Silicom Ltd 2026 Q3 Earnings Call

Thank you, operator. I would like to welcome all of you to Silicom's third quarter 2026 results conference call. Before we start, I would like to draw your attention to the following safe harbor statement. During this call, we may make forward-looking statements within the meaning of applicable securities laws. These statements may include, among other things, statements regarding the company's strategy, market opportunities, customer demand, product development initiatives, industry trends, expected deployment of the company's products and solutions, financial outlook, revenue expectations, margins, operating expenses, profitability, and future growth opportunities. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such statements. These risks include, among others, those described in the company's press release issued earlier today and its filings with the U.S. Securities and Exchange Commission, including its annual report on Form 20-F.

The company undertakes no obligation to update any forward-looking statements. With us on the line today are Mr. Liron Eizenman, President and CEO, and Mr. Eran Gilad, CFO. Liron 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. With that, I would now like to hand the call over to Liron.

Liron, please go ahead. Thank you, Kenny, and good day, everyone.

I am very happy to share another truly outstanding set of results for the third quarter of 2026. Results that surpassed our guidance and that clearly show that our strategic plan and our business are performing significantly better than we planned. Very importantly, this quarter, we returned to profitability well ahead of our plans. As we look toward the end of 2026 and into 2027, I am excited about Silicom's continued momentum, the clear visibility we have, and the vast opportunities before us. The third quarter was a truly exceptional one for Silicom, showing a strong acceleration of the growth inflection that we have been talking about all year. Revenues for the third quarter came in at $26.7 million, up an outstanding 71% year-over-year, and ahead of the $25 million-$26 million guidance range.

Equally important, thanks to strong execution and the inherent leverage in our business model, we have returned to profitability with positive non-GAAP net income this quarter, well ahead of our initial expectations. Our revenue growth is fundamentally volume driven, fueled by higher unit shipments across our core portfolio and accelerating customer deployments. You can see the acceleration in our business clearly in the trajectory of our revenue growth over the past few quarters. In Q4 2025, we reported 17% year-over-year growth, followed by 33% in Q1 this year, 59% in Q2, and now 71% in Q3. Our guidance for the fourth quarter points to continued very strong growth at a similar level of 66% year-over-year at the top of the range. Our business is now built on a highly predictable platform of recurring revenue based on years of design win momentum.

As our recent design wins ramp up, they add to the base, and that is what is driving this sharp inflection in our business. With this strong momentum, we are once again increasing our revenue guidance for the full year 2026 to a range of $96 million-$98 million. This follows an increase in our 2026 guidance last quarter and is another indication of how we are performing well ahead of our expectations. As I often discuss, the long-term growth and strength of our core business are best tracked via our design win momentum. The design wins we secure today drive our growth for years to come, which makes them one of the most important indicators of our future performance. I want to discuss why our design wins translate so powerfully into revenue growth. First, every new design win is added to our existing base of business.

This base of active design wins continues to generate a stable, recurring stream of revenue, and each new win adds further revenues on top of it. Second, many of the design wins we have secured in recent years are now in their strong growth phase, ramping up from initial orders towards full-scale deployments. It is the combination of those two effects, new wins adding to the base and recent wins ramping up within it, that is driving the strong revenue growth you are seeing today, and that gives us great confidence in our continued growth ahead. As you may remember, at the beginning of the year, I announced that for 2026 as a whole, we were targeting between seven and nine new design wins. I am very pleased to report that we have secured eight Imagine our total for the full year 2025.

With two months of 2026 still to go, we have already exceeded the low end of our target range, and we are on track to meet or even exceed its upper end. I want to spend a few moments discussing the two design wins that we secured during the third quarter. In July, an existing blue-chip customer awarded us a new design win for a custom high-speed server adapter, which we engineered to its exact specifications for a distinct use case within its infrastructure. Having already integrated one of our off-the-shelf server adapters, as well as an FPGA SmartNIC, this customer came back to us for a fully custom product. This win is expected to grow our total business with this customer from approximately $3 million in 2026 to nearly $10 million next year.

More recently, in September, we secured a design win with a new customer, a tier 1 cloud-based cybersecurity giant, for a Silicom edge networking device with an integrated 5G wireless connectivity. After evaluating our solution for many months, the customer selected Silicom specifically for the strength of our integrated cellular connectivity, which proved to be the key differentiator in a highly competitive process. The customer has already placed an initial order, with ramp-up expected to begin before the end of this year. At full ramp-up, we expect revenues from this design win to exceed $5 million annually for this device alone. In parallel, we are evaluating additional higher-end edge devices with this customer, including a GPU-integrated edge device designed for edge AI use cases. Those wins are a good example of how our strategy works.

We continue to grow our business by securing design wins with both new and existing customers, and each successful design win opens the door for further wins, often with satisfied customers coming back to us for additional products and additional use cases. Those kinds of wins reflect the long-term trusted supplier relationships we have cultivated over many years of operations with leading blue-chip customers. Importantly, together, we expect them to make a significant contribution to further growth in 2027, on top of the very significant growth we are already delivering in 2026. Beyond the wins already secured, our pipeline of opportunities remains very broad and deep, spanning our entire product portfolio, edge systems, SmartNICs, and FPGA-based solutions, as well as AI inference, white box switches and post-quantum cryptography across both new and existing customers.

We expect this pipeline to continue converting into design wins, laying the ground for sustained strong growth well beyond this year. Turning to our outlook for the fourth quarter. Based on the predictable recurring revenues from our design win platform, we expect revenues in the range of $27 million-$28 million, representing 66% year-over-year growth at the upper end of the guidance. For the full year, we have raised our revenue guidance to a range of $96 million-$98 million, representing 57% year-over-year growth. This is the second time this year that we have raised our full-year guidance, which stood at $82 million-$83 million just six months ago. I also want to emphasize a particularly important milestone. Last quarter, we told you that we expected to return to quarterly non-GAAP profitability during the second half of the year. We have already achieved this in the third quarter.

Driven by our strong execution and the significant inherent leverage in our business model, and with the strong growth we expect in the fourth quarter, we expect to build significantly on this profitability in the current quarter. This is an important turning point for Silicom, and it shows the earnings power that our growing revenues are starting to unlock. Let me now turn to the AI inference market, where we continue to see tangible and significant potential. The AI networking and interconnect market is highly dynamic, requiring rapid architectural changes. This plays directly to our core strength of quickly tailoring sophisticated solutions. As a direct result of those fast-moving dynamics, our pipeline is highly active. We are in final discussions with a new customer about a major evolving use case, and we expect to reach an agreement very soon.

Conversely, another prospect recently suspended a project to change their strategic direction. We have a strong track record of thriving in exactly this kind of fluid environment. To secure their supply chain, AI inference players are increasingly adopting dual-source strategies. Because those customers anticipate needing very high product quantities in the range of tens of thousands annually, they believe they will have sufficient volume to support both sources. This shift represents a strong long-term net positive for Silicom, opening up far more opportunities than risks. While one of our current customers now has a dual-source option, this broader trend is already driving new pipeline growth, including at least one new prospect currently evaluating us for their dual-source plans. We are uniquely equipped to capture those expanding opportunities.