Ladies and gentlemen, thank you for standing by. Welcome to the Silicom Second Quarter 2015 Results Conference Call. All participants are at present in listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. 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 GK Investor Relations 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. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin please?

Thank you, operator. I would like to welcome all of you to Silicom's second quarter 2015 results conference call. Before we start, I'd like to draw your attention to the following Safe Harbor statement. This conference call contains projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and may change as time passes. Silicom does not assume any obligation to update their information. Actual events or results may differ materially from those projected including as a result of changing industry and market trends, reduced demand for Silicom's products, the timing and development of new products, and the adoption by the market, increased competition in the industry, and product reductions as well as due to risks identified in the document filed by the company with the SEC. 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 focused future results and evaluate the company's current performance. Management believes that the presentation of these non-GAAP financial measures is useful to investors understanding and assessment of the company's ongoing corporation and prospects for the future. Unless otherwise stated, it should be assumed that the 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 our financial conditions 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 find on Silicom's website. With us today on the line are Mr. Shaike Orbach, the CEO; and Mr. Eran Gilad, the CFO. Shaike 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 like now to hand over the call to Shaike. Shaike please?

Thank you, Ehud. As we shared with you a few weeks ago, our revenue shortfall during the second quarter reflected longer than expected decision making processes and slower than projected market deployments at some of our largest customers. Revenues came in at $17.1 million, in line with our updated guidance range. We believe that the second quarter was the low point of our revenues for 2015 and we look forward to a sequential improvement in the third quarter. I will discuss our guidance in a few moments. I would like to stress that even given the slower quarter, we still demonstrated a high level of profit. We reported $3.4 million in operating income representing a margin of 20%, earnings per diluted share of 40% and continued positive operating cash flow. It is also important to emphasize that we continued to believe in our strategy which has worked well for us for many years and we expect it to continue to work moving forward as well. In terms of our balance sheet strength, our positive operating cash flow contributed to our cash levels which continue to remain strong. At the end of the second quarter, this stood at $55.4 million. I know that we continued to maintain our balance sheet strength even after sharing a dividend with our shareholders amounting to $7.3 million during the second quarter. As always, our high cash levels continue to remain a significant asset for us demonstrating to our customers that we are a solid and stable company that will support all their needs over the long term. Further than that, it provides us with an ability to work decisively when the opportunity arises to acquire synergistic businesses which expand our product portfolio, addressable market and further fuel our growth. Over the last three months, we…

Thank you, Shaike, and hello everyone. Revenues for the second quarter of 2015 were $17.1 million. Our geographical revenue breakdown for the first half of 2015 were as follows; North America, 64%l Europe and Israel, 20%; Far East and rest of the world, 16%. 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, and acquisition related adjustments. For the further consideration from GAAP to non-GAAP numbers, please refer to the press release we issued earlier today. Gross profit for the second quarter of 2015 was $7.2 million, representing a gross margin of 42.3%. This is compared with $7.2 million or gross margin of 40.3% in the second quarter of last year. I note that the gross margin does vary between quarters, mainly as a result of the specific mix of product sold during the quarter. Operating expenses in the second quarter of 2015 were $3.9 million or 22.6% of revenues, compared with $3 million or 16.6% of revenues in the second quarter of last year. The increase in operating expenses versus the second quarter of last year were partially due to the added expenses from the recent acquisition of Fiberblaze. The small sequential increase compared to Q1 of 2016 is mainly due to the change in the shekel versus the dollar exchange rate. Operating income for the second quarter of 2015 was $3.4 million or 19.8% of revenues, compared to $4.3 million or 23.8% of revenue reported in the second quarter of 2014. Second quarter 2015 net income was $2.9 million or 17.2% of revenues, compared to the $3.7 million or 20.5% of revenues in the second quarter of last year. Earnings per diluted share in the quarter were $0.40, compared with $0.50 in the second quarter of last year. Now turning to the balance sheet, as of June 30, 2015 the company's cash, cash equivalents, short-term bank debt deposits and marketable securities totaled $55.4 million or $7.62 per outstanding share. During the second, on April and 21 2015 we paid out $7.3 million as a dividend to our shareholders. That ends my summary and we would be happy to take any questions. Operator?

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

Hi guys. A couple of quick just housekeeping, can you give us your headcount at the end of the quarter?

Yes, the headcount at the end of the quarter is actually quite similar to the end of the first quarter, it's about 205 employees.

And the do you have hiring or expected as the year progresses or are you holding that flat over the next couple of quarters?

I think it would remain more or less the same number.

And any guidance on the tax rate for the remainder of the year?

Yes it should be quite similar to what we have seen in quarter one and quarter to, which means approximately 14%.

Okay great. A couple of questions on the competitive and dynamics front, first of there was a delay in the launch of the Broadcom Tomahawk 25 gig chip set over the summer and it seems to coincide a little bit with some of the softness in some people's system as deployment as people wait for that higher speed architecture, is that a factor impacting you guys or is that mainly a large scaled data centre environment issue?

Well, I wouldn't say that that would be the most important factor, but the fact that Broadcom’s 100 giga bit supporting Silicom has been delight delayed for quite a while, not necessarily Tomahawk, Tomahawk is one of the series, it is not only Silicom which supports 100 gig, did have some sort of an impact on us because we are planning obviously to release some product, which include 100 gig Silicom from Broadcom, that's a part of our offering in our roadmap and that has been delayed. So that's a good example even though not the main factor as to the fact that there is something that should have been or could have been happening earlier actually will happen later on.

On a similar note, has there been any delays in the timing of Intel related chips that are playing a factor in this slow down in new product deployments,?

Well there has been delays, not right now, I mean as a matter of fact that most important for us right now from Intel is the Red Rock Canyon, right now I mean there are no further delays, but originally of course it was supposed to rise earlier, which also would have been important as well. Also the next generation of Coleto Creek, it's not exactly delayed, but exist but it’s late and that also does have some sort of an impact, but again each of this is an example, none of this is the whole thing or something like that.

On the competitive front over, or this morning Cavium is out with their announcement of the NITROX V for 100 gig processors. They specifically noted several players, which I believe historically have been your customers, as were quoted in the press release, can you talk about whether that’s impacting your competitive position given the orientation of that product line is directly towards ADC’s weighing up UTM gateways and switches, which are all your target market?

Well, again, obviously, I cannot address specific customers, but obviously the fact that our encryption, decryption and compression at Silicom is based on Intel and Intel has not released the equivalent to Cavium's NITROX V, which just like you said have been announced today. That is not helping us. That being said, hopefully Lewisburg, which is the next generation from Intel, which is supposed to compete with NITROX V would still come in time to allow us to compete in that market. So the difference between the releases would not be – that’s what you are hoping – would not be too long, but obviously if we had the equivalent to NITROX V, it would have been better.

And when do you expect Lewisburg to actually ship?

Well, I would rather – I mean, I think that…

Well, how much delay are we talking about here? Is it months or is it quarters?

Well, I mean, I’m a little bit hesitant because I’m not sure about the level of disclosure that I’m allowed with the respective Intel plans that we are having in mind. I know that the fact that Lewisburg is going to be out is probably acknowledged, which is why I’ve talked about that. But as I said, I believe that the schedule for that would still allow us to be competitive in that market even though it would be more difficult because Cavium would have samples and actually has samples in the market right now.

Right. And then one more question on that front. There is obviously some disruption here to one of your key customers has gone private over the most recent quarter. Can you talk a little bit about whether that caused any cancellation of projects or product developments that you might have had in the pipeline and whether that has caused a tightening of inventory or whether that’s caused any additional dress to the quarter? How do we think about that?

Okay. So first of all, once again I do not want to address any specific customer, which is why I cannot be very specific, but I can say that one of our biggest customers – I mean what we sold in Q2 to that big customer of ours was significantly less than what we thought that we would sell to it. And we believe that the reason for that could be related to what you said before. Now in terms of what’s actually happening and what exactly were the reasons, we are not 100% sure. We do know that they did have excess stock, which is why they bought less. I do know that none of the projects was cancelled, but obviously they were delayed. Some of the projects with these customers were delayed, so this I do know. So trying to making sure that I responded to all your questions, yes, one of our biggest customers have had some problems or at least we have seen problems, which are probably a reflection of what this customer is experiencing. We are not aware of any cancellations or anything that would have been a long-term impact on us, but in terms of delays and things not happening at the rate that we expected them to happen, definitely, yes.

Okay. One last question, I will cede the floor. Your 42% gross margins in the first and second quarter are well above the 40% to 41% numbers that you had posted in prior periods or prior years. Does that reflect a change in the mix of your product and is it sustainable at that richer level or should we anticipate that it reverts back to historical norms of 40% to 41%?

I believe that it can definitely revert back. I mean I would have been even happier to say, hey, there was a trend there, but no at this moment, it’s just a mix of product and it could revert back as well as it could remain as it is, but there is no definite trend in there.

I see. Okay. I will cede the floor. Thank you.

The next question is from Edward Balinsky of Segmark. Please go ahead.

Hi. Good morning. What portion of the non-GAAP compensation and – was the result of the incentive plan for Fiberblaze? Was it – in the non-GAAP portion of the report, a substantial – it’s a substantial increase over the past and I see that you have a compensation with – agreement with Fiberblaze, which terminates in August, but what portion of that it is any was accounted for by that program?

Actually the answer is quite simple, no portion of that.

No portion, I see. So it’s all internal then? All right. And then the second is, I was – which was related to that, in your acquisition of the virtualization technology a couple of years ago, I was going to ask – it was – you had a similar program that would have resulted in non-GAAP charges with the net performing technology, the Hong Kong company.

The answer is no, no effect of the provision of net performance two, three years ago.

I see. All right. Tell me now just as a final item with regard to the dividend, will you base that on the GAAP or non-GAAP earnings?

We based it on the GAAP earnings.

On the GAAP earnings. Okay. Thank you. I will sign off at the moment.

The next question is from Don McKiernan of Landolt Securities. Please go ahead.

Yeah, thank you. Good morning. On the Fiberblaze acquisition, the press release said that it would be accretive to earnings. Is that still the case?

That’s still planned to be the case. Please note that it’s supposed to be accretive on an annual basis.

Right, right. And on the OpEx for the quarter, can you review the comparison this year to last year? I thought you said $3.9 million to $3 million and the numbers in the earnings release showed differently.

We didn’t understand it.

Would you ask that again, the question again?

Yeah, well, what was the OpEx comparison in the prepared remarks for the quarter?

OpEx in?

Year-over-year OpEx.

It’s return on the report.

Yeah, but you said $3.9 million versus $3 million and of that $900,000 increase most of it or part of that was Fiberblaze, but the press release shows $4.6 million versus $3.3 million?

The non-GAAP is three point...

Non-GAAP, that’s right, that’s right, I’m sorry.

Okay?

Okay. And on the timestamp product, on May 17 you announced a new version of that, new product release, yet we haven’t really seen any news on that. Can you tell us what’s going on there?

What did you mean about new product release?

On May 17, it looks like you had a new version of the timestamp product out.

On May what?

17th.

May 17, I believe, I saw on your website.

In our website?

Yeah, product release.

Yeah, okay. And the question was...

Yeah, well, you have announced on May 17 a new product, 40 gigabit time-stamping server adapter, it seems like you keep supporting the time-stamp space, but we haven’t seen any...

Oh, yes, all right. Yes. Okay. I understand the question. And I apologize for not understanding it at the beginning. We definitely continue to support the time stamping product line because while these design wins are all coming in late or hopefully coming in late, later than what we expected but they are not that. So all the customers or almost all the customers with which we started this process of providing them with the time stamping solutions, they continue with us. The process is much longer than what we thought which is what I’ve said before but the process is still there, they are still interested and we continue to pursue that. We have not given up on the time stamp.

Okay. Thank you.

The next question is from [indiscernible]. Please go ahead.

Yes. Thank you very much. As you know, many of your product lines are divided based on their speed, based on the design in terms of speeds of 1 gig, 10 gig, 40 gig, a 100 gig. I know the products if or across the board, can you tell us approximately what portion of your sales are coming from each category of speed in terms of 1, 10, and 100?

This is information that we do not disclose.

Okay, fine. Let me ask a question related to that. As you have specific products like a network adapter where you have different speed offerings like 1, 10 gig and faster, to what degree is there a higher price charged for the newer higher speed versions of the product of the cards?

Definitely. I mean a new speed which is coming up is always at a higher speed than the previous speed. Not only on a comparative level, but also in absolute numbers, typically when it comes in into the market it is coming at a very high price but at that time the quantities are lower. And as this speed or standard becomes more popular and more and more companies adopt it, the quantities go up to prices go down. This is right now the situation. So I mean if you want some more color and I can tell you that 1 gig is now actually, you may be able to consider that as legacy products, prices are no longer going down, they are with where they are and that’s it. 10 gig I believe is the where the market is right now and everyone is talking about 10 gig and that’s where the quantities are the highest right now. The 40 gig and 100 gig have just come in and indeed their prices are high at this moment.

Got it. And typically in the past the shift generation wise from having 10 gig to maybe 40 gig is the standard of the industry happens over how fast a period of time? Is it 12 months, is it three years, how quickly does the industry tend to shift?

I would say that it’s two to three years, but with that I would like to add a note that the situation is not 100% clear regarding 40 gig because they are still and that’s part of the things that you cannot tell in the market. Because there are some customers or there are some views in the market saying that actually 40 gig would never happen as a mainstream issue and that the market would actually go directly from 10 gig into 100 gig. Furthermore I mean because 40 gig is some sort of its not a technology by itself, 40 gig is in a way four times 10 gig package together. So there is a view which is saying, no, the market would go directly to 100 gig and as a part of the 100 gig standard, there would be – because 100 gig is a different technology and then going back and have 100 gig and 50 gig and 25 gigs in which case the 40 gig would hardly survive, survival will be some sort of a niche type of a thing. So with respect to 40, I mean everyone is sure that eventually the market will get to 100 gig, but would that happen relatively quickly whilst skipping the 40 gig or really after 40 gig when 40 gig becoming a mainstream business not something which is evident or very sure right now.

Okay. And one last question about the design win activity, at the beginning of the call you highlighted a couple of your recent design wins. Would it be possible to say, if you look at all your design win activity in the past year and add up the expected revenue at an annual basis from all the many design wins, it is possible to estimate approximately how much new design win activity you’ve won in the past year in terms of being $10 million per year, $20 million or some other number, if you take all the design wins together.

Well, I don’t have a clear answer to you summarizing it in millions and it’s also something which is relatively difficult to say, and let me just give an example as to why it is difficult. First of all, we announce a design win obviously for that to happen, it needs to be important and also we need to be able to clearly define it as a design win which means we are sure it would move forward as something that would continue with us. Now that can happen on various ways. Sometimes you get a design win but in a certain year, it contributes only very little to the revenues of this year and then in the following year that’s when it is taking off, so on which year would you calculate this design wins contribution into the design win package. So it’s not that easy of the calculation and it needs a definition which is why I don’t have a number to give you.

Okay. Well, maybe if you can’t provide a number, can you qualitatively state how strong your design win activity has been in the past 12 months relative to the prior year?

I think that in general, it has been in terms of dollars, it has been similar. I would say though that in 2013, for example, it was higher which contributed to our growth. And this year compared to last year, it is relatively similar. As I’ve said, the fact that our revenues this quarter did not come up as high as we thought was not due to difference in the design win activity level compared to last year but mostly as to revenues coming short of what we expected from existing customers rather than new design wins.

Okay. Thank you. Best of luck going forward.

We have a follow-up question from Alex Henderson of Needham. Please go ahead.

Yeah. Just a follow-up on Kohl’s [ph] great questions. Just to be clear, when you get a design win typical timeline to revenues is 12 months to 24 months, is that correct?

You can say that it is but it’s not always like that. I mean it depends on the level of commitment that we see from the customer. It’s not as if there was a 100% defined formula as to when a design win – when we call a design win what we define a design win once we are sure it is moving forward as something that will continue with us. Sometimes it happens only after we see significant orders already in and in which in such cases, in most cases we say that when we announce this kind of the year [ph]. Some other times, we say in that case of course we don’t speak about revenues which have already come. We say, no, we have a design win. We expect it to ramp up, but we don’t mention immediate orders. So it depends on the specific design win.

Right. Is it not fair to say that most design wins are associated with new product development projects and those new development projects typically have a launch date at which point the product sales ramp off of them - a large portion of your design wins or?

That’s the last portion of the design win.

That’s typically a 12 month to 24 month window. Yes?

That portion is like that, yes.

Okay, great. Thanks. And then second point, just to clarify the prior questioning line, when you think about 25 gig architectures going to 50 gig and 10 gig, that’s not going into private cloud for the most part. The vast majority of that would be going into large scale of that datacenter environment as opposed to private cloud environment. Is it fair to say that most private cloud environments are still in the transition from 1 gig architectures to 10 gig architectures? And in that context, the 40 gig will have a longer life style, life expectancy in private cloud footprints versus public cloud footprints where they would go to a 25 gig, 50 gig and 100 gig architecture.

That’s the most common approach and the most common opinion yet.

So the issue of length of 40 gig is really predominantly a question relative to your product line, when does the 25 gig architectures move to private club, which as far as I understand is not in the cards anytime soon?

Yes, which is why we are promoting both the 40 gig relieving products, both with 40 gig and [indiscernible].

Okay great, and then one other question. On the most recent weakness in terms of the quarter comments you made about some of the delays in product launches, were those delays the result of timing of new product launches or were those by customers or were those driven by end market conditions or what specifically caused the delays relative to the design wins turning to revenues, which you mentioned in the call?

I think it that it was a combination of both.

Okay great thanks.

[Operator Instructions] The next question is from Brendan Rose, please go ahead.

Hi guys, just a quick one. Any thoughts on repurchase, is there a particular price, particular evaluation all you need to tell where it is, or just the arguments or guess the repurchase plan right now?

Well as I've said many times every time that we are meeting at the board level this is something that we’re discussing, at this moment there is no decision to go for that.

Okay. Thank you.

The next question is from Ronald Mullins of Segmark, please go ahead

Could you please make some comments on how the Fiberblaze merger is going and in terms of sales, any other results that are significant?

Well what I can tell about Fiberblaze is that we definitely see the synergy between the two companies. Right now the companies are actually submerging to one another, so we no longer or even distinguishing between whatever they do and whatever we do, so in terms of the integration the integration is going very well. Obviously, there are always some difficulties, I wouldn't try to paint the picture as if everything goes exactly as expected, it’s not like that, but as I said in terms of the synergy we’re happy with whatever is going on. In terms of revenues that we are. once again I mean just like with the whole company, I mean that’s a part of what happened to Silicom as a whole as we experience the whole thing as the Fiberblaze as well.

Thank you.

There are no further questions at this time. Before I ask Mr. Orbach 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. Orbach would you like to make your concluding statement.

Thank you, operator. Thank you everybody for joining the call. We look forward to hosting you on our next call in three months time, good day.

Thank you. This concludes Silicom’s second quarter 2015 results conference call. Thank you for your participation, you may go ahead and disconnect.