Silicom Ltd. (SILC) Q4 2021 Earnings Report, Transcript and Summary

Welcome to the Silicom Fourth 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 and Public 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 GK Investor Relations. Mr. Green, would you like to begin, please?

Thank you, operator. I would like to welcome all of you to Silicom's Fourth Quarter and Full Year 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 dependence for substantial revenue growth on a limited number of customers in the evolving cloud-based SD-WAN, NFV and Edge market the speed and extent to which solutions are adopted by these markets, the likelihood that we will -- that we were relying increasingly on customers which provide solutions in these evolving markets, resulting in an increasing dependence on a smaller number of larger customers, difficulty in commercializing and marketing silicon products and services, maintaining protection of brand recognition protection of IP, competition, disruptions to manufacturing and development, along with general disruptions to the entire world economy related to the spread of the novel corona virus 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. management's make strategic decisions, forecast future results and evaluate the company's current performance. Management believes that the presentation of these non-GAAP financial measures are useful to investors' 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 today's 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 with an alternative method for assessing our financial condition 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 are included in today's press release, which you can find on Silicom's website. With us on the line today are Mr. Shaike Orbach, CEO; and Mr. Eran Gilad, CFO. Shaike will begin with an overview of the results followed by Eran, who will provide the analysis of the financials. After that, we will turn over the call to the question-and-answer session. And with that, I would now like to hand the call over to Shaike. Shaike, please go ahead.

Thank you, Kenny. I would like to welcome all of you to our financial results conference call discussing our fourth quarter and summarizing our full year 2021 results. We are very pleased with the solid results of the fourth quarter, which were ahead of our targets as well as the strong results for 2021 in what has been, again, not an easy year for anybody. For the quarter, we reported a 10% sequential growth and year-over-year growth of 7% in revenues to $36.3 million, ahead of our expectations of between $34 million and $36 million. For 2021, we reported a solid 20% year-over-year growth in revenues to $128.5 million at the high end of our $120 million to $130 million range issued at this time last year. Performance, we are very pleased with. Looking back at 2021, we would define this year as a key inflection point in the demand for our products in which Silicom returned to strong growth. We are all the more pleased with our 2021 performance, delivering what we originally were targeting to achieve against a progressively worsening background of component shortages and tight supply chains throughout the year that all in our industry experienced. We placed significant effort throughout the year into maximizing what we were able to manufacture and deliver, meeting as much of the high demand as possible. Demand is in excess of what is currently possible to supply and underlies my optimism as we exit 2021 that we are at a real inflection point of growth for Silicom. In fact, without the component shortages, which negatively impacted our revenues by a few million dollars, we would have reported full year 2021 revenue well ahead of the guidance range we issued last year. I will provide a more detailed update on the shortage in a few moments as well as our guidance for the upcoming quarter. We have reported our 68th quarter of continued profitability with net income of $4.5 million, up 25% sequentially and 14% year-over-year, while earnings per share was at $0.65, up 25% sequentially and 16% year-over-year. Looking at 2021 as a whole, we reported net income of $14 million, up 27% year-over-year and EPS of $2.01, up 31% year-over-year. I would like to highlight an important aspect of the results. While in 2020, we reported $10.6 million in operating income at a margin of 9.9%. In 2021, we reported $15.9 million, an increase of 50% as an improved operating margin of 12.4%. This was due in part to our 20% growth in revenue while only needing to grow OpEx by 14%. This demonstrates the strong operating leverage inherent to our business model. In terms of shareholder value creation, our strong balance sheet and cash generation allowed us to continue our current $15 million share buyback program and we purchased $3.6 million in Silicom shares in the quarter. I note that since we started our share buyback programs in May 2019, we have purchased $39.1 million in Silicom shares. At the end of the quarter, we had over $61 million in net cash on the balance sheet. The source of our growth continues to be the disaggregation and decoupling trend, representing one of the most significant transitions of IT architecture in recent history. We have been preparing for this trend over the past 5 years, developing critical technologies and products needed for its success while building important relationships with hardware and software partners. The markets to which these trends play into are the growing SD-WAN market and the developing 5G O-RAN market. The SD-WAN market is at the growth phase of its life cycle and today, contributing tens of billions of dollars to our revenues. The 5G O-RAN market is still in its early development and introduction phase. And once this market will start to move into the growth phase, we anticipate it will also begin to contribute significantly to our growth as has been the case with SD-WAN. We introduced our SD-WAN Edge product in 2016. And now 5 years later, we have built a full circle of telcos, OEMs as well as partnerships and significant collaborations, including AT&T and Intel. Our partners are divided into 2 types: software and hardware. Having Intel as our harder partner is a big advantage. Intel is the major supplier of x86 CPUs, the main building block of most SD-WAN platforms. Furthermore, working hand-in-hand with software partners and validating our systems with various SD-WAN application software is crucial in this world of decoupled hardware and software. These collaborations play a major factor in our success in this market. The success that we see with SD-WAN makes us optimistic about our future potential success in other similar markets like the 5G O-RAN market, which are endorsing the disaggregated and decoupling approach. As we have already achieved with SD-WAN, it is also important for us to build a strong ecosystem of customers and partners in the 5G O-RAN market. During 2021, we had impressive momentum on this front. In only 1 year, we have already achieved wins with Tier 1 telcos, service providers and a leading mobile infrastructure supplier. And we believe this number will grow significantly as O-RAN enters the mainstream. As such, with our partnerships in place and with the additional products and opportunities in the pipeline, we can see the design wins achieved so far are just the tip of the iceberg. And looking out over the coming few years, 5G O-RAN has the potential to add significant traction to the growth of Silicom. Looking back at our business performance in 2021, I would like to elaborate on 3 major Edge design wins achieved in 2021 to stress their significant potential as growth drivers for Silicom. The one we announced in May 2021 was with a telco giant Telefonica, which plans to start deployments this year, so the impact of this design win is still ahead of us. The second one announced in October 2021 is a design win from a U.S.-based giant, which supplies infrastructure equipment to many telcos and service providers globally. This customer is already a very active player in the SD-WAN market, where it supplies both SD-WAN hardware and software. The customer selected our SD-WAN Smart platform for its branded solution while forecasting a run rate of tens of millions per year in full ramp up. Besides the confirmation it gives to our product and strategy, it also represents a huge future potential as deployments will start this year. Finally, I would like to highlight our key design win in November demonstrating the importance of the close relationship as well as the ongoing support and communication that characterize all of our client interactions. We announced that an existing customer, which is a leading North American telco service provider awarded us with a major design win with a potential to reach a steady-state run rate of $50 million per year for a customized version of our Edge Smart platform. We announced at the time that the company has placed $30 million in purchase orders for equipment planned to be delivered primarily during the current year. Just a year ago, when we originally started working with this customer, it's orders of our products were for relatively standard platforms, and we're at the rate of just a few million dollars per year. But as our relationship developed, we became aware of more and more opportunities, which ultimately lead to this major design win, one that is approximately 10x as large as the original. Beyond this, we believe there is further upside from this customer, and we are discussing additional significant opportunities. Specifically with this customer, a part of our role is to optimize for component availability. Given the unpredictable behavior of the component crisis and the customers need to deploy the platforms under a tight schedule. In fact, we believe that our ability to carefully balance and optimize for availability on the one hand, while supporting the customer with the industry's best connectivity solutions on the other hand, helped us with this deal and our unique advantages of our value proposition. More broadly, we continue to see protracted delivery lead times for electronic components as we move into 2022, and this continues to remain a major issue in our industry. Looking ahead, we see this issue remaining with us throughout 2022 and possibly even beyond that. However, on the positive side, we've already had much of 2021 to work on mitigating these risks and our achievement of 20% year-over-year revenue growth with 50% operating income growth under these conditions demonstrate that we have done so successfully, which is why we're optimistic for 2022 as well. The steps we've taken and continue to take are leveraging our strong balance sheet to build up our inventory of raw materials carefully baked by customers, POs and commitments, buying available stock of components both from the vendors and in the free market and expediting delivery if need be; two, working with customers on optimizing availability and providing them with alternative solutions, for example, replacing products, the delivery of which is challenging with other products with better availability; three, redesigning products to use more available components to achieve optimized availability. Obviously, when designing new products, our current initial criteria is optimizing for component availability. Moving forward, while we predict that the shortages will persist despite it, given that our experience and success in dealing with the issue, combined with a very strong market demand for our connectivity solutions, and our broad range in increasingly large design wins, all this support our expectations for continued solid double-digit growth rates for 2022 and beyond, which brings me to our guidance for 2022. For the first quarter of 2022, our actual revenues will be impacted by 2 opposing forces. The dramatic growth in demand for our products on one side and the delivery constraints created by the global components crisis on the other. This makes a forecast slightly harder to pin down. So we're being a little more careful and providing a wider guidance range than we normally do. With that, for the first quarter, we expect revenues of between $31 million and $33 million, which at the midpoint represents growth of approximately 10% over that of the first quarter of 2021. I would like to note that these growth rates represent our estimates as to the level of our success in indeed mitigating the component situation, there been no such situation, our forecast would have been much higher. In summary, we see Silicom having now crossed a new growth inflection point, and we believe that Silicom will see double-digit compounded revenue growth for the coming few years. Our expectations are built on the recent major design wins the scale of which is well ahead of what we have traditionally experienced and provides us with strong revenue visibility over many quarters and even years. As we move into 2022, we already see a sustained long-term revenue growth path with further upside potential as we continue to successfully cement and broaden our relationship with some of the world's largest companies. 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 increasingly optimistic as time passes. 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 fourth quarter of 2021 were $36.3 million compared with revenues of $33.9 million as reported in the fourth quarter of last year and $32.9 million as reported in the prior quarter. Our geographical revenue breakdown over the last 12 months were as follows: North America, 69%; Europe and Israel, 23%; Far East and Rest of the World, 8%. During the last 12 months, our top 3 customers together accounted for about 30% 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 RCUs granted to directors, officers and employees, acquisition-related adjustments lease liabilities, financial expenses as well as impairment of intangible assets. For the full reconciliation from GAAP to non-GAAP numbers, please refer to the press release we issued earlier today. Gross profit for the fourth quarter of 2021 was $12.7 million, representing a gross margin of 34.9% in the upper part of the range of our gross margin guidance of 32% to 36% and compared to a gross profit of $11.4 million or gross margin of 33.6% in the fourth 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 fourth quarter of 2021 were $7.5 million, similar to the $7.5 million reported in the first quarter of 2020. Operating income for the fourth quarter of 2021 was $5.1 million, an increase of 31% compared to operating income of $3.9 million as reported in the fourth quarter of 2020. Net income for the quarter was $4.5 million, an increase of 14% compared to $4 million in the fourth quarter of 2020. Earnings per diluted share in the quarter was $0.65. This is a year-over-year increase of 16% compared with EPS of $0.56 as reported in the fourth quarter of last year. Now turning to the balance sheet. As of December 31, 2021, the company's cash, cash equivalents and marketable securities totaled $61.3 million with no debt or $9.14 per outstanding share. During the quarter, we further executed on our third $15 million share buyback plan, which we started on May 4, 2021. During the fourth quarter, we purchased approximately 81,000 shares at a total cost of $3.6 million. That ends my summary. I would like to hand back over to the operator for question-and-answer session. Operator?

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

You guys are really executing superbly against the tough backdrop. I wanted to talk a little bit about the gross margin risk associated with component costs and how you're mitigating it doing such a great job on it, obviously. To the extent that you're doing something a little different, I think, than most other companies. I think you guys have partnered with your customers, giving them the option to help you buy these components and not running that incremental cost through your income statement in terms of either revenue or margin impact. Can you talk a little bit about what you're doing there?

Yes. I mean there are several parts to that. First of all, indeed, we have very close relationship with all of our customers. And that means that we're discussing this issue openly with them and very transparently with them. And yes, you're right. I mean because we are transparent with them, and they are aware, of course, of the situation. So in most cases, we're able, first of all, to make sure that the customer is actually undertaking the additional cost when it's significant. I mean there are many cases where we are helping our customers. And then we are absorbing some of that. But when the extra costs are significant, our customers are coming into that, and they're helping into that. Now yes, you're right. I mean we're not increasing our revenues due to that. I mean, even though they're helping us, we're not using this increase to increase our revenues artificially by doing that. And either they're buying that or we're finding a way that we just, I would say, taking that out of the revenues and the expenses because they are paying for that directly or any other mechanism like that. So I would say that overall, the increased cost does have a certain impact on our cost, and it should actually reduce our margins, but because of the mix of products, et cetera, you don't see that because we're doing that. This is happening only where the increase in cost is really minimal. When it's more than that, we're working on that together with our customers.

That's very helpful. And one of the companies that we follow F5 Networks reported the other night, and they specifically called out a significant erosion in the availability of parts with a 35% jump month-to-month in decommits and then went on to say that they had been buying some components in the spot market, and the spot market has completely dried up. You can't get anything. There's just nothing to be had. Have you seen any change in the supply chain availability of the components that are critical to your product or any other change in the environment over the last months.

Well, I wouldn't be able to say that we've seen a change. The situation is still extremely challenging. The one thing that I would be able to say is that we are more familiar with what's going on, and we're getting ourselves prepared possibly in a better way. And that would include all the means that I was talking about when I was talking about that before. So as I've said, we don't see any improvement in the situation. We also experienced decommits crazy lead times and so on and so forth. But I mean, we're used to that right now. we're beginning to look at replacement components earlier. We're doing redesigns earlier, but because the demand is growing as well. So we have more to deal with which is why the overall situation is still challenging. But on the other side, we are optimistic because we're -- this is now the day-to-day work that we're doing these days.

The time line of ramping these large contracts that you've gotten? Has there been any slippage or any pull forward or any change in the magnitude that you're expecting to in terms of available demand in 2022?

I mean we are on track with these projects. But it took some decisions that we had to make together with the customer along the way. I mean, we could have had to change a certain element of the specification in order to do something a little bit different, which is, once again, this is what we're doing in order to overcome all these challenges. But right now, we're on track with a major products, major wins.

Below the line, there's a couple of things that were a little different than what we'd expected, assuming we plugged these currently, but the interest income took a little bit of a dive on seeing that at $193,000 cost as opposed to an income, which is normally what you see in that line. Can you tell us, a, what happened in there; and b, whether that should go back to an income in the March quarter?

Can you repeat, please, your question?

Financial income?

Yes. On the financial income line, we're showing $193,000 cost. We had expected a slight income and it's normally an income. It looks like it spiked down somewhat. Can you talk about whether you expect that to go back to an income in the first half of '22?

Yes, I can. First of all, in quarter four, 2021, there was a negative effect of exchange rate differences in the amount of approximately $300,000, which means that the -- that brought us from a slight positive income to losses. It is very hard to predict what will be in the future. Exchange rate differences may be a big factor in the financial income number. Thus, it is hard to predict right now. without effects of exchange rate differences, we should have an income of approximately $100,000, $150,000. With the effect of exchange rate differences, we simply cannot know.

Understand. And then the tax rate also came in lower than normal. Should -- what tax rate should we be using for '22? I assume it's around 15%. Is that the right mechanic?

Yes. Indeed, the effective tax rate in quarter four was lower than usual. This is due to very specific reasons for the quarter. I keep saying that the effective tax rate should be around 15%, a little bit more, a little bit less, but still in the range of 15%.

The costs, a lot of companies are seeing around wage inflation and staffing churn, have escalated the OpEx costs at a lot of companies. You guys seem to be able to mitigate that a lot more than most. Have you seen any impact on churn that's increased versus, say, the 2019 staffing churn rates? And have you seen any change in wage inflation my assumption is that you guys are able to hold on to people better than most companies because you have such a long tenured group of employees. But can you give us any thoughts on churn of staffing and wage inflation?

Yes. Well, I think you're right. I mean we are able, I would say, to have a quite high retention rate of our employees. And I believe that this is because we have the reputation of a stable company, which holds and protect its employees, not only in good times but also in bad times. And I believe that this is why people are staying with our company probably for longer than what they do with other companies. That being said, I would say that, yes, I mean, we're aware of what's going on. I mean, for example, getting new employees is becoming more difficult. And you need to pay more on the one hand, while on the other hand, you don't want to do that because you do not want to change the structure of the current wages that we're paying within the company. So I would say that overall, this is one of our challenges these days, but I would say also that it's a managed challenge, and we are able to eventually hire the people that we need and -- or find ways to sometimes outsourced or whatever, manage it in the right way so that the impact. The overall impact on OpEx, while I wouldn't say that it's 0, but we keep it to a minimum.

On top of that, I would like to add that in quarter four, as in the quarters before quarter four, there was a negative effect of exchange rate.

Yes, that's for sure.

The negative effect in quarter four due to the Shekel and the Danish krone was about -- the negative effect was about $150,000. The exchange rate on December 31, the last day of the year was really very -- was really low. And as I said, a negative effect of about $150,000.

All right. The good news is that it's come back in since then. So hopefully, that will help you going forward. In terms of the pipeline of new opportunities beyond what you've already announced, it sounds like you've got roughly 6 major contract wins that are in 1 form or another physician to ramp that are very significant in revenue. What's the rest of the pipeline looks like for additional opportunities?

Yes, we also have a very thick and long pipeline for additional opportunities. We have several of these, some of which are also very big. So yes, it's not only those that we've announced already, we definitely have a long and thick pipeline. Most of it is within opportunities for the Edge, but also for the smart mix, especially the 5G accelerators, we're having more customers waiting for us. We're now designing the next generation of that card. So hopefully -- not hopefully, I mean, we do have quite a significant pipeline in that space as well.

One last question then I'll see to the floor. 5G open RAN opportunities. Can you just talk a little bit more about where you are relative to winning those and when you think those might ramp?

Well, I mean, in 5G, there are several things for us in which we're involved. First of all, as I said, I mean, we are already selling, and that was one of our growth factors in 2021, even we're selling a 5G accelerator, which works within O-RAN, and we're selling that to a major telco and a major service provider. And we have another win with a major equipment provider, which has not started to ramp up yet. So -- and there are several customers around the corner, which are a part of that pipeline. So for this solution, actually, it's not even a solution. It's a family of solutions because there are several form factors, several generations, several flavors of this solution. This is, I would say, something that we're already selling, but we need to remember that 5G and O-RAN is only in its, I would say, early deployments. So even with this family as it is, we believe it would grow quite significantly even in this year and then later on. Now on top of that, we are investing in another card, which is a time synchronization card. And this card is already in, I would say, in evaluations by many of the world's leading companies, which would include OEMs, it would include the telcos. And hopefully, we would be successful with that one. The quantities would be similar to the quantities of the accelerator that I was talking before, only this card is much more expensive. So in terms of revenues and profit, it would be much more significant. And then following that, we also have additional smart cards, I would say, which address a combination of the requirements of 5G and they are also a part of our pipeline. So overall, we see 5G and O-RAN as something which is very important to us. But even if 5G does not happen, then just with the Edge, I mean, still Edge is going to be our major growth driver. And even if 5G -- even if there's no growth at all with 5G, we would still -- we would still be able to demonstrate double-digit growth for this year and following year, once again, I mean, assuming that we would be able to handle their component prices, just like we have been able to do that this year. So 5G and everything that comes with it would be on top of that.

One last clarification. I just want to make sure that I'm correct. I think we had thought when we printed last quarter that you had 5 major contract wins so far in CY '21 and that now there's an additional one that came in, in the fourth quarter, so we're now at 6. Is that -- can you clarify whether that's the right number?

A little bit difficult to say because there is a difference in the level of, I would say, importance. And I don't know exactly which of the pipe. Obviously, we have many more than just 5 wins. And so I'm not -- you make have done the calculation and the accounting of the wins more than I did, so I'm not sure I can tell you exactly the number, but I would say that, yes, I mean, we have definitely 5 or maybe 6. I mean, I don't know, really important customers. But -- yes I mean -- I would like to go with you on that. I would just like to add that some of the others maybe a little bit less important, but you know it's enough because of the relationship that we're having with them, we could just -- we are working with all of them on additional things to -- the next quarter, one of these -- the seventh one could become suddenly one of the top 3 or something like that due to another way. So that could happen as well.

[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?

Yes. Operator, we actually have a follow-up question from Alex, if you want to take it?

Yes, sure. Alex, please go ahead.

Yes. Sorry, I was hoping -- I was thinking that there'll be somebody else in the lineup. So I wanted to be respectful. But there's nobody else asking questions, I can get a couple more that I'd like to address. Can you talk a little bit about any competitive issues or any change in the competitive landscape? Have you seen anybody emerging as an alternative to you in some of these major projects that you're driving towards? Or are you still kind of uniquely positioned?

Well, let me divide my response to that to the various markets that we're addressing and specifically the growing market or the main growing markets for us. So first of all, about the Edge. So we don't see any new competitors in the space. I think actually that one of the reasons as to why we're very successful in the Edge is simply because it's been a process of several years for us because, as you know, I mean, we have entered the Edge space just about 6 years ago or something like that. And it takes some time for the -- I would say, the Edge community and for us to get to the status that we have been able to achieve in our OEM market that we service not only before, but in parallel with that. And I think that they know us by now. They respect the technology, the solutions. So I simply believe that our competitive position compared to the same competitors has improved significantly, which is why we're winning more and more. Now that comes, of course, together with the fact that the market is growing, but I think that it's a combination of the 2. The market is growing. I think -- I believe that our market share is growing whoever or the potential customers are familiar with us, know us and I think that this is helping us. So in that case, I believe that our competitive situation is improving. Now let me go and talk about the 5G and O-RAN. In 5G, I would say that the situation is in a way the other way around. In the Edge space, we were I would say, coming the latest to the market because we were addressing a market that was serviced before by our competition. And the O-RAN accelerators, both the accelerator and the time synchronization organization, we're actually leading the market. Now we do see competition around that. So -- but the competition is not yet where we are. So right now, we are, I would say, it's practically only us in the market, and it's -- I would say, it's relatively to get wins to whoever is really needing the cost. But on the other side, I mean, the market is still in early stages. So the overall market size is not big. Now the market will begin to grow I think we would be the leader in the market. We will continue to be the leader in the market, but the competition will grow as well. So overall, my prediction is that our revenues on that market will grow significantly but so will the competition because we can't win that all.

If there was a magic wand that we were able to wave over the industry, and supply chains were completely normalized overnight. Would you be producing 20% to 30% revenue growth or more?

Yes.

And I mean, can you kind of quantify the -- how much of the growth you're -- I mean we're modeling like 15%.

Yes. I mean I don't know exactly, but you ask 20% or 30% or more. So you can delete the 20%.

Okay. And going back to the gross margin side of it. Obviously, these larger contracts do represent much higher volumes, higher volumes are great of driving revenue, but they often come with some margin compression. As we look at the gross margin outlook based on the current environment that you see and the constraints that you see, is it reasonable to think that the gross margins will be comparable to or just slightly lower than where you are today. I know you've got a very wide band out there, but that band is a little lighter than I'd like to forecast to. So can you talk a little bit about what you think is going to happen on GMs?

Yes. I mean I think that it's going to be a little bit difficult for me to narrow down the, I would say, that the limit to the outlook that we have provided until now, which was margins between 32% and 36%. And that's because there are many factors which are impacting that. So on the one side, the margins that we sell especially when the contracts, just like you've said, are becoming bigger and bigger. The margins are going down to a certain extent by as we grow we are able to become more efficient. Some of our, I would say, fixed expenses, which are a part of the margin calculation are getting lower, so are improving to a certain extent. And also, obviously, there is always the mix -- the product mix that we're talking about. So I think that for 2022, we -- I can only say that it's still going to be between 32% and 36%. And I would not be able to guess within that range, we're exactly where we're going to be.

If we guess at, say, 34% for the 2 years, is that a reasonable...

I think that's reasonable.

And then on the OpEx side, obviously, the shekel pressured your OpEx last year quite a bit. With shekel now stabilizing a little bit more particularly of late, are we talking about 5% to 10% growth in OpEx against, say, a 15% revenue growth rate? Is that kind of the right way to think about it?

I think the OpEx will be a little higher more or less in the areas that you have mentioned. Yes, I mean I don't believe it will be 10% higher, but, yes, 5%.

I've exhausted those questions. The only last one would be on the balance sheet side. Do you think you will generate net cash over the course of the year recognizing that you're still doing buybacks?

Well, I think that the ability to generate cash really is very much dependent on the status of the components crisis. And I think that due to the component crisis as long as it grows, we're buying. We're increasing our stock. We are increasing our revenues. So we want to be prepared for that. And unlike, I would say, regular kinds, we're not just buying under the theme of just in time because many vendors de commit. So whenever we feel pretty confident about the revenues which are coming, we're buying everything. So we're increasing inventory quite significantly. And that's obviously something which is difficult from a cash generation perspective. But I would say that once this crisis is over, and as I'm really confident about our growth and the continuation of such growth, that would be the time that we would definitely come again to generate cash even when we go ahead with the buyback.

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 3 months' time. Good day.

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