DSP Group, Inc.
Q1 2020 Earnings Call Transcript

Published: 4 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 DSP Group Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Monday May 4, 2020.I would now like to turn the conference over to your first speaker today, Tali Chen. Thank you, please go ahead.

[Tali Chen:]

Thank you. Good morning, ladies and gentlemen. I'm Tali Chen, Corporate Vice President and Chief Marketing Officer at DSP Group. Welcome to our first quarter 2020 earnings conference call. On today's call, we also have with us Mr. Ofer Elyakim, Chief Executive Officer; and Mr. Dror Levy, Chief Financial Officer.Before we begin, I would like to remind you that during this conference call, we will be making forward-looking statements about our financial guidance for the second quarter of 2020. Our belief that our technologies, namely Unified Communications, Voice User Interface and Connectivity Solutions will become more essential and uniquely position us to take advantage of trends associated with remote working and social distancing due to the pandemic and as a result we will emerge as a stronger company, optimism about our adoption of ULE DECT and optimism about our engagement pipeline and customer product launches.Furthermore, it should be noted that the full impact of the COVID-19 pandemic continues to evolve. As such, the full magnitude that the pandemic will have on the company's financial condition, liquidity and future effects of operation is uncertain. The following discussion by the company management about the company's financial condition is subject to the future effect of the COVID-19 pandemic. In addition to the COVID-19 pandemic, important factors that could cause actual results to defer materially from the company's expectations are disclosed under risk factors in the company's Form 10-K and other SEC filings. Forward-looking statements are made only as the date hereof. Except as otherwise required by law, we assume no obligation to update any forward-looking statements.Now, I would like to turn the call over to Ofer Elyakim, our Chief Executive Officer. Ofer, the floor is yours.

[Ofer Elyakim:]

Thank you, Tali. Good morning everyone, and thanks for joining us today. I hope that you had the opportunity to read our press release which we distributed earlier this morning. I would like to open this call by thanking all of our employees, customers, and partners for their continued support during this unusual period.The COVID-19 pandemic presents an unprecedented global medical, financial, and human challenge, affecting every aspect of our lives including of course the semiconductor industry. In this call, we shall elaborate on its implications for our business. We will begin by reviewing our results for the first quarter, then comment on the progression of our business plan, and finally provide context for our outlook. Dror will then provide you with details about our financial results for the first quarter and our projections for the second quarter.At first, the COVID-19 outbreak was confined solely to China and mainly affected our customers’ supply chain operations as factories failed to reopen after the Chinese New Year holiday. Those factories experienced a prolonged shutdown and gradually resumed operations in early March. Moreover, in March as the outbreak expanded west and in compliance with social distancing and lockdown regulations aimed at slowing the spread of the COVID-19, we moved most of our employees worldwide to a work from home model, a transition that went quite smoothly.Throughout this time, our ability to deliver products on time and serve our customers remained intact. Meanwhile, by the end of the quarter and to a larger extent and what is now the second quarter, demand for consumer electronic products has softened due to those same social distancing and shelter-in-place restrictions. Despite these headwinds, we were able to generate $28.2 million in revenues for the first quarter coming within our original guidance range and essentially flat year-over-year while declining by 3% sequentially.Moreover, revenues from growth initiatives reached $18.2 million, growing by 3% year-over-year while declining by 7% sequentially and accounting for 64% of total revenues. This achievement drove our GAAP and non-GAAP gross margins to 50.9% and 51.4% respectively. Moreover, during the quarter, we met an important milestone and paid out an innovative edge AI SoC reflecting our growing confidence in the success of our business. This also drove non-GAAP R&D expenses to peak at $9.6 million in the first quarter.For the remainder of the year, we do expect our R&D expenses to run at a more moderate run rate aligned with our historical spending. While some aspects of the pandemic on businesses and consumers will be temporary, this crisis will certainly have long-term implications for how we live, work, and interact. In such an environment, we believe that DSP Group's technologies will become even more essential. We have developed world-class technologies and innovative solutions for three market verticals, namely Unified Communications, SmartVoice, and SmartHome, which has become the growth engines of the company, each of which is increasingly more important in the new paradigm, under which we will be living and working.Now, let me elaborate. In the Unified Communication, the global mandatory shelter-in-place orders have created a surge in the number of individuals working from home or other remote locations. This has created an increased demand for UC products such as headsets, phones, video and audio conferencing systems to enhance workforce efficiency and productivity. On the Voice User Interface, our SmartVoice solutions are already powering over 80 different products from tablets to light switches, remote-controls, cameras, and many more, and are well positioned to benefit from the rising need for adding Voice User Interface to many more devices due to increasing preference for contactless, germ-free, voice-enabled, human-machine interface.On our IoT Connectivity Solutions. our DECT and ULE products are addressing the growing demand for reliable IoT connectivity and two-way voice communications for the SmartHome market. Amid the COVID-19 outbreak, voice calls made from home increased significantly which should drive demand for the integration of DECT and ULE into home gateways to ensure high quality of service and full home coverage. Moreover, even our legacy cordless business can fare much better and realize a lesser decline rate through the much-increased usage of phones at home.While we are confident about our engagement pipeline and the potential of each of our growth initiatives, looking forward we may face some near-term softness mainly related to a shortfall in consumer spending.In summary, we are enthused about having an important role to play in helping people everywhere transition to a safer and more productive work and home environment with new innovative tools for communication, collaboration, and touch-free device control. We will continue to execute our technology’s solution-based strategy through this crisis and emerge as a much stronger company when it ends.Now, I would like to address each of the business segments starting with SmartVoice. During the quarter we generated revenues of approximately $4 million from sales of SmartVoice products, reflecting a year-over-year decline of 4% and a sequential decline of 19%. We attribute the decline to two main factors, both COVID-19 related. The first is associated with the lower manufacturing capacity in the first quarter as many of our customers’ manufacturing partners were forced to extend the Chinese New Year factory shutdowns. Encouragingly, these factories have gradually resumed production and capacity is increasing every week.The second factor resulted from a collapse in retail footfall in Europe and North America in March, and the change in consumer behavior resulting from social distancing and shelter-in-place restrictions. We believe however, that this weakness is temporary and that our SmartVoice solutions are more crucial now than ever, particularly, with voice as user interface moving from useful feature to a necessity.Amid the COVID-19 breakout, the Centers for Disease Control and Prevention in the U.S. and similar bodies in other countries recommend among other things to avoid touching surfaces in public places that have traditionally been high touched, examples elevator buttons, light switches, and many more. Likewise at home, it is advisable to avoid touching the surfaces of shared devices like remote control, switches, alarm keypads, door handles, smart phones, and tablets.We strongly believe that Voice User Interface adoption will accelerate more rapidly as a result of this crisis as we embrace and development new habits faster than we would have otherwise. As adoption accelerates we expect Voice User Interface application to expand into additional products use cases.DSP Group is playing an instrumental role in addressing these needs with our SmartVoice portfolio which is already powering a broad array of applications and products. Moreover, during the quarter we continued to expand our product reach and engagements with leading consumer electronic brands as demonstrated in the following achievements.The first, we secured a strategic design win with a leading platform company that integrated our SmartVoice technology into its newly launched true wireless earbuds. Our solution is ideally suited for such applications as it combines low power, hands free operation, smart AI processing with robust active noise cancellation enabling longer periods of playback and talk time while accommodating the true wireless earbuds ever shrinking form factor.In the tablet and PC market we saw a record number of new and innovative products launched by key partners that leverage our SmartVoice solutions to deliver natural, robust and high quality far field voice activation and two-way voice capability. Lenovo launched the M10 and M10+ smart tabs with far field voice activation based on our SmartVoice SoC. A leading mobile OEM launched a number of new tablet models and BBK launched its S1W tablet all integrating our SmartVoice SoC and incorporating far field voice activation and supporting multiple wake word [ph] simultaneously.In the camera market we continued to enhance our leadership position and were selected by leading security brand for its newly launched outdoor camera. These achievements, coupled with the unique momentum of Voice User Interface adoption continued to demonstrate our ability to drive down power consumption while raising the bar on quality and performance for edge devices. We believe that our SmartVoice business will continue to be a pivotal growth driver powering a broad array of exciting new applications.Moving on to the Unified Communications segment, in the first quarter we achieved revenues of $10.2 million, representing a year-over-year increase of 9% percent and a sequential increase of 3%. Even before the COVID-19 outbreak, we saw a change in the workspace as it evolved towards ubiquitous strains and an increasing need for high-quality voice and video communications.Now global remote work requirements drove more than 600 million users to collaborate virtually using these tools. Work from home is no longer optional. So it is imperative that the tools used be as reliable high-quality and productive in the home as they are in the office. This imperative makes collaboration and communication tools and the underlying technology crucial to ensure efficient enterprise operations and workforce productivity.With so many companies having rolled out work from home policies, many experts say that some of these policies will remain in place also after the pandemic. Over the next few months we believe that more technology companies and unified communication providers will expand their offerings to better support the enterprise as they look to further seamlessly connect the growing remote workforce and facilitate their collaboration efforts. DSP group is at the forefront of addressing these technology needs is well-positioned to intersect with these market trends to our best-in-class product offerings for the Unified Communications endpoints as well as portable terminals, headsets, IoT, Voice User Interface and AI on the edge.In the first quarter of 2020 we saw accelerated demand for DECT headsets, portable terminals and conferencing systems. In addition, during the first quarter we continued to expand our engagement pipeline and secured the following noteworthy wins. A tier one networking OEM selected our DECT for an innovative headset product. Sangoma launched a Sangoma H10 wireless headset based on our DECT solution and ISEIN [ph] launched a desktop Voice over IP phone with a 4G modem integrated based on our [indiscernible] solution. We remain highly confident in the continued growth of this segment propelled by strong market position and our solid engagement pipeline.Turning to our SmartHome product line. During the first quarter we generated approximately $4 million in revenues representing a year-over-year decrease of 5% and a decrease of 15% on a sequential basis, negatively impacted by the factory shutdowns in China during the first quarter. Nevertheless, we believe in the strong momentum of our SmartHome product line and the unique value proposition DECT ULE technology presents to this current environment. Phone calls have made a comeback amid the COVID-19 outbreak.In the U.S. Internet traffic in general is up around 25% from typical daily patterns. At the same time, the number of calls made from home has tripled. In response service providers are optimizing their infrastructure to deal with growth in voice calls. By integrating DECT ULE into their Gateway service providers can soon provide higher quality of service portability, more reliable communications, and full home coverage.During the first quarter, we experienced strong demand for an interest in DECT ULE by service providers as reflected by the following noteworthy development. British Telecom launched its digital and all IP voice offering a next generation home phone service based on our DECT ULE solutions. BT subscribers will benefit from highly reliable, high-definition calls throughout their homes. This offering also addresses Ofcom, UK's communication regulator's recommendation to leverage land lines at this time in order to get a more reliable connection.BTs new offering includes newly launched branded [indiscernible] phones that connect directly to BTs home gateway. In addition to these strategic achievements we expanded our customer based as evidenced by two new service providers that selected our DECT ULE solution and we are expected to launch DECT enabled home gateways in the second half of this year.These service providers can now leverage the new infrastructure to offer IoT services in addition to voice. As an example, Korea Telecom is in the process of leveraging its DECT ULE installed base to offer small businesses advanced IoT services based on our ULE technology. We are also excited about the role that ULE plays in the security market. ULE's advantages include superior edge interference-free spectrum and inherently reliable two-way voice and audio support, all of which are crucial for security products, especially during emergencies when call center or 911 support is required.We see increasing traction and interest among security service providers and in fact the leading European securities provider selected our DECT ULE for its new all in one emergency voice communications symptom. The momentum we have in DECT ULE technology is strong and we expect these trends, coupled with our strong engagement pipeline to fuel expansion of the ULE consistent with additional products and brands, thereby resulting in support of adoption by leading service providers.And now to an update on the Cordless Phone market. Our first quarter Cordless Phone revenues were in-line with our expectations. Cordless revenues declined by 5% year-over-year to $10.1 million and accounted for 36% of our total revenues. We continue to prudently manage this cash flow rich business and reinvest its profit to fuel future growth in our well performing growth initiative.Now for an update on our outlook for the second quarter. To-date our backlog for the second quarter is solid and is indicative of a relatively healthy business activity despite lockdowns and a deterioration in consumer demand. However, we do expect to see an uptick in market volatility and increased uncertainty in some of the markets we serve due to a challenging market environment and unknown dimensions of this economic downturn and its expected impact on consumers and businesses. Hence, we are taking a more cautionary view and widening our revenue guidance range to reflect these dynamics, while maintaining financial discipline and by prudently managing our operating expenditures going forward.We therefore expect our second quarter revenues to be in the range of $25 million to $31 million. The midpoint of this guidance range implies year-over-year revenue decline of 4% while flat on a sequential basis. The midpoint of the guidance also implies that growth initiatives should account for 63% to 67% of our second quarter revenues.To summarize, we are proud that DSP Group has an important role to play in helping our customers transition to safer and more productive work and home environments with innovative tools for communication and collaboration and are excited by the market response to our products and technologies. We believe that these trends and accomplishments will solidify our success also during these challenging times and that we will emerge from this crisis as a much stronger company.Now I would like to turn the call over to Dror, our Chief Financial Officer. Dror, the floor is yours.

[Dror Levy:]

Thank you, Ofer. I will now review the income statement for the first quarter 2020. From top to bottom for each line item and we'll provide the [indiscernible] results as well as equity-based compensation expenses included in that line item and the expenses related to previous acquisitions. Our revenues for the first quarter of 2020 were $28.2 million. Gross margin for the quarter was $50.9. Gross margin for the quarter included equity based compensation expenses in the amount of $0.1 million.R&D expenses were $10.4 million including equity based compensation expenses in the amount of $0.8. Operating expenses for the quarter were $17.8 million including equity based compensation expenses in the amount of $1.7 million and amortization of acquired intangible assets in the amount of $0.1 million.Financial income for the quarter was $0.9 million. Financial income for the quarter included $0.4 million of exchange rate differences related to the accounting standard associated with long term leases. This exchange differences were excluded from our non-GAAP results for the quarter.With income tax benefit for the quarter the net amount of $0.1 million that was mostly a benefit resulting from changes in deferred taxes related to intangible assets and equity-based compensation expenses. Net loss was $2.5 million including equity-based compensation expenses in the amount of $1.8 million, amortization of intangible assets of $0.1 million, income for exchange rate differences in the amount of $0.4 million and a tax benefit effect of $0.1 million. Non-GAAP net loss excluding the items I just described was $1 million.GAAP loss per share for the quarter was $0.11. The negative impact of equity-based compensation expenses on the loss per share was $0.08. The negative impact of amortization of acquired intangible assets on the loss per share was $0.01.The positive impact of the income from exchange rate differences was $0.02 and the non-GAAP loss per share excluding this item that I've just described was $0.04. Please see the current report on Form 8-K that we filed with the SEC this morning for a full reconciliation of non-GAAP presentation to the GAAP presentation.Now turning to the balance sheet. Our cash receivable at the end of the first quarter decreased to $13.9 million compared to $15.4 million at the end of the fourth quarter of 2019, representing a level of 44 days of sale. Our inventory increased from $7.5 million at the end of the fourth quarter of '19 to $8 million, representing a level of 53 days.Our cash and marketable securities decreased by $2.9 million during the first quarter and were at the level of $128.4 million as of March 31st, 2020. Our cash and marketable securities position during the quarter was affected by the following; $0.9 million of cash was provided by operations, $0.3 million of cash was used for the purchase of property and equipment, $0.2 million of cash received from exercise of stock options by employees, $3.4 million of share - of cash, sorry, was used for repurchase of 275,000 share at an average price of $12.2 per share; and $0.3 million was the change in market value and amortization of marketable securities.Now I would like to provide you with our projections for the second quarter of 2020. Our second quarter projections, including the impact of equity-based compensation expenses and acquisition related amortization expenses are as follows. Our revenues are expected to be in the range of $25 million to $31 million. We expect our gross margin to be in the range of 51% and 52%; R&D expenses are expected to be in the range of $8 million to $9 million.Operating expenses are expected to be in the range of $14 million to $17 million. Financial income is expected to be in the range of $400,000 to $600,000. Income tax is expected to be approximately $0.2 million on a non-GAAP basis. Our shares outstanding are expected to be in the range of 24 million shares to 25 million shares.Our second quarter projections include $0.1 million of amortization of intangible assets and this projection also include the following amounts forecasted for equity-based compensation expenses; Cost of goods sold includes $0.1 million, R&D expenses include $0.7 million to $0.9 million and operating expenses in total include $2.1 million to $2.3 million.Now, we'd like to open up the line for questions and answers. Operator, please. Operator, you can open up the line for questions.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Matt Ramsay. Your line is open now.

[Matthew Ramsay:]

Thank you very much and I appreciate all the commentary Ofer, given the unprecedented times we're in. I just wanted to dig in a little bit on the Unified Communications business. To me, it seems like there would be some trends that might be to your favor and also some headwinds in that business with the big work from home trends, I mean you guys have a fairly sizable business there with the big Polycom providers and office phone providers, but obviously the importance of voice calls and people working from home is going to drive some demand for maybe other pieces of that portfolio.Maybe you could just walk us through a little bit the pieces of the Unified Communications business, how much of that goes into on-prem office business? How much of it you might have exposure to that could really transfer to a work from home environment and what the pushes and pulls might be on that business? Thank you.

[Ofer Elyakim:]

Hi Matt, and in fact for the question. So, on the Unified Communication business, our - in a way our business is split between accessories, you've heard about the DECT side of headsets which are extremely important both working from home as well as from the office. We have the conferencing side, so conferencing systems, mainly a voice. And then we have the more traditional IP phones which are split, I would say about 60-40, so 60% on-prem at 40% UCaaS.However, as time progress, it becomes less trivial to really distinguish between the two, because a lot of the models that are being conducted and offered today are in a way offered in two flavors, one for on-prem, the other one for UCaaS. So, I think the UCaaS side, which is the growth driver in the Unified Communications front is for sure stimulating all the market participants to a fully packaged offering for that market as well.So, I can tell you that we have been - I can tell you at least what we've seen from our first quarter and maybe a little bit of what we see in the second quarter, but more so when we are talking with our customers and trying to better understand the way they're thinking about the demand. So, I think that; A, what has happened has happened fairly abruptly without any preparation by enterprises to accommodate work from home mode. And in a way, people or mostly employees have walked away from their office with the equipment that they thought they need for work from home and some others already have pre-installed desk and some also working from home as a standard practice.But what I believe we will see once operations resume and people resume to the office environment is that a lot of corporation's will now invest understanding that working from home and a return of a pandemic or any type of such event could happen, and so the need to equip with the users, with the employees, with many more collaboration capabilities to guarantee that people are as productive at home as they're in the office. This is something that will definitely be there.Number two, what we are also getting and hearing is the fact that since these endpoints are usually, or in most of the time, I'd say probably 90% of the cases are used by individuals. Then sanitation will be also a number one priority, and whenever you get a new person you also put in a new endpoint.And so, the way we're seeing the market evolving is that; A, businesses will have to invest in these - the productivity tools that are these endpoints, whether they're a headset, a conferencing system, an IP phone, a video communication tool, et cetera, et cetera, to enable people to work from home and utilize the infrastructure that the work environment has invested in. This is number one.And number two, that we perhaps will see more rapid replacement of the endpoints, as a result of what I've said, since this is a personal item you may prefer to have a new device sitting on your desk. So, in addition to that, it is just the thought that the number of desks in operation has grown considerably, I would say would also indicate to the idea that more products should cover more and more desks. So, this is in a nutshell what we're seeing, what we saw in Q1 and I think that we're also seeing that in Q2. I would say that there is definitely a greater demand for headsets than there was last year, so this is for sure and you also saw it from some of the design win announcements.But other than that at this very moment we do not see significant headwinds, but again as you can see that when we're looking forward, we're trying to be -- despite the fact that we have a fairly robust backlog that in normal circumstances we would be a lot more bullish. We're trying to be a little more cautious because things have happened in the world and shops are closed and people are at Home and no one is really spending as much as they used to, and that should definitely have an odd effect also on our business. But at least from the fundamentals that we're seeing and from the conversation that we are having, these are the trends.

[Matthew Ramsay:]

Got it got it. Thank you, obviously a lot of moving parts. Dror, I wanted to ask a couple of questions with respect to the guidance, and obviously the visibility is challenging here, but if you might, I guess $28 million at the midpoint on the revenue, if you could give us a little color of how you're thinking about each of the different line items on revenue by division?And then, it looks like the OpEx guidance is down really sharply on a sequential basis. I think if memory serves, there were a couple of onetime costs in the March quarter, but also a pretty big drop off into the June quarter from OpEx. If you could talk us through the moving parts there, that would be helpful? Thank you.

[Dror Levy:]

Yes sure. So first I'll start with the first one, you asked about the distribution of the revenues between the different business segments, so basically I will repeat what Ofer said and that is that we expect growth initiatives in totality Unified Communications, SmartHome and SmartVoice will account for the midpoint is 65% of the total revenues of the second quarter, this is for that one.In terms of the OpEx, yes so it is true. So we do expect that the OpEx in the second quarter will be lower. Again, if you take the midpoint it is about 2 point something or almost $3 million lower than where we were in the first quarter. This is coming from two things, first as you said there were like some onetime discretionary spending that we had in the first quarter.We also, if you had the chance to review our press release, we also related to that over there, that R&D included some spending of discretionary tape-out of a project that basically demonstrates our belief that we still need to invest in our future and to invest in our growth initiatives. So this was like the peak in the first quarter.Looking in to the second quarter, again if you take the midpoint of the guidance, R&D is around $8 million, which is slightly below the run rate of 2019, so maintained the run rate was about $8.5 million. The second quarter is expected to be around $8 million. This is coming both from the fact that we do not have like this discretion one time spending and also the fact that most people are working from Home, also result in some decrease in expenses that relates for example travel facilities et cetera. So looking ahead, we should see R&D spend I would say in the levels of 2019, so this is what we expect for the remainder of the year.So in a way the second quarter is the bottom and then we'll go back to the level that we used to see in 2019. But of course we will always be prudent in a way that we run our OpEx and we will need to see how things evolve on the revenue front and take any action that we will deem to be necessary.

[Matthew Ramsay:]

Thank you very much for the color there. I'll hop back in the queue, thanks guys.

[Operator:]

Next question comes from the line of Jaeson Schmidt. Your line is open.

[Jaeson Schmidt:]

Hey guys thanks for taking my questions. Just following up on the Unified Communications segment, Ofer I know you talked about maybe some structural shifts that are going on in that market, but just curious if you look at 2020, if you think there has been any sort of hole in a type orders going on in that segment in the first of this year?

[Ofer Elyakim:]

Hi Jaeson, so with respect to the demand part, and so I think that during the first half at least this is where we have visibility, we see that Unified Communications performing well as a segment as it relates to demand.Of course not all customers are equal, some are doing better, some are doing worse, but if you ask me with respect to pulling, so if you look let's say Q1 as we have indicated it was a I would say pretty moderate quarter from the capacity from the ability of the factories to deliver and make products as some facilities are not even open today in early May, but most of them have resumed operations or started to resume operations in early March. So, it was quite of a muted quarter from a manufacturing standpoint.I'm pretty sure that some market participants are hoping for - to kind of increase market share and are looking to produce more products and are betting on an increase in Unified Communications demand, some are taking a more cautious view and are more conservative with respect to the demand. If you were to ask me about the level of demand since this is quite fragmented type of chain from us to the manufacturers into the brand into their supply chain distributors and value added referrals up to the end customer, I would not say that there is an accumulation.So, and a pull in today because of certain –or certain degree of concern about the ability to manufacture in the second half, I right now do not see that, actually think and based on the information that is handed to us, I cannot say I can see significant focus of inventories. Inventories could be here and there, but I don't see that as a signal. I think that everyone is carefully calculating each customer, each brand is carefully calculating those steps with respect to their future demand as well as with respect to how much material they want to carry.I think that in Q1, if you ask me in March or maybe April, yes companies did want to get like the top spot in the pecking order and perhaps did provide more orders or more rosy forecasts, but I believe that when we look at where things are in early May and I think everyone is trying to draw their limits or what they want to hold and how much appetite for ordering they have, so I think everyone is paying attention, close attention to what is happening.

[Jaeson Schmidt:]

Okay, that's very helpful. And then looking at the SmartVoice business, I imagine there has probably been delays and push outs giving the manufacturing [ph] uncertainty, but have you seen any cancellations of programs?

[Ofer Elyakim:]

Yes, so with respect to SmartVoice, so as you can imagine, SmartVoice is a fairly and diversified product portfolio. It stretches from, I would say devices that are kind of in high need as we spoke about smart screens and more accessories in the IoT like hearables et cetera. But it ranges to many, many different consumer type of segments with people being locked at home and shelter-in- place restrictions, et cetera.Certain consumer categories are getting hit or impacted by the fact that people are at home and the level of spending, the behavioral pattern of survival mode versus our regular consuming mode changes. So in some categories there could be a significant shift and a slowdown in demand, but in others for instance the smart screens, we actually see a very nice revival in demand and actually a lot of products are actually out of stock, also in some of the collaboration side.If you ask me about order cancellations, orders are usually a binding thing. So, so far we have not seen anything of that nature and I would say that most of our customers who at least the majority of the customers we serve are in a good condition and we will be able to I think to navigate through these uncertain times.

[Jaeson Schmidt:]

Okay, thanks a lot guys.

[Ofer Elyakim:]

Thank you.

[Operator:]

[Operator Instructions] Next question comes from the line of Charlie Anderson. Your line is open, you may ask a question.

[Unidentified Analyst:]

Yes, thank you for taking my questions. Just going back to the backlog it sounded like it wasn't a really good place there, but you're anticipating some weakness or you’re being a little bit more cautious there. I wonder would you be able to quantify the backlog at all, maybe not numerically, but maybe on a year-over-year perspective? And I’m sort of curious to-date have you seen anything push from the backlog and that's why you're being extra conservative or are you just making assumption that some will? And then I've got a followup.

[Ofer Elyakim:]

Yes. Hi, Charlie and thanks for the question. So maybe I'll copy a little bit from like the way, how the backlog is viewed and how we use it. So, I think that in many, many previous calls we did provide this example that usually our - the average lead time that we have for our product is roughly eight weeks. So, that would mean that wherever we are let's say if we're talking about now a month into the quarter, you know we should be fairly, fairly close over two-thirds I would say, well over two-thirds.And so it gives us, the backlog basically in a way gives you the ability to understand where you are vis-à-vis we are the different months of that quarter and what is really missing and do you see a certain pattern that would let's say alarm and tell you that perhaps things are not going as you forecasted. And also we have the missing part of the backlog that we anticipated that will come in the form of the additional [indiscernible] with the due date for the quarter since the average is eight weeks, so there are certain items that are faster, four weeks, three weeks and some that are longer.So, I would say that when I say that the backlog is healthy, it means that when I look at where we were at the same period last year I am actually pretty, the backlog seems higher or more significant than let's say the same period last year, but given the overall atmosphere the fact that most of the retail outlets in the Western world have been shutdown now four almost two months and the ability to get product is limited to online, many of the categories are also out of stock.Usually consumers are of course using online a lot, but online is not the only way to get products I mean many of the categories that we serve there actually the off line is the preferred way to consume this product. And soon it is just us being a little bit more cautious given what we're seeing around us and this is for the first time that we're in such a scene where people have made a wise decision to basically shut down the economy and this will have consequences. It's not that we have seen anything, but I think that we need to be prepared that it's raining we also get wet here. So, this is what I meant by the fact that the backlog is fairly solid and strong at this period of time.However, it doesn't fulfill the entire forecast and because of the uncertainties we don't really know how bookings will be between now and the end of the quarter. All kinds of these unknowns and given also the very special circumstances that we're in and we wanted to take a much more cautious tone and on one hand wider the range because there could be a request for push out, there could be a lot of things that may happen but also to take a more conservative look at the second quarter.

[Unidentified Analyst:]

Okay great, fair enough. Thank you for all that color on that, so for my follow-up question I was curious you did mention that take of the new edge AI SoC chip, I wonder if you could speak to the strategic importance of that chip and the timeline to revenue on a new product like that. Thanks.

[Ofer Elyakim:]

Yes, sure, so as we participate in the market that we classify as a smart voice or voice of user interface, I think we're seeing an evolution, it’s not necessarily just a world in which you need to operate [indiscernible] it is a world in which all your input gets processed on edge devices for a variety of different use cases there, one could be for [indiscernible] dictation but others could be to listen to the environment and detect all kinds of sounds.For instance in our security business in the SmartHome side, one of our customers is not rolling out the sound detection to detect just by audio a lot of certain environmental sounds that are happening at home or at buildings in order to alert emergency systems, let's say a burglar, a gunshot or whatever these sounds are, so it's really about a group of audio inputs that gets processed and analyzed on the edge devices rather than all the time sending this traffic this heavy traffic into the cloud for processing.And for that, we have built and this is something that we have done gradually in the past is basically equipped product portfolio with more capabilities to run these analyses in much more I would say, dedicated tightly coupled accelerators versus running that in the software to enable that, A to deliver a lot more capabilities on an edge device but also to significantly reduce the power consumption especially in devices that are a battery-operated.And this is a real need, just looking back at our script; we mentioned a new 2 wireless product that was recently launched. This product one of the primary considerations was power consumption. In these products, if the power is not meeting the threshold of other competitive devices, no one is going to make a product like that and so the need is to put in a lot more analytics, a lot more smart capabilities but at the same time reduce the power consumption to enable longer talk and playback time.And this is indeed what we’re doing and it's not just to wireless it’s for any of the segments which are battery operated and in our domain a lot of the devices that we serve are battery-operated if you look at cameras, if you look have tablet, if you look at IoT, if you look at smartphones, smart watches, glasses et cetera, et cetera, so there is a big need for both, much lower power but much advanced analytics and this is the part that we are pursuing and this is an evolution where we were in Smart Voice. I hope this color helps.

[Unidentified Analyst:]

Great thank you so much.

[Operator:]

The next question comes from the line of Ari Shusterman. Your line is open, you can ask a question.

[Ari Shusterman:]

This is Ari taking the question for Raji Gill. So, I want to first talk about supply chain disruptions you have experienced. Can you talk about the nature of magnitude of them and also how it's been going in the second quarter in terms of supply? Thank you.

[Ofer Elyakim:]

Yes. Hi Ari and thanks for the question. So, on the supply disruptions, so maybe I will first segment the two supply chains in our business. There is our supply chain, the supply chain that gets involved in taking the wafers and packaging, testing and shipping them to our customers and this supply chain so our supply chain was intact. All products that our customers needed were supplied on time. So there are no issues, on the contrary, excellent execution.On the supply chain of our customers, so from the point that where we shipped the product into the factories and the factories have to produce and make out of them a finished endpoint, there as we discussed during the first quarter, there was a typically a Chinese New Year holiday, Lunar New Year that takes place usually in the first two months of the quarter and right after that holiday, the world started hearing about the news coming from certain parts of China about a new virus, the little one and a lot of the factories did not really open after Chinese New Year.Chinese New Year is usually a holiday of two weeks roughly where most of the factories are shut down and thereafter employees gradually come back and filling the shifts and these factories start to resume operations and usually within a week or two they get back to full capacity. This year it didn't happen. And in a way the shutdown got prolonged and I would say almost one month or maybe one month of manufacturing wiped at least in the places where we're familiar with.In the second quarter right now I believe that the problem has flipped, since I would say that right now from what I know the factories are mostly in operation trying to get to that peak capacity, some are still struggling, but most of the ones that we know are already. But the impact really comes from the end demand. So, I would say this is how we see the different supply chains and the fact I would say Q1is much more all around manufacturing, Q2 is some impact and limitation in terms of end demand, end market demand.

[Ari Shusterman:]

Got you. That's very helpful and you talked about the impact of coronavirus virus on your voice products, you have been seeing an uptick, can you provide a bit more color on this and do you expect this to continue throughout the year particularly for land line?

[Ofer Elyakim:]

Yes, so with respect to our optimism around the larger use of landlines, and I think that we have seen and there was a lot of press around it and around – the significant increase in the number of calls made from home and also in the number of calls made from landline. I think that if such an environment will persist and people will continue to use their home offices a lot more than they have used it in previous years.And the need for more capabilities, additional communication channels will be required not everywhere at home, do you have the right quality of service, whether it's coming from a mobile network or it is coming from Wi-Fi connection. In certain cases a highly reliable source of communication where people can hear really well, HD quality or also full audio quality as well as the ability to be heard really well is the landline, this is one of the sources.We have seen many service providers actually leveraging the fact that people are utilizing more the landline and actually have went with all kind of innovative packages to offers their subscribers the ability for short-term rental of landline at very nice packages. So, I do believe and also from what you have seen in our prepared comments, we did say that a number of new service providers today including - deciding to include DECT and ULE in their broadband offering in order to facilitate and address these needs.And, I can also tell you that a lot of the networks out there were not built for heavy voice traffic. They were built for heavy data usage and also multimedia usage, and the trend that has happened in the last two months is fairly strange or unplanned trend for lot of these network infrastructures and the way to accommodate it in many cases such as in Germany, in the UK, in Spain is to actually advocate by a lot of the regulators to utilize more landlines if you really want to get the best quality and alleviate a lot of the other networks or conducting more data and multimedia.So we don't really know where that will end up, but at least from what we're seeing, we’re optimistic and we believe that we're well positioned to benefit if such a trend will actually really take place and happen, so I think that this is where we're at this point.

[Ofer Elyakim:]

Are there any more questions; and if not, operator we can take the next question.

[Operator:]

Okay, your next question comes from the line of Suji Desilva. Your line is open, you may ask your question.

[Suji Desilva:]

Hi Ofer, hi Dror. So, perhaps, this question may be hard to answer, but is there any geographic color on the demand outlook, Asia versus U.S., Europe, or is it kind of all mixed at this point.

[Dror Levy:]

Yes, hi Suji. So, with respect to the mix and in the mix I think that when you look at our mix where we ship to, this is mostly Asia of course, like any other chipset vendor, but when you look at the end-market demand, I would say that probably two thirds of our demand actually goes to the Western world, so that means in a way from Australia to Europe, U.S., LatAm and maybe one third basically gets utilized in Asia excluding Australia.I would say that right now from at least what we see there would be some level of impact given the macroeconomic reports that are coming with respect to consumer spending. In Asia, I would say there is less of that, but still I think there is a lot of uncertainty and caution with respect to the job market, et cetera. So, I think that at least from our point of view we have a much stronger today dependency on Europe, the Americas than we have on like the domestic market in China for instance.

[Suji Desilva:]

Okay, that's helpful. and then for the sake segments, the second half of 2020 any qualitative puts and takes on SmartVoice versus SmartHome versus Unified Communications, I know it’s hard to actually guide given the visibility but any thoughts there will be helpful?

[Ofer Elyakim:]

So I think that at this very moment and again this situation is very dynamic, we – it’s very hard to predict exactly how it will evolve and what impact it will have on our products. What we did say is that we believe we are positioned well to benefit from these trends, both in a situation where people are changing their working habits and they are dividing their times between home and office and also in regular time.And when we try to do a deeper dive into the second derivative and look at each of the product categories, I would say that in our SmartHome business, we do believe this is much more of a kind of a longer term, a business development. We are very optimistic about our ability to continue and penetrate the security market as we have already started to do, and we have announced the win with ADT.We have a lot more in our pipeline that we believe will lead to design very nice and lucrative design wins that will help us build a much stronger footprint and also a much higher potential for revenues and revenue growth in that business. So, I think that I don't see any concerns there. Yes, there could be quarterly volatility, but I think longer term very solid engagement build-up with very good and leading customers.Unified Communications as you can see right now and this is at least our expectation going forward, it will remain strong. Again, as I said, a lot of dynamics and I think in Matt's question he also asked about that. There are lot of dynamics going on. Very hard to really predict in the end game, but right now, it does look strong also from our engagement pipeline. We feel very confident this business is moving ahead and will continue to grow.And where there is, I would say, more volatility is really on the SmartVoice, which tends to be much more of a consumer-driven business. There right now despite the fact that I believe we are really well positioned in many of the different products, we did see during this quarter some categories that did better and some categories that did not as well.And it is, I think, will be very hard to predict how exactly this will do. I am still very encouraged by the prospects that we have, that we're serving with some of the new products. We just announced this true wireless. I believe that this will signal our entry into the true wireless market which is a burgeoning market opportunity with a lot of units and a great way to build and develop our business. I think that we are - we will see a lot exciting opportunities come to fruition also in the entertainment market, tablets.So, I don't see a problem with the buildup of the design win and the engagement pipeline, but the quarterly demand and volatility probably will still be there. It's harder for me because of a much shorter lead time type of a segment and it is not in the eight weeks, it's more in the lesser number of weeks, but I think that right now I do not really see any concern, but just trying to equip ourselves with the fact that “hey the world is shut down, you need to be prepared.”

[Suji Desilva:]

Okay, thanks for the color Ofer.

[Ofer Elyakim:]

Thank you.

[Operator:]

There are no further questions at this time. Please continue.

[Tali Chen:]

Thank you. Thank you for listening in and for your interest in DSP Group and we look forward to report back to you in 90 days.

[Operator:]

That does conclude our conference today. Thank you all for participating. You may all disconnect.