Silicom (SILC) 31 Oct 222022 Q3 Earnings call transcript

Ladies and gentlemen, thank you for standing by. Welcome to the Silicom third quarter 2022 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.

received the all press have should by company’s now release. You

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to like welcome of thank you would Yes, XXXX call. I Silicom’s to conference quarter all third Operator. you results

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conference results welcome to like our financial third quarter discussing call Thank you would results. I Ehud. of our all XXXX to you

We is model. margins, This our demonstration revenues, to up a the and are profit good revenue very board. of growth clear to very We pleased reported year-over-year with across strong within report leverage a inherent business all growth performance with quarter $XX.X the XX% impressive very million. power and

quarter-end higher our and did backlog business quarter quarter. leverage better our continued operating which QX into profit crisis growth with corresponding because still All performance led last global year. income by to third This expanding operating very our Our up of in growth XXst that XX.X% have allowed this within The our for even net stress our over it the had been a profitability share over record to products. all revenue an of for quarter to margin demonstrated our want demonstrate increase strong this at XX% would demand achieved continued expenses. much our to million, a the of higher is high impressive extent of we growth versus earnings to the some been not shortages revenue a XXXX. translate with component model year-over-year the $X.X strong not our for we $X.XX, to I continuous ongoing per impact in to XX.X% sequential XX%

As you to hard over know, past we overcome situation. the this worked have year

to indeed deal have and Our and successful continued show been proved issues with ability solid mitigate results that challenges. we our

shortages to good that starting the we’re global the in improvements. stabilized minor months, component see now and is news have Looking recent ahead,

We parts of the of the the end half are improvement that of despite component XXXX working fact during continued until certain even first an for XXXX basis on the or shortage may the availability in beyond.

some our strong us. million, asset attracting levels have currently of are support lessening not from shortages signs shortages, It inventory protect and are vendors. us new used customers have our while continued demand past elsewhere. products to strategic chief available now and customers our component product significant expect non-commits by We cash With see to this existing inventory the behind in position, Over year, delivering difficulty $XX competitive cash as a peak better, and to advantage. at business up allows build position levels serve of we us readily new we which which finding that and

level are decrease at than several still higher levels normally do component would need, we the levels to of we from those improvements those our While availability due vendors. gradually to expect what

perspective us, is range, continue believe exceptionally product results from clearly in significant potential. no demand more in to see more The that we seen our have total that the demonstrate, market we growth our our importantly market experiencing strong markets. across addressable let-up As demand is we for for we are full broad but and end our

us, that the product for targeted realized broader same became Edge cost the markets our driver are applications advantages. attractive a performance, products SD-WAN initially flexibility for As for markets, many and giving clear and growth we features,

design directly our for wins secure our service connectivity proof cloud-based of as opportunities support, provide for wired price, initial security win virtual solutions. alone, teleco needs of product a As service cyber fast-growing explained enterprises, have the as An value us routing, varied a beyond an U.S.-based next dedicated applications in cyber product of secure leader original customization customers design customized markets wireless products. order for use win and capabilities customer more. generation their we This million Edge this Edge markets, meeting record and SD-WAN example providers, This and due This are edge, and access value products their end pipeline SD-WAN, from that using its rapid Edge a technology. we addressable was new cloud for market in Edge result, well multiple as and our provider platforms this disparate for as networking August. to and players represents announced $X and CPE, both new target service Telecos, to of expansion is design they will and applications. edge our potential access to and win functionality, significant leading markets. This The companies, is multiple our to us for of innovative combination our systems for interest products of chose now our cloud from Edge well customers. our trend represents product of our their

products their and on-boarding all players cyber the ideally and providers, is platforms. positions for built demonstrated more from coupled us significant that functionality, use deliver Edge support and SASE This This to and applications. the ramp-up edge and exact growing service that a companies, enterprises, telecos, for of systems opportunities. networking large ability cloud design cost rapid other we customization, by markets the generation have wins Our our and features offer next variety that pipeline with need and and

future our larger them share, as the is now mentioned, we for to we we product I Edge As our see than total our expect addressable we much significantly initially contribute planned, to and market grow that growth.

pipeline our wins, that iceberg. combined high in with underline backlog optimism potential the just existing of are our so opportunities achievements far Our our the the continued top our

ahead XXXX of of of XX% Had pleased in the the in of that to in guidance growth approximately we no In performance in coming been XX% Looking our there the $XXX which component our revenue account level such with show million expect the revenues. at over XXXX. midpoint of full that higher. revenues guidance year-over-year in proving XXXX, with to our year midpoint between leverage shortage This quarter would the to continued remain at take strong in of it. operating quarter revenues significant $XX situation to XXXX inherent growth acceleration for would summary, we $XXX into our in forecast represents the of that over continue and third as growth fourth fourth quarter growth we million implies at and our the and I note have mitigating and of million, profit full success very terms the continued our $XX a with business. been indeed year estimates situation, the million

margins pleased operating presentations XX.X% few in and fact, very surpasses quarter indicated net margin for model that XX.X% a that have investor including years. are In term achieved target margin the in of we we our this the long of been in our

better prospects me now to quarter’s total our a of pipeline Our markets forward this go over increasingly market earlier to have review will into of over addressable continued Edge detailed total what never stronger means been makes our for hand the long momentum, results. the With term. that product on exceptionally a today please and with the strong broadly, we I ever, success previous imagined bullish ahead. the ahead. visibility call that, to and a ever addressable over we the look than our expansion. than our market With larger Eran and record multi-year positioned broader and mid quarters Eran, is backlog with multiple regards our greater provides beyond application in and our growth than significantly us More estimates, its revenue well

you and with million, Thank were for of quarter $XX.X third of as million XXXX in third everyone. year. up Revenues Liron, quarter $XX.X year-over-year hello XX% the last the reported of compared revenues

Our revenue and as the XX Israel months North was follows: rest X%. over America breakdown East XX%, world of the Far last Europe XX%, geographical and

for and months, adjustments, accounted expenses which in I as rest financial basis, our excludes financial be During the and together top the of respect as a directors, officers the on about customers last options to granted XX% employees, of our and compensation non-GAAP of the XX income. acquisition-related three liabilities presenting revenues. lease results well RSUs will non-cash

was XX%, income non-GAAP of for in per compared margin income variance reconciliation XXXX XXXX earlier XXXX. in $XX.X $X.X quarter gross margin expenses of quarter. XX.X% The the $X.X mix of our Gross of year. today. of gross press to $X.X was third in third of $XX.X we in to or million $X.X the the quarter margin the GAAP $X.XX third sold profit XXXX. range was as the XX% representing to increase the gross XX%, in income million were the gross specific the quarter a numbers, is XXXX. share million, million for quarter compared Operating to of Net last of in compared in profit a as third For issued Earnings third to million third of quarter reported million, the in an at release compared EPS quarter of in quarter reported to reported of $X.X from of XX% $X.X a the guidance and please of of million, the quarter the function top third million were refer for margin increase the of third to the the XXXX the Operating of operating quarter diluted gross of full an compared XXXX. the XX% of with of $X.XX quarter third product

balance equivalents I the cash, to XX, with million Now of marketable for September company’s turning to share. debt, per no totaled the That over cash back XXXX, $X.XX the session. would Operator $XX.X answer outstanding and or ends securities like summary. to question Operator? and the sheet, my as hand

of [Operator instructions] Alex from The Needham first & Company. Henderson go question ahead. is Please

Thanks.

I thanks Great the impressed. facetiously my are, that. start so feel making forecast is I which obvious, quarter so by guys say the You to can’t super was me crushing with quarter, job, off numbers strong. I every for like wanted much strong, this, guidance reasonably the

much had the the to supply would be us a - quantification backlog to is is of or in I the ability mean, it constraints in wanted outlook any How much magnitude a of it ship you loaf, still Can bread the of give constrained. ship if better the or you outlook--how you You’re is what slice truck? quarter? it a the supply

First words to It is for of that, vendors improving situation daily would not now. not of on all extent, it’s parts. the we The is, start. sometimes. depends some basis. would thank I It before you and say, changing all, an all from right a warm on say first depends--really situation all, I evolving

and have parts parts. be numbers, would we roughly, more goes there at You impacting. a But at said, may just in on the to we impacting, shortages but a daily to them specific specific and we need would is from higher we for I continue but all, and no forward, that company exactly to same, have it’s is get. a the give big much same doing looking backlog, the visibility, definitely hear the hard better, numbers millions. hard how as It’s and part that it’s more say forward--looking battle but get If part was much it’s we it’s

though. Okay, similar question of kind a other on direction, the

it environment and a are particular the some of you’re offset delayed, so of them are that. those internationally versus get talk delayed, project downsized also magnitude that them timing even major of of You this seems your to these selling to lot wins, the some of have? able like and wins versus got the many projects economy stretched the what you’ve that where project of ramp, are Could duress, be bring is if but that down? in you lot partnerships would of and partners of you’re been under to that have U.S. a you project able or the balancing large you to the You’ve the Europe projects on so need magnitude that out, flattened in how in wins risk macro pressures to

The that understand very, plans. the we in almost who up no right ramping we’re longer design wins customers are see say yet the we need I customers definitely knows? so with can and their in global very almost I unclear term, impact. where economy, at the understand going, but we so time, least said, as the that. with do see we We’re is plans far, no what what it’s what the In on term, can Absolutely, their term, to is now, doing working all several and exactly think original to risk. I our what it’s are, closely very short talk compared tracking they short

middle to quarter going the into I year, talked that think into you have year out it the of visibility last at least this of point half the of the about you at that visibility Is demand? coming end. quarter, or out back back June through the half

to of less, we give a are XXXX, some into able they customer I very end would us general in we specific. that more visibility in until but visibility; not cases, little In but some say gain cases, is have XXXX. deep the

quarter What seasonally thinking great. we of a of What’s better here we fourth of issue? Right, the function gross result for the on, a is the is how above end margin, get about the is of of margins, first should weakest and margins, the and the two mix on year. it be midpoint you’re going environment be band, and quarter? quarter that? or thinking high the to quarters that should the the the Gross last Is able the band,

the XX. obviously, quarter. say, result, a hard then done of between work, happy the that Very all, result the maintain in would sold team and and we general XX the First this mix of the it’s I work of by hard of by it and a our still this to very is during team. products try keep We GM, guidance with but this function

guidance R&D the for you for this XXXX then a dollar, the for million. was things declined be as in that it’s and to some we that $X.X a now Can sort, I are some give row. the two little surprised also and million thinking shekel what with of plans has right, that particularly down us that, would the matter, on of which to point? go in versus quarter little that what bit expect your that line, of opex, project from at I All a but assume on fourth $X.X should do and the sense quarters any into of that would there’s timing we

actually You’re Danish the right the it’s strong krone. on actually dollar about dollar even but the versus shekel, the versus more

percentage-wise our in a the but the as items and team the shekel, say As even, well. reduction you Denmark are than one-time expenses say, that’s the R&D have causing also versus higher impacting know, in we there are would dollar that I I’d few,

and still million numbers a that’s an for those we opex still at on and of we terms we expect we year, at the XXXX. basis, at $XX what look In looking forward, around when look annual

we here? quarter, to rebounds into is it for or in the us that that. to that impossible so levels going the read range, $X should assume at right, been up lower the All million It’s fourth it’s stay

you can Sorry, repeat the question?

the fourth just Yes, quarter, going the fourth R&D in to is quarter? the rebound for here

for a is There chance that.

happens exactly hard know. us it’s krone. we know for versus shekel what with to the think don’t the I versus dollar Also, and the

for XXXX, I around opex, million. for around for $XX think million we looking for said, and $XX are I as at XXXX

Okay, that helps XX--I clarify it. it, get

Okay.

interest start a the Should the to down rates great got Going rising over see as interest to and rolling the cash line, balance, we to the up by next cash year go rates, large interest interest meaningfully look and you’ve flow. very on two line? or say, the next might higher of short-term result instruments interest quarters what a that three like, middle and the income of

be no you a exchange real factor to is of $XXXK. a of positive was rate as big real effect income or $XXXK, assuming $XXXK rate exchange of financial The number. one-time little in financial bit mentioned, three, quarter income income differences. and First there exchange all, items, other up rate a should differences is In even than the less differences no so the financial effect

rising no from rates? interest benefit And

investment is so because if if we we reinvest impact reinvest, our even the not not our No, of high, will significant. our--even so part funds, currently available be the

like with the we year? that’s baseline. on right, It guide looks next is tax of sort comfortable understandable. XX% the Any still? All that for rate Are

Yes.

not see, about low is affect long due in XX%. first was quarter As little it which our to tax three and the quarters a rate guidance. It the quite was--it term three one-time will was low, reasons approximately bit we XX%, for could

long term at guidance range of Our XX%. remains the

reasonable growth given think is As the to rates than to year this year, the rate? produced par close next or we we you and better do that it on could backlog ’XX look constraints, even out the

we when mean, lot the expect, discussions we some things the planning We our that’s unknown this believe, and double-digit down if we That’s case. of that at our or of say the go economy perspective, what XXXX visibility working continue as we so. from believe really assumptions what the much that at believe are it customers, so and a very with look mean, it’s to we going growth. will time--I the lot you will believe moment, look a ramp shortages, that’s need a unknowns, From into we’re not. to global is towards, global in a I our if projects do be will up perspective, we with be people the as

the Thanks. cede I’ll Great, floor.

star, If one. there questions, are any additional please press

ahead. stand wish Please please cancel question your you two. follow-up while more from poll The we to questions. request, is next question go Henderson. Alex star, press for If a by Please

Oh, signed there in deals Can the in of stock, the haven’t queue? to, headlights I talk deals that of talked got you yet, just are are particularly one other the potential the openRAM, about think around is that of who verticals what own that of pipeline questions us some interested look Can been you’ve in. Okay. no some really you people that have the some give - like? sense pipeline

the first biggest all, So of from our perspective growth where see we definitely. is DH,

not us and we looked perspective another As that we or that strong. more in to see other that that that thought and that more out If than the we we more the to domain maybe at, and for design or products it’s bigger but enhanced asking routing for our If it’s see if our demand coming that. customers much, from more internet, only the I part actually is them, are teleco active for in. are SD-WAN more addressable very, it’s going that’s applications, see products much becoming for market the very pointed of we that, mainly, see example, if SASE are earlier we growth be we call, initially

is All this belief driving really our that and we that is growth our main future our that’s together driver, believe where of lies.

lots number it that you’re your the the yet, as Edge been that I’m haven’t projects than larger it penned is of terms same historical is chasing has your in clear pretty question the of to back going just So the pipeline? that different of pipeline, parameters.

smaller, but signed look some you with we many in customers, you of Yes, at bigger, of potential have a mean, higher. pipeline, it’s lot not some of of as I projects, wins. them maybe, serious lot all the them said, that if but is, much discussions a of and discussions not

area Can bit? that you these by that talk of been that has getting lot an Is a is about other XG attention, opportunities? still or a little subsumed

area is this all, today. of we revenues are First where an generating

as some We them In ramp have I very say this up, are that wins related to a worldwide, going ramped of all specifically, up. in an general, mature, more happy still around a for Silicom design few XG will we--I believe general premature. not as that little not today, it is and is already would more deployment In fully it’s area to Silicom we’re business; get the with. mass it moment, will also mean at bit but

differential All significantly associated or year, have into above levels. revenues looking parts have you profit not including priced approach tact associated guys with on out a with, then right, normal by next that taken costs gross the been and

doesn’t with correctly? your to distort that in worked to help margin. way either allow customers buy gross reading You’ve or your Am those them it products, that revenue and those fund to I products and

Yes.

margins go XXXX inventory, cost on variances and you what may So with prices current the in for out benefits the expecting able environment inventory have inventory are Will that it, product? or are through your your carried charges higher having your any paid gross as you or or in associated ’XX? help to pass hurt we than to of have any into you you start working

way built this not We to all. our a team that, order impact would managing do if here. risks is those big really The focused should say not that minor on unnecessary taking the in is have way sure system that on and impact, make we that a any I have--and or at believe that we’re have risks, we

an into area of expanding new have with. brought is up talk security the Can vertical and you’re into portion what business market? to You you wins security as the that your going

seeing actually general came say and earlier, we mentioned I cannot that, security general, our now new which in that also specific percentage, on so features in as cyber for for networking of security SASE, that for that domain networking would is because we is products, But from are a both also used vendors, to that we’re more it, traditional vendors and products networking be more reason part well. classic also know and I say cyber. that, more in our I example, so in the our a had but added products vendors growth

our be approximately uploaded as the cyber which be seen was And portion will during XX very XX%. last the months, can on security presentation, shortly, of investor

So that’s business, growth assume? to be got a I higher your segment of would

Right.

weaker, I wanted opex just a talk environment. bit this about a it head have typically seasonality, we has likely spike, December seasonal How down more. quarters? quarter do in case sure ’XX? the next March quarter. we quarter mid our scenario that typically again, little Historically, that for that seasonal to in over will that the by up that the two fourth correct But also this or not in the year in been seasonally $X make on year much your million, terms largest typically in again given the posted is the and to in the the Is two third be $X It million, be you like of that margins million the XX% guidance quarter a about $X revenues quarters, the think EPS. but pattern gross of sounds then to

end going a every the expect little end the what We seasonality. We about fourth see at of see don’t quarter, what we’ll quarter, do expect--I see do this at know the definitely of we’ll to bit from QX it quarter, year see usually be there. to and down QX year will we - how expect of but up be next climbing the we

have queued. people hope you. any some All for more I there’s right. I don’t questions Thanks. other

you. Thank

Capital. Mark from of Next Boyd ahead. The next Shawn question is Please go

hear Good me morning. okay? Can you

Yes, good morning.

Gentlemen, Great. from just me. two

to other you SD-WAN talk markets markets were but market additional now opportunities size? market? eventually, to there, of expansion some were that market I look the of of per in could related you the we and know scope in like originally tens beyond that how Edge got some revenues the targeting Can terms SD-WAN millions is the thinking and obviously, first these the the products that. on these size we’ve what of now but be the The year early do not versus wins

means to of we those SASE From seen even size see, the what size numbers double of compared would SASE, the market market. market maybe trying that the SD-WAN us. SD-WAN so see we’ve that to I should share be we new with double be public, what could the that should analysts market even even be are we some markets estimate size bigger, the be--our markets think the for for those of opportunities similar, Proportionally, SD-WAN.

so Very that like? maybe of talking two, the me provider business look that brought If here just million, does a be contingent $X for million year great. going that three, year a U.S. win, would earlier, ranges with starts up one, on How year it just example at good, security. from $X to design help August cloud-based ramp rough about you

all, that of the quickly little to have that we going. we the that products First happy I order bit is that a constrained as because get $X even here do first would it’s order a believe by and could also than million very received. We say initial get be from annual bigger be revenue to to they supply, that said, many very

before product on definitely We’re be still starting, the it some we they but we are them. introducing up. in the but of ramp-up need already probably phases fully end, some working that XXXX see global ramped sometime do, with will last There’s to certification their

can we small Got operating I line questioning benefit is of there is to it, currency but My on XX%-plus it margins, XX%, are op line, bottom of dropping that providing right get about well over simply incremental at adding incremental or whether helpful. give think excess of over we each expenses, your second to so related margins. year or in the look now piece business quarter okay. certainly you’re quarter a year, take? That’s

obviously have range From on able, be believe in we with eventually will that a still the that margin, we XX%. some will level always as to same we we operating continue the we’re gross XX% here, be be have we margin, - we going Definitely our we hope and expenses, that to if good same to very will we and, news. revenue leverage and believe increase of the said, we’ll

We believe will say, as will will we along. leverage on go it’s--time we the see materialize that showing, we’re but we that

it. Got

the that’s on gentlemen. Okay, it congrats and me. you for quarter, Thank

you much. very Thank

time. at this further no are There questions

I his concluding like Mr. to I would go available to Before would Eizenman, be make Silicom’s replay closing your this Mr. remind with will www.silicom-usa.com. like statement? to that statement, website, participants of Eizenman a ahead tomorrow on ask you by call

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