Silicom Ltd . (NASDAQ:SILC), a leading provider of networking and data infrastructure solutions, has reported a significant downturn in its third-quarter earnings for 2024. The company's CEO, Liron Eizenman, disclosed a revenue of $14.8 million and a net loss of $1.7 million, a stark contrast to the $30.1 million in revenue and $2.1 million net income from the same quarter in the previous year. Despite the challenges faced, including excess inventory with key customers, Silicom remains optimistic about long-term growth, targeting an EPS above $3 and revenues between $150 million and $160 million.
Key Takeaways
- Silicom's Q3 2024 revenue fell to $14.8 million from $30.1 million in Q3 2023.
- The company experienced a net loss of $1.7 million, down from a net income of $2.1 million in the same quarter last year.
- Excess inventory with key customers is expected to be resolved by the end of 2025.
- Long-term targets include an EPS above $3 and annual revenues between $150 million and $160 million.
- The company has a strong financial position with $125 million in working capital and no debt.
- Revenue breakdown: 78% from North America, 16% from Europe and Israel, and 6% from the Far East and other regions.
- Silicom repurchased 560,000 shares for $8.6 million during the year.
Company Outlook
- Aiming for modest revenue growth in 2025 due to ongoing inventory issues.
- Anticipates slight increase in revenues and stable operating expenses in 2025.
- Significant opportunities with a service provider and an OEM expected to drive revenues starting in 2025.
Bearish Highlights
- Operating loss of $2.3 million in Q3 2024, compared to an operating income of $1.9 million in Q3 2023.
- Non-GAAP gross profit declined to $4.2 million, with a gross margin of 28.8%, down from $9.3 million and a gross margin of 31.1%.
- Three major customers represented 36% of total revenues, indicating a concentration risk.
Bullish Highlights
- Strong financial position with $125 million in working capital and marketable securities.
- Geographical revenue remains robust, with the majority coming from North America.
- Revenue mix indicates healthy demand across various sectors, including cybersecurity and network appliances.
Misses
- Revenue and net income for Q3 2024 fell significantly compared to Q3 2023.
- Net loss of $1.7 million ($0.28 per share) in Q3 2024 versus a net income of $2.1 million ($0.30 per share) in Q3 2023.
Q&A Highlights
- Eizenman noted that despite slower sales due to inventory shortages, sales are continuing with recovery expected into 2025.
- The company plans to maintain flat operational expenses with a slight increase and expects gross profit margins to remain stable.
Silicom's Q3 2024 earnings call reflected a challenging period for the company, marked by a significant revenue drop and a shift to net loss. However, the company's management remains focused on strategic growth and a robust pipeline of design wins, which are expected to contribute positively to the company's financials in the coming years. With a diverse revenue mix and a strong financial position, Silicom is poised to navigate through the current headwinds and emerge stronger in the long term.
InvestingPro Insights
Silicom's recent financial performance, as reported in its Q3 2024 earnings, aligns with several key metrics and insights from InvestingPro. The company's current challenges are reflected in its financials, but there are also indicators of potential resilience.
According to InvestingPro data, Silicom's revenue for the last twelve months as of Q2 2024 stood at $77.69 million, with a significant revenue decline of 51.34% over the same period. This decline is even more pronounced in the quarterly figures, with a 61.97% drop in Q2 2024 compared to the previous year. These numbers corroborate the company's reported Q3 2024 revenue fall to $14.8 million from $30.1 million in Q3 2023.
An InvestingPro Tip highlights that analysts anticipate a sales decline in the current year, which is consistent with the company's recent performance and outlook. This aligns with Silicom's expectation of only modest revenue growth in 2025 due to ongoing inventory issues.
Despite the current downturn, Silicom's financial position remains strong. An InvestingPro Tip notes that the company holds more cash than debt on its balance sheet, which is reflected in the article's mention of $125 million in working capital and no debt. This solid financial footing could provide Silicom with the flexibility to navigate through its current challenges and invest in future growth opportunities.
The company's valuation metrics also present an interesting picture. With a Price to Book ratio of 0.6 as of Q2 2024, Silicom is trading below its book value. This low valuation, combined with the InvestingPro Tip indicating that the company is trading at a low revenue valuation multiple, suggests that the market may be undervaluing Silicom's assets and potential for recovery.
For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and metrics that could provide deeper insights into Silicom's financial health and future prospects. The InvestingPro product includes 7 more tips for Silicom, which could be valuable for those looking to make informed investment decisions in light of the company's current situation and long-term goals.
Full transcript - Silicom Ltd (SILC) Q3 2024:
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Silicom Third 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 1-212-378-8040 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.
Kenny Green: 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 increasing dependence for substantial revenue growth on a limited number of customers; the speed and extent to which Silicom solutions are adopted by a relevant market; difficulty in commercializing and marketing of Silicom's products and services; maintaining and protecting brand recognition; protection of intellectual property; competition; disruptions to its manufacturing, sales and marketing; development and customer support activities; the impact of the war in Israel and in the Ukraine; rising inflation; changing interest rates; volatile exchange rate as well as continuing or new effects resulting from the COVID-19 pandemic and the global uncertainty, 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 could materially affect Silicom's results of operations and financial condition are discussed in Silicom's annual report filed on Form 20-F and in other documents filed by the company that may be subsequently filed by the company from time to time with the Securities and Exchange Commission, the SEC. Therefore, there can be no assurance that actual or future results will not differ significantly from anticipated results. Consequently, investors are reminded not to rely on these forward-looking statements. Silicom does not undertake to update any forward-looking statements as a result of new information or future events or developments, except as maybe 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 core operations 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 processing 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 is included in today's earnings release, which you can all find on Silicom's website. And with us on the line today we have Mr. Liron Eizenman, President and CEO; and Mr. Eran Gilad, CFO. Liron will begin first with an overview of the results followed by Eran, who will provide the analysis of the financials. We will then turn over the call for the question-and-answer session. And with that, I would now like to hand the call over to Liron. Liron, please go ahead.
Liron Eizenman: Thank you, Kenny. Welcome everyone to our conference call to discuss the results of the third quarter of 2024. We are pleased that the third quarter came in as expected. More importantly, from a strategic perspective, we made continuous progress towards our mid and long-term goals to generate shareholder value while carefully managing the short-term challenges we are facing. As we previously discussed, our sales continue to be impacted by the excess inventory of our product built up in prior years by our customers in response to the worldwide supply chain disruption. With a few specific customers this issue is being further hampered by the fact that those customers of ours have seen slower-than-expected sales of their new products and services, which includes our products. Those customers are therefore consuming their excess inventory of our products at a slower pace and this continues to impact us in the near term. However, those issues are gradually being resolved and we anticipate improvement continuing through 2025 with full resolution expected by the end of that year. Despite those headwinds, we remain on track with our strategic plan to create shareholder value, targeting an EPS above $3 with revenues of $150 million to $160 million. As we approach the end of 2024, we believe the business is appropriately sized to support long-term growth with expenses well aligned to our plan's objectives. At the same time, we continue to maintain tight control over expenses with only minimal increase planned in 2025 and beyond. Our recent sales and R&D activities are aimed at expanding our pipeline, acquiring new customers and driving future long-term revenue growth. This effort has resulted in a broad and deep pipeline of opportunities with the potential for a faster ramp-up than expected, which could accelerate our progress towards our financial goals. In terms of our financial performance for the third quarter, we reported a revenue of $14.8 million, with a net loss of $1.7 million. I want to specifically highlight that our strong balance sheet built up over many years ensures we can maintain adequate investment in our business and its growth engines without compromise. Just to highlight that strength, at the end of the third quarter, our working capital and marketable securities amounted to $125 million, including $77 million in cash deposits and highly rated bonds with no debt. All this represents approximately $21 per share. During the first three quarters of 2024, we generated over $14 million in cash with $8.6 million well over half of that used to repurchase our shares as part of our ongoing buyback plan, which is aligned with our long-term strategy of shareholder value creation. In terms of our guidance for the fourth quarter of 2024, revenues are expected to remain similar to those of the past few quarters between $14 million and $15 million. Looking further out to 2025, we expect low single-digit revenue growth due to some lingering impact from customers' excess inventory issues. For 2026 and beyond, as orders from our pipeline materialize and customers ramp their new products featuring Silicom's offering, we expect to gradually see strong annual compound growth of between 20% and 30%. I want to provide some more color on our long-term prospects, as our broad and deep pipeline of opportunities continue to convert into design wins and revenues. In particular, I will highlight two significant milestones affirming the potential of our core Server Adapter and Edge System product to drive significant revenue growth in 2026 and beyond. First, a service provider customer selected a range of our Edge products for all its deployment scenarios. This customer plan to consolidate to Silicom, as its sole source hardware provider instead of working with multiple vendors for different types of equipment. The products selected by the customer represent the latest and greatest of our low-end and high-end Edge device offerings. They combine two of Silicom's main product lines into a single product, a Silicom Edge device equipped with a Silicom network adapter. The capability of Silicom to deliver this synergy from one source, provides us with a significant competitive advantage. We believe that this trend will expand to more and more customers and we already have several other accounts in the pipeline looking to take the same approach. We expect early deployment to start in 2025 ramping to a potential of several million dollars in business in 2026 from those products only. The customer is already in the process of evaluating additional products of ours for other various use cases and equipment enhancements. And second, a network equipment OEM selected our high-speed 400-gig FPGA smart card for deployment within its core network architecture. Initial deliveries we expect to take place by the first quarter of 2025, with ramp-up starting in 2026, driving potential multi-million dollar annual revenues. This design influenced by several of our customers, demonstrated the deep technological relationship we maintain with our customers. This smart card provides a unique combination of 400-gig speed ports with an FPGA and high-bandwidth memory which creates a unique smart card that can really handle 400-gig speeds at line rate. Our already successful Capture IP which accelerates network monitoring and security applications is supported by this card providing our customers and potential customers with a path to a capture solution at 400-gig speeds. We are already engaged with several other customers who will start testing this card very soon. From a broader perspective, our long-term growth is supported by an 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, highlighting the strength and appeal of our technology offerings. As we increase 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. The recent broadening of our pipeline highlights some of our successes to date with our strategic plan. We are seeing the impact of our focus on small-to-medium design wins, which has greatly expanded the pool of future opportunities. At the same time, we continue to put emphasis on winning high potential deals with the potential for double-digit million dollars in annualized revenue. If the strong opportunities in the pipeline ramp faster than expected, we could achieve the goals of our strategic plan sooner than currently projected. In summary, we are pleased with our progress this quarter towards executing our strategic plan. Beyond that we are very optimistic about our ability to continue to successfully executing on that plan and fully focused on meeting our goal of creating value for our customers, the market as a whole and especially our shareholders. We have a very dedicated and loyal team. Many of them have been with us for decades with some of the broadest and deepest experience in the hardware business, pursuing ambitious yet achievable goals. We are operating from an extremely solid financial platform with a very strong balance sheet, including an exceptionally high level of working capital for our needs. We have a strong design win roster, full of Tier 1 customers, coupled with a superb product and a robust pipeline of opportunities. With that, I will now hand over the call to Eran for a detailed review of the quarter results. Eran please go ahead.
Eran Gilad: Thank you, Liron and good day to everyone. Revenues for the third quarter of 2024 were $14.8 million a decline from revenues of $30.1 million as reported in the third quarter of last year. The geographical revenue breakdown over the last 12 months was as follows; North America 78%; Europe and Israel 16%; Far East and Rest of the World 6%. During the last 12 months, our three 10%-plus customers together accounted for about 36% 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, 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 third quarter of 2024 was $4.2 million, representing a gross margin of 28.8% and compared to a gross profit of $9.3 million or gross margin of 31.1% in the third quarter of 2023. As discussed previously in the near-term, our gross margin is expected to be at the lower end of our 27% to 32% expected 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 third quarter of 2024 were $6.5 million, a decline from $7.4 million reported in the third quarter of 2023. Operating loss for the third quarter of 2024 was $2.3 million compared to operating income of $1.9 million as reported in the third quarter of 2023. Net loss for the quarter was $1.7 million compared to net income of $2.1 million in the third quarter of 2023. Loss per share in the quarter was $0.28. This is compared with diluted earnings per share of $0.30, as reported in the third quarter of last year. Now turning to the balance sheet. As of September 30, 2024, our working capital and marketable securities amounted to $125 million, including $44 million in high-quality inventory accounts receivable net of accounts payable of $6 million and $77 million in cash, cash equivalents and highly rated marketable securities with no debt. During the first three quarters of this year, we used $8.6 million for the repurchase of 560,000 shares. That ends my summary. I would like to hand back to the operator for the questions-and-answer session. Operator?
Operator: Thank you. [Operator Instructions] The first question is from Ryan Koontz of Needham & Company. Please go ahead.
Ryan Koontz: Hi. Thanks for the question. Nice to be on the call. In terms of your current revenue run rate what -- how is that -- can you comment on the mix across different verticals in terms of the current revenue run rate? Is the service provider still the main vertical? Or are you seeing enterprise or other traction there?
Liron Eizenman: So I think in general we see -- we don't see a huge difference from what we've seen in the past. I don't have the exact percentage in front of me, but it's a mix a mix of OEMs and service providers. In the OEMs, we see strong segments like cybersecurity is very strong network monitoring. Obviously, we have the SASE and SD-WAN markets for our Edge boxes. So I think that's kind of the mix we're seeing. And we see -- I mean both opportunities in all of them but also actual revenue coming from all of them.
Eran Gilad: I can add to that that in terms of the market demand, cybersecurity was about 31% over the last 12 months. Platforms and infrastructure was also approximately 31%. Network appliances 26% and the rest is finance 7% and others 5%.
Ryan Koontz: Great. That's helpful. Thank you. And in terms of your inventory at your key customers here, any progress on orders? And what's driving your confidence in your rebound, as we exit 2025 there? And is there any risk to obsolescence from your product that's on hand with your customers? Thanks.
Liron Eizenman: So, yes, I mean, we -- as you said, it's a process that we will continue seeing in 2025, as well. And the way we are monitoring it, it's simply speaking with the customers and they're sharing with us the numbers and we see -- sometimes we see the orders come in. So we understand that okay, now they're done with this part number, they need more of that. So as we see more and more come in, we speak with the customers so we know how it goes. As I mentioned previously on this call, some of them are selling slower than they expected. So we -- but they still sell. I mean, it's not that they're not selling the product. It's just that due to the shortages in previous years, they had to buy more and they thought they will sell it faster. The overall situation is they're still selling, but slower than expected. And I'm assuming that most of it will be done in 2025. That's our assumption.
Q – Ryan Koontz: Okay. Makes sense. And in terms of modeling here, how should we think about your cash burn through late next year? And are the current OpEx levels, what you think you need to maintain to sustain the business?
Liron Eizenman: So from an OpEx perspective, we expect to be pretty much flat maybe a slight increase, not something significant. We think we have the right team, the right size of the team in order to support our future growth. So, we don't think we will need to make significant changes to that not up, not down. And in terms of revenue, we mentioned, we expect a very slight increase maybe single-digit growth next year. We expect GP also to remain the same. So I think from that, we know pretty much where we expect to be.
Q – Ryan Koontz: Got it. really helpful. That’s all I have. Appreciate the questions.
Operator: [Operator Instructions] There are no further questions at this time. Before I ask Mr. Eizenman to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available by tomorrow on Silicom's website www.silicom-usa.com. Mr. Eizenman, would you like to make your concluding statement?
Liron Eizenman: 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 three months. Good day.
Operator: Thank you. This concludes Silicom's Third Quarter 2024 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.
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