Ehud Helft - IR Shaike Orbach - CEO Eran Gilad - CFO.

Alex Henderson - Needham Robert Sussman - Bentley Capital Aria Cole - Cole Capital Chip Saye - AWH Capital Shawn Boyd - Next Mark Capital.

Ladies and gentlemen, thank you for standing by. Welcome to the Silicom’s Second Quarter 2017 Results Conference Call. All participants are present in listen-only. Following management’s formal presentation instructions will be for the question-and-answer session. As a reminder, this conference is being record.

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 handover the call to Mr.

Ehud Helft of GK Investor Relations. Mr. Helft, would you like to begin, please..

Thank you, operator. I would like to welcome all of you Silicom's second 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 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 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, 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, 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 second quarter results of 2017. Continuing the momentum of a strong first quarter, we are very excited and pleased to report our second quarter as well as our six months period results.

Revenues demonstrated strong continued growth in the second quarter, up by 16% year-over-year to a record of $30 million in the quarter with a net income of $5.2 million.

Revenues in the first half of 2017 were up 17% totaled $55.6 million, the company's highest ever revenues for a six months period with a net income of $9.1 million, up 18% year-over-year. As you know, the most significant event for Silicom this year so far was the receipt of the largest design win in our history that we announced back in March.

This design win is with one of the world's top 10 cloud players, and has a scale of more than $30 million per year, which is extremely significant for us. It confirms the market need for our product in the cloud and as such, demonstrates that the ongoing industry transition to the cloud represents a major opportunity for us.

To remind you, the product is a customized version of our 100 gigabit per second high bandwidth, switch fabric on a next [ph] cloud solution, utilizing Intel's latest FM10k architecture combined with an onboard x86 CPU management. It is a complex product requiring the specific expertise, in which we excel.

This was one of the reasons the customer turn to us for the design. We have already surpassed the $10 million mark in revenue from this design win in the first half of 2017. As we move forward, we continue delivering products scaling up the revenues and overcoming more and more of the challenges that remain along the way.

At the same time, the customer continues to place additional purchase orders for the products demonstrating their confidence in our performance. We feel that we're moving ahead on the right track. And as such, we expect the revenues from this win in the second half of 2017 to be greater than those of the first half.

This design win is indeed very much a game changer for Silicom. On top of the expected revenues, it has allowed us to build a trusted relationship with this giant customer. A relationship which we believe can lead to additional opportunities both within the scope of the current customer application and with new applications as well.

We also see this win as the clear demonstration of the growing success of our cloud strategy, the corner stone of our approach to appropriately address the industry’s transition to cloud based solutions. Our previous investments in this strategy are beginning to bear fruit and we are seeing the strong returns on such investments.

Furthermore, our work on this win has created for us a new important and very close relationship with a top Tier server player, the platforms of which integrate our solution.

Just to make it clear, this top tier server player I am discussing now is another giant potential customer, different from the major customer that granted us the win back in March. Both of these relationships present significant potential for us.

More broadly this specific win together with the trends that we are seeing in the market are a clear indication of the superiority of our overall technical and solution capabilities.

They are very much aligned with the critical performance needs of both existing and new potential top tier customers addressing the cloud as well as other high growth markets.

Apart from this highly significant design win, we have three other recent design wins in important and growing markets all representing significant opportunity for us and each one expected to run to around $1 million in orders per year.

In April we received the design win for several versions of bypass cards from a well-established cyber security customer.

In May we reported a design win from a new customer, a leading flash only storage company for a proprietary new front loading compression module and in June we received a new design win from an existing customer, a leading provider of cloud and enterprise networking applications and appliances for encryption hardware acceleration cards.

These wins are all in high growth markets, cyber security as well as storage; they demonstrate that our solutions are very relevant in today’s fastest growing markets. These wins provide us with additional customer references open up further new opportunities and increase potential ahead.

Looking ahead, with regard to our guidance for the third quarter of 2017, we believe that revenues will be in the range of $31 million and $32 million at the midpoint it represents a growth of 27% over the third quarter of last year.

In summary, the recognition that we continue to receive from the market for our technologies and solutions, coupled with the strong demand within fast growing sectors such as cloud and cyber security is empowering us to build our business to a new level.

As you know, we have continued a strong investment in R&D which has allowed us to develop and ultimately provide right solution for some of the hottest technology segments. This strategy continues to pay off as our ongoing growth shows.

The recent slew of design wins successes and particularly our major cloud design win are a solid demonstration of our ability enforcing correctly investing in and ultimately capitalizing on the upcoming market trends.

Our ongoing success in general, as well as the success in bringing the largest design win in our history, demonstrate the power and urgency of the cloud transformation and our ability to provide the right connectivity product to meet the industry’s needs. We continue to see this very sizable opportunities ahead for Silicom.

Overall, we remained very pleased with our performance and we are increasingly excited with regard to our prospects ahead. We believe that we are better positioned than ever to achieve continued growth in the quarters to come.

With cloud and cyber security tailwind, driving demand for our products, we believe that our business has now reached a strategic inflection point in our growth trajectory and look forward to reporting on our continued progress over the coming quarters. With that, I will now hand over the call to Eran for a detailed review of the quarter's results.

Eran, please go ahead..

Thank you, Shaike and hello everyone. Revenues for the second quarter of 2017 were $30.3 million, a growth or 16% compared with revenues of $26 million as reported in the second quarter of last year. Our geographical revenue breakdown over the last 12 months were as follows. North America 71%, Europe and Israel 22%, Far East and rest of the world 7%.

I will be presenting the rest of the financial results on a non-GAAP basis, which excludes the non-cash compensation expenses is 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 second quarter of 2017 was $11.2 million, representing a gross margin of 37%. This is compared with $9.9 million or gross margin of 38% in the second 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 second quarter of 2017 were $5 million or 16.6% of revenues compared with $4.6 million or 17.8% of revenues in the second quarter of last year.

The increase in the absolute level of operating expenses versus the second quarter of last year was as we have mentioned previously, mainly 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 second quarter of 2017 was $6.2 million, a growth of 17% compared to $5.3 million reported in the second quarter of 2016. Net income for the quarter was $5.2 million or 17.3% of revenues compared to $4.7 million or 18% of revenues in the second quarter of last year.

Earnings per diluted share in the quarter were $0.69, a growth of 10% compared with $0.63 in the second quarter of last year. Now turning to the balance sheet, as of June 30, 2017 the company's cash, cash equivalents and marketable securities totaled $30.8 million with no debt. 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 go ahead..

Thank you very much. Hey guys, congratulations, things sound like they are going really well. I wanted to talk about the strategic inflection point you are talking about, particularly relative to this cloud customer and the potential timing of additional cloud wins.

And then the other question I wanted to ask a little bit about was this new comment about a server player. First on the cloud win, you’re saying you did a little bit over $10 million in the quarter or so far in the first half for that product.

Is it reasonable to think that at least upwards of $15 million to $20 million in the back half or is that $30 million type of bogie in the back half something lower than that because of the -- it would take more than a year for the first $30 million to land.

Can you help us a little bit with the trajectory of that?.

Obviously we cannot provide very accurate numbers, but first of all just like we’ve said, I will just like to give you a little bit more color for that. I mean, we said we would do in the second half definitely more than what we in the first half. And I can tell you that I believe it's going to be significantly more.

I mean, so it's not just that we did, I don't know I have the accurate number with me right now. But not just a little bit more of what we did in the first half, the second half would be significantly more. Please note that we've always said that the run rate of this customer would be over $30 million.

So it seems like indeed it would be over $30 million per year. We do still need to overcome challenges during the road for that, but the more challenges we overcome, that improves also the run rate. That allows us to build more, that allows customer to have confidence in requiring more and in building his cloud faster than what we expected.

Due to that, there isn't any very definite or specific number that I could give you for the first half, but what I can say that it's going to be significantly more than the first half..

And so as we're looking at this program where this customer, is it fair to say that this the vast majority of this is going into a single data center at this point?.

No, no. It's not going only to a single data center. It's going to a few data center that the customer is building. .

Right. And can you give us some indication of the kind of the scale of their footprint? I mean, is this a company I would assume that as if it's one of the top tier would have 30 plus type data centers.

Is that reasonably accurate?.

Well, I don't know about the 30 plus, but I can tell you that it’s one of the top 10 players. It's not one of the big three in the U.S. And it's not one of what is considered to be the big guys, which includes the top three in the U.S., and then I think the top three in China. But it's very close thereafter.

So I guess that you -- I mean there aren’t few many in there. Within the top 10. And I don't know exactly how many data centers they're having, but definitely it's not just a single data center that all of these are going into..

And then, the top tier server player.

So is that something that is in contract negotiation mode, or is that something that's in discussions, or where are you with that?.

No, let me explain what I meant by that, because maybe I was not properly understood. We have the customer, the customer is a cloud player and the customer is building its cloud. Now the customer has actually contracted this server player and this server player is the guy who is buying, who is building the cloud physically.

That's the guy who provides the server and that's also the guy who is building physically the data centers, the various data centers. That of course, the customer itself is coming with its software and everything else and operation and services and whatever on top of that.

But this Tier-1 server guys is the one who is actually building their I would say, I wouldn't even say I'm not sure whether it's the full data center or including the air-conditioning or not. But whatever has to do with the servers and the networking et cetera, this guy is actually building it for our customer.

That also means that in terms of the formal POs that we're getting, we're getting the POs from this Tier-1 server guy, not directly from the customer. At the beginning, we got these POs from the customer, because he wanted us to run. But once he has established all the arrangements there, he has arranged for this server guy to place the POs from us.

So we are formally shipping these cards to the Tier-1 server guy. He's the one who has taken the cards, putting them in his servers and then it builds the data center for the customer. That's how we have the relationship with this Tier-1 server guy. So we have an agreement with him concerning to the delivery of these cards.

But because of that, there is a relationship there, and we're talking about a lot of things. And that's created an additional potential. We are not saying that at the moment, there is anything specific which is which we're working with this Tier-1 manufacturer, or server manufacturer other than delivering the cards for that giant customer to him..

And so you've sent the card to this server player, they integrated into what they ship and install at the cloud players..

That’s correct..

They have other customers you might be able to enjoy the benefit of expanding this to their other customers..

Exactly, exactly and we are talking to them about that, because that opens the relationship, they see how we work, sometimes they have problems at the data center, which may be related to their servers, or to the architecture and we send the team to help them. So all that is building a relationship with them..

I see.

And do you have any sense of how long it might take before they were to percolate up into an expanded customer beyond the original cloud player?.

Well I mean, this is difficult to say, I mean, something could take a long time, but on the other side, sometime opportunities are coming quickly under this scenario..

Okay..

I am not expecting anything major with this customer happening and with this Tier-1 server manufacturer happening in 2017, there could be some much smaller opportunities with him, but I don’t expect that suddenly another this kind of a project will emerge during this year..

Now going back to the cloud players if I could, the -- obviously you have got one major one here, do you think there is a reasonable probability that we could announce an additional cloud win before you ran or do you think that’s the 2018 kind of….

Let me say that, I do believe we would have more wins in 2017, but they are not -- they are going to be far from the magnitude of that one. High magnitude or high volume wins similar to the one that we are talking about right now would not happen in 2017, I would say even more than that because I don’t want to mislead anyone.

Not even when I am talking about big wins, not necessarily they’re going to be that’s big, here we are talking over $30 million and as I said it could be very well over $30 million. So there could be many other very big wins, but still not that big. And I don’t think that any of that big ones design wins is going to happen during 2017. .

I got it. Just one further one, on the customer that you talked about with the flash storage that seems like an area that you haven’t really penetrated in the past.

Is that an area that you think could blossom into a significant contribution overtime? And then just to round it out can you give us the 10% customer concentration in the quarter and kind of what those two or three players might have looked like? Thanks. .

So 10% customers Eran will respond..

Okay, I will start with the second question and then to Shaike for the first question. During the first six months of 2017, we had two customers above 10%. One of them is about 20% and the other one is about 15%. Now to the first quarter Shaike please. .

Okay. So to the first question, I believe that there definitely is a potential within the storage market for us moving into the future, I think that most of that potential is really, I mean, not most but let’s say this potential the way that I look at it right now could be divided into mostly two areas that I see right now.

So one area is compression utilizing Intel’s latest technology for compression, which is where we had this specific design win that I mentioned and that you mentioned in your question. So that’s definitely one area.

Now this is new technology which is just being released so we are at the beginning of that process this design win that we had is kind of unique because actually it was achieved before even the technology was formally released, which is I am -- I did not at the design win we did not specify any details about that.

So that’s one area, the other area which is an area where we believe we would have potential not only in storage, but in storage as well is the area of implementing FPGAs to a variety of solutions within the storage and this is an area that we are active.

I have mentioned I think in previous calls as well that we are very active in terms of working with a variety of guys on FPGA based solutions to enhance the capabilities of their solutions for cloud, telecoms, NFV, et cetera and storage.

So this is another area where I think storage could become significant for us, just like you’ve mentioned I mean that is correct upon till now we don’t have storage clear which is one of our giant customers.

We do have storage wins and some of our customers are definitely storage players and they can grow, but we believe that the future in terms of technologies both this new Intel technology as well as the FPGA may result in additional wins even significant ones in the storage market..

Thanks, I’ll see the floor..

The next question is from Robert Sussman of Bentley Capital. Please go ahead. .

Good morning.

Can you talk about the difficulty of resolving the remaining issues with your large customer design win in the cloud area and what a reasonable timeframe might be to get to the end of those?.

So, first of all I think that as we are scaling up with these customers and the customers are growing. So, I think it would be -- I mean as long as the customer is still growing with us and we find ourselves doing more and more with him there still would be challenges.

But still I mean let me say something, I think, that there are still challenges, but I would although say that I’m not anymore concern by these challenges in terms of whether or not how much of a risk these challenges present to the project itself.

There are challenges, I mean, if we need to scale up immediately with significant quantities et cetera then these present challenges, talking about these kinds of quantities and I would say quick upside that we’re getting with this customer. Now going back a little bit and once again to give you a little bit more color about the kind of challenges.

So, there were basically I would say two types of challenges in this huge design win I would say. So, the first one was very, very technical. It was built up of quite a few elements of technical difficulties.

I would say that in terms of the technical difficulties we are actually I can say that we have resolved all the known technical issues within this project not all of the solutions are implemented in the manufacturing already, some of them it would take both time to implement the solution, which really resolves all the problems and bring indeed the production level.

But I think that I could say that right now that we are sure that we have a solution in terms of the technical issues which are the part of these projects. So, this part of the challenges, I think we could say is, we have resolved it it’s over.

Now what is remaining is mostly challenges related to manufacturing, to quality to get all this done in a reasonable times schedule and up to customer satisfaction and not -- and making sure that the customer himself, which may have challenges internally to himself is happy with what we’re doing and what we’re giving him.

I think that these are challenges that we have been coping with in the past and we would be able to overcome in this case as well. But the challenges are mostly related to the scaling up and capacity rather than real technical issues..

Okay.

One last question, is there anything unique about this particular the way this particular cloud customer going about this product that would not be applicable to other large cloud players and then therefore lead to other large design wins?.

I think, I am not sure that I can elaborate on what is unique right now at least with this customer, but there is definitely something unique in the approach of this customer to the cloud.

And this customer believes that once he is out with his cloud full scale and he would be able to provide performance, which is actually guaranteed performance to his customers in a way that would be better of them any other cloud player.

And once this becomes evident others would move into the same or into a similar cloud architecture that this customer has decided to move to and at that point we would be in a very good position. .

Okay. Thank you, very helpful. Thank you very much, congratulations..

There is a follow-up question from Alex Henderson..

Thanks.

Didn’t get the headcount earlier, can you tell us what your headcount is?.

Yes, the headcount at the end of the quarter was about 255 in place..

And so, as we are looking forward into the end of the back half, should we expect any change in the trajectory of your OpEx and I assume that the cloud ramp has lower margins than the corporate average, which is why you gave a wide band of gross margin guidance in the past.

Is it reasonable to think that we should still see a little bit of pressure on gross margins, but OpEx leverage kind of sustaining the operating income above the 20% range, or any guidance on that front would helpful..

Yes, so what I would say is, yes we would feel some level of pressure on the gross margin, just like you mentioned. On the other side, we will be growing the revenues so we are definitely planning to grow the revenues. I do believe that there could be some increase in OpEx as well.

But overall I think combining the increased revenues together with the even slightly less or slightly lower gross margin, with the moderate very nothing dramatic increase in OpEx than I think that you may be able to see similar or maybe even the little higher.

I don’t want to say for sure about that because you know I mean the GP itself is also a combination of our result of the mix of the project of the various products and so on and so forth and there are even one time issues typically within the OpEx.

But in general I think that if you grow the revenues, GP even slightly lower, OpEx more or less the same that’s where your model should take you..

Right. So I had the couple of emails come in from my clients asking me to ask you, why you filed the shelf registration, so if we could just cover that subject, I assume that that was an extension of the one you had before but….

That was just an extension of the one that we had before. .

Okay. Is there any circumstances where you might may need to do that, whether it would be under the scenario where you saw a sharp acceleration in working account needs as a result of demand growth or is it just….

Of course you can never tell, but right now we did it just at an extension of the shelf that we had before..

Okay, I think that solves that question. That’s all I had, thank you..

Thank you. .

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

Good morning Shaike, and congratulations to you and your team on good results so far. Question about your generation number one solution for this new $30 million potential customer.

You mentioned how in generation number two, you hope to include FPGA functionality, can you explain just what sort of benefits in terms of offloading security et cetera, you hope to achieve in generation number two of the product.

And what sort of performance improvements in various ways it will offer your customer versus the generation number one product?.

Well I think it would be easier to explain through generation one. I mean generation one, we used silicon, which is I would say it’s ASIC, it’s fixed silicon. You can use whatever there is and that’s what you can use.

So it some sort of a switch, I would say switch and a mix silicon and whatever there is that’s what you can do, you cannot add for example any security offload into that or any other offload, other than what is allowed by whatever is in the switch there.

Once you put an FPGA into there than your flexibility grows significantly and also the added value that we can provide grow significantly because then it’s not just a silicon itself, but also actually the IP that we put into this silicon. So with an FPGA, you definitely can do a lot more than what you can do with the current generation.

Now one more thing to add about that, it's not as if it is our idea just our idea coming out of the blue and talking to the customer about FPGAs. The customer himself understands that, so this issue of maybe next generation is going to be FPGA is not just something that we invented, but rather the customer understands that.

So that's why we believe that this is definitely a potential. Now that being said, I think that both the customer and us we all understand that an FPGA type of a product is typically more expensive to a certain extent than just an ASIC.

So that would mean that not only it would hopefully allow us to become the vendor of this solution for the next generation, but also increase the volume and the volume, but actually the amount of revenues that we're looking at.

So this is something that we're beginning to discuss, beginning to have ideas beginning to prepare proof of concept and so on and so forth.

Just would like to tell everyone that this is a long process, I mean solutions which are based on FPGAs, they do take time before they become a mature solution that could be really productize and becomes part of the solution in production..

Great, thank you. And then lastly, your large customer that's implementing your solution that helps them with performance in their various data centers.

Can you give us a sense of with your help, how materially and with our different architecture, how materially their data centers are performing differently from conventional data centers in the industry?.

Well, I don't have any numbers that I can give you. The only thing I could tell you is that when we're talking to them, they're saying that the difference is significant..

Okay, great. Well, thank you again. .

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

Thanks for taking my question. Several of my questions have already been answered, as it relates to your large customer. But I wonder of you could talk a little bit about SD-WAN market. I think we had some design wins last year, I haven't seen many early this year.

So could you just speak to that market and where we are?.

Yes, okay. So SD-WAN, in terms of our planning ahead is indeed one of the legs that or one of the important legs of our strategy.

So if I'm talking about whatever we do which is on top of our I would say standard types of accounts, then this is obviously include things that we do with the product and with the like of the customer of the big customer that we talked about. I mentioned FPGAs because I believe this is going to be another major leg.

And SD-WAN is definitely the other very significant leg that we are pursuing. And I can tell you that we have several accounts in the pipeline, where we are pursuing SD-WAN opportunities. And I believe that this is one of the areas which is very interesting for us and get you right, we have not announced any other design wins.

But a part of that is that I think that the business model there in some cases is a little bit different. And I'd like to explain a little bit. One name that I believe that our relationships with has been announced is a company by the name of Versa. They are one of the pioneers within Versa Networks. They are one the pioneers within the SD-WAN market.

Now their business model was that they have qualified our products to run with this offer. But they're not unlike the regular OEM business model, they are not at the moment I mean, their business model is that they just recommend our appliances by the way not only ours, but just to be perfectly clear.

But they recommend our appliances to their customers. Now their customers are some of the biggest telecoms in the world and we are now talking to some of these biggest telecoms of the world for the purpose of SD-WAN services.

Now getting a design win with these major telecoms as I have mentioned, some of the biggest in the world, that is something which is taking time. So the design win that we have announced last year was a design win which was more of, I would say traditional OEM type of an SD-WAN vendor.

And that is that the one our customer which developed the software for SD-WAN is selling to telecoms his full solution, which includes the appliances, that is why even though SD-WAN is an emerging market and is a quick market that is one achieving this design win was relatively quick.

Once you move to the other model and in this model we are now talking directly to sell these telecom customers achieving a design win will take more time, but once we get that, it’s going to be again or at least has the potential of becoming a very major design win.

So with that I just would like to add one other part and this something that we have not announced because not even -- we do not even know exactly where this is going. But please note that we are -- we continue to deliver products to companies which used to be in the WAN optimization market.

Now every company that I know which was in the WAN optimization market is now moving its offering to be not only a WAN optimization market, but also an SD-WAN offering. So some of our solutions may grow into SD-WAN without us knowing it either.

So that’s just a comment at the end, but the first part of my response to you is I believe the straightforward answer to your question. We are now talking mostly to telecoms and service providers with respect to the SD-WAN market that would take time, but the deals that are being discussed there are pretty significant..

Alright, well listen I really appreciate the color. Thank you..

The next question is from Joseph Tishby [ph]. Please go ahead. .

Good morning and congratulations for another great quarter. I have been a shareholder of the company for many years, going back to when your yearly revenues were about $10 million.

And of course I have seen a number of major moves in the stock, I believe it’s fair to say that the stock is still very liquid and one of the reasons for that is perhaps the relatively low number of shares outstanding.

My question is have you considered or are you considering any stock split to improve the liquidity?.

Well I would say that as you can imagine, I mean, everything like that have advantages and disadvantages this is always being discussed, at the moment there is no decision to go for a split..

Okay, thank you..

There is a follow-up question from Robert Sussman. Please go ahead. .

My question is about the guidance for the third quarter, if the large cloud win is going to ramp considerably in the second half, you are calling for a relatively modest increase in third quarter revenues versus second quarter is it because the guidance is conservative or are there other areas or other products where the volume is decreasing third quarter versus second?.

First of all let me say, that what we’ve said is that the second half is going to be better than first half. And obviously we are ramping up, but how much exactly we did not say as a part of that. Now we are seeing the biggest win ramping up, indeed the second half is going to be better split between the quarters.

As to what exactly would happen with the other things, it depends on -- I mean, every quarter is a different quarter from that perspective. It could very well be that everything is growing, it could be that some of them is less and some of them is more in the third quarter.

The only thing we did say in that aspect is that combining third quarter and fourth quarter it’s going to be higher than first quarter and second quarter. Please keep in mind as I have mentioned before that scale is up with this big project and big design win I would say has some challenges.

So I would add that we are in one area we could be a little bit more conservative and in other one we are optimistic. Overall that's our guidance right now, I think that overall you can look and say that in most cases we’ve been relatively conservative in our approaches.

I definitely hope we will turn out to be conservative in this quarter as well, but I cannot say about that right now like we are too conservative or whatever..

I understand. Thank you very much..

[Operator Instructions] The next question is from Aton Ifyoni of Ifyoni Portfolio Management [ph]. Please go ahead..

I wanted to ask when I do the numbers Q2 ‘17 over Q2 ‘16 and if I extract what seems to be the volume of the large order, of the large contract. It seems that everything else is down a little bit.

Is that correct?.

Well, mathematically you’re obviously right. I think is what should be the interpretation of this mathematics. So, this design win is the part of our standard business, and I think it is not right to just look at it separately and say, okay, let’s look at that and not the others design wins of customers.

We have about 150 customers and more than 400 design wins coming from various target market, which all together build our success. Always there had been and there will be ongoing change in the contribution of the various target markets to our business.

Now, when the cloud trend is dominant, it is only natural that we get more and more revenues from this market segment. The same is true for cyber security, the same was true during the time of significant growth that we had when WAN optimization was up a few years ago. So and right now WAN optimization maybe a little less and so and so for.

So the advantage, the overall advantage is that these various target market segments like cloud, cyber security, NFV, SD-WAN they are growing right now and they need -- they lead to the growth and we are achieving this growth with the same technology capabilities and IP that we developed for many years even for the other markets as well.

So, I don’t think that just taking one of these and saying let’s do that and let’s take that apart and look at all the others is the right thing to do. Maybe if you take two of them, then the picture would be different again..

Okay, I understand.

And the $8 million encryption contracts for ‘18 that you announced the prior quarter that’s still in the planning, correct?.

Yes, just one clarification. The way that we work with our customers it’s not a contract. We have a design win with our customer and this design win projected that the revenues from this agreement in 2018 would be $8 million. By the way, its current projections are higher than that. But it still needs to happen on the other side.

So, it’s not a contract with a fixed amount of revenues..

And the first dollar revenue from this design win, when should we expect please?.

Has been already..

So, it’s already running. .

Yes..

And so expect to ramp up to more than $8 million in ‘18?.

That's correct..

I see.

On the receivables there is a little bump but nothing to worry there, is that right?.

Nothing to worry..

Okay, thank you very much..

The next question is from Shawn Boyd of Next Mark Capital. Please go ahead. .

Hi, thanks for taking the question. I just want to go back to something earlier, and we may have addressed this in the explanation on the server, the top tier server win. But if we look at the announcement or discussion out there also, we talk about the big cloud player with a $30 million ramp of going to $30 million plus.

When you look at these other opportunities, whether it's with that player or with different companies, with additional players, are we talking of similar magnitude? And can you in that do we see other $30 million opportunities with that existing cloud player, or only with other companies?.

Are you asking if we can double the magnitude with this customer or only with other customers? I'm not sure I understood the question..

No, you just summed it up very well.

What I'm trying to understand, can you actually double the revenues, can you get another major win with that cloud player, if we got a $60 million customer?.

Yes. .

Okay. And when you talk about other potential customers that you could do, you could have a similar win with helps us. Is this one or two other players, is this 10 players, help me understand that. .

Let me put it this way, there are about 10 players, but definitely not all of them are going to become $30 million player per year. Some of them are big, some of them are big but not that big, and some of them are less. Most of these customers are relatively, if we get the win they would become significant customers.

But I'm not necessarily talking -- I'm not talking about 10 customers who would be able to provide us $30 million per year. Some of them may, but the 10 that I mentioned are 10 cloud players significant important players, but I'm not talking about $30 million for each..

Okay, I understand. And how long will it take to a point where recognizing that we're moving along with this. You made the point earlier that the market will once this scales up, there should be a performance improvement that the market will identify.

And at that point, you may then see some of these other cloud players recognizing that and wanting to have that technology as well.

So my question would be, is that something that happens within next couple of months, is it something that happens a year out? Where does that performance improvement become evident and really trigger that additional interests from other customers?.

Well, let me divide my response to that into two parts. First of all I believe that the performance advantage of this architecture by this player would be probably become assuming that they're successful that would I guess become evident in about a year from now, something like that.

However, this is not the only mechanism to get some other design wins within the industry that you're talking about. Because we can get some other wins through just demonstrating what can be achievable by meetings with other potential customers et cetera.

Not only that, this is not the only solution, which could be responsible for some of the design wins that we're talking about. So on the one side I'm saying no, we don't need to wait in order to move forward with other players for that performance advantage to be clear to everyone in the market before we move to other customers.

Now that being said, I'm saying that whether it is this solution or other solutions that we're promoting such as FPGAs or compression or whatever, these vendors are big companies, they take time to be persuaded, which is why I was saying that we're not expecting any other such major design win during this year.

And that's not just because the advantages or the performance advantages would not yet be clear to everyone during 2017. It's because the process is relatively long. But we're not just waiting now for the performance advantage to be clear to everyone before we go and talk to other customers about other potential win..

Got it, that's very helpful. Thank you..

There are no further questions at this time. Before I ask Mr. Orbach to go ahead with his concluding 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 on our next call in three months' time. Good day..

Thank you. This concludes Silicom's second quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect..