Silicom Ltd. (SILC) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Silicom First Quarter 2021 Results Conference Call. [Operator Instructions] 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 & 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, please?

Thank you, operator. I would like to welcome all of you to Silicom’s first quarter 2021 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 dependency 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 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, disruptions to our manufacturing and development, along with general disruptions to the entire world economy relating to the spread of the novel coronavirus, 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’s 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 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. Now, 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’ll then turn over the call to the question-and-answer session. And with that, I would like to hand over the call to Shaike. Shaike, go ahead, please.

Thank you, Ehud. I would like to welcome all of you to our conference call to discuss our first quarter 2021 results. We are very pleased with the solid and continued year-over-year improvement in our financial results this quarter with 31% year-over-year growth in revenues to $29 million, the second quarter in a row with over 30% growth. It demonstrates that 2021 is on track and the growth we have been planning for and expecting over recent quarters is here. Furthermore, we reported our 65th quarter of profitability with net income of $3 million, up 31% year-over-year. Our cash position remains strong, ending the quarter with over $78 million. We continue to use our strong cash generation to progress on our share buyback. And today, our Board announced a new $15 million share buyback plan bringing further value to shareholders. I will discuss this in more detail in a few minutes. Our strong results are on the back of tapping into today’s most important market trends, the shift to the cloud and the associated shift towards standardization, which is key for scalability. As you know, the move towards standardization has led to 2 important trends, which are disaggregation and decoupling. These disaggregation and decoupling trends, which started in the cloud, have created a process impacting all parts of the networking market. The process was started by the major cloud players, which are building the data centers under a generic infrastructure using standard servers. Standardization and the existence of standard service in the cloud increases the demand for smart cards as such servers need acceleration and offloading abilities to support the required performance. It is a huge opportunity for us. An important market segment, which also adopted these new trends was the SD-WAN market, followed by NFV, where telcos started to look for smart platforms, which are decoupled from the software, which was to be supplied from a software vendor. This allowed us to approach the market with our smart platforms, enabling us to gain strong traction and we were highly successful in this market. Due to this, the SD-WAN and NFV segments are a significant part of our current business as well as our future potential. As I’ve already spoken about previously, now telcos and mobile operators are increasingly adopting the open radio access network standards, which allows such disaggregation and decoupling in the 4G/5G infrastructure deployments. The concept behind O-RAN is to enable operators to decouple key network components, including radio units, distribution units and central units, enabling best-of-breed and standardized components from a diverse list of vendors, which can be combined into networks for superior performance. This approach is driving innovation and just, as importantly, reducing network cost significantly for operators. These trends play strongly in our favor by facilitating the need for our smart platforms and smart cards for cloud, telcos and OEMs. Furthermore, O-RAN creates opportunities for combinations of our products and expertise within the mobile infrastructure and enables us to leverage our unique and integrated capabilities in networking, acceleration, FPGAs and smart platforms. Correctly forecasting this trend, over the past few years, we directed our R&D investments as well as our sales and marketing efforts with increased focus and additional strategy fine-tuning in 2021. We are now seeing the fruits of those investments with successful customer penetrations throughout the relevant product line that address those strengths. To illustrate our success, following soon after our major top 5 global telco design win in January for our virtual O-RAN tech accelerator cards for the new network build-out, in February, we won a second 5G design win with another customer for these same cards. This new design win is a further confirmation of the power of the 5G build-out and the disaggregation trend, which is accelerating our growth. The customer and other leading U.S. service provider and 5G player is pioneering its stand-alone 5G network based on disaggregated Open RAN architecture and will use our cards in its network’s distributed units. In January, our first of 5 telco win kindled and excited industry-wide interest in our 5G-enabling technologies. Broad enthusiastic feedback with our solution has confirmed our approach and the superiority of our technology. And we are currently engaging many discussions with multiple players. This also includes expanding our 2 existing penetrations and scoring further design wins at our initial customers, the distributed unit suppliers and the hyperscalers they are cooperating with. We believe that our innovative and cost-effective products, our deep 5G system-level understanding, our years-long cooperation with Intel and the expanding relationships we have and our building with the all key telcos, hyperscaler, server manufacturers and 5G players position us for long-term success in these high potential markets. Beyond our existing achievements and the possibilities to date, today we see the potential to drive further accelerated growth with the explosive growth we see in the 5G, Edge and cloud infrastructure markets ahead and leveraging on the close cooperation with corporation and joint go-to-market activities with Intel. We have decided to somewhat increase our investment in R&D in 2021. As you have seen in our financial results, R&D expenses were $4.8 million in the quarter, being slightly more aggressive than usual compared with our traditional approach. Given the opportunities, we believe this increased R&D investment is prudent and will pay off nicely in the future. For the remainder of 2021, we feel comfortable with this level of R&D expenses. I would like to briefly address our Evenstar collaboration, another example for the potential that O-RAN 5G presents for us and for our needs to invest more in R&D. A healthy ecosystem of Open RAN vendors plays an important role in accelerating the deployment of simplified, flexible and efficient RAN technologies. A few weeks ago, we announced our Evenstar distributed units collaboration with Facebook connectivity and other Evenstar partners, addressing the operator demand for best-in-breed, unbundled distributed units that meet 3GPP and O-RAN specifications to facilitate the rollout of Open RAN in 4G and 5G networks. The Evenstar program aims to accelerate the adoption of Open RAN solutions across the industry. The new collaboration with Facebook and other Evenstar partners allows us to provide operators with groundbreaking functionality, bringing the network flexibility and performance to a whole new level such as advanced offloads and time synchronization at highly competitive price points. This cooperation demonstrates that our ability to integrate the various functionalities required within the distributed unit is indeed considered as an important asset by the industry. As you can see, moving into 2021 and beyond, Silicom is very well positioned. The markets that we address are performing strongly and are expected to continue with the significant growth in CapEx investments. The trends within these markets support the areas that we have invested in over the last few years. They support our cloud penetration efforts for smart cards, our SD-WAN and NFV-related efforts through smart platform and now they also support our smart platforms and smart cards together and separately for the huge 4G/5G O-RAN-based mobile infrastructure market. Many of our new potential telco design wins have much greater scaling potential than what we have traditionally experienced. And more than that, each design win we have already achieved and continue to achieve represents an opportunity for sustained long-term revenues once we establish a relationship with the customer. And this is also why our recent success and wins are indeed so important. Before moving on to our guidance, I’d like to address the global shortage of electronic components, which I’m sure you’re all aware of and which we already discussed last quarter. Practically, as of today, we feel this shortage with all our suppliers. I stress that this is an industry-wide issue affecting everyone in a very significant way. The extent of the component shortages are to a level we have never seen before and analysts expected to persist at least for the rest of 2021. Component lead times are increasing and scarcity is increasing prices. And in some cases, we see lead times of 12 months or even longer. Given careful planning and prudent inventory management, we’ve been able to resolve most second quarter component shortage issues. And the impact for the second quarter will be minimal. Looking further out to our deliveries during the second half of the year, our efforts today will also help us alleviate some of the issues. However, there remains component shortages, and we are working hard to resolve these as best as we can to meet the strong and growing demand for our products. I note that the longer lead times could have an impact if the mix of actually ordered product differs significantly from the forecasted mix and could delay the possible upside we would gain from faster-than-forecasted ramp-ups of existing design wins as well as the additional potential from design wins in our pipeline. There is also the concern that despite our meticulous and early planning, vendors that are currently scheduled to deliver on time will decommit as we move forward. We see this happening more and more. I would like to add that on our side is the caliber of our larger customers, which are thirsting for our products and our close working relation with them is pushing us up the components’ priority list. We are also leveraging our strong relationship with the vendors, especially Intel. We will, of course, keep you up-to-date on this. I would like to spend a few moments discussing our guidance. For the second quarter of 2021, we expect revenues of between $29 million and $30 million, which at the midpoint, represents strong year-over-year revenue growth of 28%, a third quarter in a row with about 30% growth. Given our very long and growing list of design wins, generating ongoing orders, our solid baseline of activities and strong market fundamentals, with our focus on some of the fastest-growing markets in the networking space, we are well positioned for strong growth in 2021 and beyond. While the current component shortage adds some uncertainty into the second half of the year, we reiterate our guidance range for the year of $120 million and $130 million. Before summarizing and moving over to Eran, as I said earlier, we have a strong cash position, providing us with significant financial flexibility, giving us more than enough working capital. It enables us to continue to invest internally in our R&D efforts, ultimately fueling the long-term growth of our business. Furthermore, it also allows us to share the rewards of our continued profitability and cash generation with our shareholders. And today, the Board of Directors authorized a third 1-year share repurchase plan allowing Silicom to purchase up to $15 million of our ordinary shares in the market. Our current 1-year $15 million buyback plan will expire this month. To date, during the last 2 years, we have purchased approximately 870,000 shares of Silicom for a total sum of about $30 million. In summary, as I’ve shared with you, the disaggregation and decoupling trends continue to gain traction and are significantly increasing Silicom’s potential. Our long list of design wins, our partnerships with the market major players, our extensive collaboration with Intel and our current long and deep pipelines provide us with much optimism going forward with continues to grow. Consequently, we expect that the coming few years for Silicom, we’ll see performance well ahead of what we have achieved over the past few years and that we will continue to achieve ongoing revenue growth at a double-digit compound annual growth rate for several years ahead. With that, I will now hand over the call to Eran for a detailed review of the quarter’s results. Eran, please go ahead.

Thank you, Shaike, and hello, everyone. Revenue for the first quarter of 2021 were $29 million. This is a year-over-year increase of 31% compared with revenues of $22.1 million as reported in the first quarter of last year. Our geographical revenue breakdown over the last 12 months were as follows: North America, 59%; Europe and Israel, 33%; Far East and Rest of the World, 8%. During the last 12 months, our top 3 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 noncash 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 first quarter of 2021 was $10.1 million, representing a gross margin of 34.7%, were in the range of our gross margin guidance of 32%, 36% and compared to a gross profit of $7.3 million or gross margin of 33% in the first quarter of 2020. The variance in the gross margin is a function of the specific product mix sold in the quarter. Operating expenses in the first quarter of 2021 were $7.1 million compared with $5.7 million in the first quarter of 2020. Most of the increase is R&D related and, as Shaike mentioned, is planned and represents our continued significant investment in developing new products, IT and technologies. Operating income for the first quarter of 2021 was $3 million, an increase of 90% compared to operating income of $1.6 million as reported in the first quarter of 2020. Net income for the quarter was $3 million, an increase of 31% compared to $2.3 million in the first quarter of 2020. Earnings per diluted share in the quarter were $0.42. This is a year-over-year increase of 36% compared with EPS of $0.31 as reported in the first quarter of last year. Now turning to the balance sheet. As of March 31, 2021, the company’s cash, cash equivalents and marketable securities totaled $78.1 million with no debt or $11.30 per outstanding share. During the quarter, we further executed our second $15 million share buyback plan, which we started on May 4, 2020. During the first quarter, we purchased approximately 86,000 shares at a total cost of $4 million. That ends my summary. And we would all be happy to take any questions. Operator?

[Operator Instructions] The first question is from Robert Sussman of Bentley Capital.

Can you give us -- you’ve got all these design wins that have been coming in. And I’m wondering when they ramp to really see a significant sequential increase in revenues, ignoring the component shortage problem. The second quarter is normally considerably stronger than the first, yet your guidance is for the quarter to be relatively flat. So can you talk about the timing of these design wins, including where you are with the 2 CPE design wins? I think one of which has volume, the other one has not started yet.

So I’ll try to respond both about the older design wins as well as the new design wins and also respond a little bit about the quarter. So first of all, I mean, there are no significant news with the older design wins, just like you said. I mean one of them is up and running. We’re still hoping it would grow even more, but right now, I mean, I don’t have any update on that remark. So it is a significant account for us, which is more or less, I would say, at these times flat every quarter, maybe with -- well, I mean, I would say it’s flat right now. The other one is not ramping up as of yet. They have their own issues. I can tell you that we’re discussing it with them. And I would say, well, I mean, it seems as if they would like to ramp up soon, but now we’re seeing that we have these components issues. And I’m not sure whether this really would happen or not because we would not have -- we were not having any forecast from them for the upcoming quarters. So even though they are interested right now, I’m not sure it really is going to happen. So now to the new design wins. The new design wins that we just announced, I mean, in January and February, I think for both of them, we would see revenues this year. And these revenues are supposed to contribute to our growth in the following quarters. And what I would say is that, well, our guidance for the second quarter, even guidance-wise, is a little better than what we’ve actually been able to achieve in the first quarter. And it takes into consideration these new design wins as well as the issues that we’re having from the component shortages. So I would say that if we were not in this situation, we would probably be able to show a little bit more in the second quarter. But overall, I would say that these new design wins would take an impact mostly in the second half of the year, a little bit in the second quarter as well. And still, the second quarter is going to be 30% growth, representing 30% growth year-over-year, more or less.

Okay. One short follow-up on that. That’s very helpful. When do you think we’ll start to see meaningful revenues from the 5G wins?

So as I said, I mean, 5G wins, we will start to see revenues from them mostly in the second half of the year. And again, let me say that, I mean, in order to clarify the situation with the shortages as well as the wins. So what we’re telling you for the second quarter is based on what we’re focusing on the one side and what we are having solutions for in terms of the component shortages. So we are, I would say, quite confident. Obviously, there is never 100% confidence, but we’re quite confident that we would achieve these levels for second quarter. For the third and fourth quarter, I would say that this is what our plans are, when taken into consideration the shortages situation. But we’re still hoping we would able to resolve some of these issues. But in terms of revenues, we’re thinking that we would be able to grow due to these 5G wins. That being said, you need to remember that the telcos that we’re talking about are not very predictable or not been very predictable in the past. So it’s not that easy to predict exactly what’s going to happen. And what we are doing is actually averaging our throats on these ways. But based on the information that we’re having right now, these latest 5G wins would contribute, I would say, quite -- I don’t know what the amount would be, but they would not be negligible in the second half of the year.

The next question is from Alex Henderson of Needham & Company.

A couple of questions, if I could. Let me start off with just sort of the trajectory of the growth. You’ve obviously got supply constraints that are impacting the numbers, not only in the June quarter, but I assume that you’re suggesting in the back half of the year. So as we look at the back half, is it a function of the high end of the band to -- is constrained by availability of components and that’s what’s holding it down? And what would be the conditions that would cause the low end of the band? Obviously, with $29 million plus in both the first 2 quarters, the low end of the band seems awfully conservative in the back half. Is it -- would it be decommissioning that would -- or decommitment that would require you to hit the low end of the band? Can you talk a little bit about what your thinking is at either end of the band?

Yes. I mean, I think that taking us to the lower end of the band would be 2 things, mostly decommitting, just like you said, and the other side -- well, once again, when I’m saying decommitting, I’m saying decommitting based on forecasting. So we have forecasts. And based on these forecasts, we believe we would be at the higher end. But if our vendors would decommit or if what would happen, and that happens a lot of time, and that is that our forecast is made out of many accounts. Typically, it never happens 100% or exactly in accordance with our forecast. But because there are several accounts there, some of them are actually lower than expected. Others are higher than expected, and they compensate for each other. So as long as there’s no component shortages, that’s okay because one is low, the other one is high. But now, if one of them is low and the other is high, so the low we don’t get. The high, if we’re not able to deliver because of the component shortages, that would take us to the low end. The high end, I would say, in that case, if everything goes in accordance to the plan, that would be the high end. I mean there could even -- theoretically, there could be a higher end. But I wouldn’t speak about this higher end mostly because of these components issues because if there is sudden higher end right now, it may be very difficult for us to deliver just because of the component issue.

So before I get on to my next part of this question, you definitely deserve some credit there for -- Shaike, for having now -- I think, you’re closer to 20 years at the company this year. So you’ve really demonstrated commitment to Silicom. And I think that obviously plays very nicely to the stability of the company’s leadership. So I just wanted to congratulate on that. Going back to the outlook for a little bit. Could you talk about the SD-WAN side of it? And what we’re hearing from other companies is that, obviously, enterprise spending is rebounding quite sharply on a global basis. Moreover, because the dysphoria of people is starting to come back, there’s some incremental spending around campus. And moreover, as that happens, it’s not that 100% of the people are coming back, but a lot of people are staying remote. And that, in turn, is resulting in very sharp increases in traffic growth and -- across what is described as hot networks. And that’s resulted in surprisingly strong spending on campus Edge and data centers. So is that -- does that not translate into incremental demand for your SD-WAN business? And it sounds like that’s going to accelerate over the next couple of quarters. What are you seeing on that side of the business?

Well, we are also seeing increased demand in the SD-WAN space. We’re definitely seeing that. And we’re seeing that from -- both from our existing customers as well as from, I would say, customers which are in the pipeline. And with that, hopefully, we would get very soon. I apologize for having to go through that again. This issue with the component shortages is important this year because it’s not only once we get a PO that it hits us. Sometimes, even new customers, they would like to try and do something. And they would like to try and do something this year, and it’s becoming somewhat difficult. But we definitely see the demand. We definitely see our pipeline thickening. And with everything that we’re trying, with Intel support, et cetera, we’re -- I do believe that we would actually increase our revenues in the SD-WAN space even within this year. But I think that a significant part of that would be pushed to next year. That being said, SD-WAN, even right now, is a major part of our business, I would say. I don’t know for sure, but out of my head, maybe I think it’s flat. I’d rather not say them, but it’s definitely a significant factor in the growth that we’re experiencing right now, which is a 30% growth. So SD-WAN has a significant part in that.

Within that context, there are companies that are larger that have more capabilities to do ordering and so forth against a very tight backdrop. Is this -- in your -- are you even at risk here at losing business because of your smaller scale maybe -- cusp people that could be concerned about the outlook?

I think that -- I mean to a certain level, I think that we may not only not be in risk but rather in -- possibly in a better position. And that’s due to the very strong cash position that we are in, which allows us to plan ahead, make some assumptions, go ahead and prepare inventory. And I think that possibly, as long as we were able to read the market correctly, we would be able to win over other companies because I think that one of the secrets to success in here would be to actually make the right decisions in terms of, "Okay. Which components you wanted to buy? Which components you are going to buy right now? Where are you going to use your leverage towards the component companies in order to get more components?" And I think we’re doing that. And I mean a part of that is, obviously, that we’re using our very big, I would say, giant customers to help us in these directions and vendors as well. I mean to give you an example, I mean, we are now in calls with Intel, who is helping us because we’re such a good partner with Intel, pushing some of our vendors. Not only we are pushing the vendor, but rather Intel is pushing our vendors because they have a long-term relationship with them. So I think that we’re in quite a good position in that aspect.

I see. Okay. That makes sense. Just going back to the broader subject. If we do -- were to exclude all constraints around supply, would you be looking at a range of growth that is more consistent with the first half than the back half of the year? Or would you expect that you still have some constraints in terms of timing of these larger programs and that it would be sub-20% from the dock house?

What I can say is -- because I didn’t calculate it exactly, what I would say is that if there were no constraints from the components’ perspective, our growth would be faster and at a higher percentage. I don’t know exactly if that would be at the 30%, but I’m sure it would be higher than what we’re -- what it would actually be moving forward because in the second half of the year, these constraints would be, to a certain extent, limiting our growth. Where exactly it would have been ending without any constraints, I do not have an accurate number, but I’m sure it would have been better than what we are predicting right now.

Right. Okay. I get the gist of it. Just down below the line. Should we be assuming an increase in the taxes or a continuation of the 15% rate? And then second, can you give any guidance on the interest income line based off of the: a, the buyback; and, b, some -- a little bit of a rebound in rates? Should we be assuming that the -- that to hold steady? Maybe improves a little bit? What are you thinking on those 2 lines?

Okay. I’ll start with your first question about tax rate. Still, it is expected to be in the range of 15%, no change. As to your second question about financial income, this is hard to predict because it is -- depends on the dollar exchange rate, which nobody can know what the exchange rates will be in the future. Assuming no dramatic changes in the exchange rate of the U.S. dollar, I would say that approximately $215,000 to $300,000 is the right range for financial income.

The next question is from Serge Mascaro [ph].

Based on quarter and execution, we had a lot of news, the Telefónica white paper, the partnership with Napatech and Equinox, new design wins with Facebook and Dish, and today a new buyback plan and the print up of the guidance, congratulations. But yet, the market cap at the very same level. So my first question on the last design win slide, the Facebook or Dish ones, you are not disclosing the purchase potential in a mass deployment stage. Is there any reason for that?

The reason is that the full potential, I would say, is not clear. And as you know, I mean, we are careful people. What I mean by that is that the full potential could be really, really huge in here because Facebook would be pushing these units to most of the big operators around the world. But because this process is hardly -- has not actually been started because we’re still in the development phase of this, we don’t know how that would work. I mean -- so on the one side, I mean, the upside to that could be enormous. It could be really, really dramatic. On the other side, it can be nothing. I mean we are not aware of the moment. We don’t know how the Evenstar program would be successful, how operators will indeed respond to Facebook and all these. We see positive responses, but we don’t have experience with that. And that’s why we did not speak about a potential in here. So.

Okay. Yes. Got it. Okay. So in these huge O-RAN projects, how should we think about the gross margin here? Are you still in the 32% level? Or is it going to be somewhat lower?

Well, I mean -- first of all, I mean, our combined margin, as we’re saying always, is 32% to 36%. And I am not sure that even across the 5G or O-RAN market, it is always going to be the same and it could differ between the various products that we’re selling in these markets. Overall, it would be dependent on the level of, I would say, uniqueness of the products that we provide to this market. And we are offering to this market, as you know, I mean, a combination of products, which could be acceleration costs, which are based on eASIC. We’re proposing FPGA units. We’re proposing platforms. So the mix of these products would define the actual gross margin. Overall, I believe it would be within this range of 32% to 36% within the 5G market as it is as well.

Perfect. So how do you see the competition between the ASIC and FPGA technologies on the 5G Open RAN deployments?

Well, what we are building on is actually -- and we see this cycle happening, to a certain extent, is on some sort of a cycle, I would say. And in this cycle, we are positioned in both sites. And the cycle, the way that it goes, is that many of the acceleration functionalities, et cetera, are beginning with FPGAs. And then once it becomes more or less a standard, it becomes an eASIC simply because -- and then eASIC is actually an ASIC simply in order to save cost because this industry is, of course, sensitive to cost. But then additional requirements and additional performance which are needed, which are not included in the eASIC, comes into play into the second generation of the FPGA solutions. And then when this becomes, more or less, standard, it comes to become an eASIC and so on and so forth. And I think that because we are working with Intel and I think that this part is a demonstration of why our cooperation with Intel is so important, because we are cooperating with Intel both on the eASIC side and on the FPGA side. So right now, for acceleration, we’re using Intel’s eASIC and that’s what we’re selling. At the same time, we’re developing together with Intel the replacement solution, which would come later with an FPGA. And then we will be proposing that. Intel is beginning to think already about its next generation of eASIC. So -- and we are a part of these cycles, whether it’s eASIC and/or FPGA, both of which will obviously contribute to our growth and revenues.

Okay. So I think that our partnership with Napatech that gives you access to the software is pretty interesting for you. Can you maybe explain to us a little bit about that? Because Napatech is saying that they expect revenue from this deal all -- this year. And also I think that.

Well, I’m not sure about that. I mean we still need to see the value of the IP. Napatech has developed a certain IP, which they are trying to promote for OVS. They wanted to put it to one of our cards. And we agreed as we’ve seen no disadvantage in that. But the value of that in terms of revenues is still to be seen. This is not included in our revenues’ expectation at this time.

Okay. Because as we spoke in the past, Napatech has a 70% gross margin, so would you achieve a greater gross margin with this sense?

No. I think that -- no, I don’t think we would achieve a greater or a 70% margin. We do have products where 70% margin is there. But if you want to grow the company, you cannot do that with a 70% margin. 70% margin would go to some specific applications where Napatech is still -- and I think most of their sales are still there, which is in the capture market, which I believe we are declining. We used to be in the capture market ourselves. We started to step away from that even though the margins are relatively high, but the revenue potential is low. And this is why we’re talking about different markets, different revenue levels but also different margins.

Yes. Because this partnership with Napatech is for non-5G market, right? You’d like data center something like this?

Is what?

Is something like data center or…?

Yes. It’s supposed to be for data center. As I said, I mean, it needs to be feed even within the data center.

Nice. So you’re announcing a new buyback plan today, and I’m very happy about that. But Zohar Zisapel has been selling in the open market its 10% stake in Silicom during the last few weeks. Why don’t you maybe speak with him and buy this $15 million of shares from him? I think that you could purchase more shares maybe?

I do not talk to Zohar about it. I don’t know what his plans are and/or why, so.

Yes. I understand, but it would be great for the company if you can purchase more shares at a lower price. But yes, it’s maybe difficult to say. My final question. Israel is the first country in the world that has herd immunity against COVID-19. Is that going to have a positive impact on you?

While the COVID-19 may have a positive impact in terms of the demand coming up, there’s still some negative impact as well in terms of transportation, somewhat in terms of our ability to have face-to-face meetings. But in terms of demand, I think, overall, it’s indeed a positive for us.

[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, www.silicom-usa.com. Mr. Orbach, would you like to make your concluding statement?

Thank you, operator. Thank you, everybody, for joining the call. We wish you all health. And we look forward to hosting you on our next call in 3 months’ time. Good day.

Thank you. This concludes Silicom’s First Quarter 2021 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.