last night, I think is a very good maybe reference to see that many, many companies are looking at hardware more and more, and we have many new products coming up for this market. If it's post quantum [ciphers], which is a very important thing that will become basically mandatory in the near future, and we have a solution for that to accelerate it over hardware solutions. In the [sassy] market we have many customers as well, and you see this networking plus security market exploding pretty much.

Everyone needs hardware, different type of hardware, more acceleration on the hardware side as traffic becomes more challenging, encrypted, and quantum encrypted in some cases. We see needs for special switches and we're definitely working in that area to have interesting products later this year. So we see -- there's a lot of excitement for us in this market and the opportunities that will come up. And definitely not only software as we said, definitely on the hardware side for this market.

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

I think it can affect it significantly and we are looking at that market. We already have several products that fit into this market, and we're thinking more and more and seeing that the new AI architectures in training and inference both on the edge and both on the data center requires certain acceleration and certain systems that we are able to build specifically on FPGA.

FPGA could be dramatic here in order to provide solutions that simply do not exist today, and we think we have the right team and the right know-how how to build those products. We're already discussing with potential customers, so this could become significant as well for Silicom.

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

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

(Operator Instructions) There are no further questions at this time. Before I ask Mr. Eizenman to go ahead with his closing stament, I would like to remind participants that a replay of this call will be available by tomorrow on Silicom's website, www.silicom-usa.com. Mr. Eizenman, would you like to go ahead with your closing statement?

Thank you, operator. Thank you, everybody, for joining the call and your interest in Silicom. We look forward to hosting you on our next call in three months. Good day.

Thank you. This concludes Silicom's second-quarter 2025 results conference call. Thank you for your participation. You may go ahead and disconnect.