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

Alex Henderson - Needham Amit Dayal - H.C. Wainwright Edward Balinsky - Segmark International Don McKiernan - Landolt Securities Marcel Herbst - Herbst Capital Management Josh Goldberg - G2 Investment Partners Jay Steinhilber - Morgan Stanley John Thompson - Wellington.

Ladies and gentlemen, thank you for standing by. Welcome to the Silicom First Quarter 2015 Results Conference Call. All participants are at 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-usa.com. I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Mr.

Helft, please begin?.

Thank you, operator. We would like to welcome all of you to Silicom's first quarter 2015 results conference call. Before we start, I'd like to draw your attention to the following Safe Harbor statement. This conference call contains projections or other forward-looking statements regarding future events or the future performance of the company.

These statements are only predictions and may change as time passes. Silicom does not assume any obligation to update their information.

Actual events or results may differ materially from those projected including as a results of changing industry and market trends, reduced demand for Silicom's products, the timing and development of new products, and the adoption by the market, increased competition in the industry, and product reductions as well as due to risks identified in the 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 financial measures will be discussed during this call. Such non-GAAP measures are used by 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 to investors understanding and assessment of the company's ongoing corporation 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. Now with today on the call are Mr. Shaike Orbach, the CEO; and Mr. Eran Gilad, the CFO. Shaike will begin with an overview of the results, followed by Eran who will provide the analysis of the financials.

We will then turn over the call for a question-and-answer session. And with that, I would like now to hand over the call to Shaike.

Shaike please?.

Thank you, Ehud. Good morning, everyone, and welcome to our first quarter 2015 results conference call. We are pleased to report a good set of results for the first quarter representing a positive start to 2015 and we believe we're on track for a solid year.

We recorded a number of positive achievements and made strong strategic progress in the quarter. We demonstrated design wins from both a new and existing customer, solid margins and important progress on the Fiberblaze integration into Silicom. We also declared a significant dividend to shareholders based on our full year 2014 results.

Our revenue level in the first quarter was in accordance with our plans, demonstrating that we are on the right track to achieve our goals for 2015 and our expectations are to show significant growth over 2014. In terms of our financial margins, our gross margins came in at the high level of 42.6%.

We showed a solid level of profitability in the quarter generating $4.3 million in non-GAAP operating income. In terms of our balance sheet strength, our cash levels continued to improve in the quarter and remain very strong. This is due to our continued strong positive operating cash flow that our business generates.

Our cash level at the end of the quarter grew by $4 million to $61.4 million with no debt versus $57.4 million at the end of 2014. As always, this remains a significant asset to us, demonstrating to our customers that we're a strong and stable company that can meet and support all their needs over the long term.

We've maintained these high cash levels over the past few quarters even while paying annual dividends to shareholders and completing the Fiberblaze acquisition at the end of last year.

Executing this acquisition demonstrates our ability to act decisively by leveraging our strong balance sheet to take advantage of the rising acquisition opportunities, which expand our product portfolio, addressable markets and further fuel our growth.

From a revenue growth perspective, over the past three months we continued to make strong strategic progress adding new design wins with both in existing and in new customer. In February we secured a new design win from an existing customer, a top Tier network security company, for our intelligent bypass switches.

We expect the combined sales from the new and previous design wins for this customer to reach approximately $1 million per year in the short term, ramping to approximately $3 million per year over time.

Our relationship with this particular customer has evolved from a design win, which was for a low quantity of cards to today's much higher level of cooperation in which we're supplying them with both cards and intelligent bypass switches.

Furthermore we're in discussions to provide them with other products potentially paving the way towards a further increase in volumes. This design win is a clear demonstrating of the most important principles which enables us to grow within each and every one of our existing 100 plus customers.

Customers such as this come to us initially with a need to add specific new features. As our relationship builds and strengthens our cooperation deepens and they come to appreciate our unique IP technology innovation, superior products, production speed and reliability as well as our dedication to service.

We often find that strong and growing relationship leads to the selecting for additional solutions many times in a very different area and a new design win with them can easily surpass the value of our original win.

A few weeks ago we announced a design win from a leading cyber security company, a new penetration of the company that we've not worked with before. This was the culmination of a lengthy and successful sales effort during which the customer thoroughly evaluated our technologies, operations and support capabilities.

Through this initial win, we will begin supplying high performance 10G adaptors for one of the customer solutions. In parallel, we've started discussions with them regarding their potential use of addition Silicom products including other networking adaptors, encryption adaptors, SETAC and intelligent bypass solutions.

We're excited to add this new and important cyber security company to our customers list, a first step, which has the potential to evolve into a major multimillion dollar relationship. This customer currently uses thousands of different types of cards each year across its broad range of products.

We see many areas in that business in which we can penetrate with additional products and we're already in talks with this customer for additional sales. Just like our many other customers, we're confident that this customer will grow to rely on our technological innovation, reliability, production speed and commitment to service.

Our ongoing stream of new design wins demonstrates our R&D capabilities whether internally developed or acquired. As we've proven time and again, we continue to make the correct read of the current and future needs of our customers and the direction of our market.

Our continued investment and spend in the R&D arena supports our leading competitive position and ability to maintain our growth over the long term. With regard to the integration of Fiberblaze into Silicom, the process is continuing successfully and we've begun to realize many of the synergies.

This is both in terms of the interest our customers have expressed in solutions that combine Silicom and Fiberblaze technologies as well as increased interest in Fiberblaze only solutions now that they're backed by a bigger and more established company.

With regard to our guidance, looking out to the remainder of 2015, we continue to believe that our performance will trend ahead of our markets and we reiterate the guidance we issued last quarter. We expect revenues of between $84 million and $90 million, representing growth at the midpoint of around 15% year-over-year.

In summary, our first quarter was in line with our plans and we expect that we're on track for a good year in 2015. We believe strongly in our strategy and our growth engines and we continue to invest resources in developing our products and markets.

We continue to sell more products into more of the platforms of current customers growing into new customers and offering new products to both current and new customers. We've strongly expanded our total addressable markets through our ongoing research and development efforts as well as our acquisition of complementary and synergistic technologies.

All this further contributes to the overall prospects for Silicom and underlies our confidence in our near and long term prospects. Over the years we've repeatedly proven ourselves and the success of our strategy. As we continue to gain more design wins and we look forward to continuing through 2015 and beyond.

With that, I'll now hand over the call to Eran Gilad, our CFO for a more detailed review of the quarter's results.

Eran?.

Thank you, Shaike and hello everyone. Revenues for the first quarter of 2015 were $18.8 million. Our geographical revenue breakdowns for the first quarter of 2015 were as follows; North America 62%, Europe and Israel 19%, Far East and the rest of the world 19%.

I will be presenting the rest of the financial results on a non-GAAP basis, which excludes the non-cash compensation expenses in respect of options and RSUs granted to directors, officers and employees, and acquisition related adjustments.

For the full reconciliation from GAAP to non-GAAP numbers, please refer to the press release we issued earlier today. Gross profit for the first quarter of 2015 was $8 million, representing a gross margin of 42.6%. This is compared with $7.8 million or gross margin of 40.8% in the first quarter of last year.

The gross margin does vary between quarters, mainly as a result of the specific mix of products sold during the quarter. Operating expenses in the first quarter of 2015 were $3.7 million or 19.9% of revenues compared with $3 million or 15.7% of revenues in the first quarter of last year.

Operating income for the first quarter of 2015 was $4.3 million or 22.7% of revenues compared to $4.8 million or 25.1% of revenues as reported in the first quarter of 2014. First quarter 2015 net income was $3.8 million or 20.5% of revenues compared to $4.2 million or 22.1% of revenue in the first quarter of last year.

Earnings per diluted share in the quarter were $0.52 in the quarter compared with $0.57 in the first quarter of last year. Now turning to the balance sheet, as of March 31, 2015, the company’s cash, cash equivalents, short-term bank deposits and marketable securities totaled $61.4 million or $8.44 per outstanding share.

Beyond the end of the quarter, on April 21, 2015, we paid out $7.3 million as dividend to our shareholders. That ends my summary and we would be happy to take any questions.

Operator?.

Thank you. [Operator Instructions] The first question is from Alex Henderson of Needham. Please continue..

Hi guys. So a couple of questions. First one the sequential increase in OpEx costs looks like probably the Fiberblaze acquisition was the primary driver of that.

Is that an accurate read or is there something else going on in that increase? And now that you've gone through the expenses of integrating it, should we anticipate a reversion in those costs or stability in those costs or growth in those costs?.

Okay. So first of all, the increase is indeed or at least mostly due to increase in expenses, due to the fact that we have integrated Fiberblaze right now and overall, the expenses level is more or less what you should expect for the other quarters within the year more or less..

Okay. And then the offset to that was better than expected gross margins in the quarter.

Is that a function of the, little bit of Fiberblaze revenues at the higher margin or is that a function of the shekel weakness versus the dollar what caused that improvement?.

I don’t think it's related to the shekel versus the dollar because most of our expenses even are -- cost of goods, which comes into consideration within the gross margin are in dollars. A part of them is in labor, but that's not significant. I still think that the majority or the most significant reason for the increase in GP is the mix of products.

There is a certain amount of products, which were coming from Fiberblaze, but I think that it would be much more accurate to say that the general mix of products is responsible for that. Overall, we sold more products the average of which came to be at a higher gross margin..

Well, so can you give us a little bit of handle on which categories of your product are causing that mix shift to higher margin and so that we have some sense of what's driving that? And then second, the obvious question is do you expect that higher gross margin to persists helping you to offset the higher costs associated with Fiberblaze over the course of the year?.

Well, I would say that overall planning -- we're aiming and trying to increase our gross margins as well to compensate for increased costs even though we're doing that mostly by increasing our sales. That's what we're typically trying to do.

Now in terms of product, so I could say and I've said that in the past, but typically our products, which are based on fiber and specifically fiber bypass as well as products, which are more complicated, tend to be with a higher level of gross margin. But even that does not tell the full story because the margins are not only product related.

Actually when we were saying product mix, it is even a little bit more complicated than that because its product and customer mix. Because it depends on the customers and the quantities that this customer is buying on is strategic importance to us sometimes, so it is a mix of customers and products to which we're selling, which defines it.

As I've said, we're trying to increase that. We're working on that, but I think there’re no guarantees that you would see a continuous increase in the GPS we move forward quarter by quarter because it is mostly an issue of mix..

So, I am not sure I understood the answer to the question. Is it reasonable to think that the margins sustain or improve from the first quarter levels going forward or should we….

No, I don’t think you could assume that second quarter or third quarter you would see gross margins which are better than what you've seen right now. For the long term we're trying to achieve that, but I don’t think this is an assumption for modeling that you could use right now..

All right.

So should we just assume that we can sustain that level or is it going to reverse back to the main?.

I think that we've said that I don’t remember the accurate numbers, but I think that we've said that our gross margin is around 40% or something like that or that could be a little bit more and that’s where we are. I don’t think we could at this moment change the level of margins that we've been talking about until now..

Well the problem here is trying to understand whether the 42.6%, which helped to offset the Fiberblaze costs is going to persists or whether the 42.6% reverts back to the average of last year 41% in which case you've got some cost pressure that you're absorbing..

I don’t know if it's going to persist.

I definitely cannot promise that it will -- that we will maintain the 42.6%, but what we're saying is that the plan, I mean at least from an annual basis, obviously if you look at our guidance it means that at an average, I am not speaking about what our revenues would be next quarter, but as an average, we would sell more.

So if we sell more, the gross, the margins -- the absolute value of the margins, those would definitely, assuming that we meet our plan that would definitely compensate for the increased OpEx..

Let me try it a different way. There is a mix of improved revenues from Fiberblaze, increased costs from Fiberblaze and some positive mix shift cost in the gross margins.

Is it reasonable when we look at the operating margin number to think that, that 24.8% done last year is attainable again in 2015 or is the Fiberblaze acquisition going to result in some dilution to that margin percentage over the course of the year? How is that a better way of attacking it?.

We have said that it was accretive and we're still saying that it is accretive..

So it is reasonable to think that the margins can be sustained at last year’s levels at the operating income level then?.

In terms of percentage?.

Yes..

In terms of percentage, it's reasonable. Once again, I don’t want to be very accurate in here, but it's reasonable..

Great. Thanks..

The next question is from Amit Dayal of H.C. Wainwright. Please go ahead..

Thank you. My questions around the gross margins that I guess have been answered.

Could you break down revenue contribution from Fiberblaze versus Silicom for the first quarter?.

Now this is not the information that we provide..

Okay.

Is Fiberblaze factored into your 15% annual growth rate projections?.

Yes. Fiberblaze is now an integrated part of Silicom. It’s a part of Silicom and the number -- the guidance that we provide, include Fiberblaze of course..

So are you being a little conservative on this side given that Silicom alone was on that trajectory, what help are you getting from Fiberblaze then?.

Well, as I said, the acquisition of Fiberblaze was not an acquisition the purpose of which was to take Fiberblaze sales and to combine them with Silicom sales in order to get the growth.

Fiberblaze has many aspects of synergy with Silicom and this is what we're trying to leverage when we're working together and that is what is leading us into the guidance that we're providing..

Okay.

So moving on to the cyber security related opportunities, is this relatively new area for you, are there opportunities to sell existing products into the cyber security space if this is a new opportunity for you?.

Well I would say that the cyber security market in a way is a new opportunity for us. Now let me explain what I mean by that.

What I mean is that this part of the security market I think is now growing much more than the traditional I would say security market used to grow when you looked at that maybe two years ago and that's where I see the new opportunity for us.

Because it’s now companies in this market, our product offering is similar to these customers that we used to propose to our traditional customers. But now that this market is growing and growing significantly and we're able to sell products to some of the leading companies within this market, so that presents an opportunity for us..

Okay. Is it because of the 10 GB positioning that you already have..

In what?.

In the 10 gigabyte positioning that you already have..

Oh, in the 10 gigabyte well, obviously 10 gigabyte is now the most common speed of interfaces of networking cost, which is being used, but yes, in some of these areas we have market leadership and we're using that to go to these cyber security companies.

It's still as we've mentioned with that last cyber security company that we penetrated, it's been quite a while since we've started to work with them because they started to work on that when they were small and at the beginning they started to work with someone else.

So it was that easy to penetrate them, but now we're there and with 10 gigabit product and we believe that that would take us to other products and when they move to 40 gig and then later 100 gig we’ll be there..

Got it. And it seems just finally just from your prior comments, Forex related issues are not a key concern for you..

They're not a key concern. They have an impact here and there possibly if asked, Eran will address that, but they're not a key issue. They're definitely not a key issue..

Got it. Thank you so much..

The next question is from Edward Balinsky of Segmark International. Please go ahead..

First question is what happened to the timestamp for this past several quarters we've been expecting some kind of announcement indicating acceptance for the by a new customer, but has that proved to be a non-event?.

No, it did not prove to be a non event, but as I've said last time, yes, we're also disappointed with the -- I would say the rate of progress of design wins in the time stamping area. We believed and hoped that it would happen earlier. It's taken more time than expected, but it's definitely not that.

It's taken more time which is why I used to say that we're hoping that it would happen very shortly, but because it didn't, so I am more careful right now even then it was hoped, but now it's taking more time, but it's not there.

We're still believing in it and pushing it, but yes we're disappointed with the rate of progress that we've made in that one..

Okay. The second question is some years ago you acquired a capacity in virtualization.

Has that proved to be -- are you generating new products in that area or can we expect any sales in that area this year?.

Well, it's a little bit difficult to tell. I'll explain -- I'll try to explain accurately where we're with that. So yes, we've taken this technology and invested in that to bring it to a higher level compared to the level that it was when we bought it and then we've presented it to customers. There is interest by customers.

Customers are evaluating that, but we understand that for a customer to really start buying that, significant investments would be required in that technology. We will be making these investments only if customers are willing to commit for that technology. That's our strategy right now with this technology. So it's still there.

We're pushing it in the market. It's a complicated technology. Takes a lot of time to evaluate and test. So once again it is somewhat that we're still pushing. We're not investing in it because we could see that there are a lot of directions that one could invest in that. We would invest with the customer commitment.

We would not invest without a customer commitment..

I see and okay. I assume that you have no customer commitment..

We don't have any customer commitment right now..

Okay. Fine. Thank you. Well, that answers my questions and thanks again..

The next question is a follow-up question of Alex Henderson of Needham. Please go ahead..

Yes a couple of just minor issues.

So can you talk a little bit about the 10% customers in the quarter?.

Eran?.

Yes, this quarter we had three 10% plus customers. Actually the mix is quite similar to 2014. Slightly better than 2014..

And were any of those significant numbers 20%, 30% type numbers or were they more kind of granular?.

The larger customer is currently less than 20%..

Okay. Great.

And what was the headcount at the end of the quarter?.

The headcount at the end of the quarter is quite similar to the end of the previous quarter, approximately 200 employees, 205 employees..

Okay.

And that includes the Fiberblaze people also?.

Correct..

Okay. And on the tax rate side, what are your thoughts on the tax rate for the full year now that we're in the New Year, should we use the first quarter run rate of 11.7% or is it 15% for the year is little off relative to the first quarter.

How should we think about it?.

Okay. That's right. The tax rate in the first quarter was a little bit lower than it used to be in 2014. If you take 2015 as a whole, I estimate that the effective tax rate will be very, very similar to 2014, which means in the area 14% to 15%..

Right.

So the reduction in the first quarter, is that a reflection of Fiberblaze?.

No, it’s a -- it is connected with an increase in tax assets. It's nothing -- but it's important, it's something which happens just in quarter one and I don't expect it to continue in the next quarter..

Okay. Thank you..

So again, as a whole I expected the tax rate in 2015 will be approximately 14% to 15% very similar to 2014..

Okay. Great. Thank you..

The next question is from Don McKiernan of Landolt Securities. Please go ahead..

Thank you.

So I think it was about a year and half ago even after new line of cards for the Intel Coleto Creek chipset and I think you maybe have announced one design win possibly a second, can you give us an update on how things are progressing on that front?.

Well we have a relatively long pipeline for Coleto Creek cards. We've several design wins. I think that I've indicated in one of the discussions that we had here that the design win with Coleto Creek maybe smaller and more when I compare that to the timestamp and that's more or less what is happening. So we do have several design wins.

We do have a long pipeline. Most of these pipeline design wins are not very big in size. Some of them are big, which we're still pursuing. That's it for us..

Okay. Thanks..

The next question is from Marcel Herbst of Herbst Capital Management. Please go ahead..

Thanks for taking my question, but it was just answered. So thank you. Good job in the quarter..

Okay..

The next question is from Edison Chu of G2 Investment Partners. Please go ahead..

Yes hi, it's Josh Goldberg for Edison. Just two quick questions. First I guess I saw the earnings to line up in the first quarter.

Usually your earnings goes up in anticipation of some increased sales of some of your early customers, have they asked you to hold inventory for them? Could you just talk about that inventory on the balance sheet and if that signal that the second half will be better and I've a follow-up?.

Well I think once again that I've said several times that the fluctuations in inventory not necessarily represent anything specific because they're a result or a combination of several things and that could be a increased forecast by our customers and probably is.

But it also could mean some forecast because we're preparing forecast for our customers and not all the forecasts are being fulfilled. Sometimes forecasts are not fulfilled and sales are happening out of some other cards for which we're needing for that purpose to go and buy components at the last minute.

So it's a combination of all these factors not necessary indicating increased sales. That being said, as I've mentioned before, if you look at our guidance, then our guidance means that if you look at the second half of the year, we definitely are hoping to sell more than in the first half of the year assuming reasonable behavior of course.

So in general, I would say, yes a part of that shows increase of our belief for selling more during the second half moving forward, but that’s not the only thing..

Okay.

Could you give us some sense of confidence on why or what you're seeing in terms of your visibility that makes you confident in the second half? Obviously the stock down about 13% this morning, I don’t know if people are expecting the type of optimism in your second half as you are? So maybe you can just give us some comfort on why you see that and where is it coming from?.

Well there’re several reasons for that confidence for increased sales in the second half of the year and as we move forward as a matter of fact. And let me try to count this element.

So first of all, our customers with their forecast as I think everyone have been able to see during the years the second half was almost always better than the first half. So even if you look at our current customers with the current cards if nothing happens in general then we should grow.

Last year in more or less mid-year we had some challenges that we had to overcome and that was a singular situation, but in general, if you look at us as long as things are I would say normal than our second half is better than the first half.

Now, once you add to that, the pipeline of design wins not only design wins that are not secured yet but even design wins that we've started to deliver on, but they're just ramping up. So that gives us another reason to believe in the growth.

So I would distinguish or I would divide between just our customers with the standard so called cards that we sell to them.

Number two is the design wins that have already been secured and will ramp up throughout the year and number three are the design wins, which are not yet in, which we're hoping to continue and secure, some of which could be very significant and these would add to our sales.

So combining all these, that's what leads us to believe that we would do better in the second half..

When you talk about Fiberblaze, obviously you said it's accretive.

Was it accretive in the quarter or you can just going to be accretive for the year?.

What oh, accretive. I didn’t listen. I thought integrated. Yes. We're talking about a year level..

So it might have been dilutive for this quarter?.

Well we don’t provide this data..

Okay. Thank you so much..

The next question is from Jay Steinhilber of Morgan Stanley. Please go ahead..

Hi guys.

Trying to get some more info on the timestamp, are you confident that we're going to receive those couple of orders that you had talked about yet this year or is it something that is more kind of up in the year since it hasn’t come already? I am just trying to get a confidence level that these aren’t miss sales that they're just being further delayed..

Well, depending on the definition of confident and how confident you are. That’s why we didn't announce anything because the design win is something that we announce. When we announce it, then we're confident that it's really happening. What I could tell you in order to add some color to that is to try and describe the level of confidence.

So we're talking about more than one design win.

In both cases, the customers has told us that that's a decision that they have made to go with us on these designs and they just need to do that and for a lot of reasons an example of which could be the day have not completed their software for the new generation, which was supposed to include our cards or things like that, they have not implemented that yet.

So I hope that I am coloring the situation to you enough to understand how confident we are. Customers, two significant customers at least told us we have decided to use your cards. The fact is, they're not yet using it and quantity is that we can say that's a design win due to a lot of reasons. They're still saying, they would use it..

Okay. And just a side note, I've been in the stock for since 2008 I believe now and it's a very, very volatile stock and I think I had mentioned this previously as far as I don't know getting the word now or something, but I think it would attract a lot more investors if the stock wasn’t so up and down.

And I don't know what to do, but as far as investor conferences maybe taken some of your cash and buying back stock from time to time, I don't know what the answer is, but maybe something to think about in the future..

We agree with you..

All right. Thank you..

Thank you..

[Operator Instructions] The next question is from John Thompson of Wellington Investments. Please go ahead..

Hi, I was hoping you guys could just reiterate what your guidance is for the rest of the year and just talk about how much confidence you have in that guidance?.

Well as I've said, the guidance itself is between $84 million and $90 million for the year and I feel quite confident with it, but you know it's still guidance of course, but I feel quite good with it..

Okay. Thank you..

There are no further questions at this time. Before I ask Mr. Orbach to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available by tomorrow on Silicom’s website www.silicom-usa.com. Mr.

Orbach, would you like to make your concluding statement?.

Yes, thank you operator. Thank you everybody for joining the call. We look forward to hosting you on our next call in three month's time. Good day..

Thank you. This concludes Silicom’s first quarter 2015 results conference call. Thank you for your participation. You may go ahead and disconnect..