Silicom Ltd.
Q1 2013 Earnings Call Transcript

Published: 22 Apr 2013

[Operator:]

Welcome to Silicom’s First Quarter 2013 Results Conference Call. All participants are 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, April 22, 2013. I would now like to hand the call over to Mr. Ehud Helft of CCG Investor Relations. Mr. Helf, would you like to please begin?

[Ehud Helft:]

Operator, I would like to welcome all of you to Silicom’s conference call discussing the results for the first quarter of 2013. Before we start, I’d 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 their information. Actual events or results may differ materially from those projected including results of changing industry and market trends, reduced demand for Silicom’s products, the timing and development of new products, and the adoption by the market, increased competition in the industry, and production reductions as well as due to risks identified and document filed by the company with the SEC. In addition, following the company’s disclosure of certain non-GAAP financial measures in today’s earnings release, such non-GAAP measures, financial measures will be discussed during this quarter. Such non-GAAP measures are used by management to make strategic decision focused future results and evaluate the company’s current performance. Management believes that the presentation of these non-GAAP financial measures is usual to investor understanding assessment of the company’s ongoing corporation 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. A full reconciliation of non-GAAP to GAAP financial measures is included in today’s earning release, which you can find in Silicom’s website. With us today on the call are Mr. Shaike Orbach, the CEO; Mr. Eran Gilad, the CFO. In addition, Shaike will begin with an overview of the results followed by Eran who will provide the analysis of the financials. We will then turn over the call to the question-and-answer session. And with that, I would now like to turn over the call to Shaike. Shaike, please?

[Shaike Orbach:]

Thank you, Ehud. Good morning, everyone, and welcome to our first quarter 2013 conference call. I would like to apologize for my weak voice and continuous coughing this morning. It has nothing to do with what I am going to tell you about today, and I will try my best to speak as clearly as possible. We have started 2013 on the right foot demonstrating strong growth in our revenues and net income as well as continued progress on the strategic front. Our results demonstrate that we are well on course for delivering another record year with accelerated growth in 2013. We have reported revenues of $15 million growing by 49% over last year. The contribution to our growth was diversified across our full product line with both existing and new customers in all our target markets. We also increased our net profit even further by 57%, and we achieved high level of margins reporting both operating and net margins at over 20%. This is down to the operating leverage inherent in our business model that we are increasingly taking advantage of our revenues growth. Our balance sheet has remained strong, and we ended the first quarter with $56.4 million in net cash, a substantial level of cash for a company of our size. As I have mentioned in the past, this financial asset enables us to win more business with major industry customers as it demonstrates that we are a company with sufficient resources to meet all the future and long-term needs. I know that this level of net cash is also well in excess of our ongoing working capital needs. It continues to provide us with a flexibility to invest in R&D, to expand our addressable markets, and maintain our current leadership as well as enabling us to take advantage of any external M&A opportunities. [A pause for] [ph] that, our strong balance sheet combined with our continued cash creation enables us to share the rewards of our success with our shareholders. This was behind the decision we took a few months ago when we announced our intention to distribute a dividend to our shareholders on a yearly basis. And in the past week we have paid our first dividend in lieu of our 2012 performance distributing $3.9 million to our shareholders. We are confident that our growth over the coming years together with an ongoing dividend will create value for our shareholders, while making our shares increasingly more attractive as a long-term investment. It is clear that 2013 is building on the solid execution we demonstrated last year. We are especially seeing a growing contribution to our top line from our newer product lines as demonstrated with our recent announcement we continued to rollout new and innovative products which are being embraced by our customers both existing and new. The key factor in our success is the development of the right products at the right time as the market demands. Our foresight has translated into a strongly differentiated positioning for Silicom in today’s market and our goal remains to consistently deliver the right technology and solutions to the fast growing industries we operate in. To illustrate, we have recently launched brand new product family expanding our addressable markets. The new product line which introduces unique intelligent capture cards supporting Nano-Second Time-Stamping is very much a breakthrough enabler of next generation network monitoring for big data environments and market sector with phenomenal future growth potential. We have already recorded some initial Time-Stamp revenues with the first customer, the sales cost – the sales cycle with this customer was much shorter than we would normally have expected for such an intelligent solution demonstrating the advantage of the unique features in our solution. With this design win already secured and with several market leaders already evaluating our solution, we project the rapid sales ramp from this product line with expected annual revenue potential of between $15million and $20 million within just a few years. Second important development in the quarter was with SETAC, a product line which has become another important growth driver for us. One of our existing customers a top tier world leading networking company which has been using our Server to Appliance Converter kits for sometime decided to standardize on our SETAC modules across all its next generation appliances. When we first announced this customer win a year and a half ago, we indicated the potential of this customer, given the possibility they could standardize on our SETAC and become volume users. As we had hoped this has now become the case. This decision will enable us to gradually ramp our SETAC sales to this one customer significantly to several million dollars per year. We expect that their use of our solutions will continue to increase in the years to come as they launch more next generation products built on SETAC and our sales to them will represent a reliable and continuously growing revenue stream. Our increased success with market leaders adopting our technology lowers the barrier for our entrants into additional new customers, for the expansion of our business within the current customer roster. This is very much a clear demonstration of how each and every design win within our current customer base holds significant further potential beyond the initial win. The design win for the Time-Stamping capture card, which was with a new customer demonstrates the attractiveness and value add for our new products and our significant potential for further customer acquisition. Our success in our SETAC solution penetrating much more significantly into an existing customer is a demonstration of how the current customer base in itself holds much further potential for us. We have the ability to sell a broader portfolio of products to current customers, as well as achieving sales in new divisions at existing customers. Most importantly, the two recent developments as highlighted are classic demonstrations of how we continue to correctly foresee and understand our customers’ future needs and develop the right products to meet those needs. Our continued growth is a confirmation of the value proposition we continued to provide to our 90 plus OEM customers. The success of our ongoing efforts in expanding our product lines as well as launching new lines has vastly increased our total addressable market in the past few quarters enabling us to grow well in excess of our industry. Nevertheless, our industry remained sound supported by long-term strong and growing fundamentals, which is underpinned by an ever-growing thirst for networking capacity and bandwidth, both mobile and (indiscernible). The required network infrastructure investments, therefore, continued to accelerate. Thus, the combination of our strong markets with our internal growth drivers continues to enable us to perform strong on an absolute basis and outperform our industry on a relative basis as well. We are proud of these achievement and we look forward to more success in the coming years. In summary, we have a very good start to 2013. This is true in terms of both financial performance as well as on a strategic basis. Developments, we announced will provide us with significant upside in the relatively near future. Beyond this, our strategy continues. We develop new products, penetrate new customers, and then grow the scope of the design wins increasing both the foothold in our traditional markets and our relevance in new addressable markets. Looking ahead, we remain very optimistic with regard to our future potential. We believe we will continue to exceed the growth rate of our industry and see continued growth in 2013 and beyond. 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?

[Eran Gilad:]

Thank you, Shaike and hello everyone. Revenues for the first quarter of 2013 grew to $15 million, a growth of 49% compared with revenues of $10.4 million in the first quarter of 2012. Our geographical revenue breakdown for the first quarter of 2013 will just follow

[Operator:]

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions) The first question is from Robert Sussman of Bentley Capital. Please go ahead.

[Robert Sussman:]

Good morning and a great quarter. I have followed this company for quite a while, and this is the first time I have seen two 50% growth quarters back to back. Is this sort of growth sustainable in 2013 or is there something unusual about the last two quarters that make it not sustainable?

[Shaike Orbach:]

Well, I think that I would say that the company has taken a step in our growth. So, I am not saying that necessarily each and every quarter we will grow by 50%, but it’s I do not think that we are going back to the revenues numbers that you have seen last year. So, yes, I think that we are at a higher level than what we used last year, and so we have made a step, which is not just a one-time or a two-time thing. We are moving forward with our revenue level, I would say, as where we are right now, and we are planning to grow from here moving forward. Once again not necessarily, I can say, we can maintain exactly the same growth rate, but we are at a new level right now.

[Robert Sussman:]

Can I ask one follow-up on that? The first quarter seasonally usually declines about 10% from the fourth quarter, and that’s exactly what happened this year, and then each quarter builds throughout the year. Do you see the usual seasonal pattern this year?

[Shaike Orbach:]

Well, I cannot say specifically about each and every quarter how it would develop. But you are right in saying that the first quarter is typically, I would say, not the strongest of our quarters. And throughout the year, we are hoping to have quarters, which are better than the first quarter. I am not saying that necessarily each and every quarter how much it’s going to be, but in general we hope that we would be better than in this quarter when you sum up all the quarters.

[Robert Sussman:]

One last question, the new product the nanosecond timing product, I presume there was not much volume for that in the first quarter. Will there be significant volume of that product as we go through the year or will it be quite limited, because you are still just one customer?

[Shaike Orbach:]

Well, I think that we would see sales of this product in the year more than what we have now. But still it’s a new product just like you said, I mean, we will see volumes of that in this first year. It is still going to be far from what we expect this product to reach, but it will be more than what we had until now of course. And we are looking to have more from these specific customers and we are looking to get more design wins during the year for this product already.

[Robert Sussman:]

Okay, get better quickly Shaike.

[Shaike Orbach:]

Yeah, thank you.

[Operator:]

The next question is from Edward Balinsky of Segmark International. Please go ahead sir.

[Edward Balinsky:]

I have two questions, but first with regard to the bonus, which was voted on, and I assume approved in the earlier, is that charge going to hit in your second quarter or did you reserve for it in the last year?

[Eran Gilad:]

We reserved it last year.

[Edward Balinsky:]

Alright and the second – fine the second question has to do with regard to competition, I have seen that Cisco has purchased an Austrian company focusing on the cloud and I wonder if that poses any problem or any competition for you?

[Shaike Orbach:]

Now, we don’t think that this represents any competition to us.

[Edward Balinsky:]

Okay, fine. Well, thank you very much and certainly congratulations for that quarter I never expected it.

[Shaike Orbach:]

Thank you.

[Operator:]

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

[Marcel Herbst:]

Good morning. Thanks so much for taking my question and congratulations to an excellent quarter. In regards to your new Intelligent Time-Stamping Adapter, can you talk a little bit about your competitive positioning and the addressable markets for this product line?

[Shaike Orbach:]

Yeah, I can talk a little bit about that. So, first of all from a competitive positioning what makes this card so important for us and why we are expecting so much of it is because on the one side it provides the highest level of performance which by the way is not only provided by us, but we are there I mean in line with the highest level of performance at least in the main issues which are important in that market that I would speak about in a moment, while on the other side it also provides some additional features, very important features which do not exist in the other solutions that are currently in the market. I wouldn’t go into it too much elaborated technical discussion right now, but there are certain important features that we present to customers and this is why it has immediately got us a design win from one customer. And this is why even though the product flow, I would say that the major companies took this a product for evaluation, while it was still a prototype, because these additional features were important to them. And that makes the situation with this product unlike anything that we had before. And that means that the market not as of general market but actually the specific OEMs that we hope will eventually take this card and use this are evaluating it already and once you decide to go for that the ramping up would be just like the said in a few years it will be quite a lot because the market is there. So, I think that our positioning is there, we are actually challenging current companies in that market which with a much different I would say solution which is patent pending which almost everyone who is in this market considers to be important this different features, so that’s why we are so optimistic about this product. Now the market, the market in general I would say was the network monitoring market, but the word network monitoring is becoming even more important these days with big data, because once you have big data the task to monitor this big data is becoming more complicated and the requirements for Time-Stamping and solutions within the network monitoring are becoming more important. And in terms of volume I think more acquired by many players in the market. So, that’s why I mean the combination of these two things and one side the market which is growing and becoming more and more significant in the era of big data together with the uniqueness level of the product and together with the fact that I would say the sales cycle is so clear for us moving forward that’s why we are so optimistic about that.

[Marcel Herbst:]

Excellent, that’s very helpful. Thank you. A quick housekeeping question where do you expect total operating expenses to come in for the full year 2013?

[Shaike Orbach:]

2014?

[Marcel Herbst:]

‘13, ‘13…

[Shaike Orbach:]

Oh ‘13?

[Marcel Herbst:]

Yeah.

[Eran Gilad:]

I think that the level in quarter one is quite typical to what we will see in the next three quarters. First, we will see a little bit more than that but not significantly.

[Marcel Herbst:]

Okay, thank you.

[Eran Gilad:]

Obviously it depends a lot on the dollar. So, assuming the turnover remains unchanged, the answer is what I have just told you.

[Marcel Herbst:]

Okay, good. I will go back into the queue.

[Operator:]

The next question is from Jeff Meyers of Cobia Capital. Please go ahead.

[Jeff Meyers:]

Great, thanks a lot guys. So, Shaike maybe just talk a little bit about the Time-Stamp product, what do you think the sales cycle to the other customers who are evaluating it now how long sales cycle might last?

[Shaike Orbach:]

Well, typically sales cycles of the cards like that are long, because it’s an intelligent card, there is a lot of features in the card, there is a lot of software in the card, and typically sales cycles for these cards are taking more than a year. But and sometimes even two years. But that being said, we see the response of the market to our card and that’s why we’re optimistic that in this case it will be at least with some of the customers it would be shorter sales cycle because this card is unique and not only I mean even we have done some things which are unique, but not necessarily everything that you do that is unique is someone that is considered to be that important to your customers. What we’ve seen with this card is that the unique parts of these cards are considered to be important by our potential customers, which is why they are already evaluating that even though they may have some cards that they are currently using. So, that’s why it seems that the sales cycles are going to be somewhat shorter than usual as demonstrated by the first design win that we already had in the past.

[Jeff Meyers:]

Got you, okay. And what about if you look at your other intelligent cards, there are network processor based and the redirectors how are those doing and what are the pipelines would be like for this?

[Shaike Orbach:]

They are doing okay and we’re seeing good traction with actually all our intelligent cards. In general, I was not what I mean to say by that is that I did not look at any specific cards of that and maybe that’s on a quarterly basis not necessarily all of them are growing, but in general I see traction for all of these cards. And I think that all of them would – not eventually I mean they are already and with continued to be a good growth factor for us.

[Jeff Meyers:]

And lastly, the External BYPASS boxes are those doing in terms of design wins and pipeline there?

[Shaike Orbach:]

Well, I think that nothing significant really happened this quarter other than the usual once again in this quarter. I think that we are okay with these. There are – there is a pipeline for these. And furthermore, I think that the market is starting to move to 40 gigs and 100 gigs even. And typically these developments are good for us because there is a period within both the current generation and the next generation are being procured and as we are working on all these, so I believe that we would be able to grow this segment of our sale as well both because we – of the fact that we would get new customers and because we will have new products.

[Jeff Meyers:]

Good. Okay, thanks a lot guys.

[Operator:]

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

[Don McKiernan:]

Thank you and congratulations, as well fantastic start to the year. On your website under solutions you have something called DNA which is direct and I see access unique network driver for Silicom, is this something that’s competitively significant relative to your competition and proprietary and patented?

[Shaike Orbach:]

Yeah, I think, I mean, this is a cart that these are actually softer solutions, which improved the performance of our mix. So, they do give us differentiation compared to the competition. I would add to that, that this technology was also used in our Time-Stamping card, because without that we wouldn’t have been able to present a capture card at a standard I would say Intel Chip Driver performance. So, we had to use that in order to build Time-Stamp, but this technology is relevant not only with Time-Stamping, and it’s definitely a differentiator.

[Don McKiernan:]

Yeah, and so therefore this will probably be part of new products that you are developing right now as well? Is that correct?

[Shaike Orbach:]

Yeah, I mean, I would say that many of our products, many of our adapters can be bundled with that, and all our products, which are using Intel silicon are actually most of them, not all of them are built in a way, where it would be possible to bundle this technology with these adapters.

[Don McKiernan:]

Great, thank you.

[Operator:]

(Operator Instructions) We have a question from Noah Steinberg of G2 Investments. Please go ahead.

[Noah Steinberg:]

Hey, guys. Just if you can comment a little bit on the inventory increase and with the expectations are for the SETAC module revenue this year? Thanks.

[Shaike Orbach:]

Well, the inventory increase, there is an inventory increase, which is exercised due to the focus that we are having from our customers. That’s the main reason for that. Now, we definitely will be selling, I am not sure I understood your question about SETAC modules. We definitely will be selling SETAC modules this year.

[Noah Steinberg:]

What I mean to say was the announcement that this new customer will ramp to several million dollars per year, could that happen in 2013?

[Shaike Orbach:]

Well, I don’t think that we would reach the volume of several million dollars per year in 2013, but we definitely will sell these modules this year.

[Noah Steinberg:]

Okay, thanks.

[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. I would like to conclude by saying that we will continue to work hard with the aim of bringing you another record year with accelerated growth in 2013. As you can see in both of our results in our new dividend policy, we remain very focused on our ultimate goal of increasing value for you, our shareholders over the short and long-term. Good day to all of you, and I look forward to speaking with you next quarter.

[Operator:]

Thank you. This concludes Silicom’s first quarter 2013 results conference call. Thank you for your participation. You may go ahead and disconnect.