Ladies and gentlemen, thank you for standing by. Welcome to the Silicom's First Quarter 2020 Results Conference Call. All participants are present in a listen-only mode. Following managements 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 over the call to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin?

Thank you, operator. I would like to welcome all of you to Silicom's First Quarter 2020 Results Conference Call. Before we start, I'd like to draw your attention to the following Safe Harbor Statements. 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 any information. Actual events or results may differ materially from those projected, including as a result of our increasing dependence for substantial revenue growth on a limited number of customers in the evolving cloud-based SD-WAN, NFV and Edge markets; the speed and the extent to which solutions are adopted by these markets; the likelihood that we will rely increasingly on customers, which provides 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 recognitions; protections of intellectual property, competition, disruptions to our manufacturing and development, along with general disruptions to the entire world economy relating to the spread of the novel corona virus or COVID-19 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 understanding and assessment of the company's ongoing cooperation and prospects for the future. Unless otherwise stated, it should be assumed that financials discussed in this conference call will be on a non-GAAP basis. Non-GAAP financial measures disclosed by management are provided as 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 at www.Silicom.com. With us today on the call are Mr. Shaike Orbach, CEO; and Mr. Eran Gilad, the CFO. Shaike would 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. I would like to welcome all of you to our conference call to discuss the first quarter of 2020. I hope you and your family stay healthy during these unprecedented times, and I wish all those who have been impacted by the virus a speedy recovery. We reported revenue of just over $22 million for the quarter, in line with our updated guidance of between $21 million to $22 million and 15% below the original guidance we issued in January prior to the global spread of the corona pandemic. Reporting our 61st quarter of continued profitability, we are pleased with our financial results achieved during the unprecedented working and logistical challenges that the current pandemic has posed for us, which includes supply chain interruptions, component shortages, and delivery delays in the second half of the first quarter. Broadly, for Silicom 2020 was off to an excellent start and we had strong expectations for year before the global effects of the pandemic began to materialize. We therefore believe that was once the major impact of pandemic on the world is behind us, we will return to the strong growth trend that had already started. As you know, by mid-February the business environment started changing rapidly. During this period our top priority is ensuring the health and safety of all our employees as we continue to serve our customers around the globe. To achieve that, we eliminated international travel by employees and took steps to implement social distancing at all our facilities. We provided the infrastructure and implemented work from home, limiting the office to only those workers whose physical presence was essential. Face-to-face meetings have been minimized and we are utilizing video conferencing where possible, including for customer and remote support, as well as for business development and…

Thank you, Shaike and hello everyone. Revenues for the first quarter of 2020 were $22.2 million this is compared with revenues of $30.2 million as reported in the first quarter of last year. Our geographical revenue breakdown over the last 12 months were as follows; North America 70%, Europe and Israel 23%, Far East and rest of the world 7%. During the last 12 months, our top three customers together accounted for about 35% of our revenues. I will be presenting the rest of the financial results on a non-GAAP basis, which excludes the non-cash compensation expenses in respect of auctions and RSUs granted to directors, officers and employees, as well as acquisition-related adjustments. For the further reconciliation from GAAP to non-GAAP numbers, please refer to the press release we issued earlier today. Gross profit for the first quarter of 2020 was $7.3 million, representing a gross margin of 33% compared to a gross profit of $10.3 million or gross margin of 34.1% in the first quarter of 2019. Operating expenses in the first quarter of 2020 were $5.7 million compared with $5.9 million in the first quarter of 2019. Operating income for the first quarter of 2020 was $1.6 million compared to operating income of $4.4 million as reported in the first quarter of 2019. Net income for the quarter was $2.3 million or 10.3% of revenues compared to $4 million or 13.3% of revenues in the first quarter of 2019. Earnings per diluted share in the quarter were $0.31 compared with $0.52 as reported in the first quarter of 2019. Now turning to the balance sheet, as of March 31, 2020 the company's cash, cash equivalents, bank deposits, and marketable securities totaled $79.9 million with no debt or $11.05 per outstanding share. That ends my summary, and we would all be happy to take any questions. Operator?

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

Hey guys. I was hoping you could just start off with a little bit of discussion between whether you saw pressure on supply and logistics due to the COVID challenge or whether you also saw an increasing falloff in demand related -- can you distinguish between the pressures in the March quarter and what you think might happen as we go into the June quarter between those two issues?

Yes, I mean so almost all of the issues that we have experienced were related to supply. Now, within the supply there are a few different issues. At the beginning what we saw was that our vendors for specific components, mostly those which are I would say make components rather than standard components, were delayed in their delivery and that is because they were under some sort of a quarantine, many of them in China, etcetera. So, we didn't have delivery dates for the components that we ordered from these vendors. Later on, they started to come back and they started to deliver and at that point we started to experience two different types again of delays. One type was with I would say our subcontractor who is doing the installations and then later on they came under quarantine, so we were not able to get systems out of them even though we already had all the components, but then they were not able to ship these components to us. So that was the next phase. And then in parallel with that, there was another thing which continues even today, the second thing to a certain extent continues even today as well, and that was transportation difficulties. Transportation difficulties is mostly because of as you know, I mean, major changes with the airlines. So it was much more difficult to find a flight. Flights that were scheduled were cancelled and we did not receive what we were supposed to receive on time. We are not able to ship in time. So, these are three types of difficulties they were the main difficulties. Now, we have not seen any reduction in the demand whatsoever. The only thing that I am saying is that once we delay what we deliver to our customers right now, so everything, the whole process is getting delayed to a certain extent. So, I mean I'm assuming that would have some sort of an effect, but no deductions whatsoever, no cancellation of Pos, nothing of that sort.

Okay, so the expectation is then that the supply constraints, logistic challenges, transportation, installation challenges all are persisting into the June quarter at about same level that you saw in the March quarter or has it gotten worse?

No, it's unclear. I mean, I would say that what is a characteristic of what was happening to us towards the -- I would say the second half of March was surprises, and we continue to be surprised. I mean, because we get committed dates for our suppliers or vendors or whatever and then we get a surprise. And this is why is I am saying that it's unclear. I mean, I don't know if that would be exactly like that in second quarter, worse or less, we continue to have some surprises. We try to mitigate these surprises. Some of these we even try to mitigate by multiplying the number of sources that we work with and that would probably help us towards the end of the quarter and possibly towards Q3. So it's unclear and that's why we are saying there is no visibility. I cannot say that it's becoming worse but there are surprises. I mean, there is a certain vendor to us, for example, who was supposed to go out of quarantine by May 3rd and then just about, I think, two to three days ago we get a notification from him that his quarantine is extended until May 21st or something like that. So, this continues to happen and we tried to mitigate that, but that's why it's unclear. I cannot say that it's going to be worse, I cannot say that it's going to be better.

So just mechanically the timeline on these components, what is the production time from you get in the production of the components in to turning it around in terms of finished unit and getting it out the door, is it three to six weeks kind of production time and therefore, if it doesn't get resolved by pretty much the end of May, you'd start to have challenges getting products out of the door or is it shorter than that and therefore…?

This is more of the case. Between, I would say, four weeks to six weeks to deliver from the time that we have all components. But you should remember, although, that some of these surprises are coming from our contract manufacturers that are doing the installation as well. So they -- we may get some surprises there as well. On the other side, I mean, some components we can install later on. So, some components, even if we get them one week before the delivery, if they're just a part of the final installation, then we can still go ahead and deliver on time. So, it depends on the specific component.

Shifting gears, could you talk little bit about the dip in the gross margins in the March quarter and whether you think that that will persist, is that a function of some increased costs on expediting things or transportation or logistics or spreading the purchases around, what caused that?

Well, I think that -- well, first of all of course we are within the spectrum that we've defined for the gross margin, which I believe we said is between 32% to 36%. I think that the main reason for that dip this quarter is indeed the mix of product, because we sold more of the Edge products in this quarter. Even though I think that there were some expediting fees as well, which were possibly a little bit more than usual, but I think the main reason is the mix of products.

And so do you expect that persist at that mix given the environment or how do you see that playing out as we go forward?

Well, I mean, looking about the full year I'm not sure whether exactly this mix will persist. I believe and hope that we will continue to sell more Edge products on the one side, but on the other side, you cannot tell especially with these surprises. So, I would still say that we -- that our gross margin would be between 32% to 36%, because I mean, we could easily change just -- I mean, a certain amount or a certain percentage of the mix of product in order to be up by 1% to 1.5% and that would change -- that would be represented as a change in our GP. I mean, take for example this last win that we've announced. This is a traditional product, so our margin there should be a little bit higher and at least a part that would be sold during this year. So it's a little bit difficult to count exactly where we would end up between these 32% to 36%.

Just following up on that question of the contract that you won, you said part of that is this year, I thought that that was 15 million in the first year, maybe I remembered it wrong?

No, no, I mean, you remember it right. I mean, we said that it will be sold within the next 12 months, which means that part of that would be within this financial year, within 2020.

So, going back down to the OPEX line, R&D was pretty normal, but you did see a sequential decline in both the sales and marketing and G&A. I assume that shekel in place kind of dynamics are helping there, is that the right mechanics of why that happened?

In a way yes, I would say that some things are very evident in here. I mean, obviously, we had less travel expenses this year -- this quarter starting I don't remember exactly the date when we terminated all…

March. Beginning of...

The beginning of March terminated all flights. And even before that, I mean, we had started to -- I mean, flights to China and to the Far East were terminated even before that, so that was a part of that. I think that shekel helped us. Eran, maybe you can comment a little bit more on that one.

Yes. As Shaike mentioned, the shekel -- the dollar helped us this quarter. The dollar was stronger this quarter compared to the previous quarter, which means that we had a positive effect on our operating expenses, which decreased the total amount of operating expenses in the amount of more than 100,000 for the quarter.

Just to be clear, you don't hedge on the shekel, correct?

Correct.

That's what I thought. Okay, just one last question then I'll cede the floor. Can you just update us on what's going on in the SD-WAN space both on an OEM basis as well as what's going on relative to the service provider related business, it does seem like that's one of the few areas that has benefited significantly from work from home, is that showing up in the demand coming at you or are you seeing any pickup in demand there as a result of that, any thoughts along those lines would be helpful? Thanks.

Yes. Well, we are seeing an increase in demand in that space, specifically the low-end devices. And we're seeing customers requesting more of these and they tell us explicitly that this is due to the work from home initiative. So we do see that on the one side. We see a little less on the higher end units, which are mostly targeting the enterprise, where our customers are even telling us explicitly that this part of their business is suffering a little bit. But, overall, I mean they do see an increase due to a significant increase in the work from home. So, we do see that happening. And in general we believe that we would be feeling that during the year, that's what they're telling us. We've received some, I would say, unexpected deals even due to that that we were not able to deliver immediately, obviously. But still I believe that overall definitely SD-WAN, especially at the low-end, will increase this year.

That would suggest to me some margin pressure from that, is that reasonable to expect?

Yes, yes.

Okay, great. I will cede the floor. Thanks.

The next question is from Robert Sussman of Bentley Capital. Please go ahead.

Thank you. Can you give us an idea when you might start to ship that $15 million order and are the shipments there being held up by the problems that you're having with your supply chain?

Now, we hope that we wouldn't have problems. But, even if we do, I mean, we believe that we will ship it in the -- start shipping in the third quarter of this year. This is a standard of the sales system. So, we do not expect any other problems other than supply. So, we're working hard right now to get all the components needed to start shipments and we believe that we will begin shipping in the third quarter of this year.

And you said when you made that announcement that, that customer or integrator said you should expect more orders. I assume, from their same customer is there -- is this the only government that might want to go through an upgrade like this or is there potentially many governments that would, so that it could be a very large source of business for you?

Well, I would say that. I mean, I do not think that there is a very significant chance, I would say, that this specific integrator would sell the same concept as it is to other governments. Now, that doesn't mean that our product would be -- wouldn't be sold to other governments and we're trying to achieve that. But I don't think that this would happen through the same customer of ours right now. However, even though this is a huge project, this customer is telling us that this is just a fraction of what he expects would happen even within this specific government. And therefore we do believe that this customer could represent a strategic growth driver for us, not only with this product, by the way. Because now we -- by the way, this is not the first product that we sell to this customer. Only what we sold up until now were not that -- was not that significant, and therefore it was not used or we were not able to leverage that to really create the relationship with the customer. With this kind of a big project, meetings that we had with them, the transparency that we demonstrated to them in our schedules, in our designs, etcetera and now the actual award, we feel that now we really have a relationship with them. Now, their needs include both this product to many other potential installations within this specific government, as well as other products, because they're a major integrator in that country that we're talking about. And they would have significant demands in various areas. So, the strategic value of this relationship is now both for exactly the same, I would say, government projects with this specific project, as well as to other products, which would fit into many other government projects, which this customer may be involved in.

Did the company buy back any stock during the first quarter?

Yes, we repurchased almost $5 million during the first quarter.

And, did the cash drop? There was a fair amount, there was this maybe an $8 million or $9 million drop in the cash, is that because of working capital needs as you were unable to ship, so you had to build inventory?

It is mostly connected to the buyback. The buyback is cash out, so most of the decrease derives from the buyback.

Okay, thank you very much.

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

Yeah, I couldn't let you guys get off the hook without pressing a little bit on the forward-looking thoughts. It sounds like you are kind of thinking that the trajectory into the current quarter has a wide dispersion and hence you can't forecast it. But the dispersion seems like it's potentially as much sequential improvement as sequential erosion hence, the expected value would be roughly in the middle, i.e. flat sequentially. Is that the right way to think about it?

Yes, I mean, could be, yes. Could be, I mean you know there is unknowns to both directions whether they meet in the middle or not, I cannot be sure. But, it's a reasonable thinking.

Okay, and then so given the demand is reasonably healthy and you haven't seen erosion in demand. I'm like sure that this is impossible question to ask, but my job is to ask it anyway. So, as we move out of the June quarter, assuming conditions gradually start improving, any reason to believe that you don't make up some of this demand into the back half and, how are you thinking about conditions into the back half at this point and I realize that there's, again, a huge dispersion of potential results here?

Yes. I mean, it really is difficult to respond to that. The only thing, I'm saying is that the demand does not disappear. When we will see it again, I'm not so sure about, because things are delayed from us and Q3 is dependent on what happens in Q2, and so on and so forth. And also on the customers, because while I don't think that that demand will disappear, but when something is delayed and they miss a certain date and, they move it to another quarter or whatever these things happen as well. So, it's really tough to say what will happen in Q3 and Q4. But, overall, I'm pretty sure -- yes, I would say, you can ever tell what happens. But I don't see any signs for that demand to disappear.

So can you talk little bit about what portion of your business is the traditional appliance related stuff that you sold into a variety of enterprise customers as part of their systems business as opposed to what I would describe as the newer security/SD-WAN/service providers/cloud related stuff that you're doing? How do you see those two businesses in terms of mix and visibility? Clearly, listening to the earnings results of Facebook and Microsoft, and I'm sure Amazon will be the same when they report the cloud world is seeing very robust demand growth where enterprise is obviously more challenged, so is there any -- can you give us any help in thinking through that variance?

Well, I mean, we do not provide the specific breakdown between the various markets and part of that is because it's a little bit difficult to do that. You may note that even with our traditional customers some of them are migrating and from what they used to do into the new space. So, that makes it even more difficult to say which market -- even though we try to say, to analyze what we're selling looking at end customers as well. And, this is something that Eran can provide. But, I would genuinely say that looking at our traditional markets that were flat or a little bit less than flat, obviously this new design win makes it easier for us under traditional aspects. And we expect all these new markets to grow. So this is what I can add without providing actual figures or numbers about that.

Can you talk a little bit about the FPGA products and to what extent that's seeing any inflection in terms of design activity and the like, is this environment helping you with design wins or is it eroding your ability to deliver new wins coming down the pike?

Well, I think that what is actually happening with our FPGA is really interesting and I was referring to that when I was talking at the beginning. And, I think that this is something which is very encouraging. Because, what we see now on top of the pipeline that we have for just FPGA cards, which is healthy by itself. But, we see another trend, which for us, is extremely important, I think. And that is a trend that many of our potential customers are now seeing that actually they can combine and get from us a full solution on which they would run their software, which includes both the compute node, which is actually our Edge units, and FPGA card which they would use to offload the CPU within our compute node. And, some other I would say, cards or mechanisms which we use to do some other mix or offload mechanisms together to create the optimal solutions. Now, this is something that I don't think they can do with anyone else. Now, because most of these solutions are also based, I would say, on Intel architecture, we're receiving significant assistance from various Intel divisions and organizations. And, altogether this creates demands from us for something that we're almost the only ones who can provide. So customers are coming to us whether it's in the mobile world, or in the Telco is also -- not always mobile, but Telco, I would say Telco data center. And, they're asking for solutions, which will include the compute node already integrated with FPGA, because integrating an FPGA into a host is not always simple. So, they would like to get something like that from us with [indiscernible] and an FPGA and, sometimes another offload solution integrated into the FPGA card or something…

So, this is a related to serverless Edge applications that you're talking about?

This is what?

Relative to serverless Edge applications.

Well, I mean, I think serverless, you could say serverless, because they do not necessarily include I would say a traditional server. Because in these situations our Edge compute unit would actually replace the server.

Yes, this serverless comment is related to the software engineers not needing to take into account the server architecture. It's a…

For sure, everything that we do or almost everything that we do these days is based on the basic, I would say, strategy of decoupling the software from the hardware and this is a part of what we are doing.

Great, thanks I will cede the floor again.

[Operator Instructions]. The next question is from George Marima [ph] of [indiscernible]. Please go ahead.

Yeah, hi, thank you. Good morning Shaike. I wanted to press a little more on FPGA in terms of in your pipeline of opportunities out there are you seeing more of different verticals than your traditional verticals out there, because you've been -- in the last year or so you've announced in automotive sort of area win and a healthcare vertical and if you can comment on the progress of those and other opportunities that may present out there that are in your sort of non-traditional areas?

Okay. So, first of all I mean, regarding to these two specific opportunities that you mentioned so, yes, we hope to begin seeing some revenues from one of them at least in the near future, at least beginning ramping up towards the end of this year. The other one would take more time. I would tell you that the automotive one will take more time, because what we've built was for pilots and it's going to take a lot of time right now for that to turn into real revenues. But I would like to emphasize that even when we have announced these opportunities, I think, we told you -- not you personally, I mean, but everyone, that these are not our focus. Our focus is still our traditional markets which are all within the networking arena. But we were happy to see that other verticals came to us even though we did not invest any specific efforts trying to selling it to them. And once they came to us, of course, we took the opportunity, because our technology was there. We didn't need to invest in marketing, so we just did the job. Now -- so we continued to focus on the traditional areas that we were focusing in, which were around networking. Now, networking where? Once again, we are talking mostly in the Telco space, whether it's the Edge or the Telco data center, which we are talking about and that's where we see most of the interest. We are also seeing, I would say, related interest with surprisingly very similar technologies to an area which is related to that, which is the IoT area, taking us to some industrial applications. Again, being drawn up to these areas through our partners, these are again networking, but not exactly not our regular fodder within the marketing space, so we see these as well. But, overall, we continue to focus on the networking area mostly with Telcos and Telco data center environment.

Thank you Shaike.

Of course, not only -- we work not only directly with the Telcos, we worked both directly with the Telcos as well as with the OEMs who are delivering to the Telcos and the software vendors who are providing solutions to the Telcos as well in order to get these wins.

Thank you.

The next question is from Abba Horwitz of OSP. Please go ahead.

Hi, I just wanted to know the average cost per share that you paid for the stock in this past quarter?

Approximately $30 per share.

$30 per share, okay.

On average.

Right, understood. And how many shares are you going to buy on a day -- per day?

It depends, it's not a fixed amount every day. It depends on the market.

On the average -- like average volumes. So, how many does that generally come to?

It's about -- I would say it's about 2,500 shares per day.

Okay. And did you purchase any blocks this past quarter?

No, not during the last quarter and not before that.

Okay, wonderful. Thank you guys, thanks again.

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 hope you all are safe, and we look forward to hosting you on our next call in three months' time. Good day.

Thank you. This concludes Silicom's first quarter 2020 results conference call. Thank you for your participation. You may go ahead and disconnect.