Silicom Ltd. (SILC) Q2 2026 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Silicom Second Quarter 2026 Results Conference Call. As a reminder, this conference is being recorded. You should have all received by now the company's press release. If you have not received it, please contact Silicom's Investor Relations team at EK Global Investor Relations at 1 (212) 378-8040 or view it in the News section of the company's website, www.silicom-usa.com. I would now like to hand over the call to Mr. Kenny Green of EK Global Investor Relations. Mr. Green, would you like to begin, please?

Thank you, operator. I would like to welcome all of you to Silicom's Second Quarter 2026 Results Conference Call. Before we start, I would like to draw your attention to the following safe harbor statement. During this call, we may make forward-looking statements within the meaning of applicable securities laws. These statements may include, among other things, statements regarding the company's strategy, market opportunities, customer demand, product development initiatives, industry trends, expected deployments of the company's solutions, financial outlook, revenue expectations, margins, operating expenses, profitability and future growth opportunities. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such statements. These risks include, among others, those described in the company's press release issued today and in its filings with the U.S. Securities and Exchange Commission, including its annual report on Form 20-F. The company undertakes no obligation to update any forward-looking statements. With us on the line today are Mr. Liron Eizenman, President and CEO; and Mr. Eran Gilad, CFO.

Thank you, Kenny, and good day, everyone. I'm very happy to share a truly outstanding set of results for the second quarter of 2026, results that came in significantly ahead of our expectations and that demonstrate the clear success of our strategic plan. Looking ahead and from our perspective in mid-2026, I have rarely been more excited about Silicom's strong momentum, upcoming potential, and the trajectory ahead. The second quarter was an exceptionally good one for Silicom, and it marks a clear acceleration of the growth inflection we talked about earlier this year. Revenues for the second quarter came in at $23.8 million, up a very strong 59% year-over-year and well ahead of the $20 million to $21 million guidance range we shared with you last quarter. Our strategic plan for the core business is tracking well ahead of our original expectations from when we first launched the plan. Our highly predictable platform of recurring revenue built on years of design win momentum, combined with the upside from our growth engine, is now driving a key inflection point in our business. You can see it clearly in the increasing trajectory of our revenue growth. 2 quarters ago, in Q4 2025, we reported 17% year-over-year growth. Then we accelerated to 33% growth last quarter and now a further step up to 59% in the current quarter. Beyond that, we are maintaining and even further building on this momentum with the guidance for the next quarter, implying a further acceleration to 66% year-over-year growth at the upper end. This is a powerful accelerating trend, and it reflects the compounding contribution of our multiple recent design wins as they ramp. Importantly, our visibility into the remainder of this year has improved markedly over the past few months. As a result, we are raising our revenue guidance for the full year 2026 significantly to a range of $93 million to $95 million, up from our previous guidance of $82 million to $83 million. This higher guidance reflects the better-than-expected improvement in our core business and is further supported by the additional multimillion-dollar revenues that we now expect from AI inference production orders in 2026. We have discussed many times that the long-term growth and strength of our core business are best tracked via our design win momentum. As you may remember, for 2026 as a whole, we targeted between 7 and 9 new design wins. I'm very pleased to report that we are just over halfway through the year, and we've already secured 7 new design wins. This means we are well on track to meet and to even exceed the upper end of the range. Those design wins achieved in recent months are the foundation for continued strong growth into next year and beyond. I want to spend a few moments discussing the design wins that we secured during the second quarter and more recently. During the quarter, in April, we announced an FPGA Smart NIC design win with a European leader in advanced encryption and secure communication solutions. The customer selected our solution following a successful evaluation, testing the performance and reliability required for its advanced encryption solutions, including post-quantum cryptography. This was our third PQC design win as we continue to build post-quantum cryptography as an emerging future growth engine for silicon. We expect to scale towards an anticipated annual deployment of around $3 million. On top of that, we are in discussions regarding this customer's next-generation higher-speed FPGA Smart NIC, which is planned to launch in 2028, as well as potential full system solution combining a server with an FPGA Smart NIC, opportunities that could each add meaningfully to our future revenues for discount. A few weeks later in May, we announced our first-ever white label switching design win. This was a win with a $5 million per year potential with a Tier 1 global security leader. Seeking to move away from vendor lock-in, the customer decided to replace its existing proprietary switches from an incumbent industry leader with Silicon's open white label switch solutions. The customer selected a full range of silicon-designed white label switches as the networking infrastructure for its security platforms. First production orders are expected before the end of the year. More recently, in July, an existing blue-chip customer awarded us a new design win for a custom high-speed server adapter engineered to exact customer specifications for a specific use case. This win triples our expected business with this customer to nearly $10 million in 2027, a significant contribution to our growth in 2027 on top of the very strong growth we are already delivering in 2026. Those wins capture the essence of our strategy. First, each successful win opens the door to the next with satisfied customers coming back to us for additional products and additional use cases. Second, they reflect the compounding value of the long-term trusted supplier relationships we have cultivated over decades of operation with blue-chip customers. Together, they strengthen the visibility we have into continued growth in 2027 and beyond. Beyond the wins we already secured, our pipeline of potential opportunities remains very broad and deep, spanning all our core product lines, including systems, Smart NICs and FPGA-based solutions across both new and existing customers. We expect this pipeline to continue converting into design wins, laying the groundwork for sustained strong growth well beyond this year. Turning to our outlook for the third quarter. We expect revenues in the range of $25 million to $26 million, representing accelerated 66% year-over-year growth at the upper end of the guidance. For the full year, as I mentioned earlier, we raised our revenue guidance to a range of $93 million to $95 million, representing over 50% year-over-year growth.

Driven by our strong execution and the significant inherent leverage in our business model, we now expect to return to quarterly non-GAAP profitability during the second half of this year, significantly earlier than we had originally anticipated. This is a meaningful inflection point for Silicom and a clear demonstration of the earnings power that our rapidly growing revenues are beginning to unlock. Let me now turn to the exciting progress we are making in the AI inference market. We are very pleased with the tangible strong progress we achieved on the AI front in less than 9 months. I want to highlight a few of our key AI-related engagements. Recently, we secured a design win with a pioneering AI inference acceleration provider and received the first production order from this customer. This is an important milestone, establishing a foundation for what we believe can become an exceptional revenue stream. Additionally, we successfully customized an AI NIC solution to meet the customer-specific needs, delivered the first unit to the customer for evaluation, and are preparing for initial deliveries of this customized product per purchase order received from the customer, a leading AI inference ASIC and infrastructure vendor. In parallel, we are expanding our AI inference product portfolio. And based on orders secured, we are now developing a completely new bespoke inference-specific solution. We are witnessing AI spending shift decisively from training to inference, and the rise of disaggregated inference architectures is positioning Silicom as a key player, bringing our networking know-how and building blocks to the architectures that power those workloads and creating significant new opportunities for us along the way. We view our rapid progress and expanding footprint in AI inference as a potential game changer for Silicom, and successfully capitalizing on this generational shift will significantly enhance our long-term growth trajectory. This brings me to our balance sheet, which remains exceptionally strong and provides us with the flexibility to invest in our growth while maintaining a conservative financial profile. At the end of June, our working capital and marketable securities totaled $107 million, representing approximately $19 per share, including $55 million in cash, cash equivalents, and highly rated marketable securities with no debt. In summary, this was an outstanding quarter, and it's an exciting time for Silicom. Our core business is accelerating rapidly with 59% year-over-year growth in the second quarter and third quarter guidance pointing to accelerated 66% growth at the upper end. At the same time, we are making fast and exciting progress on our AI inference upside. Our design win engine is firing on all cylinders with the lower end of our full year target already reached in only half a year. On the strength of this momentum and improved visibility, we have raised our full year revenue guidance to $93 million to $95 million, and we now expect to return to quarterly non-GAAP profitability in the second half of this year.

Thank you, Liron, and good day to everyone. I will review the financial results and business performance for the second quarter of 2026. Before beginning the financial overview, I would like to remind you that unless otherwise indicated, all financial results are non-GAAP. A full reconciliation of our results on a GAAP to non-GAAP basis is available in the press release issued earlier today. We are very happy with our revenues for the second quarter of 2026, which were $23.8 million, 59% above the $15 million reported in the second quarter of last year.

North America, 79%; Europe and Israel, 13%; Far East and rest of the world, 8%. During the last 12 months, we had 2 10%-plus customers, which accounted for about 23% of our revenues, not above, but about 23% of our revenues. Gross profit for the second quarter of 2026 grew 51% to $7.2 million compared to a gross profit of $4.8 million in the second quarter of 2025. I note that our gross margin of 30.4% in the quarter is at the upper part of our short- to midterm expected gross margin range of 27% to 32%. Operating expenses in the second quarter of 2026 were $8.3 million compared with $7.2 million reported in the second quarter of 2025. I highlight that this is an increase of only 16% year-over-year compared with 59% revenue growth, a clear demonstration of the operating leverage inherent within our business model. Operating loss for the second quarter of 2026 was reduced to $1.1 million, a solid improvement from the operating loss of $2.4 million reported in the second quarter of 2025. This narrowing of the operating loss reflects the operating leverage inherent in our model as our revenue returned to strong growth and points clearly to the improving profitability profile we expect to deliver as our growth accelerates. Net loss for the quarter was reduced to $0.9 million, a 54% improvement compared with the net loss of $2 million in the second quarter of 2025. We are very pleased with the pace at which we are closing the gap to profitability, and we expect to return to quarterly non-GAAP profitability during the second half of this year, significantly earlier than we had originally anticipated. Loss per share in the quarter was $0.16, a significant improvement compared with a loss per share of $0.35 as reported in the second quarter of last year. Now turning to the balance sheet. As of June 30, 2026, our working capital and marketable securities amounted to $107 million, including $71 million in high-quality inventory and $55 million in cash, cash equivalents, and highly rated marketable securities with no debt. I would like to add a few words on the increase in inventory. We are intentionally building our inventory, both to support our strong revenue trajectory and to safeguard our ability to ensure uninterrupted product delivery to our customers. This is a deliberate proactive step, and we are leveraging our balance sheet strength to take it, effectively mitigating the impact of the currently extended lead times for memory chips and positioning us well to continue capitalizing on the growth opportunities ahead. That ends my summary. I would like to hand back to the operator for a question-and-answer session. Operator?

The first question is from Ryan Koontz of Needham & Company.

And just terrific results, guys. Really nice to see the business inflecting. Reflecting here on your accelerating revenue here in the first half of the year, are there any particular market verticals you'd point out use cases that are particularly strong within your core business that are resulting in the outperformance here in the first half or in the second quarter?

So first of all, Ryan, thank you very much. And I would say, I mean, what we're seeing basically is the core business.

And with regards to -- you've been able to hold gross margins in here pretty well given the creep up in COGS, I'm sure. I assume with your open BOM strategy here with your customers that you've been able to raise price, and has pricing contributed to some of the revenue outperformance, pricing per unit?

First of all, it's a lot of hard work. So it's not easy to do that. We have a dedicated team that's working very, very hard on sourcing the components at the best prices possible, and it's relationships of years and years and years that we have with manufacturers and suppliers and silicon vendors that allow us to get access to those guys, speak with them, and try to get the best prices possible and also availability, which is not easy nowadays. And on top of that, yes, it's the work with the customers, keeping them updated all the time with the situation, making sure they get from us a view of how we see the industry, what the challenges are, where we need them to help us, and sometimes we're working together to find good solutions. Eventually, all of that is leading us to the result that you mentioned, which is exactly that. We are able to maintain the gross margin. And one more thing I would like to add on top of that is that because of our very strong balance sheet, we are able, and Eran mentioned that before, to build significant inventory intentionally, not by mistake; that allows us, in some cases, to keep the prices down for a very long time by buying ahead.

With regards to memory costs, they've obviously been just skyrocketing. I've heard from other vendors that they are in the midst of, in some cases, redesigning products with lower memory. Is that something you're looking at in some cases? Or are your customers pretty pleased with your products and where they're at today?

We definitely do those kinds of things. It depends on the customers. So as I said, everything is a discussion with the customer for us. So in some cases, it's not even a design change. Sometimes the design itself can have more memory or less memory or more storage or less storage. And we did have cases where we discussed with the customers, and when memory and storage were, let's call it, cheap a year ago or 18 months ago, then someone would say, okay, give me a little bit more memory. It doesn't cost me too much. I don't know if I really need it, but put it in the product. And we definitely worked with some customers, with all customers. Some of them wanted to make the changes. Some of them didn't want to make the changes. And definitely, we had some changes in some products in order to support our customers better and get them to a price point that still allows them to sell the product. But yes, we do see generational shifts. It depends if a customer was maybe on a product that was using DDR4 and wanted to move forward to DDR5. Not necessarily; they immediately see the impact of that because DDR5 prices are also increasing, but maybe over time, they will see it.

Really helpful. That's great. And with regards to your increased guidance on the balance of the year, you did mention, I think, that your inference customer and maybe your switch product is beginning to contribute. Can you give us a rough magnitude of how much these brand-new design wins secured in '26 are contributing to your end-of-year revenue?

Just to make sure, are you asking about AI inference in 2026?

Yes. Yes, AI inference and any other major design wins that you've recently secured?

So that's a little bit different. So for the AI inference, I would say the total number that you can put in your head or in your models for 2026 is in the range of $3 million to $4 million. That is roughly the number that we expect for this year.

And then maybe just lastly on this inference design win. I know there's a lot of excitement from investors about that. Can you maybe summarize some of the intellectual property and some of the advantages you have that contribute to that sort of design win in the AI inference domain?

Yes. So I mean, for competitive reasons, I would limit myself at some point. But still, I mean, we are still focusing on the know-how that Silicom has and that we built over many, many years. And we now see a lot of, I would say, 2 areas.

The next question is from Greg Weaver of Invicta Capital.

Great quarter. Since the core business seems to be driving these results, can you maybe flesh out a little bit what's been a surprise, I guess, in terms of how things have gotten pulled in? And what's caused the acceleration that you didn't anticipate, say, 6 or 9 months ago?

As I'm trying to think about the answer to how to provide it, I would say no single customer or a single industry that is creating it. I think it's more of all of the design wins that we had and we won in the last 18 months, all of them ramping up. And as always, some customers are more successful than they anticipated; some are less successful than the one they anticipated.

From a gross margin outlook perspective, obviously, there are some moving parts here with some of this new business coming on and, say, some of this inference ramping. Do you foresee much of a change as a result?

I think we expect the same. We don't think it will change dramatically.

And just lastly, maybe if you could just address here for everybody on the call about the shelf. There seems to be a lot of consternation around that. And maybe just talk to that and what the thought process was there.

The filing is strictly standard corporate housekeeping. We like to maintain an active shelf to ensure we have maximum financial flexibility.

So I mean, you think you could buy that much inventory, or you need that much receivables working capital ramp that you'd absorb $50 million in cash you got on the balance sheet now in the next 6 months?

Yes, we believe so.

You could ramp working capital that hard.

Sorry, I don't think I understood your question. Can you repeat?

Right. You have $50 million plus of cash and equivalents on the balance sheet currently, correct?

Correct.

Right. Would you need to use that much cash for working capital needs in the next 6 months, do you foresee?

I think that if we need it, it will maybe be for AI if it really ramps up to the very, very high volumes.

There are no further questions at this time. Before I turn the call over to Mr. Eizenman to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available tomorrow on Silicom's website, www.silicom-usa.com. Mr. Eizenman, would you like to make a concluding statement?

Thank you, operator. Thank you, everybody, for joining the call and for your interest in Silicom.

Thank you. This concludes Silicom's Second Quarter 2026 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.