Ladies and gentlemen, thank you for standing by. Welcome to the Silicom Second Quarter 2019 Results Conference Call. All participants at present are in a 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 at www.silicom.co.il. 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 2019 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 that information. Actual events or results may differ materially from those projected, including as a result of our increasing dependence on - for substantial revenue growth on a limited number of customers in the evolving cloud-based SD-WAN, NFV and Edge markets, the speed and extent to which solutions are adopted by these markets, the likelihood that we will rely increasingly on customers which provide solutions in these evolving markets, resulting in an increasing dependency on a smaller number of larger customers, difficulty in commercializing and marketing Silicom's products and services, maintaining and protecting brand recognition, protection of intellectual property, competition and other factors identified in the documents 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, forecast future results, and evaluate the Company's current performance. Management believes that the presentation of these non-GAAP financial measures is useful to investor’s understanding and assessment on the Company's ongoing collaborations and prospect 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 discussed by management are provided as an 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 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 now like to hand over the call to Shaike. Shaike, please.

Thank you, Ehud. I would like to welcome all of you to our conference call to discuss the results of the second quarter of 2019. We are satisfied with the results of the quarter with revenues in line with our expectations, ongoing profitability and continued cash generation. We reported $25 million in revenue and net income of $3 million. We also generated $6 million in positive cash flow further strengthening our balance sheet. Our cash position stands at the highest level it has ever been at over $87 million with no debt. We ended the quarter with shareholders equity of over $164 million as a result of over - 14 years of ongoing and continued profitability. Our strong balance sheet gives us significant financial flexibility and enables us to pursue any opportunities that may arise whether through internal R&D investment or external acquisition. As you know, our main long-term growth drivers come from two directions, our uCPE plus Edge products, targeting primarily SD-WAN, NFV, and other networking and telco-related sectors, as well as our advanced FPGA solutions. These markets are currently at the early adoption phases of their growth curves which presents a huge opportunity over the long-term for Silicom. As we discussed with you last quarter, because of the emerging nature of this nascent market, there are timing and visibility issues in the short-term from our major SD-WAN design wins. This is primarily due to the excess inventory accumulated by one of our major SD-WAN customers and also due to the slower than expected ramp up and timing of our major telco wins. We believe this is a short-term issue, and I would like to take a few minutes to explain why we believe that this is indeed the case. Regarding our major OEM customer, given the large growth…

Thank you, Shaike and hello, everyone. Revenues for the second quarter of 2019 were $25.4 million compared with revenues of $27.6 million as reported in the second quarter of last year. Our geographical revenue breakdown over the last 12 months were as follows; North America 80%,Europe and Israel, 16%, Far East and rest of the world 4%. During the second quarter of 2019, our top three customers together accounted for about 35% of our revenues. I would 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 discontinued project-related write-offs. For the full reconciliation from GAAP to non-GAAP numbers, please refer to the press release we issued earlier today. Gross profit for the second quarter of 2019 was $8.8 million, representing a gross margin 34.6% compared to the gross proceeds of $9 million in the second quarter of last year, representing a gross margin of 32.5%. Operating expenses in the second quarter of 2019 were $5.9 million or 23.4% of revenues compared with $5.5 million or 19.8% of revenues in the second quarter of last year. Operating income for the second quarter of 2019 was $2.8 million or 11.1% of revenues compared to operating profit of $3.45 million or 12.7% of revenue reported in the second quarter of last year. Net income for the quarter was $2.9 million or 11.4% of revenues compared to $3.4 million or 12.2% of revenues in the second quarter of last year. Earnings per diluted share in the quarter were $0.38 compared with $0.44 reported in the second quarter of last year. Now turning to the balance sheet, as of June 30, 2019, the company's cash, cash equivalents, bank deposits and marketable securities totaled $87.4 million with no debt or $11.56 per outstanding share. This is up $5.9 million compared we $81.5 million at the end of the first quarter and up $13.4 million compared with $74 million at the end of 2018. That ends my summary and we will be happy to take any questions. Operator?

[Operator Instructions] Your questions first question is from Alex Henderson of Needham and Company. Please go ahead.

So I was hoping if you could explain what a process equipment space is, little confused by the term around that customer win. Just can you give a little bit more clear what category that is?

I mean, it’s going to be a little bit difficult simply because we’re careful to identify the customer, because if I go into details it may lead you to understand who the customer is and we’re not allowed to do that at the moment, which is why it’s difficult. What I can say is -- what I can say is that this customer is a technology company, so we're not talking about the process control or process equipment in I would say chemical industry or anything like that. It’s a tight technology company involved in the technology business and the processes that we’re talking about are processes within the technology segment.

So just kind of production equipment for manufacturing something?

That could be an example to that yes.

Second question is last couple of times we've talked about the outlook, you were still little concerned about the rate of drawdown of the inventory. This call you sound a lot more confident, should we assume that the rate of pull down over the information you have relative to the rate of pull down of that excess inventory has either accelerated or the visibility is improved around it since we last talked?

Yes, I mean we definitely have more data. I wouldn't say that it helps us in terms of visibility towards what's going on but it definitely gave us some data point at least looking back so that we understand what's going on. So last time when we were talking about this major OEM customer, we only knew that he had a lot inventory and a we didn't know how much time it would take the customer. This is something we still don’t know for sure but at least we have some data point. We didn't know anything about the rate at which what’s going to happen with this inventory, is it something that is happening with this customer, is it something which is happening in the market as to why all that stopped and so and so forth. Now, we have collected some data which while it does not give us clear visibility as to what would happen in the very short-term, but we were able to see that okay, the inventory of these units was X at a certain point in time three months ago and now when we asking for data right now, it said okay now the inventory that we have is that’s what. So that allowed us to calculate the rate at which this customer is actually deploying our systems. So we’re saying that if this continues it gives us - first of all it does give us the confidence because we were able to compare this rate with what we were - with the rate that actually happened in 2018. So we were able to analyze and say, yes while the quantity that we actually deploy in the field maybe not the quantities that we sell but the quantities which are in the process of being deployed in the field are growing. So unlike what exactly we've thought, I mean we see the process and the process is that yes the customer may have had some issues due to which he bought much more than what he wanted to but we do have a certain rate right now which is higher than the rate that we had last year which is why we believe that it continues by that rate at the beginning of 2020 it is going to begin with all this inventory and then continues with that rate that give us confidence that these sales are going to come back to us by the beginning of 2020. So yes, this is dependent on the assumption that the same rate will continue. It may be a little slower, it maybe a little higher. So we cannot know for sure, but we do see the movement of our unit as they are being deployed in the field and this is definitely encouraging.

So if I look at the commentary you're giving it sounds like you have a baseline understanding of what the underlying growth rate in SD-WAN is. When I look at the commentary out of Gartner and other surveys that have been done around SD-WAN, it shows growth rate anticipated for the industry in the 40% to 60% range. You don't seem to be cleaving to that yet you sell to almost all of the underlying players that they are measuring. How do we reconcile that discrepancy? Is it just a timing issue, is it - are there forecast of how do we reconcile that. We just did a survey that showed a cloud direct modeling and SD-WAN was one of the most aggressive sought out technologies in the sample of 50 companies in the $500 million to $6 billion range. It's just not putting - how do we reconcile it?

Well, what I would say is that the data that we have which may not be representative of the full market, but it does not contradict the data that you are giving. Because to be honest, I mean what happened to us was by the end of 2018 in a way we were I would say misled by the fact that we had one in a way I would say even more than one. But let me talk about this specific customer, because that was the main factor that led us to these conclusions. We have received a huge order towards the end of 2018 which eventually turned out to be exaggerated and not need. Now if we take just what was actually needed by that customer during that time, during 2018 and then we look at the current rate that we’re hoping to get in 2018 yeah that may definitely be 40% or maybe even more. Only you cannot take what we sold in 2018 and expect a 40% growth over that because this what we sold to this customer in 2018 was actually reflecting the need of the market, but rather some assumptions to this specific customer said. So talking generally yeah, I mean – I think it may make sense that our growth rate in SD-WAN could be quite similar to what you’ve said – but that would – we would feel that in terms of significant in total revenues that would be significant in 2020. 2019 may not be that significant.

So if that’s the case and market is in fact growing 40% plus then I'm struggling with the explanation of why the two large service providers who want to participate in that space have delayed so much. Last quarter you gave an exclamation that you thought part of the reason why those two Tier 1 customers in the U.S. didn’t deploy white box SD-WAN was because they were seeing weak underlying sales at the OEMs. And therefore they were no rush to undermine their MPLS business. Can your revisit that assumption relative to the delays that those two Tier 1 that?

Yes, I mean I think that last quarter we gave several potential reasons for the delays and we thought that possibly some of – these reasons were related to slower than expected ramp up of SD-WAN and NFV. When we look at that closer and analyze the numbers so indeed I’m saying that I don't see based on the numbers that we now looked at. I don’t think there is a slower than expected rate of growth of the SD-WAN. There still maybe a relatively slow deployment in terms of NFV, but not in SD-WAN. Now as to your specific question, so your specific question about these two big wins. So and I address that in what I described, but I'll try to give you some more color into that. So the first one of them was starting actually to launch our systems with SD-WAN and then there was a decision there to change the configuration that they wanted to launch. Now never mind they may have several programs, these are huge organizations so they maybe growing in one area, but this area not due to the market they decided to change the configuration and they put on hold everything. And I said I mean now, the definition of the new configuration is completed. We have started to provide them with the new configuration. So we believe that by the end of this year or beginning of next year everything will be in place to ramp up just like we hope for in the beginning. I believe that we have said that this win will ramp up to approximately $15 million ramp per year. Now the process is actually just beginning again I mean - we hope it would begin last year by the end of last year and then…

One last question if I could just on the cost side of the equation. So the shekel had an pretty good run, should we be expecting a little bit more cost inflation as we go into the back half and into 2020 as a result? Thank you.

I cannot tell about the second half, because nobody can tell. I can say that indeed the shekel was stronger compared to the dollar in quarter two compared to quarter one, which means that there was a negative effect on our operating expenses in the amount of about a 100,000 in Q2 compared to Q1

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

I was kind of curious, how you think about your net cash position going forward. I was surprise to see that there were not much buybacks if at all during the quarter, even though you had the authorization and you had all more than like a third of your market gap is now net cash and you keep your rating like quite a bit of it. So can you just share your thoughts on how you tend to deploy it and so on. A – ShaikeOrbach: You talk about the buyback, I'll talk about the market gap. A – EranGilad: Correct, so I will comment about the buyback issue that you raised and I'm not necessarily agree with what you have said, because the buyback plan is progressed as planned. We intend to meet the targets, which was set by our Board of Directors, which means the buyback of say up to $50 million within one year. You should remember that we announced the buyback plan at the beginning of May and actually started it little bit afterwards, which means that you do not see a full quarterly effect of the buyback plan.

We have a follow up question Alex Henderson. Please go ahead.

Sure, great. So I just wanted to talk a little bit about the margin structure little bit. Obviously, you've had some pressure on that there’s really big programs that would've pushed down the gross margins. Your gross margin came in at 346 in the quarter, I think that's a function of mix. It sounds like that mix is persisting into the back half since neither of the very large Tier 1 programs are really ramping yet and you're still primarily selling the OEM projects, is that a reasonable level of margin to think about for the back half of the year persisting at that level? A – ShaikeOrbach: Well, I would say that your analysis is correct. I think overall, yes, but still you need to remember that it is a function of the mix of product as well even within our OEM, older I would say products, there's still could be deviations in the margins, which is why we continue to say that the margins would be between 32 to 36, because it is depended on mix, but generally speaking I mean, you’re right. I mean, that’s where we are.

So you absorbed about a half - 100,000 in currency impact in the quarter to OpEx. Your OpEx came in essentially flat. Are we offsetting the cost of the change in new hires and other issues on inflation, so that we are still looking at fairly flattish OpEx with a very slight bias upside sequentially or what's the trajectory of OpEx at this point? A – ShaikeOrbach: Yes. We think it’s more or less going to be flat. Of course, cannot say 100% and there could be some deviations here and there but in general, more or less flat.

Down on the tax rate came in a little lower than we had expected were using 15% in the back half, does that still the guide? A – EranGilad: First of all correct. The fixed rate in quarter two was lower than usual mainly due to one-time effects, which will not continue in the future. I would say that the expected tax rate for the next few quarters should be as before approximately 15%.

That’s all I had on those. One last question if I could, going back to kind of what I would describe is this historic business you're selling into traditional OEM customers. I look at the five numbers from last data as an example. They are moving heavily to soft-only and as a result the appliance business was down 11% year-over-year. So I mean, not talking about them specifically but rather that as a general trend, have you seen an acceleration in the erosion of the legacy appliance end market business or is that continuing to be fairly flat. Can you give us any help on that side of the business? A – ShaikeOrbach: Yeah, I mean, we haven't seen any dramatic change but I would say that -- but I wouldn't say it’s flat. I mean the trend is a decline but we're not seeing it as a sharp decline. I mean, we are seeing very slow decline. Now it may be partially, I am not sure that the information that I'm giving you is really representing what's happening in the market, because you need to understand that even though we do not invest too much in that, but even because these customers like us we get new design wins from these customers as we speak. And so these new design wins sometime they compensate for whatever is happening in the market. So the fact that we’re saying a decline which is close to flat behavior does not necessarily mean that that’s the market but for us at least we see a very soft, easy decline as the trend that you're seeing.

[Operator Instructions] 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, at www.silicom.co.il 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 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.