Ehud Helft - Investor Relations Shaike Orbach - Chief Executive Officer Eran Gilad - Chief Financial Officer.

Alex Henderson - Needham and Company Edward Balinsky - Segmark Aria Cole - Cole Capital Chip Saye - AWH Capital Don McKiernan - Landolt Securities.

Ladies and gentlemen, thank you for standing by. Welcome to the Silicom’s First Quarter 2017 Results Conference Call. [Operator Instructions]. You should have all received by now the Company’s press release.

If you have not received it, please contact Silicom’s Investor Relations team at GK Investor and Public Relations at 1-646-688-3559 or view it in the news section of the Company’s website, www.silicom-usa.com. I would now like to hand the call over to Mr. Ehud Helft of GK Investor Relations. Please go ahead..

Thank you, operator. I would like to welcome all of you to Silicom’s first quarter 2017 results conference call. Before we start, I would like to draw your attention to the following Safe Harbor statement. This conference call contains projections or other forward-looking statements regarding future events or the future performance of the company.

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

Actual events or results may differ materially from those projected, including as a result of changing industry and market trends, reduced demands 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 risk identified in the document filed by the company with 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, focus future results and evaluate the Company’s current performance.

Management believes that the presentation of these non-GAAP financial measures is useful to investor understanding and assessment of the Company’s ongoing corporation and prospect for the future. Unless otherwise stated, it should be assumed that financial discussed in this conference call will be on a non-GAAP basis.

Non-GAAP financial measures discussed 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 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 hand over the call to Shaike.

Shaike, please?.

Thank you, Ehud. Good morning everyone and welcome to our conference call to discuss our first quarter results of 2017. We are very pleased with the strength in our first quarter results.

Revenues demonstrated ongoing and robust year-on-year growth up by 19% to over $25 million in the quarter and on the bottom line impressively we grew even faster by 28% year over year reporting net income of $3.9 million. While our financial results were excellent we also made strong strategic progress.

The most significant event of the first quarter was the largest design win in our history that we announced in March. This design win is with one of the world's top ten cloud players. Based on the customer's guidance once we move past final scale up challenges we expect this win to build to over $30 million per year.

This is on a scale which is well ahead of anything we have achieved in the past. It very much confirms the market need for our products in the cloud and as such it demonstrates that indeed the ongoing industry transition to the cloud represents a major opportunity for us.

The product is a customized version of Silicom's 100 gigabits per second high bandwidth switch fabric on a niche [ph] cloud solution utilizing into latest FM10k architecture combined with on-board x86 CPU management.

It involves multi 100 gigabit ports, powerful switching and advanced compute power all on a standard PCI Express card making it a complex product requiring specific expertise which Silicom has. This was one of the reasons the customer turned to ask for their design.

I am very pleased to share with you that since we announced this design win about a month ago we received an additional $8 million in PO's bringing the total value of purchase orders received today from this customer to around $25 million.

These PO's cover a small volume alpha phase and intensive better program and the products first commercial deployment.

While both the beta phase and ramp up of commercial manufacturing are in progress we're still finalizing the product configuration and validating the solutions performance within the service in which our product will be deployed in cooperation with the customer and the customer selected Tier-1 server manufacturer.

This design win is a very much game changer for Silicom once we complete the development and ramp up. I know though that there are still remaining challenges which we need to overcome before we can realize its full potential and achieve a large scale data center commercial deployments, all signs are that we are moving ahead on the right track.

We believe our customers also share this view based on our mutual enthusiastic and enthusiast cooperation in the project as well as by their sizable purchase orders.

This groundbreaking design win is a clear demonstration of the success of our cloud strategy, the cornerstone of our approach to appropriately address the industry's transition to cloud based solutions. We have invested heavily in this strategy and now we are beginning to see the strong returns for such investments.

Apart from these highly significant design we had other very important and strategic wins during the quarter. All these wins demonstrate that we continue to benefit from our long term success in the most traditional business that we do with our OEM customers.

In January we reported a first design win with a cloud object segment with one of the world's largest technological companies. In February, we announced that one of our biggest customers selected our encryption cards for its next generation appliances.

Most important with regard to this major design win is that we have regained our status as the customers prefer encryption solution supplier.

When it became clear three years ago that we would not be able to be ready with a solution for the customers prior generation appliances we refocused our efforts on the next generation working closely with Intel, while continuing to support and brainstorm with the customer. We're now seeing the fruits of that effort.

This customer has placed initial production orders for cards for its first next generation appliance and expects volumes to grow with the launch of additional new platforms. According to customers forecast orders were ramped up gradually reaching the full run rate in 2018 at around $8 million per year.

This win demonstrates the importance of our ongoing customer relationship and that significant long term potential among all our large clients whatever our current status with them is.

This win is also an indication to the increasing need of high performance encryption solutions and the importance of such solutions as another growth engine for Silicom.

More recently we announced an important design win for [indiscernible] cards with a well-established and highly respected cybersecurity customer which has now standardized on our solution as its networking add-on solution provided.

We are pleased that this cybersecurity player sees us as its go to provider for networking solutions and this has the potential to bring us further design wins in the future.

Like much of the cyber security industry this customer will soon be adding a security as a service cloud offering to its portfolio and we're working with them to include our cloud related solutions within it.

All our recent wins demonstrate that our product lines are essential building blocks for companies designing and offering systems for both traditional markets and the cloud.

In fact many of our clients are now active in both reals and to match their needs we have built an end to end value proposition based on our leading technology, unbeatable support and strong synergies across all of our product lines and the industry is responding positively.

It is very clear that the lines between what have being our traditional products and new cloud businesses are blurring.

We see many of our longtime customers initiating new cloud product lines as an extension to their existing line and are naturally turning to us with the required connectivity components, therefore in many ways our cloud and traditional business are becoming one market for us and enabling us to leverage over very strong existing competitive positioning.

In summary, our investments are into providing solutions for some of the hottest technology segments that of the cloud and cyber security continues to pay off .These segments depend on flawless connectivity and our innovations are geared towards exactly meeting those needs.

The recent slew of design win successes are a solid demonstration of our ability in foreseeing, correctly investing in and ultimately capitalizing on the upcoming market trends. Our design wins represent the ongoing fruits of significant past R&D investments made at the right time.

In particular our success in the past few months demonstrates the power and urgency of the cloud transformation and our ability to provide the right connectivity products to meet the industry needs. The combination of a rapidly expanded markets together with our demonstrated competitive edge gives us confidence with regard to our future prospects.

In fact our efforts are leading to us being increasingly seen by many existing and potential customers as the connectivity partner of choice. The industry is ongoing transition to cloud very much remains a very sizable opportunity for Silicom.

Looking ahead with regard to our guidance for the second quarter of 2017 we believe that revenues will be in the range of $28.5 million and $29.5 million. We are excited regarding our prospects and look forward to reporting our progress in the coming quarters.

And with that I will now hand over the call to Eran for a detailed review of the quarter's results. Eran, please go ahead..

Thank you, Shaike and hello everywhere. Revenues for the first quarter of 2017 were $25.3 million, a growth or 19% compared with the revenues of $21.4 million as reported in the first quarter of last year. Our geographical revenue breakdown over the last 12 months were as follows.

North America 67%, Europe and Israel 24% percent, Far East and the rest of the world 9%. I will be presenting the rest of the financial results on a non-GAAP basis which excludes the noncash compensation expenses in the respect of options and RSUs granted to directors, officers and employees and acquisition related adjustments.

For the further conciliation from GAAP to non-GAAP numbers please refer to the press release we issued earlier today. Gross profit for the first quarter of 2017 was $9.7 million representing a gross margin of 38.2%. This is compared with $8.2 million or gross margin of 38.6% in the first quarter of last year.

As we have mentioned in previous conference calls, our gross margin is largely affected by the specific mix of products sold in the period. Operating expenses in the first quarter of 2017 were $5.1 million or 20.3% of revenues compared with $4.7 million or 21.9% of revenues in the first quarter of last year.

The increase in the absolute level of operating expenses versus the first quarter of last year was primarily due to higher investment in R&D reflecting our strategy to invest incremental resources to take advantage of diverse opportunities in our target markets.

Operating income for the first quarter of 2017 was $4.5 million for growth of 25% compared to $3.6 million reported in the first quarter of 2016. First Quarter 2017 net income was $3.9 million or 15.3% of revenues compared to $3 million or 14.2% of revenues in the first quarter of last year.

Earnings per diluted share in the quarter were $0.52, a growth of 27% compared with $0.41 in the first quarter of last year. Now turning to the balance sheet, as of March 31, 2017 the company's cash, cash equivalents and marketable securities totaled $37.6 million or $5.09 per outstanding share.

In line with our dedication to ongoing creation of shareholder value through our dividend policy and based on our continued strong profitability in 2016 on April 5, we paid a dividend to our shareholders amounting to a total of $7.4 million or $1 per share. That ends my summary and we would be happy to take any questions.

Operator?.

[Operator Instructions]. The first question is by Robert Susman [ph] of Stanley Capital. Please go ahead..

I've a few questions.

Number one, can you describe the technological challenges that are yet to be solved on their very large order and related to that why would the customer give you another $8 million of orders before you've solved them?.

Okay. I'll try to do to answer both. First with respect to the technological challenges, so obviously I'm not able to describe the full product details in that conversation but first of all I would like to say that in general there could be two, I would say different elements of challenges.

Some elements are within the product that we are building and obviously there are also some elements which are not even related to our products but rather through the implementation of the full system by our customer because this is a new system which is going to be deployed by the customer.

From our perspective I would just say that it is a very dense design in 100 gigabit doing some I would say really state using I would say some state of the art technologies which are just new to the market and for these technologies to work together flawlessly there are challenges, I mean a card like that needs to work perfectly or close to perfectly under all conditions and with a multiple 100 gig in a very selected space this is difficult.

So that's whatever is related to our part in there, I would like to tell you that we seem to be just like I've mentioned I mean we are on the right track I believe that we are on the right track to resolve these challenges but there are still challenges to be overcome before I can say we've done that.

Now considering that part you should think that now all -- our product is a part of a much bigger system which is I would say a relatively new solution from the customer's perspective and there could be some challenges there.

In that part we don't know for sure what exactly are the challenges but take it into consideration that this is a system which is working at really the cutting edge of technology then there would be some challenges and we understand that they're on the right track as well that the whole solution seems to be working and so on and so forth but there are still challenges.

Now as to the reason why they would give us more PO's I would say it is in general -- for us these are read extremely significant PO's of course I mean because we're getting $25 million this is not something which is happening every day. For them this is a much, much bigger project and they would like to be ready.

They would like to be ready for the time that all these issues are resolved they would like to make sure that we have all the allocations needed in the various components which are based on allocations so they would like us to go ahead and buy this components or commit to these components, they would like to make sure that once indeed they are happy with what we are delivering we could move fast and deliver and we're delivering right now as a matter of fact because as I've said these purchase orders included well the alpha phase was not very significant but it included the beta phase which was significant beta program because for them the beta program is a data center more or less.

So its significant and then they even begin to wanted and to require and they want us to deliver production systems already because once they are saying yes we're okay, they would like to go ahead and deploy all of that immediately so that's the reason for providing all these purchase orders right now..

And I just have to ask a follow up, does this leave you with the possibility that you end up with significant inventory that has no value because either their product doesn't work or your product doesn't work and therefore it's not viable?.

No, I mean they understand the situation and actually the reason that they give us these PO's is because they do not want us to limit whatever we're doing due to that concern and that's why they're giving these I would say bidding PO's and for us allowing us to move forward without having this kind of concern..

One last thing, if this product is successful will there be other companies who are going to want to emulate this therefore providing you with an even larger market?.

I believe that the answer to that is yes.

It would be a long process because any such customer who would like to use this product or a similar product I would say would also need to adjust part of his I would say architecture in the cloud that he is building or whatever in order to be able to use these products so it's going to take time but eventually yes.

Probably not exactly the same product but rather something similar to that customized but eventually yes..

The next question is Alex Henderson of Needham and Company. Please go ahead..

So a couple of questions, so I just wanted to make sure I had the data right here. So it's $30 million was the initial order and then there was an add-on of 8C [ph] or approximately $40 million of orders from this particular design win.

Is that the right numbers there?.

No, lets really clarify the numbers. First of all at the time that we have announced the win we said that we had purchase orders for $17 million and that we expect the run rate to be over $30 million per year. What we're saying right now is the run rate is going to be over $30 million per year up until now we've received $25 million of orders.

This is the data that--.

I get it, right. That’s perfect. And so I have a clarity on the cadence of the ramp of this -- I assume that these numbers are fairly small up front that the alphas you know quarter of a million dollar kind of spend here in the second quarter.

I assume that its still $7 million [ph] in the third quarter, and then its going to start to kick in a little bit more aggressively in 4Q or 1Q of next year, is that kind of the right cadence to this?.

Well I don't want to give out accurate figures in that, we cannot and we do not want to give accurate figures but I would like to say the alpha was really negligible and it was delivered and provided.

The beta is relatively significant and we are in delivery of the beta, we have not completed that yet, but on the same side we are going to begin and deliver some production orders pretty soon.

So everything is going in parallel in this project but of course I mean this also takes into consideration the advancesments that we're making with the technical solutions etcetera so I would say there are peaks that we deliver something and then there are some stocks that the customer is saying okay now let me look how we're working with that at this scale at the current scale that we're doing.

So I'm saying we obviously we are not at the full scale of the deliveries right now, but it does not necessarily mean that the data that you provided, the quarter of a million and 1 million I'm not confirming neither the other way around that it's accurate because I cannot provide accurate data.

We're not at a steady state run rate for sure and we're moving there, they are way towards over $30 million in spike, it's not something which is goes very linear.

It come up because they would likely test at a certain scale and then wait a little bit and then another bump, not bump another I would say -- well you could say a bump, a jump in the quantity of systems that we deliver and then they look at that again and so on and so forth..

But is it fair to say that you would be cautious about putting too much in the first couple of quarters here when we're still going through this process and that it looks like a ramp around targeting generally around 4Q and then first half of next year..

We definitely would like to be cautious with that, yes..

Okay.

And then the second question I want to ask on this project is you know obviously you have said many times and reset the margins expectations based on the idea that cloud margins are going to be lower than your traditional margins and that when you lower the guidance from the 40% plus the 35 to 40 I assume that that’s predominantly reflecting that dynamic.

I'm assuming that this customer is a cloud customer therefore the margins on this is probably at the lower end of the 35 to 40 that you've given guidance towards and therefore as this ramps we should also be in anticipating some implication for the gross margins now obviously with the revenue offsetting at pressure on the OpEx line because your OpEx would grow at that rate but is that the right way to think about those two elements of the mix on costs?.

Yes. In general I would say yes of course I mean as we move forward we would be also able to improve our cost to a certain extent but in general yes what you've said is accurate..

And on the cyber security side of it, is that program around encryption, encrypt-decrypt or is that you know a broader set of features that you're offering there?.

Okay. Let's distinguish indeed this could be a little bit confusing because this the cyber security win that we have announced is not for encryption, its for a bypass networking cards.

That being said, we had another design win which was in that encryption area but encryption is being used not only in cyber security, encryption is now a I would say a widely used feature which is growing everywhere and almost any application that you would think about would do require some sort of encryption.

So that's why I mean our cyber security win is bypassed networking cost, its not encryption.

We have announced an encryption win with one of our biggest customers this is a steady state $8 million win and one is not I would say a part of what it is doing is cybersecurity because today everyone understands that it needs to add cybersecurity components into its offering but this customer is not most mostly known as a cybersecurity customer..

Right.

The deal that you're doing for the large cloud player is this engaged in containerization and micro-segmentation deployments or is this more standardized architectures?.

It is a more standardized architect right now from the form factor of the servers right now. It is not standard from I would say software architecture.

Also moving forward and now I'm talking about the relatively long term whether its be to reuse or something like that and there is a good chance that the form factor of the overall solution would change but probably it would not need the form factors of the cards right now unless the new form factor would allow for a more space in that case there maybe some additional needs but right now it is a standout servers architecture, it would be moving into a diff one which is still using the cards as they are and then later on there maybe a different form factor altogether which may require us to do some additional work as well..

Okay. One more question if I could on the technology.

The move to 400 gig architectures with quad 100 gig force wave division [ph] multiplexing, does your multi-100 gig port is that a feed to a quad 400 gig product or is that just straight 100 gig lanes?.

I would say that it's a straight 100 gig but it is -- well I said straight 100 gig but its not a straight, it is in terms of the port, in terms of whatever is actually happening on the card there is some unique technological that we're using there.

So its 100 gig ports but the overall technology that we're using there is unique and its new and stand out. .

Okay.

Couple of just headcount and other related 10% customer's headcount in the quarter?.

There are two 10% plus customers, total together for the last 12 months and to around 26% together. As to-debt [ph] count very, very similar to the previous quarters, about 240, 245 employees..

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

It seemed to me you are amortizing if you run your first quarter, you are comp going expecting to complete the amortization of intangibles sometime this year, is that correct?.

Yes this is correct..

I see, fine.

And secondly rather more delicate question, are you considering acquiring, are you in the late stage of considering acquiring another company?.

We are not neither in the late stage nor in any specific consideration so nothing specific is going on but just like we've been doing in the past we are continuously looking at opportunities and if we see something which makes sense we would try to move forward. Right now there is nothing specific..

The next question is by Aria Cole of Cole Capital. Please go ahead..

Just one very simple question, the large design win order you had with cloud customer that is -- with $25 million order in hand, can you just kind of explain how long the process took from them approaching you to working in the design win and finally getting the first order from them?.

Well I believe that’s the process of about two years, something I've had a little less but it's a relatively long process.

As of the time well I mean it's a long process started from just general discussions and general familiarization with people involved and then a really I would say beginner proof of concept type of an order and then it's moved forward but overall it's about a two years effort..

Okay.

And then related to that I would assume then the you may have a number of other potential cloud orders like this that are in process you know I understand that some of them may not end up leading to orders but can you kind of indicate how many potential customers you have that are in this two year process that might lead to orders like this?.

Well I mean we're talking to quite many cloud players right now but first of all not all of them are on the same magnitude.

So not necessarily if we get another design win its going to be an over $30 million per year just like this one even though obviously there are some who could even be bigger but not necessarily that would be the case and so I think we are -- if I need to just throw a number then I would say that we're right now talking to about 10 of these guys or maybe 15 about this but once again I would like to emphasize it is not a short process and while I'm not necessarily saying it would take more than two years but you need to understand that what happened with this specific customer is that our technology matched what he thought about the concept or the architecture of the cloud.

Talking to other customers while if we find a customer which agrees with the same architectural concept it's going to be relatively easy but if on the other side we see other customers then of course first of all they need to decide that whatever we do with this product is relevant to what they want to do from an architecture perspective.

Now all that being said I would like to emphasize that this is not the only product that we're offering to cloud players.

So when we are talking to these 10, 15 significant cloud players our portfolio includes many other products which could be relevant to them not to mention the fact that when they look at our portfolio just like whatever happened with this customer.

He did not select exactly our product, he said well okay I see that you have expertise in A, I see that you have expertise in B, can you build the product to me which would take these two and then make a product for me.

So if we are proposing other products as well and customers talking to us the deeper we go can come up also with their ideas combined with ours to develop products which would make sense for their architecture..

The next question is by Chip Saye of AWH Capital. Please go ahead..

I have a question as most everyone does about the large design win. So initially the $17 million in PO's goes to 25 and you move from the alpha phase to beta phase.

Can we think of this beta phase as one data center and that's represented by $25 million or am I thinking about that wrong?.

The $25 million is not only for the beta, the $25 million include the beta and production orders but in terms of the beta, the beta is more or less one data center. Can represent at least the single data center..

Okay.

Within those purchase orders, one data center would represent how much of those purchase orders?.

This is not something we can provide..

Okay.

Alex Henderson asked a lot of questions about my questions about margin so I want to ask you, you referenced potentially 10 to 15 other customers that would be interested in talking to you about cloud solutions, would these customers be other hyperscale cloud providers or would they be some of your traditional OEM maybe enterprise customers?.

Well when I was talking about 10 to 15 I was referring to cloud providers, that's what I was thinking about but obviously we're talking to our typical OEM customers and they are offering their systems to the cloud as well..

Okay.

So the 10 to 15 customers would be just cloud providers and then I guess the next way would be your OEM and enterprise customers looking at solutions as well?.

Well typically we sell to enterprise per say, we sell to OEMs but what's important to mention here is that when our OEM.'s -- yes they're selling through the cloud but typically they would be selling to the cloud a specific application.

So a cyber security traditional customer would sell to the cloud his application together with his servers and appliances many times and that's when we're selling through our OEM customers that's what's happening. That would mean that sometimes the quantity could be very high but that would happen when he is selling to several of these.

So the mechanism of creating the quantity is somewhat different. So we have a very successful OEM customers who sells his devices to several very big clouds that would be generate if significant quantities but if we sell to an OEM customer who was successful to sell to a single cloud vendor then the quantities may be smaller.

On the other side we may be successful to sell to a big cloud vendor just like we have been in this case and this would be very big.

Speaking with the cloud vendors we only speak to those who are not necessarily as big but we obviously are not speaking to very small cloud vendors because that wouldn't make sense, that would become just another end user to whom we don't try to sell. So the mechanism is a little bit different but the number 10 to 15 was to cloud vendors..

Okay.

And of the 10 to 15 cloud vendors it's fair to say that a lot of those are looking at this first opportunity you have and seeing if you can succeed in beta test here, correct?.

Well we have not -- we could not of course and have not disclosed who our customer is, our customer has not disclosed to the public what is doing so I don't think that the other customers are at this point right now that they're looking at whatever is happening with the Beta of this customer. I don't think anything about that is public.

We are at the phase of presenting to them this solution, they're asking questions. Potentially once our customers discloses everything about his architecture and his success that may help us but that has not happened yet..

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

Two questions, the first one with this large new $30 million design win I'm wondering if Fiberblaze intellectual property any of their technology was instrumental in capturing this significant win?.

Well it was I would say instrumental in kind of a strange way and I would explain what I mean by that. This technology is not a part of the solution that we're providing to our customer in this design win.

However because there is a general market trend towards using offloading or I would say even significant offloading in the cloud and because FPGA technology seems to be the relevant technology from that perspective so even this customer told us for his next generation of solutions he may consider FPGA technology and that's why one of the factors when he selected a partner was a partner with whom it would be able to go ahead with FPGA technology once needed as well so that's how instrumental it was.

It is not a part of the current design but the fact that we have this capability was a factor in our selection by the customer..

Terrific. And then in the SD-WAN space you have adverse networks and probably a few more, can you comment on where things stand there and it's a very exciting opportunity but I don't think it's really ramped up yet..

Yes. I mean just like you said and but you're also right, I mean we are talking to a few potential customers. We do have a pipeline with SD-WAN customers and this is definitely another growth engine that we believe would materialize.

Again it may take some time especially as I would say that well you know I mean many customers who used to be one of the [indiscernible] customers and even others are now running into the SD-WAN market because it seems to be an exciting opportunity so not all of them are there right now.

We're talking with too many of them, not all of them really are shipping significant quantities of products right now but they're talking about that and we are I believe that we have a healthy pipeline with these customers with some of these customers so yes this is another area which we believe we would be able to get some more business..

The next question is by Alex Henderson of Needham and Company. Please go ahead..

Actually it was on the SD-WAN stuff that was just asked but if I could just chime in one more angle on that.

Clearly, there are a lot of players in SD-WAN and some of them look like they're going to be successful and some of them are probably going to be challenged but you're I'm assuming you're associated with at least with Riverbed and probably with [indiscernible] cloud and tela [ph] which are the three that seem to be leading the pack.

Can you talk about the breadth of the customer set that you're in negotiations with or discussions with and whether in fact you would be -- that the key leaders in the space would be representative in that set in a similar way that you talked about 10 to 15 cloud discussions, are there half a dozen discussions in the SD-WAN space?.

Yes, well first of all there is even a little bit more I would say than half a dozen and about well once again if I need to just throw up a number its going to be around 10, potential customers that we're talking to. I would say that in that space the customers that we're talking to are divided into three categories I would say.

So one category is our traditional customers who are now offering SD-WAN solutions as well, so that's one of the thing, the other is a company which well I may call them start up but not necessarily the start-up's because some of them are shipping quite significant quantities of these products but I would say young companies that emerged based on the SD-WAN technological only meaning that they came forward with an SD-WAN solution and that's what they're selling and the other group of companies to some of which we're talking is some of the big telecoms because some of these companies just like Versa for example, I mean they're selling the software only and they're just mentioning they are hardware vendors by reference.

So in that case we need to go and speak to their potential to their customers in order to get a win there so this is a three type of customers that we're talking to..

So that's very helpful.

Just to parameterize, is your expectation that your growth in SD-WAN would be coming predominately from your traditional vendors or would it be coming predominately from new customers and telcos?.

I think that the first two would be the quickest. I mean telecoms because when I recognize that we didn’t use to work directly with telecoms until now. We were working through OEMs. Now this is changing to a certain extent because due to the fact that telecoms are building their own clouds etcetera so they are becoming customers for us as well.

Not only for the SD-WAN, so we're talking to telecoms now which is something we haven't been doing in the past because in the past everything went through our OEM customers but these days because the world is changing as a part of the cloud transition we're talking to telecoms but telecoms are huge organizations in terms of supply chain it takes time, yes we're are recommended by some of our customers such as Versa but what I think is it would take time before we really established significant growth with telecoms.

But once the telecoms see that we are those who are developing -- who are providing the SD-WAN appliances to their OEM's whether they are traditional or new companies which are the customers that I think that we would grow with quickly or then I think we would be able to penetrate even to a more significant rate than telecoms themselves..

If I could just press one more question along those lines.

So should we be thinking about mainly the central office locations as opposed to the virtualized edge boxes that would be out in the branch office environments, as the primary area where you would be adding your technology? Is it the core large chassis type stuff that would be the main central point or are you also in some of the branch of white label server environments?.

So I think I mean first of all we would be in both but for the edge we would be providing the full box or the full appliance there just like what is being qualified for versa and this is also we had I believe I don't remember exactly when the laws, we had another design win that we have announced about that. So there we provided a full appliance.

For the central office there we would continue, that would be more of a traditional market for us because it would be the same mostly the same OEM's that we've been working with who would provide these boxes and we would continue to deliver cards going into these boxes..

If it's the entire white label box at the edge, I would think that A, that would be a little bit lower margin but B, a lot of revenue associated with that because we're talking about 1000s of branches and individual deployments here, that seems like a very big ramp when that starts to kick in.

Am I thinking about that right? I mean it seems like a very large number?.

Yes, you're right about that. You're right about that, it's a very large market and you're right -- we're considering that by the way to be a part of what we say the cloud transition having an impact on the margins as well.

Quantities are very big, margins are lower, we have some competitive edge there because we're working very closely with Intel, providing some features that others cannot and by the way once again even though it's -- let me just add one more thing here.

Even though these are edge devices and small devices some of the customers that are looking ahead and again this is not something which is going to happen this year but they're thinking of adding to the smaller level of I would say appliance to add their FPGA technology and make it work even better so there are some ideas in that space -- this space as well.

So everything is kind of converging for us and I think that's going to be a competitive advantage for us even in the relatively low end, not the lowest end, the lowest end would not have this kind of technological, but still at the branch level..

The next question is by [indiscernible] of Stanley Capital. Please go ahead..

Can you give us any idea of what the large customer -- the time frame he is hoping to have his product ready to go to market and your product ready to go to market with it? Is it later this year or is it third quarter, fourth quarter, I mean I'm just trying to. Well its difficult to say because there are many factors in here.

The customer would like to do that as quickly as possible that I can tell you. He would like that to happen as quickly as possible but there are still things that need to be happen to happen and it's very difficult to say I think that we ourselves would know as it happens, what the actual rate is going to be..

Is it possible for you to tell at this time exactly the product you need to provide when the customer has not even finalized his product yet?.

We definitely know what is the customer that we need to provide at each and every step I mean there could be some changes, same product but there could be some changes when we move from one step to the other.

In fact I mean I can tell you that as I've said that we have provided alpha, beta and already we're in the process of providing production units as well, they are not all identical, they're not 100% identical. But at each step we know for sure what we need to deliver.

And I believe by the way this is a normal step in any product development, only the size of this product is so big that of course it's important to understand exactly and I understand why you are asking these questions but when exactly each of these steps would be concluded and finalized is not something that I can say for sure right now and its not even entirely dependent on us..

[Operator Instructions]. The next question is from [indiscernible]..

I want to give us a little bit of an update on the FPGA. I've seen some recent news, Intel has put out some new products lately, they also have some kind of IoT product. I just wanted to kind of give a feel of where the FPGA market is for Silicom and the opportunities out there. .

Okay. So first of all I would like to tell you that we think that FPGA technology and solutions around FPGA are going to be extremely, extremely important. We're investing in that. You understand it may take some time but we believe that it will be extremely important.

Just like you have said, I mean one of the reasons I mean there are two I would say trends, not trends, but two events and -- well even event is not the right word but two things which are happening together which I believe are important to understand, maybe even three.

So one is again the cloud, I mean the cloud, I think that cloud vendors do understand today and that's by the way why we have been able to success even with that customer that in order for their cloud to be effective, in order to cut down their expenses they need to have several ways or to do offloading within the cloud.

Our FPGAs seem to be recognized now almost by everyone as the right technology for the purpose of doing this kind of offloading. I think that although -- when I'm saying cloud by the way I mean the whole package, I mean it's cloud and NFV, SD-WAN virtualization, all that together.

So when build systems using these technologies you would need to do offload, the right technology to do offload is FPGA.

Now Intel has acquired Altera, and we're talking to Intel and it seems of course we -- I did not talk to Intel CEO but the guys from Intel that we're talking to that's what they believe that's why they have made this acquisition in general because they feel that this is where the market would be growing. So they believe that there would be FPGAs.

Now one more important thing to say about that is that FPGA is something that you need expertise with.

So unlike let's take for example networking card or even a motherboard you take a networking card or a motherboard you have a design, you give the design to someone who knows how to manufacture, these manufacturers who test and that's more or less it.

In an FPGA environment it's different because there is another part and that design always even if you just want what we call a naked card you need to have IP calls within the FPGA would connect the FPGA to the host PCI Express and so on and so forth.

So that means that companies which would have FPGA expertise I believe would be very well positioned to deliver the FPGA offloading solutions to the cloud, to the NFV and I would even say to cybersecurity and the other growing markets because all of these guys are seeing that, we see that everywhere.

Now we're there, I can tell you we have signed a certain MOU which we consider important for us.

I mean it doesn't provide any commitment to any revenues right now because everything is at an early stages right there but we are very much engaged with companies from all aspects of the industry and that's obviously because of the expertise that we are having with our FPGA technology. So I mean you didn't hear me speaking about the.

FPGA technology in this conference call because I would say it is very easy to become enthusiastic about something that would happen in two years and these conference calls are about what's happening right now or in the next quarter or in the next year but I am very, very enthusiastic and optimistic about whatever is happening with FPGAs..

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?.

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 2017 results conference call. Thank you for your participation. You may go ahead and disconnect..