Silicom Ltd. (SILC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Silicom Third Quarter 2026 Results Conference Call. [Operator Instructions] 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 like now to hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin, please?

Thank you, operator. I would like to welcome all of you to Silicom's Third Quarter 2026 Results Conference Call. Before we start, I would like to draw your attention to the following safe harbor statement. During this call, we may make forward-looking statements within the meaning of applicable securities laws. These statements may include, among other things, statements regarding the company's strategy, market opportunities, customer demand, product development initiatives, industry trends, expected deployment of the company's products and solutions, financial outlook, revenue expectations, margins, operating expenses, profitability, and future growth opportunities. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such statements. These risks include, among others, those described in the company's press release issued earlier today and its filings with the U.S. Securities and Exchange Commission, including its annual report on Form 20-F. The company undertakes no obligation to update any forward-looking statements. With us on the line today are Mr. Liron Eizenman, President and CEO; and Mr. Eran Gilad, 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 over the call to the question-and-answer session. And with that, I would now like to hand the call over to Liron. Liron, please go ahead.

Thank you, Kenny, and good day, everyone. I'm very happy to share another truly outstanding set of results for the third quarter of 2026. Results that surpassed our guidance and that clearly show that our strategic plan and our business are performing significantly better than we planned. Very importantly, this quarter, we returned to profitability, well ahead of our plan. As we look towards the end of 2026 and into 2027, I'm excited about Silicom's continued momentum, the clear visibility we have and the vast opportunities before us. The third quarter was a truly exceptional one for Silicom, showing a strong acceleration of the growth inflection that we have been talking about all year. Revenues for the third quarter came in at $26.7 million, up an outstanding 71% year-over-year and ahead of the $25 million to $26 million guidance range. Equally important, thanks to strong execution and the inherent leverage in our business model, we have returned to profitability with positive non-GAAP net income this quarter, well ahead of our initial expectation. Our revenue growth is fundamentally volume-driven, fueled by higher unit shipments across our core portfolio and accelerating customer deployments. You can see the acceleration in our business clearly in the trajectory of our revenue growth over the past few quarters. In Q4 2025, we reported 17% year-over-year growth, followed by 33% in Q1 this year, 59% in Q2, and now 71% in Q3. And our guidance for the fourth quarter points to continued very strong growth at a similar level of 66% year-over-year at the top of the range. Our business is now built on a highly predictable platform of recurring revenue based on years of Design Win momentum. As our recent Design Wins ramp up, they add to the base, and that is what is driving this sharp inflection in our business. With this strong momentum, we are once again increasing our revenue guidance for the full year 2026 to a range of $96 million to $98 million. This follows an increase in our 2026 guidance last quarter and is another indication of how we are performing well ahead of our expectations. As I often discussed, the long-term growth and strength of our core business are best tracked via our Design Win momentum. The Design Wins we secure today drive our growth for years to come, which makes them one of the most important indicators of our future performance. I want to discuss why our Design Win translate so powerfully into revenue growth. First, every new Design Win is additive to our existing base of business. This base of active Design Wins continues to generate a stable recurring stream of revenue and each new win adds further revenues on top of it. Second, many of the Design Wins we have secured in recent years are now in their strong growth phase, ramping up from initial orders towards full-scale deployment. It is the combination of those 2 effects, new wins adding to the base and recent wins ramping up, that's additive, that is driving the strong revenue growth you are seeing today, and that gives us great confidence in our continued growth ahead. As you may remember, at the beginning of the year, I announced that for 2026 as a whole, we were targeting between 7 and 9 new Design Wins. I'm very pleased to report that we have secured 8 new Design Wins this year, already matching our total for the full year 2025. With 2 months of 2026 still to go, we have already exceeded the low end of our target range, and we are on track to meet or even exceed its upper end. I want to spend a few moments discussing the 2 Design Wins that we secured during the third quarter. In July, an existing blue-chip customer awarded us a new Design Win for a custom high-speed server adapter, which we engineered to exact specification for a distinct use case within PC infrastructure. Having already integrated one of our off-the-shelf server adapters as well as FPGA Smart NIC, this customer came back to us for a fully custom product. This win is expected to grow our total business with this customer from approximately $3 million in 2026 to nearly $10 million next year. More recently, in September, we secured a Design Win with a new customer, a Tier 1 cloud-based cybersecurity giant for a Silicom edge networking device with an integrated 5G wireless connectivity. After evaluating our solution for many months, the customer selected Silicom specifically for the strength of our integrated cellular connectivity, which proved to be a key differentiator in a highly competitive process. The customer has already placed an initial order with ramp-up expected to begin before the end of this year. At full ramp-up, we expect revenues from this Design Win to exceed $5 million annually for this device alone. In parallel, we are evaluating additional higher-end edge devices with this customer, including a GPU-integrated edge device designed for edge AI use cases. Those wins are a good example of how our strategy works. We continue to grow our business by securing Design Wins with both new and existing customers, and each successful Design Win opens the door for further wins, often with satisfied customers coming back to us for additional products and additional use cases. Those types of wins reflect the long-term trusted supplier relationships we have cultivated over many years of operations with leading blue-chip customers. Importantly, together, we expect them to make a significant contribution to further growth in 2027 on top of the very significant growth we are already delivering in 2026. Beyond the wins already secured, our pipeline of opportunities remains very broad and deep, spanning our entire product portfolio, Edge systems, Smart NICs and FPGA-based solutions as well as AI Inference, White Box Switches and Post-Quantum Cryptography across both new and existing customers. We expect this pipeline to continue converting into Design Wins, laying the ground for sustained strong growth well beyond this year. Turning to our outlook for the fourth quarter. Based on the predictable recurring revenues from our Design Wins platform, we expect revenues in the range of $27 million to $28 million, representing 66% year-over-year growth at the upper end of the guidance. For the full year, we have raised our revenue guidance to a range of $96 million to $98 million, representing 57% year-over-year growth. This is the second time this year that we have raised our full year guidance, which stood at $82 million to $83 million just 6 months ago. I also want to emphasize a particularly important milestone. Last quarter, we told you that we expected to return to quarterly non-GAAP profitability during the second half of the year. We have already achieved this in the third quarter, driven by our strong execution and the significant inherent leverage in our business model and with the strong growth we expect in the fourth quarter, we expect to build significantly on this profitability in the coming quarter. This is an important turning point for Silicom, and it shows the earnings power that our growing revenues are starting to unlock. Let me now turn to the AI Inference market, where we continue to see tangible and significant potential. The AI networking and interconnect market is highly dynamic, requiring rapid architectural changes. This plays directly to our core strength of quickly tailoring sophisticated solutions. As a direct result of those fast-moving dynamics, our pipeline is highly active. We are in final discussions with new customer with a new customer about the major evolving use case, and we expect to reach an agreement very soon. Conversely, another prospect recently suspended the project to change their strategic direction. We have a strong track record of thriving in exactly this kind of fluid environment. To secure their supply chain, inference players are increasingly adopting dual-source strategies. Because those customers anticipate needing very high product quantities in the range of tens of thousands annually, they believe they will have sufficient volume to support both sources. This shift represents a strong long-term net positive for Silicom, opening up far more opportunities than risks. While one of our current customers now has a dual-source option, this broader trend is already driving new pipeline growth, including at least one new prospect currently evaluating us for their dual-source plans. We are uniquely equipped to capture those expanding opportunities. Our ability to deliver both FPGA-based and COTS-based solutions ensures that we can provide the most cost-effective high-performance architectures to ASIC inference companies as they scale. Ultimately, the behavior of decision-making and extended time frames in the AI Inference space closely mirror those of our traditional markets. Success in this environment requires patience and a readiness to provide consistent long-term support through very long product introductions, initial deployments, and ramp-up periods. We are fully prepared to navigate those extended cycles, having executed exactly this playbook across similar markets for more than 30 years. Finally, this brings me to our continued balance sheet strength, which provides us with the flexibility to invest in our growth while maintaining a conservative financial profile. At the end of September, our working capital and marketable securities totaled $107 million, representing approximately $18 per share, of which $45 million in cash, cash equivalents and highly rated marketable securities with no debt. In summary, this was another excellent quarter. It reinforces our confidence in the strength of our target market, the effectiveness of our execution and the soundness of our strategic plan, and it is a very exciting time for Silicom. Our business delivered 71% year-over-year revenue growth in the third quarter, ahead of our guidance, and we have returned to non-GAAP profitability well ahead of our original time line. Our Design Win engine is firing on all cylinders with 8 Design Wins already secured this year, and we have once again raised our full year revenue guidance to $96 million to $98 million, representing 57% year-over-year growth. Most importantly, the strong base of design wins we have built together with our very broad pipeline of opportunities position us -- position our business very well for continued growth in 2027 and beyond. Taken together, those achievements clearly show that we have passed an inflection point. Customer demand is stronger and our broad momentum continues to build. With accelerating revenues and our return to profitability, we expect to close 2026 on a high note, carrying this exceptional momentum into a highly promising 2027. We look forward to delivering continued strong growth and returns to our shareholders in the quarters ahead and over the long term. With that, I will now hand the call over to Eran for a detailed review of the quarter results. Eran, please go ahead.

Thank you, Liron, and good day to everyone. I will review the financial results and business performance for the third quarter of 2026. Before beginning the financial overview, I would like to remind you that unless otherwise indicated, all financial results are non-GAAP. A full reconciliation of our results on a GAAP to non-GAAP basis is available in the press release issued earlier today. We are very happy with our revenues for the third quarter of 2026, which were $26.7 million, 71% above the $15.6 million 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, 11%; Far East and the rest of the world, 11%. During the last 12 months, we have one 10% U.S. customer, which accounted for about 13% of our revenue. Gross profit for the third quarter of 2026 grew 63% to $8.1 million compared to a gross profit of $5 million in the third quarter of 2025. Our gross margin of 30.3% in the quarter is comfortably within our expected short to midterm gross margin range of 27% to 32%. Operating expenses in the third quarter of 2026 were $8.1 million compared with $7.4 million reported in the third quarter of 2025. I highlight that this is an increase of only 9% year-over-year compared with 71% revenue growth, a clear demonstration of the operating leverage inherent within our business model. Operating income for the third quarter of 2026 turned positive just above breakeven at $20,000, a significant improvement from the operating loss of $2.4 million reported in the third quarter of 2025. Net income for the quarter was $0.3 million compared with a net loss of $2.1 million in the third quarter of 2025. We are delighted to have returned to quarterly non-GAAP profitability in the third quarter, well ahead of our initial expectations. Earnings per share in the quarter were $0.04 compared with a loss per share of $0.36 in the third quarter of last year. Now turning to the balance sheet. As Liron mentioned, as of September 30, 2026, our working capital and marketable securities amounted to $107 million including $73 million in high-quality inventory and $45 million in cash, cash equivalents and highly rated marketable securities with no debt. That ends my summary. I would like to hand back to the operator for a question-and-answer session.

[Operator Instructions] The first question is from Ryan Koontz of Needham & Company.

Great quarter, guys. Really great quarter. A few questions, if I could, please. Just can you start with reminding us what the revenue ramp? I know there's different scales of different design wins, obviously. But can you remind us of the timing of revenue ramps typically from the time that you announce a win? Are we talking 2 quarters to start small and maybe gets material in 3, 4 quarters? If you could just comment on that, just to reset the expectations here on these Design Wins, that would be really helpful.

Yes. I mean, obviously, it differs from one Design Win to another. But usually, it's going to be in the range of 6 months. We start seeing the revenues coming in 12 months, we see the ramp-up. And then usually from that point on, it's basically continuing at the sort of run rate.

Really helpful. So this really exemplary growth you're delivering here in the second half with a really strong acceleration exceeding 50%. These are design wins, I assume then the primarily contributors here are design wins you secured in the second half of '25. Is that a good way to think about it?

Before, yes. But it's definitely not the Design Wins we secured in the first half of this year, those will be mainly contributing for the years to come. So everything we're seeing right now already in the growth in the revenue numbers are Design Win we achieved either in 2025 or some of them even earlier than that.

Yes. Great. Great to hear that. And then I know you've talked in the past about this inference Design Win and the potential for this to -- any updates for us there? I know investors are keenly interested in that opportunity, but can you share any updates on your view of the opportunity and timing?

Yes. We continue to be very excited about this opportunity, obviously, and we're seeing good momentum with this customer. And I definitely hope we will have some updates for you soon. Right now, it's still moving forward good. As we published, we got the first production order. We're working on delivering it and also working on trying to secure additional orders.

Got it. Super. And if you could clarify -- your microphone is a little fuzzy. It's a little bit hard to hear you on this call, to be honest. But you had the comments about dual source. This is from an existing design win you have that's going to dual source? Or can you clarify your comments there?