Silicom Ltd. (SILC) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Silicom Second 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 1646-688-3559 or view it in the News section of the company’s website, www.silicom-usa.com. I would now like to hand the call over to Mr. Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin, please?

I would like to welcome all of you to Silicom’s second quarter 2021 results conference call. Before we start, I would like to draw your attention to the following Safe Harbor statement. This conference call contains projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and may change as time passes. Silicom does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of 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 extent to which solutions are adopted by these markets; the likelihood that they will rely increasingly on customers which provide solutions in these evolving markets, resulting in an increasing dependence on a small 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, around 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 the 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 core operations 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, to the introductions, 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 our second quarter 2021 results. We are very pleased with the solid and ongoing improvement in our financial results for this quarter. We reported 31% year-over-year increase in revenues to over $30 million, demonstrating that 2021 is on track and the expected growth we have been discussing in recent quarters continues. We reported our 66th quarter of continued profitability, with net income of $3 million, up 59% year-over-year. EPS was at $0.42 and an increase of 62% year-over-year. This significantly higher growth in net income and EPS demonstrates the inherent leverage of our business model. We completed our second $15 million buyback in the quarter and started a new third $15 million one. In total, we purchased 83,000 shares in the quarter, amounting to $3.6 million. Our strong cash position and ongoing cash generation allows us to contribute to increased shareholder value in this way. At the end of the quarter, we had over $74 million in net cash on the balance sheet. We continued to advance with our strategy that we have discussed in recent quarters and as our two recent design wins demonstrate, we continued to build our penetration in the 5G/O-RAN as well as the SD-WAN markets, leveraging further from the inherent growing market demand. In May, we were honored that one of the world’s largest mobile infrastructure equipment providers selected our acceleration cards for their next-generation 5G mobile networks. Not only has this customer selected our current solution, but even more importantly, understanding our capabilities, it has also decided to work with us in parallel on a different version of the solution, which by itself would be an important contribution to our portfolio on top of the requirements of this specific customer. This was our third major 5G win with a global leader in only 6 months, but was also the first time that a major 5G equipment vendor had selected our solution. This third major 5G win is a solid demonstration of our growing leadership in the 5G space and in particular, in the distributed unit performance booster market. It also helps us expand our momentum in this market segment. A few weeks later, we were very pleased that Telefonica Tech, which is Telefonica’s holding for digital businesses and is part of one of the world’s largest telcos, selected our flagship SD-WAN Smart platform for its global SD-WAN solution for the small to medium enterprise segment. Telefonica Tech strongly valued our Smart platform, differentiated feature set for the disaggregated network environment. We also demonstrated a superior performance to price ratio as well as flawless integration of our hardware with their software platform. We also enjoyed a highly effective collaboration effort and strong working relationship with Telefonica Tech and the other vendors involved in the project, which we believe will lead to additional wins down the road. Telefonica Tech aims to offer an in-house SD-WAN solution for small to medium-sized businesses, or SMBs, as they are known, enabling them to leverage the decoupled network concept. This approach will help SMBs maximizing the connectivity, agility and flexibility of their cloud-based applications while reducing provisioning, upgrade and service delivery costs. In fact, we feel that in the current and perhaps future post-corona world, where remote and work from home is the new norm, the market demand from SMBs for this type of service would be very significant and grow quickly, whereby such growth will obviously be reflected in our SD-WAN-related revenues. Telefonica Tech expects the deployment of this SD-Branch service to begin ramping up in 2022. As more and more business applications move over to the cloud, we believe that businesses will increasingly see the power of the SD-WAN concept to give them connectivity that is more robust, flexible and cost-effective than ever before. We expect the transition to drive multiyear growth for SD-WAN service providers, like Telefonica Tech and therefore this win represents multiyear growth potential for Silicom. We aim to continue our collaboration with Telefonica Tech on both this as well as additional projects, deepening our positioning as one of their go-to sources for advanced solutions enabling their disaggregated and decoupled strategy. Beyond these two key design wins that we focused on and announced during the second quarter, we continued to bring further new customers and Design Wins that we did not publicize. We continued to see a good conversion rate of our long and healthy pipeline into new Design Wins, especially in the SD-WAN and 5G/O-RAN market segments. And we do believe that the accumulation of such wins is indeed what is fueling our growth. Before moving on to our guidance, I would like to address the global shortage of electronic components and materials which has been ongoing now since early 2021 and which we addressed in our last conference calls. Similar to all our peers, we continue to experience these shortages across all our suppliers. I stress that this is an industry-wide issue affecting everyone in a very significant way. Components lead times continue to increase and the scarcity is increasing prices. The extent of these shortages are to a level we have never seen before, and analysts expect it to persist throughout this year and at least into the first half of next year. Given our careful planning and prudent inventory management, we have been able to resolve most of the component shortage issues in the second quarter and report revenues slightly better than our guidance. I note that the longer lead times 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 new design wins in our pipeline. Furthermore, despite our meticulous and early planning it is possible that certain vendors that are currently scheduled to deliver on time will de-commit as we move forward. However, we continue to work hard and we are leveraging our strong cash position to ensure that we have sufficient inventory of parts available to meet the demand for our products. I would like to add, we are leveraging our strong relationship with the vendors, especially Intel. In addition, the caliber of our large customers which are thirsting for our products ensures our higher level on many of our vendors’ priority lists. I would like to follow-up and discuss our guidance. For the third quarter of 2021, while taking the component shortages issue into consideration, we expect revenues at between $32 million and $33 million, which at the midpoint, represents strong first 9-month year-over-year revenue growth of 24%. While the current component shortage adds increased revenue uncertainty into the second half of the year, our careful planning still allows us to narrow the range of our previously issued annual guidance of between $120 million and $130 million and we expect revenue to fall in the upper part of that revenue range. With that, for the fourth quarter of 2021, we expect revenues to grow to between $34 million and $36 million. More generally, we expect that the coming few years for Silicom will 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. In summary, our momentum is strong, and our recent wins position us exceptionally well for maintaining and building on our growth in the coming quarters. Many of the end markets we serve are performing strongly, and we continue to support all our clients’ connectivity needs in today’s hottest networking market segments. Our pipeline remains healthy and we expect our increasing roster of wins and growing momentum to lead to further 5G and SD-WAN opportunities in the coming months. Furthermore, we see the recent design wins having much greater scaling potential than what we have traditionally experienced. It represents an opportunity for sustained long-term revenue as we cement and broaden our relationships with some of the world’s largest companies. Beyond that, many of the new design wins bring us strong credibility in the 5G space, which in itself has the potential to bring us new customers. More broadly, our 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 as well as our current long and deep pipeline makes us ever more optimistic that we are well positioned for strong growth in 2021 and beyond. 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. Revenues for the second quarter of 2021 were $30.3 million. This is a year-over-year increase of 31%, compared with revenues of $23 million as reported in the second quarter of last year. Our geographical revenue breakdown over the last 12 months, were as follows: North America, 61%; Europe and Israel, 31%; Far East and rest of the world, 8%. 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 options and RSUs granted to directors, officers and employees; acquisition-related adjustments; as well as lease liabilities financial expenses. 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 2021 was $10.8 million, representing a gross margin of 35.8%, at the upper end of the range of our gross margin guidance of 32% to 36%, and compared to a gross profit of $7.8 million, or gross margin of 34%, in the second quarter of 2020. The variance in gross margin is a function of the specific product mix sold in the quarter. Operating expenses in the second quarter of 2021 were $7.3 million, a slight increase compared with $7.1 million in the previous quarter, and compared with $5.9 million in the second quarter of 2020. Most of the increase compared to last year is R&D related and, and as we discussed last quarter, has been planned and represents our continued significant investment in developing new products, IP and technologies. Operating income for the second quarter of 2021 was $3.6 million, an increase of 83% compared to operating income of $2 million as reported in the second quarter of 2020. Net income for the quarter was $2.9 million, an increase of 59% compared to $1.8 million in the second quarter of 2020. Earnings per diluted share in the quarter were $0.42. This is a year-over-year increase of 62%, compared with EPS of $0.26 as reported in the second quarter of last year. Now turning to the balance sheet, as of June 30, 2021, the company’s cash, cash equivalents and marketable securities totaled $74.3 million, with no debt, or $10.88 per outstanding share. During the quarter, we completed our second $15million share buyback plan and executed on our third $15 million share buyback plan, which we started on May 4, 2021. In total, since we started our first buyback program about 2 years ago and up until June 30, 2021, we purchased approximately 925 shares at a total cost of approximately $32.3 million. That ends my summary. And now back to the operator for question-and-answer session. Operator?

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

Thanks and just congratulations on all these great large wins that you’re delivering. I wanted to talk a little bit about the supply constraints relative to what you reported in the quarter that was just printed. Obviously, you’ve seen some pretty strong orders, but it’s hard to tell the timing of when those orders should kick in. And several of them I think you’ve talked about kicking in more in the ‘22 time frame. So was there enough demand that if you had had more parts and more availability, I know you got more than you had anticipated, but more than that, that you would have delivered further upside to the revenue? Or were you not supply-constrained because your good job of managing your inventory levels and the like? Can you talk about whether there was upside in demand?

Well, first of all, there was an upside in demand. And I mean, if I needed to give you just a bottom line answer as to whether or not if we had no constraints at all on components if we would have been able to deliver more, then the answer is, yes. Now that being said, I mean, we are investing a lot of time in, I would say, minimizing the impact of the shortages, and that includes both in terms of inventory planning as well as in time invested in talking to all our vendors and pushing them and explaining to them what we really believe in: that if they help us, that would be positive for more business, moving forward. So it’s a combination of both. But if you just needed to have the bottom line, yes, if we didn’t have any constraints on material, we would have been able to deliver more.

Similarly, when you look at the third quarter guide, I’m assuming that you’re also expecting continued constraints to limit upside to the numbers based on what you’re seeing. I mean, are we talking about $2 million, $3 million, $4 million, $5 million worth of potential upside that’s left off the guide because of that?

Well, I don’t have a number. But once again, I mean, obviously, if we had no constraints, we would have been able to deliver somewhat more. I do not know exactly how much more. I would also like to say that this number that we’re giving you right now, on the other side, it is based on what we know right now on our planning that I discussed before. In these times, sometimes vendors de-commit to what they used to commit to and there are surprises. So on the other side, there is still risk in delivering that as well. But if you’re asking from a pure demand perspective, yes, we would have been able to deliver somewhat more.

So going out into the fourth quarter, the guide that you’re implying is kind of low-single-digits growth rate. It’s a pretty big decel. Can you talk about why that decel is occurring there? Is it just simply because of the much easier comps in the first three quarters against a much tougher comp? Is it supply constraints further out look tighter and harder to forecast? What’s behind that?

So first of all, I would like to say that when you look at the full year, that even with the fourth quarter included in there, you would still see a year-over-year growth, which I believe is approximately 18% or something like that, or 19%, which I believe is significant. Now that being said, I would also agree on one of the things that you’ve said. Yes, I mean, the impact of the shortages in material is not being reduced for the fourth quarter; but rather, the other way around. So yes, we have even more difficulties, all of which are taken into consideration when we provided our guidance, but we do have more difficulties in terms of material shortages for the fourth quarter than before that. I would like to mention that we started to plan our inventory not only when this crisis started, but also before that, which is why at the beginning we were fully prepared with inventory against the upcoming orders. As we move into this scenario of prices and shortage of material, the scenario becomes even more challenging, which is why I would say that the results of the fourth quarter, the impact on the fourth quarter results is somewhat higher than the impact on the third quarter, than the impact on the second quarter, and so on and so forth.

So when I look at the very significant wins that you’ve had over the course of the last 6 months and with the launch of the Evenstar product in March, it seems pretty clear, I mean, there are multiple large global Tier 1 type customers here, that there is a lot of future demand implied by that. Can you talk about the timeline for when you think those players will kick in, whether those projects are in the numbers in the back half of the year or are more of a ‘22 number, a ‘23 number? How do we think about that in terms of measuring the outlook?

Well, first of all, obviously, not all of these projects will kick in at the same time, and there are differences between these projects. But if I had to provide a generic answer to the question, I would say that the impact in 2021 is minimal of these projects, that we would feel a significant part of that in 2022 and possibly even more in 2023.

I see. And is the pipeline as rich as the rear-view mirror?

Yes.

One of the surprises in the quarter is against a backdrop of people expediting. Most companies are seeing compression in their gross margins. Yet you guys are seeing margins coming in at the higher end of the spectrum. Can you talk about why that’s the case? I would have thought larger deals and difficult challenges getting parts causing expediting would, in fact, cause the opposite to happen?

Well, I would say that from a day-to-day perspective, we do feel exactly the same pressure. However, we do have, well, I would call it, the privilege of having a very wide, I would say, portfolio of products which represents a mix in the gross margin that we could charge between them for a variety of reasons. So the main reason for the somewhat higher gross margin in this quarter is simply the mix of product. It’s not because we are different than anyone else and while everyone else’s prices or costs are increased we were able to reduce the price of components. I think we’re doing good, but we’re not doing that good. I mean, this kind of environment right now does not allow for cost reductions; it goes the other way around. And we are just like everyone else, somewhat maybe negotiating tougher, but that would not constitute the difference. The reason behind the increased gross margin is the mix of products sold in this quarter.

So we’ve been tracking a lot of the appliance-related, more traditional customer base and been very positively surprised. It has a robust – the demand from enterprises are for data center and campus branch infrastructure, with order rates ranging from 15% to as much as 30% growth in what I would describe as traditional products that have been areas that have been declining. Is that part of what’s going on here, is that underneath the surface your traditional business of appliances into a variety of traditional customers is seeing a very strong uptake and that’s driving that mix?

In terms of a mix, a part of that is coming from what you’re saying. I mean, that we did have some, I would say, traditional customers which, to a certain extent, increased their demand and, consequently, whatever they took from us during the quarters. But the mix difference is not only due to traditional customers and new customers. Even within the new customers and the new markets, the mix and the gross margins can vary between various products, sometimes various customers, sometimes simply due to the fact that in a certain opportunity we were able to significantly reduce the cost of certain components. So while I would say that what you said is definitely a part of that, it’s not the only part. I mean, and they are different in gross margins of various products and customers, even with the new market segments that we’re addressing.

So just to take those comments out into the gross margins in the back half of the year, are we looking at more like last year’s gross margins or are we looking more like first half of this year’s gross margins in the back half?

Well, I – the only thing that I am saying is that fourth quarter, and then obviously there would be an average of that, fourth quarter was still within what we define for gross margin, which is 32% to 36%. And Q3 and Q4 may fall within the lower part of that or the higher part of that. And then, I mean, I am presuming that when you calculate the average, it may be somewhat higher. So, maybe 34% something or something like that.

I see. And then just one more question, the interest income line went negative, after running at around $400,000, $500,000 in prior quarters. Is that going to snap back in the September quarter? Is there something unusual in that, that has caused this to go negative? I mean, obviously, you have got a huge cash balance.

The main reason is that exchange rate may be a big factor in the financial income number. So, it depends – every quarter it depends on the actual exchange rates against the shekel and against the Danish currency. This quarter, the effect was negative.

Okay. So, if we exclude the volatility in exchange, would that have been a $400,000 kind of number in that line, as it was in the first quarter? Is that the ongoing run rate we should be using, assuming flat currency, in the second half of the year?

I would say that if we exclude the exchange rate effect, the real economic number is approximately $100,000 per quarter.

Okay. So, we should be using $100,000.

Correct.

I appreciate that detail and I will see the floor. Thanks.

The next question is from Sergi Mascaró. Please go ahead. Sergi Mascaró: The first question I wanted to ask today was about the potential of the deals that we have had this quarter. I think that we have had a deal with Telefonica Tech and another one with Ericsson. But you did not disclose the long-term sales potential of these deals. Can you speak a little bit about this, please? Are we in the same case as with the Facebook project that we spoke about at the last call? Thank you.

Well, first of all, indeed, we have identified Telefonica Tech, and we have not identified the second customer. So obviously, I am not referring to the name. I would say that the potential, in general, of the deal with Telefonica Tech is not yet very clear, even to them. Obviously, it’s going to be millions of dollars. And if it’s going to be a low number of millions of dollars, they would consider that to be a failure. But it’s a little bit difficult. It’s a new service that they are launching. So, what exactly the volume will be, we don’t know. As to the second win, I would say that we expect out of the specific product that we are selling to this customer, we are expecting a few million dollars per year, single digits. But we consider that penetration to this customer is extremely important, because we believe we would be able to sell more products to this customer as we move forward. Sergi Mascaró: Yes. Thank you. I said the second name because Ericsson has recently announced that it will be using Intel’s Acceleration eASIC cards for its mid-band Cloud RAN technology. And I think that only Silicom is using these cards. Also, Ericsson said in the press release that the Cloud RAN solution could work with 7 million of its radio. So, I don’t know if you can say anything about that.

No. I cannot comment on that. Sergi Mascaró: Okay. No worries. Great. Now about the Evenstar and Telecom Infra Project. This quarter, we also had lots of news here. Vodafone, MTN Africa, Telecom Egypt and others have disclosed that they were committed to the Telecom Infra Project and Open RAN. So, is Silicom involved in this project with the Evenstar program? I am not sure if Evenstar and Telecom Infra Project share connections.

I am not sure I understood what the question is. Obviously, I mean, as we have said, we are a part of the Evenstar program. We have not delivered the units yet. It’s a long-term program. I am not expecting revenues of this program to be significant this year. It is obviously up to the participants within the program to decide what exactly they are going to take and from whom. And I am not sure that I answered your question, to be honest. I am ready. If you would like to direct me again what the question was, I would try to respond to that more accurately. Sergi Mascaró: Yes. So I mean, is there any kind of relationship between Evenstar and Telecom Infra Project? Because lots of companies like Vodafone or MTN Africa said that they were working with the Telecom Infra Project. So, maybe you could speak about that?

Is there a relationship between whom? Sergi Mascaró: Yes. Evenstar and Telecom Infra Project.

I am not familiar with this kind of a relationship. Sergi Mascaró: Okay. Okay. No worries. So, it is now eight months away since you announced the 5G field trials project in October last year. Is there any kind of update you can give us about these field trials?

Yes, I can give you an update about that. The customer has decided to use, I would say, next generation of solutions for these field trials, which is why we are still working with the customers in updating what we wanted to do at the beginning. That means actually the period or the timelines for these kind of field trials would be postponed into next year. Sergi Mascaró: Okay. And one more question about the tech side. During 2019, we had delays in the SD-WAN and FPGA deployments for a few quarters. Do you believe that these delays are already behind us?

Which delays? Sergi Mascaró: Yes. We had delays in the SD-WAN and the FPGA deployments in 2019 for a few quarters.

Delays from whom? Sergi Mascaró: Do you believe that these delays…

Which delays? Sergi Mascaró: Yes, for a few customers we spoke. SD-WAN and FPGA.

I am not sure what delays you are referring to right now, and we do not have any delays right now. And when I say delay, I mean that we commit something to our customers that we cannot deliver on the day committed. If the delays that you were talking about were due to COVID-19, I am not sure. But still, I mean, we do not have any delays right now. But obviously, with the increasing demand coming from our customers, we are not always able to deliver goods to them on the dates that they wish to get the goods, especially in the environment of shortages of materials. But I am not – right now, there are not any significant delays company-wide or something like that that I can talk about. There is nothing like that. Sergi Mascaró: Okay. So everyone is speaking about inflation right now. My questions here are, do you have pricing power to increase the prices of the design wins if we see sustained levels of inflation? And are you experiencing this inflation right now?

Inflation? No, no impact. Sergi Mascaró: Okay. But do you have pricing power to increase the prices of the design wins if we see sustained inflation?

It’s not an issue of pricing power; it is an issue of policy. I mean, we work with our customers. And even if we had the power, once our customers become dependent on us to increase the price for a certain demand, we are very reluctant to do that, because we work closely with our customers, making them partners. So, even if we do have the power, we do not do that. Sergi Mascaró: Okay. Thank you. And my last question. We have recently seen large semiconductor companies like Qualcomm and Nvidia presenting plans to develop ASICs for the use that support an Open RAN network model. Do you think that this increases the competition to your products?

Well, I would say, in general, that the competition to our products will increase, whether it’s by Qualcomm or Nvidia or maybe some other players as well. And yes, we are teamed with Intel. And let us just say that if we get the market share that Intel is planning to get for itself or even half of that, I would be very happy. Sergi Mascaró: Okay, well said. Thank you. Many thanks and best of luck.

[Operator Instructions] There is a follow-up question from Alex Henderson of Needham & Company. Please go ahead.

Thanks. Clearly, there has been a lot of change over at Intel, Pat Gelsinger coming in and the like and realignment of their programs and policies and architectural decisions and things. Can you talk about whether there has been an improvement, a status quo or erosion relative to your positioning there?

Well, right now, it’s obviously status quo. We hope that there would be some improvement in some areas. I would say, in general, that we are really working closely with Intel. And when I say with Intel, it means that we are talking to, I would say, mostly three divisions within Intel. So with two of them, we are working really, really closely and really have partnership relationships. And this is where our growth is coming from. These are the areas where the growth is coming from. There are other divisions, the third one and possibly some others, where we did not experience exactly the same kind of a relationship. And due to these organizational changes, we are hoping that possibly we would be able to even increase, I would say, our partnership penetration within Intel for the better. But we are not sure that would happen.

And again looking at what they are seeing in terms of projects, I know that they have historically handed a fair amount of business off to you where it was at the right scale for you, but not necessarily the right scale for them. Are you still seeing that relationship or do you see a good pipeline of projects coming over from them?

Well, first of all, we see a good line of projects coming from them. And we are seeing during the last year that even though, in general, what you have said before is still correct, but there are some projects that they are saying, no matter what, “We would give these to Silicom, even if they are scaling, if their required scale is high,” simply because we – I mean, they are maybe turning resources into the processors or whatever. So, in some situations that we work with them, they are allowing us to actually be the only ones acting in their names without them, themselves, having another product which would go to the high-scalers. But in general, it’s the same approach, yes.

Okay. Great. I appreciate the answers. Thank you.

Thank you.

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

Thank you. Could you update us on the status, I don’t think this has been asked, of the CPE business with the two large telcos? Last I heard, one had not started at all, and the other one was moving ahead, but very slowly.

So, the status is that the last one, which is moving ahead, and by the way, very slowly. It is slower than what we expected, but it’s not that slow. I mean, we are still selling quite a few millions of dollars to this telco. And with the other one, I would update that there – that we begin to see a certain change in there, at least in terms of requests coming up again and so on and so forth. I am not sure that they are really ramping up, because it’s happened in the past and then we got disappointed. But just recently, during this quarter, we have been able to say that even this second telco is – there is a possibility that it would be ramping up. Now, that being said, I would say that these two telcos are a relatively old story. Overall, our CPE business is booming. We are selling tens of millions of dollars of CPEs already. And this is the most, I would say, the area of our business which is growing in the fastest way.

Okay, just a follow-up to that, what is the annual potential of these two telcos when they really ramp up?

Well, even – I mean, when the projects with them started, I may have been able to give a response, and I think we even included such a response in the PRs that we presented when we announced these wins. I would say that right now I really don’t know. I mean, it is very difficult to say. We have been disappointed, to a certain extent, with one of them; even in full to the other one. So the potential, yes, it’s tens of millions of dollars of each. Whether or not this would happen and what is the chance that that would happen with the experience of last year, it’s not very high. But once again, I mean, if you are asking not about these two telcos, the wins of which we received maybe 3 years or 4 years ago, but rather of the SD-WAN or CPE business as a whole, then the potential there, I would tell you, it is huge. We are selling right now tens of millions of dollars. And I wouldn’t flinch before saying that a potential there could come to $100 million or even more, just for CPEs.

Are you saying $100 million on an annual basis?

Yes.

Okay. If it’s not with the two telcos, can you tell us what products that you are selling into the CPE market and give us an idea of who the customers may be for it?

Well, we cannot give an idea about the customers. We have issued several PRs providing some examples of wins that we had. There are quite a few customers to which we are selling these units. And I see the potential both with these customers and with additional customers with which we have our pipeline with as a very strong one. As I said, speaking about potentially combining all of these together, yes, it could come to $100 million, not immediately, per year. Not immediately, not the next month. But speaking about potential, the potential is there.

Okay. Thank you very much.

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 wish you all health, and we look forward to hosting you on our next call in three months’ time. Good day.

Thank you. This concludes Silicom’s second quarter 2021 results conference call. Thank you for your participation. You may go ahead and disconnect.