Ladies and gentlemen, thank you for standing by. Welcome to the Silicom’s Fourth Quarter 2016 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 and Public Relations at 1-646-688-3559 or view it in the news section of the Company’s website, www.silicom-usa.com. I would now like to hand the call over to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Yes. Thank you, operator. I would like to welcome all of you to Silicom’s fourth quarter 2016 results conference call. Before we start, I would 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 that information. Actual events or results may differ materially from those projected, including as a result of changing industry and market trends, reduced demands for Silicom’s products, the timing and development of new products, and their adoption by the market, increased competition in the industry and price reductions as well as due to risk identified in the document filed by the company with SEC. In addition, following the Company’s disclosure of certain non-GAAP financial measures in today’s earnings release, such non-GAAP financial measure will be discussed during this call. Such non-GAAP measures are used by management to make strategic decisions, focus future results and evaluate the Company’s current performance. Management believes that the presentation of those non-GAAP financial measures is useful to investor understanding and assessment of the Company’s ongoing corporation and prospect for the future. Unless otherwise stated, it should be assumed that financial discuss 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 can find on Silicom’s website. With us today on the call 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. Good morning, everyone and welcome to our conference call to discuss our full year and fourth quarter results of 2016. It was a strong quarter culminating a very successful year. Our ongoing top line growth was very robust and revenues for the quarter were at the highest level in our history at over $28million, and for the year, we crossed the $100 million milestone for the first time up 21% over last year. Our results confirmed that not only are we on the right path. Our long-term strategy is playing out as we hope and we have been successful to an outstanding degree. Our focus and investment into providing solutions for some of the IT industry’s current hottest segments that are Cyber Security, Virtualization, and Cloud continues to pay off. These segments in particular dependence on flawless connectivity and our product innovations and out-of-the-box concepts are tweak towards exactly meeting our customers need. In fact, our all efforts here are leading to us being increasingly seen by many existing and potential customers in our target industries, as the connectivity-partner-of-choice. As I’ve always said, our growth strategy is built on three pillars. Our consistent expansion of the product portfolio by adding new product lines, as well as broadening and updating existing offerings, growing our addressable markets by penetrating additional adjacent market segments, and deepening our relationships and further penetrating into many of our existing customers, especially the top tier OEMs, with both new and existing products. Our recent flew of design win successes are at solid demonstration of all three of these growth concepts. They show our ability in predicting, correctly investing, and investing in an ultimately capitalizing on the upcoming market trend. Our design wins represent the ongoing fruits of significant past R&D investments made at the…

Thank you, Shaike, and hello, everyone. Revenues for the fourth quarter of 2016 were record $28.3 million compared with revenues of $27.4 million as reported in the fourth quarter of last year. Revenues for the full year of 2016 were also at a record reaching $100.3 million representing year-over-year growth of 21% over $82.7 million as reported last year. Our geographical revenue breakdown for 2016 were as follows; North America 65%, Europe and Israel 24%, Far East and the Rest of the World 11%. 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 full reconciliation from GAAP to non-GAAP numbers, please refer to the press release we issued earlier today. Gross profit for the fourth quarter of 2016 was $11.3 million, representing a gross margin of 39.8%. This is compared with $11.4 million or gross margin of 41.4% in the fourth quarter of last year. As we’ve mentioned in previous conference calls, our gross margin is largely affected by the specific mix of products sold in the period. Operating expenses in the fourth quarter of 2016 were $5.4 million, or 19.2% of revenues, compared with $4.5 million or 16.3% of revenues in the fourth quarter of last year. The increase in the absolute level of operating expenses versus the fourth quarter of last year was mainly due to higher investment in R&D. This reflects our strategy to invest incremental resources in order to take advantage of the various opportunities that we seen our target markets. Operating income for the fourth quarter of 2016 was $5.8 million or 20.6% of revenues, compared to $6.9 million as reported in the first quarter – in the fourth quarter of 2016. Income taxes for 2016 were $2.8 million, representing 14.4% of income before income taxes. This is within our typical 14% to 15% range, which we discussed in previous conference calls. Fourth quarter 2016 net income was $4.9 million or 17.4% of revenues compared to $6.3 million in the fourth quarter of last year. Earnings per diluted share in the quarter were $0.66 in the quarter compared with $0.86 in the fourth quarter of last year. Now turning to the balance sheet, as of December 31, 2016, the company’s cash, cash equivalents, short-term bank deposits and marketable securities totaled $35.9 million or $4.87 per outstanding share. That ends my summary, and we would be happy to take any questions. Operator?

Thank you. Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] The first question is from Alex Henderson of Needham and Company. Please go ahead.

Thanks, hey guys. Just a couple of housekeeping to start with if I could, can you give us the headcount in 10% customers?

Yes. Total headcount is about 214 employees very similar to the previous quarters. And to the customers, we have two 10% plus customers. One of them is approximately 17% and the second one is approximately 12%.

Okay. So, approximately 29% combined.

Correct.

Okay. And as you’re looking forward do you expect the headcount to remain relatively flat.

Yes. Quite flat maybe a few employees more.

Okay. So as we look forward into the CY2017, any reason for a change in the tax rate? Or do you expect that it holds in the standard range? And then second, what’s your thoughts on the overall OpEx as we go through 2017. Any sense of whether you’re going to accelerate it, hold it steady, anything that would helpful on those lines.

As to the tax rate, it is suppose to refer similar to 2016 which means in the range of 14% to 15%. As to the operated expenses it is suppose to be quite similar to the quarters in 2016. Perhaps a little bit slightly a little bit more than 2016.

Okay. You’ve come in several quarters now after giving a changed guidance for gross margins and you’ve been coming in pretty much at the upper end of the band on what you would suggested? Are you still thinking a pretty wide band – I think if I remember correct that was 36% to 40% was the original guide that back a while back now? Or do you think it coming narrow that a little bit it’s going out given what your visibility looks like?

Well, I believe that the general guidance should still be similar to what we’ve said even though I mean this is a gradual process. I mean as we’re moving towards the cloud, it would take time for these sales to make impact. So which is why I believe that if you’re talking about the first quarter, then it would be closer to where we are right now as we move forward the general guidance should still hold.

Okay. Great, I’ll see you at the floor. Thanks.

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

I’ve seen as the contingent consideration has moved around quite a bit little and has dropped from the fourth quarter of last year. Does that mean that you are growing for contingent consideration as accrued? Are you still using some kind of some formula?

The answer is follows, as of December 31, 2016, as we can all see the company continue to maintain $4.6 million liability in connection with contingent configuration, which is all related to the ADI acquisition. We are required to assist changes into fair value of this contingent liability every quarter. If the loss earn-out is related to the assignment of future performance milestones for 2017, which means the next year the liability schedule to be fully retain off by the end of 2017.

I see, all right. Thank you very much. That really takes care of my question.

The next question is from Marcel Herbst of Herbst Capital Management. Please go ahead.

Good morning. Thank you for taking my question. In your prepared remarks, you mentioned a long list of new products in the pipeline. Is that mostly about broadening your existing product families or you also planning to launch new product family?

Well. We are continuously planning to launch product families, but I think that I would like to clarify that the finishing of new product family. Because what we are not planning is we are not going to look for something, which is entirely different from what we are doing now. But we do, we are planning continuously planning to release a new product family, so if just to give an example, so let’s say that we have the products utilizing sailings FPGAs and now we are going to release the family of products, which are going to release to use Altera FPGA. So we said new product family for us especially in high speed but it’s synergetic to what we are doing. So we are not going to go into entirely different areas. So yes, definitely new product lines, but within the business or the scope of environment that we typically operate.

Okay. Thank you.

The next question is from George Marimo [ph]. Please go ahead.

Good morning, Shaike.

Good morning

Compared to your previous growth phase, does it – to the current an emerging opportunities provide Silicom specifically was the smaller, similar, larger, or much larger addressable market opportunity over the intermediate term.

Well, I would think if I need to select between these I would say larger.

Okay. And which area of your business, do you think has the most upside potential?

I think that working with cloud providers – I think, first of all I believe that the cloud would represent the major opportunity for us. And I think that that could happen in, I would say in two areas. One area is the various approaches within the cloud, which require switching capabilities as a part of the servers within the cloud, which is an area, in which we’re very active and hopefully that would happen – that would show in design wins. And in a way it is already showing in some areas, well, actually three areas that I could mentioned in here. The other area, a little bit longer term would be the area of FPGAs we believe that cloud users and NFV users would be using FPGA-based solutions and we’re going to be there with the solution. And also there’s the area of SD-WAN, which is sort of a derivative of the cloud business, we’re – which is another area that we’re seeing growth.

Okay, also I noticed that the VeloCloud was recently added to your website as a partner. Is Silicom already engaged with current deployments as part of their solutions or as VeloCloud bringingSilicom to customers directly for future deployments.

Well, I – we cannot speak about specific customers. And I think that possibly we’ve included VeloCloud has one of the market leaders in the area of SD-WAN, but I cannot respond to your question specifically, because we’re not addressing specific customers and where we are with that just specific customers.

Okay. Can you give any comments about SD-WAN specifically at 2017 and folds are you othercustomers – what are the customers telling you. What kind of expectations you have for SD-WAN.

Well, they are telling us, it’s going to be a major growth area specifically for them. Each company that we talk to – with respect to SD-WAN is focusing growth, which is very significant growth with the amount of grey hair on me I would be more careful as its relates to Silicom. But I do believe that it’s going to be quite significant.

Okay. And one more, how do you envision the business model leverage going forward for the next 50% or 100% revenue growth over whatever time period that maybe? What percentage increase in operating expenses, do you anticipate to support that come in increased revenue? Just generally.

Well in general, there would definitely be an increase once we’re talking about 50% or 100% growth, which is something that we’re looking at there would be growth. I believe that our operating profits are such that, on the one side I can say, well, we would have leverage and I’ve said for a quite some time. On the other side, I do know and we do know that in order to grow the level of revenues you do need to increase your operating expenses as well. I definitely don’t expect our operating growth – profit as a result and that would be less than what we are now. I expect them to be higher. So, yes that’s about it. I mean we would need to grow but our EPS would grow. I’m sure about that.

Okay. Thank you, Shaike.

The next question is from David Wilson of UCS Finance. Please go ahead.

Thank you. Just couple of sort of bookkeeping. Can you maybe you addresses before. Explain how the G&A number works and moves around, when you look at it quarter-to-quarter 2015 to 2016, it’s a significant drop as I’m looking at my numbers right. If you look at it 12-month period it sort of goes the other way. What am I missing here? How can you explain that?

If you look at the non-GAAP numbers you will see similar numbers. The structure of our G&A expenses was quite the same in 2015 and 2016. What you see is the GAAP numbers, which in connection with G&A included last year in quarter three included a one-time adjustment related to the formal acquisition of Fiberblaze in 2014.

Gotcha. The other question in bookkeeping is. I know a while ago you announce the philosophy of holding a higher inventory. Because you have some customers that essentially asked you to have it on a rapid demand basis if you will. That philosophy worked for you. Your inventory number still relatively high, but may be been able to meet their demands on a just in time basis. Is that work pretty well?

I would say yes.

Okay. Thank you.

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

Hi. So just I was hoping if you could give us some sense of what sectors of your business relative to security and particular is driving the revenue growth sequentially and annually. And whether you see that changing it all as SD-WAN kicks in. My understanding is security is running little over of 30-year business trailing has that, is that percentage still increasing and do you expected to increase in 2017?

Well. First of all security is definitely an important part of our business and a growing part of our business. I believe that the amount that the number itself in terms of security, yes, it’s approximately just like you said something like 35%, 36% of our business and I think it’s growing. I think that even though I mean securities sometimes go into the cloud, et cetera. So these are not exactly the same kind of definition, but in terms of growth I would say that if you look at where we’re going in terms of which is the end user, which is going to use our product. When in that case I think that the cloud and whatever is related to the cloud including SD-WAN would be the sector, which demonstrates the higher growth even more than security. I believe that security will grow, obviously whatever has to do with cloud to the growth. I believe that our – some of our other traditional market segments such as Application Delivery or WAN Optimization, they would not grow that much. I mean our customers are telling us they would grow, but to be honest, I think that this is not an area of growth right now. I think that security and whatever is related to the cloud are the areas of growth for us.

So as you look at your mix going forward, it sounds like cloud security SD-WAN in particular the drivers and those should rapidly increases a percentage of sales given the fairly flat markets in ADCs and went up. Do you think you can hit 50% of sales growing from that in 2017 or 2018?

Together or you mean just each. I mean I don’t think…

I aggregate the growth areas.

The growth – well, I think that security, which is now 35%, would not reach 50% in this year. And it would grow, but it would be I think so, possibly a double-digit but not reach to 50%. I think that the Cloud business that we were having, which are – if you combine everything that was selling into the cloud directly or an indirectly, which is probably around 20% right now. That could grow very significantly in 2017. I would like to add one more thing. I’m now talking about end markets. We can still – while I’m telling you all that, we can still experience grow even the traditional market given some sort of a big design win, which could have an impact and it’s not related to the growth in the end market. So that could happen as well, but in terms of growth of end market. So I think that security would grow for us double-digits, but not reach 50%, cloud would grow – could reach 50% growth.

That’s very helpful. And just a couple of product questions, can you give us an update on Encryption and Time Stamping. Thanks.

Okay, so in terms of an Encryption, first of all, I would say that we have a quite promising pipeline in terms of a design wins, which we hopefully would receive during the year. And that is both with the current generations of the Silicom, that Intel is coming out with. And with the next generation Silicom that’s coming – that Intel is coming with. But on top of that there is one other thing, I mean, we understand and we feel that one of the main issues within the cloud in general and I would not going to details right now is the concern about security, which is not addressed entire in its entirety by the off the shelf ASIC’s that Intel or other companies are proposing to the market, which would also contribute so we believe to the penetration of FPGA-based solutions in to the cloud. Now I don’t think that our sales within 2017 from data segments would be very significant, but I do believe firmly that our relationship with Intel on the one side. The activities or the R&D efforts that we are taken into including, I would say security solutions into FPGA, on the other side combine together that could be quite significant as I’ve said not in 2017, but in 2018. So now while this was about security, it was not exactly about Time Stamping but it was about our FPGA activity, which is one activity. So while I do see some pipeline for so called Time Stamping and I believe that we would have some design wins in that area. But in terms of our FPGA activity, I think that the issue of security within FPGA is much more strategic.

Thank you very much.

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

Thanks. Congrats on a great quarter and the year. In the SD-WAN space using much revenue – whether it would be in the fourth quarter or any time during the year last year in SD-WAN?

No, the revenues last year from SD-WAN was not significant.

Okay. And can you give us a sense of how many customers you have in SD-WAN?

SD-WAN, well, not in number but we have a few. I mean a few means I can definitely count them with the fingers of one hand right now.

And how many more would you say?

Well. As a matter of fact I’m not even sure about that right now, thinking about that because some of our WAN Optimization customers they’re selling SD-WAN as well. So, okay, about – let say above five.

Okay. Because effectively you are supplying these Edge appliances, right. These appliances go on the Edge of the network.

Yes. We’re supplying Edge appliances but that’s not the only thing that we’re selling to the SD-WAN market because some of our customers are using higher-end appliances for the SD-WAN market as well and they’re using our cards for that market.

Well from what I read the growth opportunity there is explosive and it sounds like it's happening right now. So it will be great to follow your progress over the course of the year here. Good luck, thank you.

Thank you.

[Operator Instructions] The next question is from George Marimo [ph]. Please go ahead.

Yes. Hi, I was wondering what you see specifically for the NFV market in 2017? What do you see out there?

Well, the NFV is related to us, once again in – I would say two parts, two different parts. And one part which could to be happening in terms of revenues for us relatively earlier and even to a certain extent throughout 2017 is once again with Edge appliances. Because Edge appliances, vCPEs, they are not only for SD-WAN. I mean in the – from a broader perspective based upon the NFV markets were I would say telecoms are deploying such Edge appliances, which in a way are very similar to the SD-WAN appliances. So that’s one area where we see NFV not direct, but NFV customers who use to sell typically these are companies who used to sell a part of the equipment. I would say to the telecom these companies are now turning to us for Edge appliances for NFV. That’s one part of that. The other part of that once again is with FPGA-based cards. And actually we are engage with the discussions of some I would say market leaders for the purpose of building FPGA-based cards, which would include also standard. I would say Intel networking drivers on the one side and on the other side would include capabilities, which would facilitate easy and secure NFV deployment. So that’s were impacted us right now.

You’ve been talking a lot today, but these if I have a right FPGAs, could you tell me more about what it is exactly and then what you’re doing with it?

Yes, sure. So FPGA is a field-programmable what is that – integrate FP whatever, okay, field-programmable gate...

Array.

Array, yes. Array, yes, so these are devices which allow you to add specific functionality actually in hardware by writing code into these devices. So on the one side there, you could say that they are something between a processor that you can put them board as well and real hardware, which is the zero flexibility. So with these devices, which are typically used to get very high performance, you could achieve certain flexibility, because you can add your own functionality to a hardware device and then get much improved performance. Performance that you could get with the typically or higher than what you could get with network processors sometime and less or not even less, but in similar that what you can get with an ASIC’s at a somewhat higher price, but much higher level of a flexibility. Now the most important thing that happened about the year ago in this market, they were actually only two players in the world, which were manufacturing or delivering to the market FPGAs. These were Xilinx and Altera. What happened about a year ago was that Intel has acquired Altera and since then it has shared with the one of its plan FPGAs on the motherboard, on cards, and so on and so forth. And now I think the world understands that in order to achieve the performance that I needed in future NFV deployments and et cetera. They would need to use FPGA and Intel would make the use of such FPGA solution easier through providing suites of software drivers et cetera. And I think that we are on the right path to be a part of that wave, but just one word as I mentioned because we’re developing new products to that and that these products are relatively complex. I do not think we would see significant revenues for that area in 2017, but in the following year definitely.

Okay, that’s a great overview. Thank you, Shaike.

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?

Yes. Thank you, operator. Thank you everybody for joining the call. We look forward to hosing you in our next call in three months time. Good day.

Thank you. This concludes Silicom’s fourth quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.