Silicom Ltd.
Q1 2021 Earnings Call Transcript

Published: 1 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Silicom First Quarter 2021 Results Conference Call. As a reminder, this conference is being recorded. You should have all received by now the Company’s press release. If you have not received it, please contact Silicom’s Investor Relations team at GK Investor & Public Relations at 1 [phone] or view it in the News section of the company’s website, www.silicom-usa.com. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin, please?

[Ehud Helft:]

Thank you, operator. I would like to welcome all of you to Silicom’s first quarter 2021 results conference call. Before we start, I’d like to draw your attention to the following safe harbor statement. This conference call contains 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.

[Shaike Orbach:]

Thank you, Ehud. I would like to welcome all of you to our conference call to discuss our first quarter 2021 results. We are very pleased with the solid and continued year-over-year improvement in our financial results this quarter with 31% year-over-year growth in revenues to $29 million, the second quarter in a row with over 30% growth. It demonstrates that 2021 is on track and the growth we have been planning for and expecting over recent quarters is here. Furthermore, we reported our 65th quarter of profitability with net income of $3 million, up 31% year-over-year.

[Eran Gilad:]

Thank you, Shaike, and hello, everyone. Revenue for the first quarter of 2021 were $29 million. This is a year-over-year increase of 31% compared with revenues of $22.1 million as reported in the first quarter of last year. Our geographical revenue breakdown over the last 12 months were as follows

[Operator:]

The first question is from Robert Sussman of Bentley Capital.

[Robert Sussman:]

Can you give us -- you’ve got all these design wins that have been coming in. And I’m wondering when they ramp to really see a significant sequential increase in revenues, ignoring the component shortage problem. The second quarter is normally considerably stronger than the first, yet your guidance is for the quarter to be relatively flat. So can you talk about the timing of these design wins, including where you are with the 2 CPE design wins? I think one of which has volume, the other one has not started yet.

[Shaike Orbach:]

So I’ll try to respond both about the older design wins as well as the new design wins and also respond a little bit about the quarter. So first of all, I mean, there are no significant news with the older design wins, just like you said. I mean one of them is up and running. We’re still hoping it would grow even more, but right now, I mean, I don’t have any update on that remark. So it is a significant account for us, which is more or less, I would say, at these times flat every quarter, maybe with -- well, I mean, I would say it’s flat right now. The other one is not ramping up as of yet. They have their own issues. I can tell you that we’re discussing it with them. And I would say, well, I mean, it seems as if they would like to ramp up soon, but now we’re seeing that we have these components issues. And I’m not sure whether this really would happen or not because we would not have -- we were not having any forecast from them for the upcoming quarters. So even though they are interested right now, I’m not sure it really is going to happen. So now to the new design wins. The new design wins that we just announced, I mean, in January and February, I think for both of them, we would see revenues this year. And these revenues are supposed to contribute to our growth in the following quarters. And what I would say is that, well, our guidance for the second quarter, even guidance-wise, is a little better than what we’ve actually been able to achieve in the first quarter. And it takes into consideration these new design wins as well as the issues that we’re having from the component shortages. So I would say that if we were not in this situation, we would probably be able to show a little bit more in the second quarter. But overall, I would say that these new design wins would take an impact mostly in the second half of the year, a little bit in the second quarter as well. And still, the second quarter is going to be 30% growth, representing 30% growth year-over-year, more or less.

[Robert Sussman:]

Okay. One short follow-up on that. That’s very helpful. When do you think we’ll start to see meaningful revenues from the 5G wins?

[Shaike Orbach:]

So as I said, I mean, 5G wins, we will start to see revenues from them mostly in the second half of the year. And again, let me say that, I mean, in order to clarify the situation with the shortages as well as the wins. So what we’re telling you for the second quarter is based on what we’re focusing on the one side and what we are having solutions for in terms of the component shortages. So we are, I would say, quite confident. Obviously, there is never 100% confidence, but we’re quite confident that we would achieve these levels for second quarter. For the third and fourth quarter, I would say that this is what our plans are, when taken into consideration the shortages situation. But we’re still hoping we would able to resolve some of these issues. But in terms of revenues, we’re thinking that we would be able to grow due to these 5G wins. That being said, you need to remember that the telcos that we’re talking about are not very predictable or not been very predictable in the past. So it’s not that easy to predict exactly what’s going to happen. And what we are doing is actually averaging our throats on these ways. But based on the information that we’re having right now, these latest 5G wins would contribute, I would say, quite -- I don’t know what the amount would be, but they would not be negligible in the second half of the year.

[Operator:]

The next question is from Alex Henderson of Needham & Company.

[Alex Henderson:]

A couple of questions, if I could. Let me start off with just sort of the trajectory of the growth. You’ve obviously got supply constraints that are impacting the numbers, not only in the June quarter, but I assume that you’re suggesting in the back half of the year. So as we look at the back half, is it a function of the high end of the band to -- is constrained by availability of components and that’s what’s holding it down? And what would be the conditions that would cause the low end of the band? Obviously, with $29 million plus in both the first 2 quarters, the low end of the band seems awfully conservative in the back half. Is it -- would it be decommissioning that would -- or decommitment that would require you to hit the low end of the band? Can you talk a little bit about what your thinking is at either end of the band?

[Shaike Orbach:]

Yes. I mean, I think that taking us to the lower end of the band would be 2 things, mostly decommitting, just like you said, and the other side -- well, once again, when I’m saying decommitting, I’m saying decommitting based on forecasting. So we have forecasts. And based on these forecasts, we believe we would be at the higher end. But if our vendors would decommit or if what would happen, and that happens a lot of time, and that is that our forecast is made out of many accounts. Typically, it never happens 100% or exactly in accordance with our forecast. But because there are several accounts there, some of them are actually lower than expected. Others are higher than expected, and they compensate for each other. So as long as there’s no component shortages, that’s okay because one is low, the other one is high. But now, if one of them is low and the other is high, so the low we don’t get. The high, if we’re not able to deliver because of the component shortages, that would take us to the low end. The high end, I would say, in that case, if everything goes in accordance to the plan, that would be the high end. I mean there could even -- theoretically, there could be a higher end. But I wouldn’t speak about this higher end mostly because of these components issues because if there is sudden higher end right now, it may be very difficult for us to deliver just because of the component issue.

[Alex Henderson:]

So before I get on to my next part of this question, you definitely deserve some credit there for -- Shaike, for having now -- I think, you’re closer to 20 years at the company this year. So you’ve really demonstrated commitment to Silicom. And I think that obviously plays very nicely to the stability of the company’s leadership. So I just wanted to congratulate on that. Going back to the outlook for a little bit. Could you talk about the SD-WAN side of it? And what we’re hearing from other companies is that, obviously, enterprise spending is rebounding quite sharply on a global basis. Moreover, because the dysphoria of people is starting to come back, there’s some incremental spending around campus. And moreover, as that happens, it’s not that 100% of the people are coming back, but a lot of people are staying remote. And that, in turn, is resulting in very sharp increases in traffic growth and -- across what is described as hot networks. And that’s resulted in surprisingly strong spending on campus Edge and data centers. So is that -- does that not translate into incremental demand for your SD-WAN business? And it sounds like that’s going to accelerate over the next couple of quarters. What are you seeing on that side of the business?

[Shaike Orbach:]

Well, we are also seeing increased demand in the SD-WAN space. We’re definitely seeing that. And we’re seeing that from -- both from our existing customers as well as from, I would say, customers which are in the pipeline. And with that, hopefully, we would get very soon. I apologize for having to go through that again. This issue with the component shortages is important this year because it’s not only once we get a PO that it hits us. Sometimes, even new customers, they would like to try and do something. And they would like to try and do something this year, and it’s becoming somewhat difficult. But we definitely see the demand. We definitely see our pipeline thickening. And with everything that we’re trying, with Intel support, et cetera, we’re -- I do believe that we would actually increase our revenues in the SD-WAN space even within this year. But I think that a significant part of that would be pushed to next year. That being said, SD-WAN, even right now, is a major part of our business, I would say. I don’t know for sure, but out of my head, maybe I think it’s flat. I’d rather not say them, but it’s definitely a significant factor in the growth that we’re experiencing right now, which is a 30% growth. So SD-WAN has a significant part in that.

[Alex Henderson:]

Within that context, there are companies that are larger that have more capabilities to do ordering and so forth against a very tight backdrop. Is this -- in your -- are you even at risk here at losing business because of your smaller scale maybe -- cusp people that could be concerned about the outlook?

[Shaike Orbach:]

I think that -- I mean to a certain level, I think that we may not only not be in risk but rather in -- possibly in a better position. And that’s due to the very strong cash position that we are in, which allows us to plan ahead, make some assumptions, go ahead and prepare inventory. And I think that possibly, as long as we were able to read the market correctly, we would be able to win over other companies because I think that one of the secrets to success in here would be to actually make the right decisions in terms of, "Okay. Which components you wanted to buy? Which components you are going to buy right now? Where are you going to use your leverage towards the component companies in order to get more components?" And I think we’re doing that. And I mean a part of that is, obviously, that we’re using our very big, I would say, giant customers to help us in these directions and vendors as well. I mean to give you an example, I mean, we are now in calls with Intel, who is helping us because we’re such a good partner with Intel, pushing some of our vendors. Not only we are pushing the vendor, but rather Intel is pushing our vendors because they have a long-term relationship with them. So I think that we’re in quite a good position in that aspect.

[Alex Henderson:]

I see. Okay. That makes sense. Just going back to the broader subject. If we do -- were to exclude all constraints around supply, would you be looking at a range of growth that is more consistent with the first half than the back half of the year? Or would you expect that you still have some constraints in terms of timing of these larger programs and that it would be sub-20% from the dock house?

[Shaike Orbach:]

What I can say is -- because I didn’t calculate it exactly, what I would say is that if there were no constraints from the components’ perspective, our growth would be faster and at a higher percentage. I don’t know exactly if that would be at the 30%, but I’m sure it would be higher than what we’re -- what it would actually be moving forward because in the second half of the year, these constraints would be, to a certain extent, limiting our growth. Where exactly it would have been ending without any constraints, I do not have an accurate number, but I’m sure it would have been better than what we are predicting right now.

[Alex Henderson:]

Right. Okay. I get the gist of it. Just down below the line. Should we be assuming an increase in the taxes or a continuation of the 15% rate? And then second, can you give any guidance on the interest income line based off of the

[Eran Gilad:]

Okay. I’ll start with your first question about tax rate. Still, it is expected to be in the range of 15%, no change. As to your second question about financial income, this is hard to predict because it is -- depends on the dollar exchange rate, which nobody can know what the exchange rates will be in the future. Assuming no dramatic changes in the exchange rate of the U.S. dollar, I would say that approximately $215,000 to $300,000 is the right range for financial income.

[Operator:]

The next question is from Serge Mascaro .

[Unidentified Analyst:]

Based on quarter and execution, we had a lot of news, the Telefónica white paper, the partnership with Napatech and Equinox, new design wins with Facebook and Dish, and today a new buyback plan and the print up of the guidance, congratulations. But yet, the market cap at the very same level. So my first question on the last design win slide, the Facebook or Dish ones, you are not disclosing the purchase potential in a mass deployment stage. Is there any reason for that?

[Shaike Orbach:]

The reason is that the full potential, I would say, is not clear. And as you know, I mean, we are careful people. What I mean by that is that the full potential could be really, really huge in here because Facebook would be pushing these units to most of the big operators around the world. But because this process is hardly -- has not actually been started because we’re still in the development phase of this, we don’t know how that would work. I mean -- so on the one side, I mean, the upside to that could be enormous. It could be really, really dramatic. On the other side, it can be nothing. I mean we are not aware of the moment. We don’t know how the Evenstar program would be successful, how operators will indeed respond to Facebook and all these. We see positive responses, but we don’t have experience with that. And that’s why we did not speak about a potential in here. So.

[Unidentified Analyst:]

Okay. Yes. Got it. Okay. So in these huge O-RAN projects, how should we think about the gross margin here? Are you still in the 32% level? Or is it going to be somewhat lower?

[Shaike Orbach:]

Well, I mean -- first of all, I mean, our combined margin, as we’re saying always, is 32% to 36%. And I am not sure that even across the 5G or O-RAN market, it is always going to be the same and it could differ between the various products that we’re selling in these markets. Overall, it would be dependent on the level of, I would say, uniqueness of the products that we provide to this market. And we are offering to this market, as you know, I mean, a combination of products, which could be acceleration costs, which are based on eASIC. We’re proposing FPGA units. We’re proposing platforms. So the mix of these products would define the actual gross margin. Overall, I believe it would be within this range of 32% to 36% within the 5G market as it is as well.

[Unidentified Analyst:]

Perfect. So how do you see the competition between the ASIC and FPGA technologies on the 5G Open RAN deployments?

[Shaike Orbach:]

Well, what we are building on is actually -- and we see this cycle happening, to a certain extent, is on some sort of a cycle, I would say. And in this cycle, we are positioned in both sites. And the cycle, the way that it goes, is that many of the acceleration functionalities, et cetera, are beginning with FPGAs. And then once it becomes more or less a standard, it becomes an eASIC simply because -- and then eASIC is actually an ASIC simply in order to save cost because this industry is, of course, sensitive to cost. But then additional requirements and additional performance which are needed, which are not included in the eASIC, comes into play into the second generation of the FPGA solutions. And then when this becomes, more or less, standard, it comes to become an eASIC and so on and so forth. And I think that because we are working with Intel and I think that this part is a demonstration of why our cooperation with Intel is so important, because we are cooperating with Intel both on the eASIC side and on the FPGA side. So right now, for acceleration, we’re using Intel’s eASIC and that’s what we’re selling. At the same time, we’re developing together with Intel the replacement solution, which would come later with an FPGA. And then we will be proposing that. Intel is beginning to think already about its next generation of eASIC. So -- and we are a part of these cycles, whether it’s eASIC and/or FPGA, both of which will obviously contribute to our growth and revenues.

[Unidentified Analyst:]

Okay. So I think that our partnership with Napatech that gives you access to the software is pretty interesting for you. Can you maybe explain to us a little bit about that? Because Napatech is saying that they expect revenue from this deal all -- this year. And also I think that.

[Shaike Orbach:]

Well, I’m not sure about that. I mean we still need to see the value of the IP. Napatech has developed a certain IP, which they are trying to promote for OVS. They wanted to put it to one of our cards. And we agreed as we’ve seen no disadvantage in that. But the value of that in terms of revenues is still to be seen. This is not included in our revenues’ expectation at this time.

[Unidentified Analyst:]

Okay. Because as we spoke in the past, Napatech has a 70% gross margin, so would you achieve a greater gross margin with this sense?

[Shaike Orbach:]

No. I think that -- no, I don’t think we would achieve a greater or a 70% margin. We do have products where 70% margin is there. But if you want to grow the company, you cannot do that with a 70% margin. 70% margin would go to some specific applications where Napatech is still -- and I think most of their sales are still there, which is in the capture market, which I believe we are declining. We used to be in the capture market ourselves. We started to step away from that even though the margins are relatively high, but the revenue potential is low. And this is why we’re talking about different markets, different revenue levels but also different margins.

[Unidentified Analyst:]

Yes. Because this partnership with Napatech is for non-5G market, right? You’d like data center something like this?

[Shaike Orbach:]

Is what?

[Unidentified Analyst:]

Is something like data center or…?

[Shaike Orbach:]

Yes. It’s supposed to be for data center. As I said, I mean, it needs to be feed even within the data center.

[Unidentified Analyst:]

Nice. So you’re announcing a new buyback plan today, and I’m very happy about that. But Zohar Zisapel has been selling in the open market its 10% stake in Silicom during the last few weeks. Why don’t you maybe speak with him and buy this $15 million of shares from him? I think that you could purchase more shares maybe?

[Shaike Orbach:]

I do not talk to Zohar about it. I don’t know what his plans are and/or why, so.

[Unidentified Analyst:]

Yes. I understand, but it would be great for the company if you can purchase more shares at a lower price. But yes, it’s maybe difficult to say. My final question. Israel is the first country in the world that has herd immunity against COVID-19. Is that going to have a positive impact on you?

[Shaike Orbach:]

While the COVID-19 may have a positive impact in terms of the demand coming up, there’s still some negative impact as well in terms of transportation, somewhat in terms of our ability to have face-to-face meetings. But in terms of demand, I think, overall, it’s indeed a positive for us.

[Operator:]

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 by tomorrow on Silicom’s website, www.silicom-usa.com. Mr. Orbach, would you like to make your concluding statement?

[Shaike Orbach:]

Thank you, operator. Thank you, everybody, for joining the call. We wish you all health. And we look forward to hosting you on our next call in 3 months’ time. Good day.

[Operator:]

Thank you. This concludes Silicom’s First Quarter 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.