Ehud Helft - GK Investor Relations Shaike Orbach - CEO Eran Gilad - CFO.

Alex Anderson - Needham Robert Sussman – Bentley Capital Don McKiernan – Landolt Securities Edward Balinsky - Segmark International Inc. Lisa Thompson - Zacks Small Cap Research Josh Goldberg - G2 Investment Partners.

Welcome to the Silicom's First Quarter 2014 Results Conference Call. All participants are present in listen-only mode. Following management's formal presentation instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. You should have all received by now the company's press release.

If you have not received it, please contact Silicom's Investor Relations team at GK Investor Relations or view it in the News section of the company's website, www.silicom.co.il. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr.

Helft, would you like to begin, please?.

Yeah, thank you, operator. I would like to welcome all of you to Silicom's first quarter 2014 results conference call. Before we start, I'd like to draw your attention to the following Safe Harbor statement. This conference call may contain 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 their information.

Actual events or results may differ materially from those projected including a result of changing industry and market trends, reduced demand for Silicom's products, the timing and development of new products and their adoption by the market, increased competition in the industry and price reductions, as well as due to risks identified and document 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 measures will be discussed during this call. Such non-GAAP measures are used by the management to make strategic decisions focused future results and evaluate the company's current performance.

Management believes that the presentation of these non-GAAP financial measures is useful for investor understanding and assessment of the company's ongoing operation and prospects for the future. Unless otherwise stated, it should be assumed that the 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. With us on the line today 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 like now to turn over the call to Shaike. Shaike, please..

Thank you, Ehud. Good morning, everyone, and welcome to our first quarter 2014 results conference call. We have started 2014 on the right foot with a solid set of financial results and strategic progress inline with our long term plan.

First quarter revenues showed year-over-year growth of 26% and operating income increased by 37% year-over-year well in excess of our revenue growth. Our net income grew by 28% over last year.

We are proud of another quarter of strong year-over-year growth with our results very much demonstrating the strong operating leverage inherent in our business model. Our revenues grew strongly over those of last year while operating expenses grew by only 16% year-over-year, a much modest rate than our revenue growth.

I would also like to point out that half of the increase in the operating expense was in R&D, a demonstration of the importance we place on investing in our future through ongoing R&D efforts. The contribution to our top line growth was again diversified across all our product lines and existing revenue streams.

We sold products throughout our broad base of OEM customers with some of our newer customers beginning to ramp and increasingly contributing to our overall revenue. In terms of our balance sheet strength, our cash levels remain strong for a company of our scale standing at $55 million at the end of the quarter with no debt.

This remains a significant asset for us and demonstrates to our customers that we are a strong and stable company that can meet and support all their needs over the long term. A few weeks ago we filed a F3 shelf registration statement and prospectus with the SEC offering up to $80 million in shares.

Our growth strategy is based on our continuous organic growth while taking advantage of external opportunities through potential acquisitions especially as we increase our addressable markets.

While our current cash levels are more than adequate for our ongoing working capital and organic growth needs our shelf filing provides us with the flexibility and resources to act should the right opportunity present itself.

Our aim is to consistently remain a few steps ahead of market needs and trends bringing to market new products to meet the current and future demands of our customers in the highest growth areas as we have done so successfully over the past few years. And indeed, one such hot market is the cloud.

As the industry is beginning to accelerate its move towards cloud based solutions and as the majority of such solutions utilize virtualization, which requires significant CPU power, a clear market need is developing, that of maintaining and improving performance under virtualization while reducing cost, power consumption and space.

Silicom's concept for providing a solution to this market need is offloading. We are proposing smart solutions which offload CPU tasks on to add on cards which maintain or improve the performance of the server while reducing power consumption, space and overall costs. We recently launched our first virtualization offloading product the SmartSilc VHIO.

This product incorporates the advance (inaudible) virtualization offload technology that we acquired last September. It is based on a completely new concept that addresses the offloading challenge in a unique way, offloading some of the CPU consuming tasks which are directly associated with virtualization.

It is the first of a family of unique cloud solutions which are geared for resolving the specific load caused by virtualization part of the cloud solution. The product operates under OpenStack umbrella, an emerging cloud management standard which is gaining significant industry traction.

As a Netbook processor blade incorporated within cloud compute note and Netbook note, SmartSilc VHIO offloads all network and storage input/output tasks from the Hypervisor significantly reducing CPU utilization and consequently improving the performance of any compute node in which it is installed.

In addition, SmartSilc VHIO's implementation within the network nodes addresses (inaudible) and other tasks previously carried out within the network node and consequently frees the node to become an additional compute node. We have already seen a significant interest in the concept and in the product by several industry leaders.

The SmartSilc VHIO was formally launched at the Red Hat OpenStack summit in San Francisco just last week. The reception and level of interest amongst potential customers at the trade show was very positive confirming our belief in the value proposition of this new product.

We believe the SmartSilc VHIO has a strong potential to develop into a new revenue stream over the long term and could become an important future growth driver for our company.

Our launch of the SmartSilc VHIO as well as this new virtualization related family of products follows on from our release of another new family of offloading products targeting the cloud market.

These products are offering offloading of encryption and compression tasks to our hardware accelerators based on the Intel communication chipset 89 series products on which we work closely with Intel.

In only a few months we are already seeing strong traction and several significant customers are currently evaluating these products demonstrating the validity of our approach. These products offer significant advantages over other solutions including a much better performance to price ratio.

The compression solution specifically is also targeting the Hadoop market segment, a leading technology focused on big data, and a market expected to grow to over $50 billion by 2020 from $2 billion now.

This presents further expansion in our total addressable market and we believe this product line will also become significant growth driver for us in the coming years.

With the expected explosion on cloud data centers utilizing virtualization, Hadoop and SEM, all of which need offload, we believe our new product family launches exactly what the market needs right now. Our broad solution base positions us extremely well as the first point of call for any potential customer with needs in this fast growing market.

In the first quarter of 2014, we continue to secure new design wins with both existing customers and new customers. Some of these customers are industry leaders in their markets and others are pioneers in high-potential emerging technology.

We also succeeded in securing design wins across our portfolio of products including both the traditional product line and the newer product line. These recent design wins bring the total number of our customers to more than 100. I know that at the same time, the number of products for customer is also increasing.

We especially seen significant potential amongst some of the newer customers we have secured and we believe that many of these customers could become much more important in the future, that is we expect to grow our scope of sales to these customers in two dimensions.

One, as their sales grow through their ex customers, we expect our existing design wins with them to grow and scope and, two, the initial design wins allows us to build a strong working relationship with our customer.

This tends to lead to additional design wins as they launch new systems and enables us to penetrate further into these customers across their other product line. This is why each and every design wins within our current customer base holds significant further potential beyond the initial win and underpins our growth over the long term.

In summary, 2014 has started well showing solid year-over-year growth as well as demonstrating the strong inherent operating leverage in our business. Our ongoing success has allowed us to demonstrate our commitment to shareholder value as we have recently proved through the issuance of our second annual dividend to shareholders a few weeks ago.

Our customer base remains a significant asset with strong revenue generating potential. We continue to expand our customer base through the sales of our broad product portfolio, through new design wins and capturing additional market here.

We are consistently bringing to market new solution meeting defined needs in additional industry segment substantially expanding our addressable market and romping sales. As I've demonstrated, in only the first half year we have brought out two new and very important families of products focused by market segment showing a significant growth.

We intend to continue with this strategy, a strategy that has been so successful for us over the past few years. With that, I will now hand over the call to Mr. Eran Gilad, our CFO, for more detailed review of the quarter's result.

Eran?.

Thank you, Shaike, and hello everyone. Revenue for the fifth quarter of 2014 were $19 million, a growth of 26% compared with revenues of $16 million in the first quarter of 2013. Our geographical revenue break down for the fifth quarter of 2014 were as follows; North America 75%, Europe and Israel 14%, South East 11%.

I will be presenting the rest of the financial results on a non-GAAP basis. To exclude the non-cash compensation expenses in respect of option granted to employees and director as well as amortization of intangible assets. For the further conciliation from GAAP to non-GAAP number please refer to the press release we issued earlier today.

Gross profit for the first quarter of 2014 was $7.8 million but presenting a growth margin of 40.8%. This is compared with $6.1 million or 40.3% of revenue in the first quarter of last year. The growth margin that vary between quarters mainly as a result of specific mix of product sold during the quarter.

Operating expenses in the first quarter of 2014 was $3 million or 15.7% compared with $2.6 million or 17.5% of revenues in the first quarter of last year. Operating income for the first quarter of 2014 was $4.8 million or 25.1% of revenue.

This is a 37% increase over operating income of $3.5million as reported in the first quarter of 2013 or 23.2% of revenue. First quarter 2014 net income was $4.2 million or 22.1% of revenues. This is a 28% increase compared with a net income of $3.3 million or 21.7% of revenue in the first quarter of last year.

The increase in net income and net margin was more impressive given the increase in tax rate in the quarter which amounted to 14.1% of income before tax in the first quarter of 2014 versus 9.3% in the first quarter of last year. The increase in the tax rate is mainly due to changes in tax laws.

Looking ahead over the rest of 2014 we expect the tax rate to be in the range or between 14% and 15%. Earnings per diluted share were $0.57 in the quarter compared with $0.46 in the first quarter of last year.

Now turning to the balance sheet, as of March 30, 2014, the company's cash, cash equivalent, bank deposits and marketable securities totaled $54.9 million or $7.64 per outstanding share. Beyond the end of the quarter on April 17, 2014, we paid out $7.2 million as a dividend to our shareholders. That ends my summary.

And we will be happy to take any questions.

Operator?.

Thank you. Ladies and gentlemen at this time we will begin the question-and-answer session. (Operator Instructions). The first question is from Alex Anderson at Needham, Please go ahead..

Hi, guys. I was wondering if you could talk a little bit about the sequential change in the top line. What are the factors that caused the decline sequentially from 4Q to 1Q steeper than the historical averages? I think I know the answer to that but I just like to hear you clarify a little bit.

And then, second, can you talk a little bit about the portion of your business that's 10 gig versus 1 gig and its throughput speeds, and if you see any change in the demand for higher speed segment as a result of 10 gig server introductions accelerating? And then finally can you talk a little bit about the competition with the new 10 gig nic cards? I think you compete with Solarflare on that if I am correct could you just give us some sense of who you are competing with there?.

Okay. Well, so I'll address the questions in the order the way were posted. So first of all, with respect to the quarters, I think that the meaningful comparison is indeed the year-over-year comparison rather than the sequential especially in comparing Q4 to the first quarter.

I think that indeed Q4 has always been the strongest for us and traditionally the first quarter has always been, I'm not sure that always has been the lowest but never as good as the fourth quarter.

But I think I do believe that really the comparison that should be made is between the first quarter of this year and the first quarter of the previous year which is 26% of growth and this is the important factor.

Yes, I mean, I'm not trying to just say that I understand where you are coming from from this question, but I think that we cannot analyze how our performance based on the percentage of change between the first quarter of this year and the fourth quarter of last year.

Fourth quarter of the year is typically the strongest but the percentages are not necessarily the same thing; there is nothing there to say that this should be the percentage between the quarters.

I think that if you look between the quarters of the year, you could also say that not necessarily there is a repetition as to how the quarters are proceeding one after the other. So just like I said, I think that the real comparison should indeed be between the first quarter of this year and previous year.

Now to the other question, we definitely see a continuous increase in the 10 Gigabit portion of our business compared to 1 Gigabit, I think that it was something like 50%?.

Yeah..

I think around 60% of the business was 10 Gigabit compared to much lower I mean obviously and this continues and we will continue to continue I would say because the market is moving to 10 Gigabit and then later on it would move to 40 Gigabit and then later on 100 Gigabit and so on and so forth.

And actually this process is one of the reasons why I would say our market is never ending even without any level of innovation and I think we bring a lot of innovation to the table but even without that just moving from 1 Gig then to 10 Gig then to 40 Gig, the industry is moving and we are moving with it.

The market is growing and we grow with it just by that, not to mention new products and new customers. Now in terms of competition, you mentioned Solarflare but I wouldn't say that Solarflare is definitely our competition. And more than that I could say that I don't think there is one company that I could say that this is our main competitor.

And that's because we define our market, I would say, differently. We provide solutions which improve the performance in servers where these servers are operating in a variety of markets. I think that, for example, I mean Solarflare market is a market which is addressing mostly the financial trading market.

So yes, we have the presence there with most of it time stamping card but this is definitely not our main market. On the other side, I mean, you could say that in certain areas we are competing with Intel because sometimes we sell just standard network interface cards.

Into other areas we are competing with a (inaudible) I would say delivering Intel based encryption parts.

So there are a variety of companies with which we can compete, and I think that one of the assets for our company is the fact that the definition of our market is something that I think we were able to do and define our market in a way where if you look at the overall market that we define which is solutions enhancing server performance you could say that we are quite a bit of the market leader while not necessarily in any vertical of this market we're always the leaders.

In some of these areas we are, but not in all of them..

Sir, does that answer your question?.

Yeah, that's fine, thank you..

The next question is from Robert Swissman[ph] of Western Capital. Please go ahead..

Good morning, I have got two questions. Number one, the inventories from the fourth quarter to the first quarter grew even with a large sequential decline in revenues, can you discuss that? And number two, when is the earliest time period that the two new products you discussed could have a meaningful impact on revenues? Thank you..

Okay. So in terms of the inventory, the inventory is not indicating too much in any specific direction. The inventory build is a combination of several factors, each of them having an impact. One of them is the focusing that we had and whether or not what percentage of what kind of this forecast was actually exercised and what was not.

The other is the forecasting that we're having for the following quarter. So there are a lot of factors in there, lead times are sometimes changing becoming longer or shorter, so there is a lot of combination. There is a combination of a lot of factors which influence the inventory, and that's why it could not indicate any specific direction.

Now, as to the other question, I would say that there is quite a different between the two families of products.

The family that we announced first which is the family of encryption and compression cards, we have cards during evaluation with some of the major players and we believe that we would start to see meaningful revenues from that in the second half of the year.

The other product or the family of products that we have announced lately at the VHIO, the SmartSilc VHIO product family is something which we had just launched. So customers are beginning to ask questions about that. The sales cycle there would be longer. I don’t expect that we will start to see any meaningful sales before 12 months from now..

Okay. One follow-up then. The increase in inventories has been fairly consistent and it's besides a very large increase in revenue. So it was very much needed as it was in the fourth quarter.

Was there shortfall in first quarter revenues and if so is the inventory buildup involuntary in the first quarter or does the forecast look such that you are totally comfortable with the first quarter and you will think you will need to the remaining part of the year?.

Oh, definitely I mean, I'm definitely comfortable with inventory I'm sure we will need it and will continue to need it, and so I don't think there is any problem with that..

The next question is from Don McCanna at (inaudible) Securities. Please go ahead..

Good morning and congratulations on another solid quarter.

Can you give us an update on the timestamp product, how many customers you and if you are generating meaningful revenues, and maybe also the size of the addressable market that time stamp is serving?.

Okay. So first of all, I can tell you that we actually have another small. I would like to say small design win for the time-stamping card during this quarter, and actually that means right now I believe we have at least three design wins with that card.

We have not announced because of this moment we had not considered that to be significant enough to announce it but we see the progress that we are doing. What I would say is that the main progress that I see with this card is not indeed design wins but rather the progress to making with the major players in the market which could use this card.

Now we are making progress with these major market players, they are evaluating the cards I would say -- I'm hesitating to say they have decided to use our cards because when someone tells you yeah we are going use this card but you could ever tell what happens unless you really see that it is a design win, but it's at that level.

I mean something is still needs to be defined and so on and so forth and I'm still seeing just like I said when we have first announced the timestamp that the potential of the timestamp card for us is tens of millions of dollars a year..

The next question is from Edward Vilinsky of (inaudible) International Inc. Please go ahead..

Good morning. Before I ask the question, I just like to observe with regard to the sequence of sales that your first quarter over the past four year has represented roughly a fifth of your total year of sales whereas the fourth quarter well exceeds a third of the total year of sales, so that I'm not surprised about the first quarter.

My question has to do with just a couple housekeeping items.

I think in your S20 you indicate that you pay interest and I just would be curious as to since there is not debt on the balance sheet what is the source of these interest payments?.

I'm not sure I understand your question, can you repeat please?.

Yes, let me see if I can find, you indicate in your S20 that you pay interest, and I wonder where -- what the source of those interest payments are?.

We do not pay interest, just pay small amount of usual fees to the banks, but we do not pay interest of any kind..

I thought I saw that in interest, that in your S20 under the interest caption you paid something like a $0.5 million with interest in the year?.

This is not correct..

It is not correct. Okay. I -- what I will do is, I will find the specific notation and get in touch with you with that regard..

Okay..

With regard to your inventory, the write off of absolute inventories last year was fairly substantial, it was almost I think 2% of your sales, almost 3% really of your sales.

Was that an unusual situation or as you grow and diversify your product line, is that going to be fairly standard?.

This is fairly standard. (inaudible) in 2012 and also in 2014 was around 2%. Meanwhile, in quarter one, it is more or less the same percent. There is nothing special or nothing unusual..

All right.

And finally, would you elaborate on your relationship with the Freescale?.

Well….

They issued a statement indicating that you are partners in a development of sorts and I would just like an elaboration and perhaps an estimation of what kind of revenue that might yield?.

Shaike Orbach:.

Now, it is also good for us because Freescale itself, who asked us to participate in this kind of development, is pushing the solutions into some customers and they are telling us that there are some big customers who are waiting to get this card because the card is not yet ready really in the market, it has been announced but it is not really available for production right now.

So they are saying that there is a big potential for that card, because at that time we -- it is them that they are pushing that. So I do not know exactly what is the real potential behind it, but they are pushing it. And it seems to us to be a revenue potential that we do not have to invest too much effort in order to exercise that, if it happens.

So we can only be surprised with the better in that case..

The next question is from (inaudible) Securities. Please go ahead..

Yes. I just wanted to know if you have any plan to split your stock price and increase your share float.

And then, secondly, I wanted to know if there is any plans for stock options on the stock?.

Well, for the first part, this is something that we consider. Right now, no decision has been made. As our stock options, stock options to who, I am not sure that I understood the question..

Just regular stock options for investors who basically use them on the marketplace, on your stock?.

We do not have a plan for stock options for investors..

The next question is from Lisa Thompson of Zacks Small Cap Research. Please go ahead..

Hi. Good afternoon. I was just hoping that you could talk a little bit about the shelf offering. It seems like the market has moved ever since you field it. And may be you could talk a little bit more about give them some assurances, that you are not going to do something cookie and highly dilutive with the money.

So could you put up a few parameters around possibly what you are looking at, besides the areas that you have that are of interest?.

I mean, I think that I have referred to that in what I told you in -- when I was talking about the shelf before, but I will mention that again. I mean, as we have said, I think many times in the past while we believe in our organic growth and we continue to grow, it -- and we demonstrated that in that quarter as well and we hope to continue to grow.

But still we were continuously looking and always looking at other opportunities that are in the market and we file.

Our conclusion was that in order to really be able to take advantage of such an opportunity once it becomes possible then we may want to use the shelf, which is why we have posted it as a shelf rather than doing anything else at this time.

So that was the intention behind it, to increase our flexibility if such opportunities really emerge, which is why there are not any specific parameters right now that I can say well, this is the scenario that it is going to happen because there is not any definitive scenario right now that we are talking about, its rather more to increase our flexibility should such a scenario develop.

.

Okay.

So you are not ruling out anything additive, dilutive, neutral, no criteria on that, in that area at all?.

We do not have criteria right now. Obviously, once there is an opportunity then we will start thinking about all these criteria..

(Operator Instructions) The next question is a follow-up question from Alex Anderson at Needham. Please go ahead..

Yeah. So a couple of follow-up questions. You said that 60% was 10 Gig.

Can you give us what those ratios were last year in the fourth quarter and or alternatively last year or preferably both last year in the first quarter? And similarly, can you talk about the percentage of sales from new customers in the quarter versus the top prior quarter and versus last year? Is that 20% of revenue is coming in from customer that are new over the course of the year? I think that was the metric I heard last quarter.

And I've got a follow-up beyond that. .

Well, first of all, I think that approximately both sort of quarter or maybe for the year, I'm not sure, but last year 10 Gigabit was 45% approximately and now it is 60%, and I believe this will continue to grow. As to the new customers, I do not think we have such an analysis.

It is although difficult to define exactly what is a new customer because many customers they are new for -- and they took -- customers take one year before they really start to buy significant quantities.

So when do they start to be defined as new and when are they defined to be old, what I am saying is that we do see the fact that even customers that are -- well, as you know, I mean, we have some customers which are our customers for seven years, for eight years, these customers are definitely not new customers.

So when we are talking about customer that we started to work with like say, 2 years ago or 18 months ago and suddenly we will look at what this customer is doing and there is another card and they ramp up their revenues and so on and so forth, so we see quite many of these that are -- that you -- because I am not sure that that can be defined as new, but they are bigger now, significantly bigger compared to what they used to be.

And on the other side, also all their customers, some are biggest add product, add divisions which are using our products. So how exactly you will define that I don't know. Overall, its really across the board if we increase other items..

If I could just go back to that new customer new OEM question from a different angle then, can you tell me how many additional OEMs were added over the course of the quarter or versus last year?.

Well I don't have a number right now because we do not count them because we know all of them have the same significant level but I think we got quite a few. I mean, I don't know if its 7 or 8 or 11 or 5 but we got quite a few..

So just going back to the original question on the quarter to quarter comparison, let me point out that the sequential decline from the fourth quarter to the first quarter in each of the last three years has been almost exactly 10%. The sequential decline from 4Q '13 to first quarter '14 was 25%. That is a steeper decline than historical.

Obviously had a much stronger growth rate in '13 than historical and that may account for a good piece of that.

Can you talk a little bit about whether there was any particular customers that were much larger in the fourth quarter versus the first quarter and whether you would expect a similar ramp or any other quantification of what caused that differential in the rate of decline of the fourth quarter to first quarter? It is a steeper decline..

Well it is a --.

The stock is down 17% on it. So I think we need a little bit more granularity on that..

Well I mean the facts are obvious.

But still I do not think I have an explanation as to why the first quarter of this year compared to the fourth quarter is lower than the first quarter compared to the fourth quarter in previous year while the first quarter this year is 28% more than the first quarter of previous year because we don't analyze it this way.

I mean, fourth quarter was great, was really, really great. All our customers and all the products that we sold came up to a real climax, I would say, of revenues. This first quarter is the best first quarter that company ever had.

And I don't think that there is any thing that I could say specifically as to why this quarter is not only 10% or whatever you calculate it compared to the fourth quarter because we don't have an analysis for that.

I can tell you that we have not lost any customer during this period, that nothing dramatic has changed to which I can say well, okay, this is the reason for that. But there is one thing that I would say and that is I think you mentioned that. You're right.

I mean, I'm not saying that a company can maintain a growth of 50% year-over-year -- well, maybe some companies can, I mean, but I did not pretend and I'm not saying that we would be able to maintain 50% growth year-over-year for many years..

To be clear, you beat our forecast. We're not arguing that you missed the numbers or anything of that sort; we're just trying to get some clarity on how to explain to people who ask the question.

If I could, do you have any other commentary that are more forward-looking in terms of the demand conditions by either the three primary variables? One, end market conditions, do you see them accelerating? We're hearing positive comments about demand conditions.

Are they indicating acceleration in their expected order patterns? Two, can you talk a little bit about what portion of the sales growth in '14 might come from additional content going into the existing customers appliances? And then three, new OEMs, if you were to rank order the magnitude of the impact of those three, can you give us some sense to that?.

Let me just write it down.

So can you remind me the three parameters that you're asking about?.

So there's primary parameters. The end market --.

The end market? The first one was the market as we hear it from OEMs..

Are OEMs telling you that their business is accelerating, their demand conditions are improving? Are they giving you any indication on that forecast that would suggest an acceleration in conditions that would improve your growth rate in '14 or some other parameter, other alternative scenario? Two, can you talk about what potion of the revenue growth in '14 will come from increased content per appliance? In other words, add one module in an appliance (inaudible) two or three plant modules in an appliance? And then three, can you talk about what portion of your growth in '14 will come from new OEM, OEMs that were modest contributors in the past or essentially new to your revenue stream that would be additive to the gross rate in '14?.

Okay. So let me try to respond to that. I will tell you whatever I know. So from a market perspective, I would say that it's difficult to tell. We do get forecast from our customer. We even talk to them and they tell us what they expect. The problem is that too many times what they are telling us is not related to what is actually happening.

And that happens in both ways. I mean, sometimes they tell us that the market is going to be great and then we find sometimes this is even implemented through a very nice forecast and then the forecast does not happen. Sometimes it happens the other way around. So --.

And with that caveat aside, there can be forecasting.

What are they telling you? Are they telling you better, flat or worse?.

I think that mostly they are telling us better for them, not for the -- necessarily for the market because they mostly tell us well our year is going to be much better this year than previous year, that is what they are telling us and most of the customers..

Just to be clear, you are saying they are saying that their business is accelerating or just that --.

Accelerating may be too stronger word but they are telling us that it is going to be better. I mean, if I need -- if I am going to average it that is what they are telling us..

Okay..

Okay.

Now, the two other parameters what you call the customers or appliance content, and if you do not mind, I would describe that as not necessarily appliance content but rather existing customer, existing significant customer content compared to customer which is not significant, which is the third one and whether or not this is going to be to have an impact in 2014.

And I would say that between these two it is approximately 50%-50%. I mean, we would -- I hope that we would sell more products both into the sample appliance and into other appliances.

And at the same time, I think that new OEMs -- and when I am saying new, once again I do not mean new, something that we have never heard about until this time of the discussion but rather someone that we have started the work with and until now he bought an insignificant amount and what we believe is that during this year he will become significant.

So I think that our growth would come from these two factors..

So you are saying half your growth is coming from new content, half your growth is coming from new customers and none is coming from that market growth? I mean --.

No, I am saying that --.

Could you allocate it between those three? I mean if you take 100% of your growth, can you allocate it between those three?.

As I said, from the market perspective I am not sure what the market will do. I think -- if you are asking my personal opinion then I think that the market will grow a few percents to market that we are currently selling to.

Of course, they are the markets which are growing faster such as the cloud, these markets are markets to which we are proposing our new products, but it is going to take some time before that becomes -- have significant impact on our revenues.

So that is why I am taking -- put the market aside for a moment, because I do not know how much exactly of that would be because that is based on what I am hearing from our customers not on my knowledge. The other two reasons are areas which I know much more about what is going on and between them it is going to be 50%-50%..

The next question is from (inaudible) of G2 Investment Partners. Please go ahead..

Hi, guys. This is Josh Goldberg first.

And how are you guys doing?.

Thanks. Good. .

Just a couple quick questions. First I guess, in terms of customers, customer concentration. Can you talk about -- do you have any top 10 customers and how big are their percent of revenue? And I have a follow-up..

What I can say is that in quarter one, in 2014 there is no material change in the concentration of customer. Actually, it is very -- it is almost identical, very similar with the concentration of customers in 2013..

Okay.

And so generally, the decline, I know you are looking at things year-over-year, but the declines in fourth quarter was more broad-based across all customers, there was not one customer that has got the order and anything like that?.

No, I think it was more or less across the board as well..

Okay. And then, last year at this time as you are building your inventory, you talked about need to build the inventory early on in the year for some upside scenarios for growth scenarios through the back half of the year.

Do you feel confident that that's the case today as well, that your inventory up to about $30 million is time of positive growth trends throughout the back half of the year?.

Well, as I said, I mean not necessarily the growth of inventory is only due to growth. I mean, just like you said. I mean we are building inventory to take account of some upside.

If this specific upside that we are targeting for is not happening so that means that we have excess inventory, but for a certain period of time because we would not be doing that for a product which is going end of life or an appliance which is going end of life, which is why I do not see a risk in that.

But still it is not as if the increase in inventory is only supporting upsides. Sometimes the increase is because we build an inventory for an upside and this upside did not happen. So still I believe we would use the inventory, but it is not an indication of any specific direction..

Okay.

But you still believe that you will maintain the -- this level of inventory going forward?.

More or less, yes..

Okay, got you. Just shifting gears here a little bit, in terms of some of the new products and opportunities, I know you announced in December an opportunity with Intel, where you are working closely with them. Can you talk a little bit more about that relationship and what opportunities there could be working with Intel for this year? Thanks..

Yeah. I mean, I definitely can about that. I mean -- so Intel has released a series -- not a series, yeah. I mean, actually it is three types of silicon belonging to the same family, doing both encryption and decryption.

Now, up until the release by Intel, there was actually only one player in that area which was mostly Cavium, and Intel has decided to go after this market because it is becoming more and more important both in encryption and in compression. And has decided to release this pieces of silicon.

Now, these pieces of Silicon, they have several advantages over the competition.

And these advantages are both in performance, in price and also as they have a lot to do with the fact that Intel is obviously the owner of the x86 architecture and because these pieces of Silicon are working closely with x86, so the way that they are integrated into the x86 architecture is better than the competition.

Now, that being said, Intel has build one type of a card supporting this silicon mostly as an evaluation card and they are working very closely with us both technically and towards customers in terms of offering most flavors, working with the customer to make sure that the customer is getting the responses that he needs, allowing us to develop more around their basic software and hardware to provide these solutions.

And this cooperation has given us I think quite an advantage in the market. Now, the other side to that is that of course cards which are based on Intel silicon are relatively the newcomer into the market. So it takes some time. But we see quite a significant traction in there.

And as I said, I believe that even during the second half of this year we will see meaningful sales of cars which are based on this silicon..

So in terms of design win activity and stuff you see a lot of opportunity there?.

Definitely..

The next question is from Dan Jape[ph] of Wellington Capital. Please go ahead..

Can you give us a little bit of clarity? In the past conference calls you gave us a little bit information on your feeling and the pipeline going forward specifically in the fourth quarter. You were extraordinarily upbeat about the potential for the pipeline.

Is that consistent going forward into 2014 or has anything changed?.

Nothing has changed in terms of the pipeline that you're having. We're making progress, we feel that we're making progress..

Okay, perfect.

And does that look like you closed some of those design wins that you're expecting or are they still off relatively far in the future?.

Well, I mean, some design wins its difficult to say because some design wins we believe that they are closer but not always. That's why, I mean, I do not want to say definitely that they are close because knowing from experience sometimes I thought that the design win was going to happen within a week, and then it took us six months to close.

So these things happen, but we definitely feel that we are making progress with the design wins that we are pursuing..

The next question is from Grant Collier[ph]. Please go ahead..

Just a couple of quick questions in regards to the shelf offering.

Will the, first, stock price play into your decision making at the time an opportunity arises? Second, on the last conference call you had noted that you may give further guidance as to the short and medium term revenue for the year hopping at the $100 million? And then, third, you mentioned that your customers are really pushing hard to get you to ship before the year end.

Can you give any color on the size of that (inaudible) order that kind of kicked in in the last few days of the fourth quarter? Thanks..

Not sure I understood the second question. To the first question, I think that its obvious that the price of the share would definitely be a parameter when and if we come to the point of decision regarding the shelf. I'm not sure I understood the second question..

Just in terms of your $100 million per year mark you said in the last conference call that you may revisit that number the next time we talked..

Oh, I see what you mean. So I don't have an accurate number to tell you right now but we will definitely be shooting speaking a few years ahead for a number which is higher than $100 million..

Okay.

And then can you give any guidance the size of the orders that kind of came through in the last few days of the fourth quarter that otherwise probably would have been in this quarter?.

Well, I mean, its not always order. I mean, you should understand that the way that we operate is both by purchase orders that we need to deliver and also we have some agreement with customers which are consignment agreements by which they actually were shipped to them and when they consume what we ship, then it becomes a part of our sales.

So both of these happens. Now I don't have any number to give you right now as to what exactly was the percentage of revenues that were generated in the last few days of the quarter, but yes it was significant..

The next question is from Jay Steinhober[ph] of Morgan Stanley. Please go ahead..

Just a comment. Your stock seems to move around quite a bit as you can imagine. Being an advisor for over 20 years what I see is when you have bigger volume on the stock and more institutions and more analysts typically speaking the stock doesn’t move around as much as what your stock is.

And so I would encourage you to get out and do more corporate presentations, get more analyst coverage because it just seems like the stock is moving around way too much for the type of results you're putting out as we speak. So again great job and keep up the good work..

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 a concluding statement. .

Thank you, operator. Thank you everybody for joining the call. We look forward to hosting you in our next call in three months time. Good day..

Thank you. This concludes Silicom's first quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect..