Ladies and gentlemen, thank you for standing by. Welcome to the Silicom Second Quarter 2024 Results Conference Call. All participants are 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 EK Global Investor Relations at 1-212-378-8040 or view it in the News section of the company's website, www.silicom-usa.com. I would now like to hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin, please?

Thank you, operator. I would like to welcome all of you to Silicom's second quarter 2024 results conference call. Before we start, I would like to draw your attention to the following safe harbor statements. This conference call contains forward-looking statements. Such statements may include, but are not limited to, anticipated future financial and operating results and Silicom's outlook and prospects. Those statements are based on management's current beliefs, expectations and assumptions, which may be affected by subsequent business, political, environmental, regulatory, economic and other conditions and are subject to known and unknown risks and uncertainties and other factors, many of which are outside of Silicom's control, which might cause actual results to differ materially from expectations expressed or implied in the forward-looking statements and which include but are not limited to, Silicom increasing dependence for substantial revenue growth on a limited number of customers; the speed and extent to which Silicom solutions are adopted by a relevant market; difficulty in commercializing and marketing of Silicom's products and services; maintaining and protecting brand recognition; protection of intellectual property; competition; disruptions to its manufacturing, sales and marketing; development and customer support activities; the impact of the war in Israel and in the Ukraine; rising inflation; rising interest rates; volatile exchange rate as well as any other -- any continuing or new effects resulting from the COVID-19 pandemic and the global economic uncertainty, which may impact customer demand through their exercising greater caution and selectivity with their short-term IT investment plan. The factors noted above are not exhaustive. Further information about the company's businesses, including information about factors that could materially affect Silicom's results of operations and financial condition. I'll discuss in the annual report on Form 20-F and in other documents filed by the company and that may be subsequently filed…

Thank you, Kenny. Welcome, everyone, to our conference call to discuss the results of the second quarter of 2024. The second quarter was a period of focused execution of our strategic plan to generate significant long-term value for our shareholders. Our sales and R&D activities are operating under a renewed focus as part of the plan with the goal of building a deeper pipeline, acquiring new customers and ultimately increasing revenue and long-term upside. Those efforts have already brought us an exceptionally broad and deep pipeline of new and high potential sales opportunities. This is making us increasingly optimistic about the long-term prospects for Silicom. In parallel, however, the sales cycle for all our product lines have become longer than any -- than they were in the past, negatively impacting the pace of progress in our strategic plan. Beyond that, we continue to believe strongly in the long-term potential of our main product lines, including server adapters and Edge systems, which continue to garner strong customer interest despite the current slowdown. A further element of our strategic plan was the stabilization of operating expenses, which we completed early in 2024. We believe that our business is now appropriately sized, enabling us to support long-term growth with expenses aligned to the plan's objectives. We will continue to tightly control expenses with only minimal increase expected in 2025 and beyond based on our plans' needs. In terms of our financial performance for the second quarter, we reported revenues of $14.5 million with a net loss of $0.9 million. I stress that our strong balance sheet built up over many years enables us with the ability to continue and ensure that we can maintain adequate investment in our business and its growth engines without compromise at the revenue and expense levels predicted by…

Thank you, Liron, and good day to everyone. Revenues for the second quarter of 2024 were $14.5 million, a decline from revenues of $38.1 million as reported in the second quarter of last year. The geographical revenue breakdown over the last 12 months was as follows, North America, 83%; Europe and Israel, 14%; Far East and rest of the world, 3%. During the last 12 months, we had two 10%-plus customers. 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, acquisition-related adjustments, as well as lease liabilities, financial income. 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 2024 was $4.3 million, representing a gross margin of 29.7% and compared to a gross profit of $12.3 million or gross margin of 32.2% in the second quarter of 2023. As discussed previously, in the near term, our gross margin is expected to be at the lower end of our 27% to 32% expected range, and as our revenues grow from current levels, over the longer term, it will increase towards the upper end. Operating expenses in the second quarter of 2024 were $6.7 million compared to $7.5 million reported in the second quarter of 2023. Operating loss for the second quarter of 2024 was $2.4 million compared to operating income of $4.8 million as reported in the second quarter of 2023. Net loss for the quarter was $0.9 million compared to net income of $4.5 million in the second quarter of 2023. Loss per share in the quarter was $0.14. This is compared with diluted earnings per share of $0.66 as reported in the second quarter of last year. Now turning to the balance sheet. As of June 30, 2024, the company's cash, cash equivalents and marketable securities totaled $78.3 million with no debt. This represents an increase of over $13 million compared to the end of 2023. We used about half of that at $6.6 million for the repurchase of 410,000 shares during the first half of this year. That ends my summary. I would like to hand back over to the operator for the question-and-answer session. Operator?

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

Thanks. I wanted to spend a little bit of time talking about the balance sheet. If I look at the inventory levels, $44.5 million. Any risk to that inventory? In other words, is there any portion of that inventory that is getting along a tooth or specialized for a particular customer that may not be achievable that might cause you to have to write down any of that inventory? Or conversely, are you feeling confident that that inventory is all going to be utilized going forward?

We don't see such a risk. It's a very high-quality inventory.

And similarly, any risk to the receivable side of the equation?

No.

So the -- essentially, 22 and change in asset values per share is -- you're confident that those total current assets are all solid assets and are not going to be impaired? If I look at the liability side of the equation, I think it's a [13.7 or $2.30] (ph) a share or so in liabilities that are current. Is there anything in there that we should be aware of?

Nothing special, all standard.

Okay. So the balance sheet looks clean. Then the question then is, how long do you think it takes to get back to breakeven on the earnings front? Do you think you can hit that in 2025? Or is that all the way out into 2026?

Yeah. I don't believe it will happen in 2025. As I said, I believe that the increase of revenue from 2024 to 2025 will not be that significant, which means we're still going to be in a situation that we're not breakeven. We expect that to happen in 2026. In -- let's say, during 2026, probably in the second half of 2026.

Right. And if I look at the quarter, the EPS came in a little bit better than we had expected. But it looks like a lot of that was below the line, particularly in the tax line. We were expecting a tax cost, not a tax benefit. Can you talk to what you think the tax line is going to do in the back half of calendar '24?

Yes. First of all, the tax income that we saw in quarter two is a result of a one-time reason. This is due to almost $1 million one-time tax returns from previous years. Again, this is a one-time occasion. Looking forward, assuming 2024-2025 will not be profitable, we expect annual income tax in a very low amount of about $0.1 million more or less.

$0.1 million per quarter, about $100,000 per quarter?

Per year. A very low amount of tax expenses. So $0.1 million for the full year.

For the full year. So essentially near zero per quarter?

Exactly.

All right. And when I look at the income statement based off of the commentary about the numbers on the top line, it sounds like you're still talking about around that $60 million level in '25. Is that back-half weighted? Or do you expect the income statement to be fairly low in the first half of the year and then start to recover in the back half of '25 to get to a higher level of, say, $16 million or something like that in the back half or -- and $14 million in the front half? Or do you expect it to be fairly flat around the current levels at $15.5 million to $16 million range?

I expect, let's say, the first two quarters of the year to be similar to what we're seeing right now, give or take. And then from there, it will increase a little bit as we go into the second half. So it will be more weighted in the second half, but not very dramatically.

Okay. But something in the vicinity of $60 million is kind of what you're thinking about in terms of the year?

Roughly, yes.

Right. And the gross margins on that, any mechanical change in the mix here that you're assuming? Or are we still kind of around that 30% level?

I think it will be very similar to what we're seeing right now.

All right. So continued. That suggests you're kind of looking at about a $10 million operating loss in '25 and another $5 million or so in the back-half. So, we should be thinking then that roughly $15 million in burn rate? Is that a reasonable assumption for the cash burn?

I think we were talking something in the range of $10 million, maybe more than that, $15 million. I think -- but it really depends on -- I mean, when we're looking at that, we're also thinking about future projects and when we will need to start getting more inventories ready for supporting the new products. So hard to give a very conclusive answer to that, but I...

Well, if you hold the OpEx fairly flat at current levels, around $27 million a have a 30% margin on just under $60 million, that's 10% -- or $10 million operating loss. So I would assume that if you're going to build inventories, it's going to be more than that in '25, plus you got the first half or the back-half of '24 to deal with, which is another, what, $5 million of operating loss? So I would think it's at least $15 million, plus any build in inventory that happens late in '25.

If you're talking -- if you're including also the second half of 2024 and for the full year of 2025, than yes. But I would also add the fact that we are expecting to get some financial income as well that could improve the situation, again, depending on what will happen on that side. But give or take, the number $15 million, I think it's a reasonable number.

All right. I get it. Going back into the mechanics of the business, I know that you guys had been chasing a lot of large deals and that looked pretty attractive when those deals look like they were probable to metastasize into the revenues and drive the business. Obviously, those projects did not materialize as expected. And now I understand that you've shifted to a -- more the traditional model of going after design-ins that are what I would call singles business, a couple of million dollars a year potential for each design and win. But design-ins generally take longer to materialize. You've got to design it in, companies got to put it in their product. And then they've got to launch the product. And that just takes longer. Is that part of why this timeline to recovery is slower to than you thought? Or is it just simply the macro is causing deep uncertainty and therefore, we can't count on these revenues?

So a few points. So first of all, you are right that when we're designing in, when our customers design us in, then it's a process. They need to get rid of their current inventories, they need to launch it and market the new product and it usually takes time. The bigger the design win is, by the way, usually it takes longer to do so. So with smaller and medium design wins, it may happen faster then with very big design wins. The macro right now and the overall situation of high inventories with customers are causing those processes to be longer even than what we used to see in the market. So that means that this is why we see a delay even in the timeline that we expected, which is causing the process to take longer.

Yeah. So -- but I want -- what I'm trying to determine is, is the change in the strategy to do more singles business, part of the reason why you're anticipating a slower recovery?

No…

Obviously, maybe an increased visibility to that recovery as those design-in wins are very persistent business.

No. This shift in strategy is not what's causing a slower recovery. What's causing the slower recovery is the fact that customers are sitting still on inventories. It's the fact that making decisions on new products and new technology for the customers take longer than it used to be, again, because of the macro and because of the situation that they are struggling to sell their products sometimes or they've been more optimistic than the reality. So all of that together is putting us in a place that it takes longer. But it's not because of the shift to smaller and medium design wins. And I would also add that we didn't stop looking for the big design win. It's just that we are also focusing very much on the small and the medium because our experience when we look back showed us that sometimes small and medium, they become large over time, whether it's with this specific design win or whether it's with a new design win that we get from the same customer. So we're not focusing solely on the big ones. We're focusing on small and medium. While we still have our list of the very big design wins, which I talked about a little bit, that could be even $20 million a year, but we're not focusing only on those.

I see. Okay. I'll cede the floor. Thanks.

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Eizenman 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. Eizenman, would you like to make your concluding statement?

Thank you, operator. Thank you, everybody, for joining the call and for your interest in Silicom. We look forward to hosting you on our next call in three months. Good day.

Thank you. This concludes Silicom's second quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect.