Earnings call transcript: Silicom Q4 2024 reports EPS miss, stock drops

Silicom Ltd (NASDAQ: NASDAQ:SILC) reported its fourth-quarter 2024 earnings, revealing a net loss of $0.58 per share, which fell short of analysts’ expectations of a $0.33 loss per share. The company’s revenue reached $14.49 million, missing the forecasted $14.64 million. Following the earnings announcement, Silicom’s stock declined by 3.11% in pre-market trading, reflecting investor concerns over the missed earnings and revenue targets.

Key Takeaways

• Silicom missed both EPS and revenue forecasts for Q4 2024.
• The stock dropped 3.11% in pre-market trading.
• The company maintains a strong cash position with $121 million and no debt.
• New design wins signal potential future revenue growth.
• Long sales cycles and delayed revenue realization present challenges.

Company Performance

Silicom’s performance in Q4 2024 was marked by a revenue decline to $14.5 million from $18.8 million in the same quarter the previous year. This decrease reflects ongoing challenges in the market and operational hurdles. Despite these setbacks, the company secured significant design wins with major players in cybersecurity and networking, indicating a strategic focus on future growth.

Financial Highlights

• Revenue: $14.5 million, down from $18.8 million YoY
• Earnings per share: -$0.58, compared to the forecast of -$0.33
• Gross Profit: $4.2 million with a 29.1% margin
• Cash and Marketable Securities: $121 million

Earnings vs. Forecast

Silicom’s actual EPS of -$0.58 missed the forecast by $0.25, representing a significant deviation from expectations. Revenue also fell short by $0.15 million, indicating a challenging quarter for the company.

Market Reaction

Following the earnings release, Silicom’s stock fell by 3.11% in pre-market trading, moving towards the lower end of its 52-week range. This decline reflects investor concerns over the earnings miss and revenue decrease, despite the company’s strong cash position and future growth prospects.

Outlook & Guidance

Looking ahead, Silicom expects Q1 2025 revenue between $14 million and $15 million, with low single-digit growth projected for 2025. The company aims for strong double-digit growth from 2026 onwards, driven by new product innovations and strategic partnerships.

Executive Commentary

CEO Liron Eisenman emphasized the company’s strategic progress, stating, "We are advancing towards our mid- and long-term goals with a robust pipeline that positions us well for double-digit growth from 2026 onwards." He also highlighted the company’s comprehensive solutions, saying, "We are providing a full solution for our customers, understanding both hardware and software."

Q&A

During the earnings call, analysts inquired about the length of design win contracts and the potential for FPGA opportunities, which are growing in sectors like trading and security. The company noted that design win contracts typically last 4-5 years, offering long-term revenue potential.

Risks and Challenges

• Prolonged sales cycles could delay revenue realization.
• Market volatility and economic pressures may impact future performance.
• Dependence on a few large customers poses concentration risks.
• Competitive pressures in the technology sector could affect market share.
• Execution risks related to new product launches and design wins.

Full transcript - Silicom Ltd (SILC) Q4 2024:

Conference Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Silicom 4th Quarter 2024 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.

You should have all received by now the company’s press release. If you have not received it, please contact Silicom’s Investor Relations team at 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. Kenny Green of EK Global Investor Relations. Mr.

Green, would you like to begin, please?

Kenny Green, Investor Relations, EK Global Investor Relations: Thank you, operator. I would like to welcome all of you to Silicom’s quarterly results conference call. Before we start, I would like to draw your attention to the following Safe Harbor statement. This conference call contains forward looking statements. Such statements may include, but are not limited to, anticipated future financial and operating results and Silicom’s outlook and prospects.

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 Silicom’s control, which might cause actual results to differ materially from expectations expressed or implied in the forward looking statements. These include, but are not limited to, Silicom’s increasing dependence for substantial revenue growth on a limited number of customers, 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 the intellectual property competition disruptions to manufacturing and sales and marketing development 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 their short term IT investment plan. The factors noted are not exhaustive. 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 documents filed by the 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, investors are reminded not to rely on these forward looking statements. Silicom 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 in 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, forecast future results and evaluate the company’s 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 basis. Non GAAP financial measures 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 condition and operating results. These measures are not in accordance with or a substitute for GAAP. A 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. Liron Eisenman, President and CEO and Mr. Eran Gillard, CFO. Liron will begin with an overview of the results, followed by Eran, who will provide the analysis of the financials. We 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 Liron. Liron, please go ahead.

Liron Eisenman, President and CEO, Silicom: Thank you, Kenny. Welcome, everyone, to our conference call to discuss the results of the Q4 and full year 2024. We are pleased with our achievement this quarter, 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 mid to long term revenue growth. Those achievements highlights 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 potential new customers created a significant pipeline, which we hope to convert to even more design wins in 2025. While we continue to overcome short term challenges, during the quarter, we achieved milestone after milestone with 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 in 2020 6 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 During 2024, we generated 17 point $3,000,000 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 built up over our many years of success and cash generation. This ensures we can maintain adequate investment in our business and its growth engines without compromise and at the same time take advantage of opportunities to increase shareholder value. Just to highlight the balance sheet strength, at the end of the Q4, our working capital and marketable securities amounted to $121,000,000 including $79,000,000 in cash deposits and highly rated bonds with no debt. All this amounts to $21 per share. We remain on track with our long term strategic plan, which is targeting an EPS above $3 at the revenue level of between $150,000,000 $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 cybersecurity 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 20 26 to achieve a full annual run rate of around $2,000,000 This 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 synergetic from the customer’s 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 pipeline looking at a similar approach. This win expands 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 with a global networking and a security as a service leader, a new customer standardizing on silicon for all its edge deployment scenarios. This makes us their sole edge networking hardware provider paving the way for additional multimillion dollar design wins.

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. Initial deliveries should begin in the second half of twenty twenty five, which 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 when 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 potential for others. The fact that we can address all the edge networking needs of this customer confirms the value of our broad product portfolio and the strength of our offering.

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 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. Today, the pipeline of opportunities at the input of our design win funnel is broader than it has been for very long time, encompassing edge systems, smart NICs and FPGAs. Our target is to achieve between 7 9 additional new design wins in 2025.

I want to note that the sales cycle for our product is inherently long. In 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 a meaningful ramp up. It therefore takes significant time from the first achieving a design win to when Silicom experienced significant recurring revenues. 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, expanding the pool of future opportunities in addition to the deals with the potential for double digit 1,000,000 of dollars in annual revenue. We believe that during the coming years, we will see a lot of additional new opportunities at the input of the funnel, and we expect that more and more of those opportunities will convert into design wins. Furthermore, the potential growth is supported by increasingly diverse pipeline of design wins, including both new and existing customers. This pipeline includes leading names in the networking service providers and cybersecurity industries.

While we 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 on our accounts. While our recent design wins will have minor positive impact on our financial results

Conference Operator: in 2025, we believe those and others that we expect to sign

Liron Eisenman, President and CEO, Silicom: 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 at 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 that position us well for double digit growth from 2026 onwards. As I have mentioned, we aim to achieve 7 to 9 design wins in 2025, which will serve us as a key indicator of our progress. Looking further out, we continue to focus on creating strong long term value for our shareholders aiming at an EPS of above $3 when we reach annual revenues in the range of $150,000,000 to $160,000,000 A fast ramp up of a few of the potential deals we have within the pipeline 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 with a solid balance sheet.

We continue to generate positive cash flow and we have an active share repurchase program that underscores our commitment to enhancing shareholder value. This 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’s prospects. We look forward to reporting on our progress as we continue executing on our growth strategy. With that, I will now hand over the call to Eran for a detailed review of the quarter results. Eran, please go ahead.

Eran Gillard, CFO, Silicom: Thank you, Liron, and good day to everyone. Revenues for the Q4 of 2020 24 were $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, 76% Europe and Israel, 16% Far East and Rest of the World, 8%. During the last 12 months, our top our 2 10% plus customers together 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 granted to directors, officers and employees impairment of goodwill, taxes on amortization and impairment of acquired intangible assets, impairment of intangible assets and related write offs as well as lease liabilities, financial expenses.

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 2024 was $4,200,000 representing a gross margin of 29.1% and compared to a gross profit of $5,300,000 or gross margin of 28% in the Q4 of 2023. As discussed previously, in the near term, our gross margin is expected to be towards the lower end of our expected 27% to 32% range. And as our revenues grow from current levels over the longer term, it is expected to increase towards the upper end. Operating expenses in the Q4 of 2024 were $6,900,000 compared with $6,800,000 reported in the Q4 of 2023.

Operating loss for for the Q4 of 2024 was $2,700,000 compared to operating loss of $1,500,000 as reported in the Q4 of 2023. Net loss for the quarter was $3,400,000 compared to a net loss of $500,000 in the Q4 of 2020 3. Loss per share in the quarter was $0.58 This is compared with net loss per share of 0 point 0 $7 as reported in the Q4 of last year. Now turning to the balance sheet. As of December 31, 2024, our working capital and marketable securities amounted to 100 and $121,000,000 including $41,000,000 in high quality inventory, 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 $10,000,000 for the repurchase of about 650,000 shares. That ends my summary. I would like to hand back over to the operator for questions and answers session. Operator?

Conference Operator: Thank you. Ladies and gentlemen, at this time, we will begin the question and answer The first question is from Ryan Coons of Needham and Company. Please go ahead.

Jeff Hopson, Analyst, Needham and Company: Hi, this is Jeff Hopson on for Ryan Kuntz at Needham. Thank you for the questions and thank you for the very comprehensive presentation today. It was very helpful to visualize all the opportunities and design wins at Silicom. Maybe if we could just go into some of 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 length or yearly engagements for each of these design wins on average?

Liron Eisenman, President and CEO, Silicom: We estimate usually it 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 5 years and then discussions would start on the next generation, but that’s very typical for us.

Jeff Hopson, Analyst, Needham and Company: And then for these new products or new designs, are there any architectural design changes? Or what’s kind of the underlying competitive advantage that Silicon has for these new opportunities?

Liron Eisenman, President and CEO, Silicom: 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 a product as long as the silicon 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 that puts us in a very strong position to be a great, let’s say, also consultant 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 and basically become a one stop shop for our customers to get everything they need on hardware from 1 company.

Jeff Hopson, Analyst, Needham and 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. Is there any initial estimates they

Liron Eisenman, President and CEO, Silicom: to expand dramatically, if at all, it will be something very specific that we need here or there, but nothing dramatic.

Jeff Hopson, Analyst, Needham and Company: Thank you. I’ll re queue and let more questions.

Conference Operator: There are further questions from Ryan Coons of Needham and Company. Please go ahead.

Jeff Hopson, Analyst, Needham and Company: Hi, Jeff Hopson again. Just maybe 2 more from 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

Liron Eisenman, President and CEO, Silicom: 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 that’s what we expect overall to stay in that range.

Jeff Hopson, Analyst, Needham and Company: 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 that something that’s too out in the future for being a real driver?

Liron Eisenman, President and CEO, Silicom: 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 products to that 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 opportunities.

Jeff Hopson, Analyst, Needham and Company: Perfect. Thank you very much for the questions.

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

Jeff Meyers, Analyst, Cobia 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 forward and maybe also talk a little bit about gross margins on that front?

Liron Eisenman, President and CEO, Silicom: Absolutely. So with FPGA, we see several opportunities. We’ve been always pretty active in the high frequency trading. We continue to be there, but we also see the opportunities growing much more than that. We 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. So we see quite a lot of opportunities either we provide the IP through one of our partners and we’re actually building quite an 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 a gross margin perspective, usually those products are somewhat better. And we hope that indeed we can maintain a higher GP on those products. And but at the end of the day, I think with looking at all the opportunities we have, I don’t think that the range of our overall GP would change, but definitely for those opportunities we will probably see higher GP than the average.

Jeff Meyers, Analyst, Cobia Capital: Got it. Thanks, guys.

Kenny Green, Investor Relations, EK Global Investor Relations: Thanks, Jeff.

Conference Operator: 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 Silicom’s website, www dotsilicom usa.com. Mr.

Aizanon, would you like to make your concluding statement?

Liron Eisenman, President and CEO, Silicom: Thank you, operator. Thank you, everybody, for joining the call and for your interest in Silicom. We look forward

Conference Operator: to hosting you on our next call in 3 months. Good day. Thank you. This concludes Silicom’s Q4 2024 results conference call. Thank you for your participation.

You may go ahead and disconnect.

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