In the second quarter of 2008, after 17 consecutive quarters, growth was halted for Silicom Ltd. (Nasdaq:SILC; TASE:SILC), as the global crisis took its toll. But even during the toughest time of the crisis, the small company from Kfar Saba somehow succeeded where companies much larger than it failed, and it remained profitable and cash flow positive each quarter.
Now, with the crisis passed and growth returned, Silicom is grabbing hold of a new market, which can double its activities. The company operates in the networking appliances sector, and until now has been active only in routers. Now Silicom is offering a solution that helps routers provide similar capabilities to those of the appliance.
"We've got positive momentum", says Silicom president and CEO Shaike Orbach, in an interview with "Globes".
Silicom provides solutions for network connectivity, and trades at a market cap of around $80 million. Twice in recent weeks its share price has jumped in heavy trade, once by 18% after publishing its second quarter results, and once by 10% after announcing a contract in its new area of operations.
In day to day trading, the company does not attract excessive investor interest, and its daily turnover on Nasdaq and on the Tel Aviv Stock Exchange (TASE) is not high. "We believe that in the end, results do the talking, and if the share price is exaggerated in any direction - we give investors credit that in the end it works out," says Orbach.
Globes: You invest efforts in investor relations, and in attempts to introduce the company to analysts and potential investors?
CFO Eran Gilad: Perhaps we are under the radar in Israel, but we do whatever is necessary in the area, on a low flame and not necessarily ecstatically.
Your image is of a small and modest company
Orbach: "Silicom is a modest company; that is an accurate definition. Anyone who enters our offices understands that. But I hope and believe that when there is a positive trend, the market sees and understands. In recent quarters, we have been in a positive trend, and now we can even say that the market has increased demand, and its not just wishful thinking. The market is returning to its strength."
Silicom's business model is based on OEM (original equipment manufacturer) partnerships with large companies. That is, Silicom's solutions are integrated into the products of those companies, and are sold by them to customers. Check Point Software Technologies Ltd. (Nasdaq: CHKP), for example, is a Silicom customer, and other companies that are believed to be customers include Juniper and Cisco.
The OEM model can create dependence on customers, because Silicom's fate does not only depend on you.
It is correct that if all the big customers will enter a crisis at the same time, we will have a problem. But we are diversified, and our largest customer, in contrast to the situation two years ago, does not represent 30% but 11-12% of sales. In addition, there are other elements of our success. We sell additional products to the same customers, and add more customers all the time. This way, even if the market does not grow, we'll grow.
Silicom's SETAC solution, which it recently launched, opened for it another part of the market, which had previously been closed to it. Orbach explains that in the world of networking appliances, companies that develop applications put them in a "machine", which is the hardware. Until now, the world was divided into two: Standard servers, which sometimes also included Silicom cards, and hardware appliances - "boxes" with modular connectivity. Servers are considered reliable and high quality, while appliances are considered cheap and flexible.
"Our solution connects the two worlds," explains Orbach. "We add our network adapter cards in the server, and turn it modular like the appliance." That way, he says, customers can enjoy both worlds, and Silicom has entered the appliance sector.
The first significant contract which was recently signed, with a leading security company whose name was not disclosed, will give Silicom $3 million of revenue in the first year.
Silicom is part of the Rad group , alongside companies such as Ceragon Networks Ltd. (Nasdaq: CRNT; TASE:CRNT), Radware Ltd. (Nasdaq: RDWR), Radcom Ltd. (Nasdaq: RDCM), and others. Orbach points out that while this does not have operational significance, it has a positive side in terms of accessibility to executives of sister companies when there is a need for advice. "We began to operate in China, and there was no problem calling, for example, the CEO of Radvision Ltd. (Nasdaq: RVSN; TASE: RVSN) and getting advice," he tells.
In contrast to some of the sister companies which decided to delist from the Tel Aviv Stock Exchange (TASE) and trade only in the US, Silicom considered it and decided not to leave the local exchange.
CFO Gilad explains the dismissal of the idea. "I can say that the costs and work hours that the dual listing requires of us are nearly zero. Silicom is Israeli, and trading here allows us to reach institutional investors who won't invest in Israeli companies overseas. In addition, when we listed for trading in Tel Aviv at the beginning of 2006, we had an offering which was very successful, and all the options were exercised. From our perspective it creates a responsibility - we don't take the money and go home."
Published by Globes [online], Israel business news - www.globes-online.com - on August 24, 2010
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