Silicom Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 1, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Silicom 4th Quarter and Final 2023 Results Conference Call. All participants are present in listen only mode.

Operator

Following management's formal presentation, instructions will be given for the question and answer session. 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, Contact Silicom's Investor Relations team at EK Global Investor Relations at 1212-378-8040 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.

Operator

Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin?

Speaker 1

Yes. Thank you, operator. I would like to welcome all of you to Silicom's 4th Quarter 2023 Results Conference Call. Before we start, I would like to draw your attention to the following Safe Harbor statement. This conference call contains forward Those statements are based on management's current beliefs, expectations and assumptions, which may be affected by subsequent business, political, environmental, Regulatory, Economic and Other Conditions and are subject to known and unknown risks and uncertainties and other factors, many of which are outside of and which include, but are not limited to, silicon's increasing dependence of substantial revenue growth on a limited number of customers, the speed and extent to which silicon solutions are adopted by the relevant market, difficulty in commercializing and marketing of silicon's products and services, maintaining and protecting brand recognition, protection of intellectual property composition disruptions to its manufacturing, sales and marketing development and customer support activities, the impact of the wars in Gaza and in the Ukraine, rising inflation, rising interest rate, volatile exchange rate as well as any continuing or new effects resulting from the COVID-nineteen pandemic and the global economic uncertainty, which may impact customer demand through their existing greater caution and selectivity with short term IT investment.

Speaker 1

Factors noted above are not exhaustive. Further information about the company's business, including information about factors that material effects that are coming to results of operations and financial condition are discussed in our Annual Report and Form 20 F and other documents filed by company and that may be subsequently filed by the company from time to time with the Securities and Exchange Commission. Therefore, there can be no assurance that actual future results will not differ materially from anticipated results. Consequently, you are cautioned not to rely on these forward looking statements. Silicom does not undertake to update any Looking statements as a result of new information or future events or developments to fix debt as they be required by law.

Speaker 1

In addition, following the company's disclosure of certain non GAAP financial measures in today's earnings release, such non GAAP financial measures will be discussed during Such non GAAP financial measures are used by management to make strategic decisions, forecast future results and evaluate the Ongoing cooperations and prospects for the future. Unless otherwise stated, it should be assumed that financials discussed in this conference call will On a non GAAP basis, non GAAP financial measures disclosed by management are provided as additional information to investors in order to provide them with an And a full reconciliation of the non GAAP to GAAP financial measures are included in today's earnings release, you can find on Telecom's website. With us on the line today are Mr. Lioran Eisenman, President and CEO and Mr. Eran Gillard, CFO.

Speaker 1

Eran will begin with an overview of the results, followed by Eran, who will provide the analysis of the financial. We will then turn the call over to And with that, I would now like to hand the call over to Liran. Liran, please go ahead.

Speaker 2

Thank you, Kenny. Welcome, everyone, to our financial results conference call to discuss our Q4 ending 2023. Revenue were $18,800,000 in the quarter and we reported a net loss of 0.5 Over the past few months, we have made a significant effort to conduct checks and engage in discussions with all our customers in order to assess and gain a strong handle on the situation. I believe that now we do understand the situation much better, including both the challenges and In our previous conference call, we have discussed 2 significant headwinds, which impacted our results during the second half of twenty twenty three and that we are now facing as we move into 2024. The first headwind is our customer access inventory.

Speaker 2

During the global COVID shutdown in 2020 and onward. Supply chains around the world became tight with very limited availability of electronic components. As a precaution, our customers order a high level of products from us with a significant portion being for inventory purposes and this drove above average demand and high backlog for our product, which we enjoyed in 2021, 2022 and the first half of twenty twenty three. However, as we shared in the second half of twenty twenty three, we saw a reversal of the strength. Supply chain tightness abated and customers who built up significant inventory began drawing on existing inventory stock while reducing significantly ongoing purchases.

Speaker 2

The second headwind we are facing are industry related and macroeconomic factors delaying IT infrastructure investment. This is leading to a longer decision making process on new project slower investment and implementation of existing infrastructure projects. As I mentioned last quarter, some of the design wins we achieved in 20222023 are ramping up significantly slower than our customers had initially anticipated when first are proceeding cautiously diverging significantly from the original timeline forecast by our customers. On top of those market headwinds, there are a few additional silicon specific issues that are impacting revenues. First, we won 2 very large design wins in 2021 2022.

Speaker 2

According to the customer's initial forecast, each of those wins were expected to provide us with annual revenue of $20,000,000 to $30,000,000 Both customers provided us with very large purchase orders and we've already delivered more than $10,000,000 of each. Both still have very large inventories, which they are digesting at a very slow pace due to poor market success of their full solution. Currently, there are no additional outstanding purchase orders from either of those 2 customers. 2nd, a large customer of ours was acquired during 2023 with a new owner and management, which prefer to focus on software and following a long period of severe global supply chain and hardware disruption, the focus of the customer is shifting and this negatively impacts its ongoing hardware purchases from us. This shift may reduce their ongoing annual purchases by $10,000,000 3rd, unfortunately, Oran is not developed according to industry as well as our expectation on those and those of our customers.

Speaker 2

During 2022, we had a very nice early success with Oran sale among a few telcos and mobile operators, which provided us revenue of about $10,000,000 However, with a lack of general coupled with short term uncertainty and low visibility. We have therefore made various adjustments to our operation to align with this new reality. Following that, we initiated and started working under a new 5 year strategic plan covering 2024 until the end of 2020 This plan is designed to generate significant value for our shareholders even under the new market reality of today. This strategic plan has been approved by our Board of Directors and I want to share this plan with you now. In terms of our financial objectives, the main long term goal of our plan to gradually increase earnings per share to about $3 in 20.28.

Speaker 2

Looking towards the near term, we believe that Our 2024 revenue will be about $70,000,000 impacted mainly by the headwinds and issues I mentioned earlier. We believe that the excess during global economy headwinds will ease as we move forward throughout 2024 and thus the second half revenues will be higher than those of the first half. Q1 twenty twenty four revenue are expected at between $14,000,000 $17,000,000 We are facing period. However, our very strong balance sheet and cash position allows us to continue at full steam ahead, supporting our broad and deep pipe as well as continue with our core R and D efforts, while not being significantly impacted by a loss of few $1,000,000 during this transition period. We believe that our 5 year strategic plan will allow us to return Silicom to a gradual and steady top line and EPS growth.

Speaker 2

In terms of our gross margin. For the coming years, we expect a range between 27% to 32%. The reasons are threefold. 1st, Our edge systems typically carry lower gross margin than our server adapters. As we grow the portion of edge systems in our mix of products sold, it should reduce our company gross margin.

Speaker 2

Gross margin. 2nd, the market has changed from a vendor's market to a buyer's market, where the purchasing people and their CFOs are pushing us as well as other vendors for discounts. This is a cyclical issue and will probably improve in a year or 2, should inventories be drawn down and the global economy improve. And third, our cost of goods include a fixed cost element. Therefore, as revenue will decrease.

Speaker 2

While we already put efforts into reducing the fixed portion of our cost of goods, it still exists. The negative impact of this fixed cost should decrease the coming years as we return to growth. Thus, we believe that in 2024 and 2025, our gross margin will be at the lower part of the range and will improve in the years following. I want to stress that our current working capital and marketable securities As of the end of 2023, it's $140,000,000 with very high quality amounting to $51,000,000 account receivables, net of accounts payable of $18,000,000 as well as $71,000,000 cash. All this represents about $21 per share.

Speaker 2

I want to address the primary elements of our 5 year strategic plan. First, our initial step has been to align our current expense footprint with our expected revenue level ahead. We've already reduced our personnel from 310 to 240 people. With that, we expect to reduce our OpEx in 2024 to about $27,000,000 assuming current exchange rate. I want to stress that while making those expense we have verified that we are maintaining sufficient investment to support future revenue growth, bear our strategic plan.

Speaker 2

Over the coming years, we will continue to tightly control our expense level and allow only minimal increase in OpEx in 2025 and beyond based on the execution of strategic plan. 2nd, based on our very strong balance sheet, as I discussed earlier, we plan to continue with an aggressive buyback of shares Throughout 2024 2025, we currently plan to repurchase approximately a total of 1,600,000 shares over the next two The timing and amount of the repurchases will be subject to business and market conditions, corporate and regulatory requirement, share price, acquisition opportunities and other factors. I know that at year end, we have 6,400,000 shares outstanding following the repurchase of 250,000 shares in the Q4. 3rd, in terms of growth, we believe that as of 2025, we will achieve about 20 percent compound average annual growth on 2024 baseline. This growth rate does not consider potential significant upside that we may experience from very large projects like the ones we had in the past, such as the large IBM project 2017 2018, which may provide additional incremental growth for our business.

Speaker 2

We believe that the growth in 2025 and beyond will come from the ramp up of already achieved SD WAN and SASE design wins, additional edge system sales to leading telcos and service providers and from increased revenues related to our large roster of design wins and pipeline of potential design wins for server adapter and edge product with leading networking security and service providers globally. 4th, as an important part of the strategic plan, we will increase the focus on our core server adapter and edge solution portfolios for which we had typically been robust fundamental demand. As a part of this strategy, conducted a very detailed evaluation of all our current programs and decided to discontinue 2 non core Oran related programs. Unfortunately, Oran can no longer be considered as a core business for us as it is not developed according to the industry expectation as well as the expectation of both ours and those of our customers. 5th, we will also return to a marketing and sales strategy that worked well for us in the past.

Speaker 2

We will once again also focus on the smaller design wins with current annual expected revenues in the $1,000,000 range as many of those types of accounts have the potential to become much larger accounts over the years. This does not mean that we will not pursue an achieve larger design wins of an immediate $10,000,000 plus range. However, the plan is to actively compete on smaller design wins as and not focus only on the larger one. This should make our revenues more diverse and long term growth more robust. The compensation plan of our sales people have already been adjusted to reflect this approach.

Speaker 2

By executing all of the above aspects of the strategy, taking measures designed to maximize growth in revenues, controlling our expenses and putting in place an aggressive buyback plan, we believe that we will achieve the main goal of our strategy to As we approach this target, we believe that our EPS will improve gradually and across the milestone of $1.6 EPS in 2027. Please bear in mind that those are internal targets that we are sharing with you and should not be taken as our current financial guidance. As we proceed, we will share with you our progress against those targets. We have a very dedicated loyal management team with lot of experience in the hardware business. Most members of our management team and Board of Directors have been with us for many years and have already navigated our business to success through many market crisis and transformations in 2000 and and in 2017, just to name a few.

Speaker 2

We strongly believe that the targets that I outlined are attainable by Silicom And I'm optimistic in our ability to successfully execute on this 5 year plan. To summarize, as you know, our environment is much more challenging going into 2024 for all players in our industry. We have a strong strategic plan in place, which focuses on ultimately bringing value to not just by returning to revenue growth, reducing expenses and growing profitability, but also enhancing it through an aggressive buyback and a strong reduction in share count over 2 years. I want to stress that Silicom is well positioned as a key player in our industry And given our design win roster, a deep pipeline, a highly experienced management team and a new strategic plan in place, I'm confident that we will achieve growth starting from 2025 beyond with a long term goal of reporting over $3 per share earnings in 20.28. With that, I will now hand over the call to Eran for a detailed review of the quarter results.

Speaker 2

Eran, please go ahead.

Speaker 3

Thank you, Liron, and good day to everyone. Revenues for the Q4 of 2023 were $18,800,000 down from revenues of $45,200,000 as reported in the Q4 of last year. Our geographical revenue breakdown over the last 12 months were as follows: North America, 85% Europe and Israel, 13% Far East and rest of the world 2%. During the last 12 months, we had one over 10% customer And our top three customers together accounted for about 38% of our revenues. I will be presenting the rest of the financial results on a non GAAP basis, which excludes the non cash compensation expenses in respect of options and RSUs granted to directors, officers and employees, acquisition related adjustments, impairment of intangible assets and related write offs as well as lease liabilities financial expenses.

Speaker 3

Before moving on, I want to highlight That due to the termination of 2 programs as part of the new 5 year strategic plan, which Liron mentioned earlier, we recorded an impairment of intangible assets and related charge to GAAP cost of sales of $9,600,000 which are not included in our non GAAP numbers. For the full reconciliation from GAAP to non GAAP numbers, please refer to the press release we issued earlier today. Gross profit for the Q4 of 2023 was 5 point Presenting a gross margin of 28% and compared to gross profit of $15,100,000 Our gross margin of 33.5 percent in the Q4 of 2022. As Liron mentioned earlier, our gross margin range going forward is expected at between 27% and 32% over the years 20242025 with the gross margin gradually increasing over that period. Operating expenses in the Q4 of 20 23 were $6,800,000 compared to $7,200,000 reported in the Q4 of 2022.

Speaker 3

Operating loss for the Q4 of 2023 was 1,500,000 dollars compared to operating income of $7,900,000 as reported in the Q4 of 2022. Net loss for the quarter was $500,000 compared to net income of $6,600,000 in the Q4 of 2022. Loss per share in the quarter was 0 point 0 $7 This is compared with diluted earnings per share of $0.98 as reported in the Q4 of last year. Now turning to the balance sheet. As of December 21, 2023, The company's cash, cash equivalents and marketable securities totaled $71,500,000 with no debt.

Speaker 3

This represents an increase of $4,200,000 just in quarter 4, a result of a positive operational cash flow of $8,600,000 net of share repurchase cost $4,400,000 During the quarter, Silicom repurchased approximately 250,000 shares under our current share repurchase plan. In total, Silicom has purchased an Aggregate $52,000,000 in share buybacks in recent year. As mentioned by Liron, Based on our strong balance sheet and improved cash position, we intend to continue repurchasing our shares at a full pace. That ends my summary. I would like to hand back over to the operator for questions and answer

Operator

The first question is from Alex Henderson of Needham and Company. Please go ahead.

Speaker 4

Great. Thank you very much. So a couple of For comments, first off, my condolences to all the people who lost their job. I know how dedicated the Silicon employees are with The tenure and the tenure of those employees, I know that must have been a very painful move on your part, but I think it's the right move. Just going back to the share repurchase to start with.

Speaker 4

So what is left on The buyback, I know you say you wanted to buy 1,600,000 shares over the next 2 years. Is that all fully authorized and that's what's left

Speaker 3

Currently, we are still in the 3rd buyback plan. We still have the possibility to purchase approximately $6,000,000 And the plan is scheduled to end in April 2024. Moving forward, we will probably Declare new buyback plans.

Speaker 4

I see. So the Board will declare additional buyback in order to get to the

Speaker 3

Exactly. Okay.

Speaker 4

And in terms of the timing of these Staff cuts, I think the comment was you've already reduced the staffing from 310 to 240, which is a 2% cut. Is that complete now or is there further trimming going to happen in The current quarter and I assume that was done in the 4th quarter. Is that correct?

Speaker 2

That's correct. We've done we completed all the reduction we need Do not the full impact was recorded in Q4 due to the fact that it happened in Q4, but some of that did, but we are now done with this process.

Speaker 4

And so when you talk about the full year run rate of, I think, with $7,000,000 OpEx, I assume that we could just quarter that? Yes, that's the first assumption. Okay. Is there any commentary in terms of the mix of the change in OpEx between R and D, sales and marketing, G and A, any thoughts on where it's heavier, where it's lighter?

Speaker 2

So we I mean, the reductions we've made in general, we the reduction were mainly in the operation side. So we reduced about, I think something like 50 employees Around that number there in R and D additional 10 and in other departments the rest though, I mean that kind of give you a picture of where we made the reductions and the impact on

Speaker 4

the different divisions. More heavily skewed to R and D, a little less in sales and marketing and G and A? Yes. Okay. In terms of these projects, have You called out one where the company switches to software and hardware.

Speaker 4

But the longer term project, have you seen other Outright cancellation that we should be calling out here?

Speaker 2

First of all, it's not cancellation per se. I mean, it just reduced Their demand reduced their activity, but it wasn't order cancellations of something of that sort. And again, we're monitoring it. We don't have an Exact similar situation where we say, okay, this company was acquired and we expect it to behave the same. But I mean, everything is possible, I would say.

Speaker 2

But But right now, we do believe we understand the situation much, much better.

Speaker 4

And the 2 projects that were or programs that were Discontinued, was there revenue associated with those? No. Okay. And is there a cost savings associated with those cancellations beyond the headcount?

Speaker 2

So just basically, it's the headcount. Stopping those investments was mainly the headcount.

Speaker 4

Okay. It's mainly in the headcount. Okay. And then finally, over the short term, Is there an expectation that the kind of $16,000,000 $17,000,000 kind of trajectory for the Q1 It's going to stay at that level or will it rebound seasonally into the June quarter? Can you give us some thoughts on

Speaker 2

forecast for Q1 is 14% to 17%. And yes, I mean, we believe the second half is going to be very going to be very loaded on the second half. Compared to the first half, we expect that the inventory will be a little bit better, maybe the economy will be a little bit better there. So we definitely expect the second half to be better than the first half.

Speaker 4

So no quantification of that delta, is it forty-sixty, 30, 70, what do you think?

Speaker 2

Very hard to say.

Operator

There are no further questions at this time. 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

Speaker 2

Thank you, operator. Thank you, everybody, for joining the call and for your interest in Silicom. We look forward to hosting you on our next call in 3 months. Good

Operator

Thank you. This concludes Silicom's 4th and final quarter 2023 results conference call.

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Key Takeaways

  • Silicom reported Q4 2023 revenue of $18.8 million and a net loss of $0.5 million, down from $45.2 million and a $6.6 million net income in Q4 2022, and expects full-year 2024 revenue of around $70 million with stronger second-half performance.
  • The company identified two primary headwinds: customer inventory drawdowns after COVID-era overstocking and macroeconomic delays in IT infrastructure investments, which have slowed design-win ramps and current purchases.
  • Silicom unveiled a 5-year strategic plan with targets including ~20% CAGR from a 2024 baseline, $3 EPS by 2028, and a refocused product mix on core server adapters, edge solutions and diversified smaller design wins.
  • As part of cost restructuring, headcount has been reduced from 310 to 240 employees to lower 2024 OpEx to ~$27 million while preserving key R&D investments.
  • With a strong balance sheet—$71 million in cash and $140 million in working capital—the company plans to repurchase approximately 1.6 million shares over the next two years to enhance shareholder value.
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Earnings Conference Call
Silicom Q4 2023
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