Silicom Ltd. Price & Performance (SILC)

These include, but are not limited to, Silicom increasing dependence for the speed and extent to which Silicom solutions are adopted by the relevant markets, difficulties in the commercialization and marketing of Silicom's products and services maintaining and protecting brand recognition, protection of intellectual property [indiscernible] and customer support activities the impact of war in Israel and in the Ukraine, Rising inflation, changing interest rates, volatile exchange rates as well as any and continuing or new effects resulting from the COVID-nineteen pandemic and global economic uncertainty, which may impact customer demand through customers exercising greater caution and selectivity with a short term IT investment plan. [indiscernible] factors noted are not exhausted. [indiscernible] Further information about the company's businesses, including information about factors that materially affect Silicom's results of operations and financial condition, are discussed in Silicom's Annual Report on Form 20 F and other filings filed by the company and that may be subsequently filed by the company from time to time [indiscernible] the Securities and Exchange Commission, Therefore, there can be no assurance that actual future results will not differ materially from anticipated results. Consequently, statements 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 and 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 for 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 cooperations 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 Non GAAP financial measures disclosed 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 and operating results. These measures are not in accordance with or a substitute The full reconciliation of non GAAP to GAAP financial measures are included in today's earnings release which you can find on Silicom's website. With us on the line today are Mr. Leron Eisenman, President [indiscernible] and Mr. Eran Gilad, CFO. Iran will begin with an overview of the results followed by Iran who will provide the analysis of the financials. Will then turn the call over to the question and answer session.

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

Welcome everyone to our conference call to discuss the results of the 4th quarter and full year 2024. Delivering financial results in line with the expectations and even more importantly, we made continuous progress in line with our strategic plan. Aimed at bringing renewed revenue growth profitability and ultimately increased shareholder value. Strategically, I'm happy to say that we are on track And during the past quarter, we saw strong design win momentum.

Increasing the visibility of our potential mid to long term revenue growth. The effectiveness of our strategy, and position us well with the potential revenues from recent wins expected to ramp up from 2026. Our renewed focus on our core product lines coupled with our strong relationship with our customers and created a significant pipeline which we hope to convert to even more design wins in 2025. [indiscernible] While we continue to overcome short term challenges, during the quarter, we achieved milestone after milestone a variety of customers and projects, and we advanced exciting opportunities through our broad pipeline towards future design wins. All this is a clear indication that we are on track for a return to strong double digit growth 2026 and beyond. In terms of our financial performance for the Q4, our revenue came in at the center of our expected range at $14,500,000 [indiscernible] generated $17,300,000 in cash, with $10,000,000 well over half of our cash generation, used to repurchase our own shares as part of our ongoing buyback plan. This is aligned with our long term strategy of shareholder value creation. Our ability to pursue this strategy is due to our strong balance sheet, our many years of success and cash generation.

This ensures we can maintain adequate investment in our business and its growth engines without compromise. At the same time, take advantage of opportunities to increase shareholder value. Just to highlight the balance sheet, strength at the end of the 4th quarter our working capital and marketable securities amounted to $121,000,000 including $79,000,000 in cash [indiscernible] and highly rated bonds [indiscernible] All this amounts to $21 per share. Remain on track with our long term strategic plan. Which is targeting an EPS above $3 at a revenue level of between 100 $50,000,000 $160,000,000 I want to highlight 2 recent design wins and highlight the progress that we have made in recent months. We recently announced a new design win with a major U. S. Based site security company an existing customer of ours. We received initial orders and expect first revenues in the second half of twenty twenty five. With revenues starting to ramp up in 2026 to achieve a full annual run rate of around $2,000,000 design win is for the next generation of this customer's leading product line. Our ability to efficiently customize this product for our customer providing both an edge system and our network interface card were key factors in securing the win.

Our capability to deliver both products is highly synergistic from the customers' point of view and provides us with a significant competitive advantage. We believe this trend will gain traction with additional customers and we have several other accounts in the [indiscernible] looking at a similar approach.

This will expand the relationship that we have been building with this customer for several years. Furthermore, we continue to discuss the potential for including additional product for the customer's other product line. We also announced a design win [indiscernible] Networking and the security as a service leader. A new customer standardizing on Silicom for all its edge scenarios This makes us their sole edge networking hardware provider paving the way for additional multimillion dollar design win. This first design win with this customer encompasses several products including several of our newest edge networking solutions pre integrated with Silicom's network interface cards. [indiscernible] Initial deliveries should begin in the second half of twenty twenty five with revenues from this design win starting to ramp up to over $3,000,000 annually from 2026. This was the result of a process which began a year ago. We initiated a discussion covering a specific product. Over time, the discussion expanded to more products and additional use cases. Leading to this design win as well as the fact that we can address all the adjunctive needs of this customer confirms the value of our broad product portfolio the strength [indiscernible] Those wins underscore the traction of our renewed sales growth strategy, building a robust pipeline and strong base of recurring revenues for long term growth The relationships are based on deep trust built built over a long period of time and show slow but solid growth supporting the success of our strategic plans.

I want to provide some more color on our pipeline. [indiscernible] the pipeline of opportunities at the input of our design win funnel is broader than it has been for a very long time. Encompassing edge systems, smartNICs and FPGAs. Our target is to achieve between 7 and 9 additional new design wins in 2025. I want to note that the sales cycle for our product is inherently long. Our experience, it takes between 9 12 months to achieve a design win from initial contact and then further 3 to 9 months working closely with the customer to initial revenues with up to 12 months for meaningful ramp up therefore takes significant time from the first achieving a design win to win Silicom experienced significant recurring revenue However, when we do reach a steady state of recurring revenues, those tend to provide a long tail over the lifetime of the customer's product which can be many years. I want to highlight our new investor presentation, which you can find on the website. Which includes examples of some of the many opportunities in our pipeline It also shows examples of the opportunities which made it through the funnel and have become design wins and a source of revenue growth.

We are seeing the positive impact of our focus on small to medium design wins the pool of future opportunities in addition to the deals with the potential for double digit 1,000,000 of dollars in annualized [indiscernible] We believe that during the coming years, we will see a lot of additional new the input of the funnel and we expect more and more of those opportunities will convert into design wins. Furthermore, the potential growth is supported by increasingly diverse pipeline of design wins excluding both new and existing customers. Pipeline includes leading names in the networking service providers cybersecurity industries highly increased the number of those strategic engagements we believe they will lead to more sustainable revenue growth by reducing our reliance on a few large strategic accounts. While our recent design wins will have minor positive impact our financial results in 2025, we believe those and others that we expect to sign in the coming months will serve as the foundation for much more meaningful growth in 2026. I note that if the opportunities in the pipeline ramp up faster than expected, we could achieve the goals of our strategic plan sooner than currently projected. In terms of our guidance for the Q1 of 2025, revenues are expected to remain stable levels similar to those of the past few quarters between $14,000,000 $15,000,000 Looking further out, growth in 2025 is expected to be in the low single digits with strong double digit annual growth rate materializing gradually from 2026.

In summary, we are pleased with our progress. We are very optimistic about our ability to continue and execute on our growth plan and fully focused on meeting our goal of creating value. For our customers and for our shareholders. We are advancing towards our mid and long term goals with a robust pipeline As I have mentioned, we aim to achieve 7 to 9 design wins in 2025 which will serve us as the indicator of our progress. Looking further out, we continue to focus on creating strong long term value for our shareholders in aiming at an EPS of above $3 when we reach annual revenues in the range of 150 A first ramp up of a few of the [indiscernible] may help us achieve this goal faster. We have a strong design win roster full of Tier 1 customers coupled with superb products and a robust pipeline of opportunities We have a strong financial foundation we continue to generate positive cash flow and we have an active share repurchase program that underscores our commitment to enhancing shareholder value. New the new opportunities and design wins momentum that has grown throughout 2024 has increased the already high motivation and dedication of our excellent team who entered 2025 with excitement regarding Silicom We look forward to reporting on our progress as we continue executing on our [indiscernible] [indiscernible] With that, I will now hand over the call to Iran for a detailed review of the quarter results.

Eran, please go ahead. Thank you, Lerone, and good day to everyone. Revenues for the 4th quarter of 2024 $14,500,000 a decline from revenues of $18,800,000 as reported in the Q4 of last year.

The geographical revenue breakdown over the last 12 months was as follows: North America, [indiscernible] Europe and Israel 16%, Far East and Rest of the World 8%. During the last 12 months, Our top our 2 10% plus customers [indiscernible] accounted for about 26% 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 [indiscernible] granted to directors, officers and employees impairment of goodwill, taxes on amortization and impairment of acquired intangible assets, impairment of intangible assets in related write offs, as well as lease liabilities financial expenses. For the full reconciliation from GOC from GAAP to non GAAP numbers, Please refer to the press release We should Gross profit for the 4th quarter of 2024 $4,200,000 representing a gross margin [indiscernible] 29.1 percent and compared to a gross profit of 5,300,000 dollars gross margin of 28% in the Q4 of 2023. As discussed previously, in the near term, our gross margin is expected to be in to be towards the lower end of our expected 27% to 32% range. And as our revenues grow from current levels, over the loan longer term, it is expected to increase towards the upper end.

Operating expenses in the 4th quarter [indiscernible] Well, 6 point $9,000,000 compared with $6,800,000 reported in the 4th quarter of 2023. Operating loss for the Q4 of 2024 was 2.7 $2,700,000 compared to operating loss of $1,500,000 as reported in the 4th quarter of 2023. Net loss for the quarter was $3,400,000 compared to net loss of $500,000 in the 4th quarter of 2023. [indiscernible] Loss per share in the quarter [indiscernible] $0.58 This is compared with net loss per share of $0.07 as reported in the 4th quarter of last year. Now turning to the balance sheet. As of December 31, 2024, our working capital and marketable securities amounted to 120 $1,000,000 including $41,000,000 in high quality accounts receivable net of accounts payable of $3,000,000 and $79,000,000 in cash, cash equivalents and highly rated marketable securities with no debt. During 2024, we used [indiscernible] for the repurchase of about 650 650,000 shares. That ends my summary. I would like to hand back over to the operator questions and answers session. Operator, Ladies and gentlemen, at this time, we will begin the question and answer session. The first question is from Ryan Kuntz of Needham and Company, Please go ahead.

Hi, this is Jeff Hopson on for Ryan Koonz at Needham. Thank you for the questions and thank you for the very comprehensive presentation today is very helpful to visualize all the opportunities and design wins at Silicom Maybe if we could just go into some of the those design wins As you laid out the timeline It does take a long time from design to revenue What is then the typical contract lengths [indiscernible] yearly engagements for each of these design wins on average?

We estimate usually it's spans around 4 to 5 years. So it's quite a lot of work to get started and win But once we are there, usually, a customer would go for us for 4 or 5 years, and then discussions would start on the next generation. But that's very difficult for us.

And then for these new products or new designs, are there any architectural design changes or what's kind of the underlying that silicon has for these new opportunities I mean, first of all, we are really at the I would say at the edge of the newest technology working with the best silicon vendors out there and working very, very closely with them to make sure we are usually the first to be out with the product long as the Silicom launches. We are also launching our product But I mean, that's not the only thing we're also providing a full solution for our customers in the sense that we also understand software very well and we can give them all the supply chain capabilities they need around the product to be successful. But always being first and we invest quite heavily in R and D. [indiscernible] and a great, let's say, also consulting to our customers about what to do. Many times, they come to us and ask us, oh, we have that kind of problem. How can you help us solve that? And we're able to give them And one thing that really distinguish us from others is our very rich product line that we can actually also integrate our network interface cards SmartNICs, FPGA cards or acceleration cards into our own systems [indiscernible] basically become a one stop shop for our customers to get everything they need [indiscernible] From 1 company.

Thank you. And for then the investment in R and D Are there any initial thoughts? I know for sales, for 2025, you're thinking low single digit Does any initial estimates On R and D spend, or hiring salespeople for the near?

In general, we are not expected to expand dramatically. If at all, it will be something very specific that we need here or there but nothing dramatic.

Thank you. [indiscernible] More questions? [indiscernible] further questions from Ryan Koonce of Needham and Company. Please go ahead. Hi, Jeff Hoxzen again. I just maybe 2 more for me.

I know you guys had the long term target for gross margins of 28% to 32%, Is there any variability in the gross margin expectations for the 3 Segments of Opportunities that you laid out in the presentation I mean, it's changing from product to product, from use case to use case. Still, we think the average that we'll see eventually after all, taking all the different opportunities into play would be in the range that you mentioned, 27% to 32% Some products obviously have more, some products have some less. But But that's what we expect overall to stay [indiscernible] Perfect. Thank you. And maybe just one more You did have AI data infrastructure as one of the opportunities in SmartNIC. I guess overall for AI, is the technology at the edge yet or is is that something that's too out in the future for being a real driver.

We think that for the edge, it's still I would say POC level at the moment. It's not full production right now. But definitely it's something that comes up with customers from time to time. And we see still we see on the other side, let's say, on the training side, on the big data center side, Some of our customers are providing to those goals, those use cases. So we enjoy through them And some other opportunities are actually maybe us doing something more direct with those kind of customers we are pursuing both both opportunities.

Perfect. Thank you very much for the questions.

The next question is from Jeff Meyers Covia Capital, Hi, good morning.

Maybe you could talk a little bit about the FPGA opportunity.

Where you've been with those products? What you see going [indiscernible] talk a little bit about gross margins on that front?

Absolutely. So with FPGA, we see several opportunities We've been always pretty active in the high frequency trading with continue to be there but we also see the opportunities growing much more than that. See actually opportunities together with many of the IP partners that we are partnering with, we see opportunities in streaming. We see opportunities from security. We see opportunities in network equipment companies, we see quite a lot of opportunities. Either we provide the IP through one of our partners and we're actually impressive network of IP partners working with us. Or actually the customer is taking upon themselves to do the actual IP development. So we have a few very nice opportunities, I would say. At the top of the pipeline right now, we hope that they will materialize. And definitely from From a gross margin perspective, usually those products [indiscernible] And we hope that indeed we can maintain a high higher GP on those products And at the end of the day, I think with all the opportunities we have, I don't think that the range of our overall GP would change, but definitely for those opportunities we would probably see higher GP than the average Got it.

Thanks guys.

Thanks, Jeff. [indiscernible] There are no further questions at this time. Before I ask Mr. Eisenman, Before I ask Mr. Eisenman 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, Mr. Isomnan, Thank you, operator. Thank you, everybody, for joining the call for your interest in Silicom. We look forward to hosting you on our next call in 3 months. Good day.

This concludes Silicom's Q4 2024 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.