DSP Group, Inc.
Q4 2019 Earnings Call Transcript

Published: 3 Feb 2020

[Operator:]

Ladies and gentlemen, thank you for holding. And welcome to the Q4 and full year 2019 DSP Group 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, and I would now like to hand the conference over to your first speaker today, Tali Chen. 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 fourth quarter and full year 2019 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 first quarter of 2020, revenue growth in 2020, growth initiatives being on an upward trajectory and being final revenue drivers, optimism about our engagement pipeline with strategic customers, recovery of Unified Communications segment in 2020, and momentum in growth of fuel in Europe and the U.S.We assume no obligation to update these forward-looking statements. For more information about the risks and factors that could affect the forward-looking statement made herein, please refer to the risk factors discussed in our 2018 Form 10-K and other SEC reports we have filed.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 begin by reviewing our results for the fourth quarter and the full year, then commenting on the progression of our business plan; and finally, providing context for our outlook.In a short while, Dror will provide you with detailed comments about our financial results for the fourth quarter and the full year and our outlook for the first quarter of 2020. Our fourth quarter results were ahead of guidance on most financial metrics, revenues of $29.3 million grew by 12% year-over-year while declined by 6% on a sequential basis.We ended the quarter with record high revenues from growth initiatives, reaching $19.6 million and accounting for two-thirds of our revenues. This accomplishment drove quarterly GAAP and non-GAAP gross margin expansion to 50.9% and 51.2% respectively.Growth initiatives benefited from solid momentum across all product segments. SmartVoice, SmartHome, and Unified Communications each grew by 21%, 63%, and 17% year-over-year respectively. With annual revenues of $73.8 million from growth initiatives representing 63% of total revenues and driving gross margins to a sustainable level of 50% plus throughout the quarters, 2019 marks the year in which DSP Group succeeded in positioning itself as a leading voice AI and IoT technology company, while maintaining solid engineering and financial discipline.We ended the year with revenues of $117.6 million, flat on a year-over-year basis and despite the demand shortfall in the Unified Communications segment that we experienced in 2019, growth initiative revenues still increased by 15% year-over-year surpassing the revenue growth level in 2018 of 12% and driving annual GAAP and non-GAAP gross margins to a record high of 50.6% and 51% respectively.Lastly, during the year, we generated $10.5 million of cash flows from operations and ended the year with a cash balance of $131 million. We are thrilled by the momentum and acceptance of our new products and technologies and excited about the number of new engagements we have secured with strategic customers.At CES 2020 in January, the voice user interface and AI took center stage, and our solutions were an integral part of that. During the show, we successfully demonstrated our leadership and best-in-class technologies for Voice AI and IOT.Moreover, we presented a record number of newly launched products by leading consumer brands, tier-1 service providers, and leading OEMs integrating our SmartVoice, SmartHome, and Unified Communications products across IoT, mobile computing, enterprise, and hearablesapplicationsand here are a few examples.Today, our SmartVoice solutions are driving voice UI and AI in a broad array of application with over 80 products by 40 plus vendors including Tier 1 brands such as Arlo, Facebook, GoPro, Logitech, Lenovo, Samsung, and TCL that leverage our voice and AI solutions to design and bring to market highly differentiated and innovative products.In our SmartHome segment, three leading Tier-1 service providers selected our ULE product as their primary wireless IoT technology, including Orange in France and ADT in the U.S. and driving more OEMs and ODMs to take an active role in the growing ULE ecosystem.In the Unified Communications, we established our leadership position by securing engagements with all of the top seven leading enterprise OEMs including Cisco, Avaya, Poly, Yealink, Mitel, ALE, and NEC.These strategic achievements, along with our exceptional pipeline of design engagements solidify our success and validates that our growth initiatives will continue their upward trajectory and become the primary driver of our business going forward.Now, I’d like to move on to the business update by segments starting with SmartVoice. During the quarter, we generated revenues of approximately $4.9 million from sales of SmartVoice products representing a year-over-year growth of 21% versus the fourth quarter of 2018, while representing a decline of 1% on a sequential basis.We are delighted with the performance of the SmartVoice segment in 2019 reaching record revenues of $19.3 million and growing by 78% versus 2018. During the quarter, we continued to expand our product reach and engagements with leading consumer electronic brands as demonstrated by the following new product launches.Facebook launched a highly innovative videoconferencing system, its Portal TV, integrating our high-performance advanced audio and machine learning SoC. Leviton launched its Decora Dimmer with Alexa voice services support leveraging our audio voice SoC coupled with our voice processing algorithms featuring noise reduction, beamforming, and echo cancellation.The hardware and the algorithms are optimized for small footprint, far-field performance, and low cost. Nortek selected our SmartVoice products for its Numera Libris personal emergency response system, supporting long battery life while adding always listening features. These achievements, coupled with the recent wins in the smartphone market, including the newly launched Oppo K2 smartphone, continued to demonstrate the depth, strength, and diversity of our SmartVoice franchise and our ability to drive down power consumption, while raising the bar on quality and performance for Edge devices.At CES, we demonstrated how we are leveraging our voice expertise to create innovative AI solutions as the next frontier in machine learning is now applied to voice.As more AI processing gets performed at the edge to address privacy concerns, reduce latency, and to make better use of available bandwidth, more efficient hardware and associated algorithms must be tightly coupled and optimized to meet consumers’ requirements.We will continue to enrich our product portfolio with a suite of algorithms and hardware that address the rising need to create increasingly accurate AI solutions for Edge devices, for applications such as sound detection, proximity, acoustic beaconing, and more, all while maintaining the lowest power consumption. We believe that our SmartVoice biz 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 fourth quarter, we achieved revenues of $10 million, representing a year-over-year increase of 17%, while flat on a sequential basis. We ended the year with revenues of $38.1 million, representing a year-over-year decrease of 2%.And while we are disappointed by these results and attribute the revenue shortfall mainly to a delay in timing of orders originating from uncertainties related to trade war concerns, as well as weakness in enterprise IT spending, we remain highly confident in the recovery of this segment this year, propelled by the high-volume design we secured in 2019 that already commenced mass shipment and is expected to contribute in a meaningful way to our 2020 revenue, as well as additional designs we secured including a Tier 1 OEM and two other ODMs that launched new lines of IP phones with dual card displays, a Tier 1 OEM that launched a new series of IP phones for the UCaaS market to complement its on-premise portfolio.Based on our engagement pipeline, we are confident that we are positioned well for our performance and revenue growth in the Unified Communications segment this year.Turning to our SmartHome product line. During the fourth quarter, we generated $4.7 million in revenues representing a year-over-year increase of 63% and an increase of 23% on a sequential basis. Full year SmartHome revenues of $16.3 million grew by 12% year-over-year.During the quarter, we accomplished a milestone event for DSP Group and secured our first significant win in the U.S., which should pave the path for ULE's broad market adoption in the Americas.ADT, a leading U.S. security service provider announced that it has selected our ULE technology as its primary connectivity for its new wireless security offering. The system, which was demonstrated at CES includes a lineup of IoT sensors as well as the hub and camera. And moreover, some of these devices will also incorporate our SmartVoice technology.We are excited by the momentum of the ULE technology and expect this achievement to propel faster expansion of the ULE ecosystem with additional product and brands, as well as adoption by additional leading service provider. This momentum is also evidenced by the following wins and new product launches.Golden Mark selected our ULE technology for its new line of wireless SmartHome devices including an in-wall dimmer, in-wall switch, plug-in dimmer, plug-in switch and water leak detector.Ooma launched a smart security keypad based on our ULE technology, the keypad allows control of Ooma’s smart security system that already includes a siren as well as a motion sensor, door window sensor or water sensor to detect leaks and a garage door sensor, all of which run our ULE technology.We are optimistic about the design momentum and growth of this product category in 2020 and beyond on the heels of a strong traction for ULE, both in Europe and the U.S.And now to an update on the cordless phone market. Our fourth quarter cordless phone revenue was in line with our expectations. Cordless revenues declined by 8% year-over-year to $9.7 million and accounted for only 33% of total fourth quarter revenues.For the full year 2019, our cordless business generated revenues of $43.9 million representing a decline of 18% year-over-year which is in line with the secular decline pattern of 15% to 20%. We continue to prudently manage this cash flow rich business and reinvest its profits to fuel future growth in our well performing growth initiatives.Now for an update on our outlook for the first quarter. Taking into account the focus we received from customers and our own assessment, we expect our first quarter revenues to be in the range of $28 million to $30 million, the midpoint of this guidance range implies a year-over-year revenue growth of 3%. The midpoint of the guidance also implies that growth initiatives should account for 60% to 64% of our first quarter revenues.To summarize, we are excited by the market response to our products and technologies, as well as the growing number of Tier 1 engagements. We believe, that these accomplishments will solidify our future success on the heels of a strong pipeline of design wins which are expected to contribute to solid performance and revenue growth this year.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 fourth quarter of 2019 on top to bottom. For each line item, I will provide the U.S. GAAP results as well as the equity-based compensation expenses included in that line item, as expenses related to previous acquisitions and the exchange rate differences related to a new accounting standard related to long-term leases.Our revenues for the fourth quarter of 2019 were $29.3 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 $8.8 million, including equity-based compensation expenses in the amount of $0.6 million.Operating expenses for the quarter were $16.1 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 $0.5 million. Financial income for the quarter included $0.1 million of exchange rate differences related to a new accounting standard related to long-term leases. These exchange rate differences were excluded from our GAAP results for the quarter.Income tax benefit for the quarter was $0.6 million and includes a tax benefit resulted from changes in deferred taxes related to intangible assets and equity-based compensation expenses in the net amount of $0.3 million.Net loss was $0.1 million, including equity-based compensation expenses of $1.8 million, amortization of intangible assets of $0.1 million, exchange rate differences in the amount of $0.1 million and the tax benefit effect of $0.3 million.Non-GAAP net income excluding these items I just described was $1.6 million for the quarter. With no GAAP earnings per share for the quarter, the negative impact of equity-based compensation expenses and EPS was $0.07. The positive income of the deferred taxes on the EPS was $0.01 and the non-GAAP diluted earnings per share excluding these items I just described was $0.06 per share.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 accounts receivables at the end of the fourth quarter of 2019 decreased to $15.4 million, compared to $21.6 million at the end of the third quarter, representing a level of 47 days of sales.Our inventory decreased from $8.7 million at the end of the third quarter to $7.5 million, representing a level of 47 days. Our cash and marketable securities increased by $10.4 million during the fourth quarter, and were at a level of $131.3 million as of December 31.Our cash and marketable securities position during the quarter was affected by the following; $10.8 million of cash was provided by operations. $0.3 million of cash was used for purchase of property and equipment. $0.1 million of cash received from exercises of options by employees; and $0.2 million was the change in the market value and amortization of marketable securities.Now, I would like to provide you with our projections for the first quarter of 2020. Our first quarter projections, including the impact of equity-based compensation expenses, and acquisition-related amortization expenses are as follows; revenues are expected to be in the range of $28 million to $30 million. We expect our gross margin to be in the range of 50% and 52%.R&D expenses are expected to be higher than our runrate in the range of $10 million to $11 million. For the remainder of the year, R&D expenses are expected to be back to the level of $8 million to $10 million per quarter.Operating expenses are expected to be in the range of $17 million to $19 million. Financial income is expected to be in the range of $500,000 to $700,000. We do not expect to have any taxes on income or tax benefit for the quarter on a non-GAAP basis and shares outstanding is expected to be in the range of 24 million shares to 25 million shares.Our first quarter projections include; $0.1 million of amortization of intangible assets. Our first quarter projections also includes the following amounts forecasted for equity-based compensation expenses; cost of goods sold include $0.1 million. R&D expenses include $0.7 million to $0.9 million; and total operating expenses include $1.9 million to $2.1 million.And now, I would like to open up the line for questions and answers. Operator please?

[Operator:]

[Operator Instructions] And your first question comes from the line of Matt Ramsay from Cowen. Please go ahead. Your line is open.

[Matt Ramsay:]

Thank you very much. Ofer, it was obviously at CES, as well, great to hear about the ADT design win, and it seems like ULE is starting to get a little bit of a foothold, maybe you could talk a bit about your expectations for the size of that design win as it rolls out.And then secondly, if I am not mistaken, I think it’s on their DIY platform, and maybe you could talk if there’s opportunities on sort of the mainstream platform at ADT as well, and what the differences might be in between our mainstream platform and the DIY one? Thank you.

[Ofer Elyakim:]

Hi, Matt and thanks for your question. So, relating to the ULE momentum, indeed, we are excited, and for the last couple of years ULE was a phenomenon that was mainly a European one where we were mainly addressing and designing the technology with leading both security and telecom service providers, and today have both [indiscernible] which is part of securitized direct, and entire SmartHome -- Magenta SmartHome of Deutsche Telekom. And also, Maison Connect and Maison Protegee which are the SmartHome and SecuredHome of Orange that are all based on the ULE technology.And actually, during 2019, we’ve made significant efforts to market and promote the technology in the U.S., and we believe that the technology’s unique characteristics in the form of – its nature of support for voice and voice is a key requirement for the security service providers.It is today a very important use case that will be deployed and used by all major security service providers. And when we look at this domain, we do see in a way two different markets that are today addressed by many different security vendors both coming from the Do-It-Yourself, and this is the ability to purchase a security system – basically a public security system in retail, install it, subscribe to a certain level of service with that brand and get a certain level of capabilities with respect to home monitoring and the ability to have access to all kinds of additional services versus the traditional, professional security markets.And when we look at a market like the U.S., with about 120 million households, we see a great opportunity in security for ULE for our products and technologies, including SmartVoice, and we believe that there will be continued growth in this market by the adoption of more DIY, as well as the existing professional security.We definitely see today that the DIY security market is burgeoning, and we see a lot of activity and a lot of new brands that are addressing this market initiative, and there is also of course the professional side which is handled by fairly stable and significant service providers such as ADT.From the expectations point of view, I would say that it is still too early to say what the impact would be, but we definitely have expectations to see that being a driver in our SmartHome revenues this year. As you could understand both from CES as well as from the prepared comments that each system is shipping with numerous ULE chipsets that are basically existing in almost every sensor, as well as in many of the sensors with smart voice capabilities, so the dollar content here is fairly rich and we do expect also to see the volumes.This product is now hitting retail, and we will of course monitor it very closely and then try to provide you with as much information as we can, but in addition we are also hopeful that we will see following the bellweather type of service provider that has chosen this solution for the DIY that there will be also further opportunities to penetrate also the professional side as well as the ability to engage and leverage what we have done so far, and what we can provide this market with this natural support for two-way voice, voice activation, a lot of AI capabilities on the Edge. We believe that this will be very highly applicable to many other participants in this market, and this is definitely part of our operating plan for the next two years. So, we are very excited about the momentum, and I think that you’ve seen a lot of that at CES.

[Matt Ramsay:]

Thanks, Ofer for all the detail there. As my follow-up, Dror, I wanted to ask about gross margin. Obviously, mix helps, but I remember when we were having the conversation of how to get the company out of the low 40s and now you are in the low 50s, so well done on that front and I wonder if you could give us some commentary going forward how you think margins might trend, and maybe remind us of the collection of your growth businesses, how far above the DECT business are those just a separation of gross margin there on mix would be helpful. Thank you.

[Dror Levy:]

Sure. Thanks for the question, Matt. And so, first of all, as you saw, when you look into the first quarter of 2020, we already see the midpoint is at 61% and it is better than where we were in average in 2019. So, we are already looking to improve margin and we believe that when we look throughout the year, we can even improve this number to maybe something which is like closer to 51%, 52%.Overall, as you rightly indicated, there are two factors. The first, this is like the mix of the products where revenues, and I would say like Unified Communications, SmartVoice, and also SmartHome tend to have better gross margin. In the Cordless [ph], we see that from year-to-year, and this is also something that is demonstrated in our presentation, one we see that the proportion of the increased growth initiatives increased.We also took -- margins went up, as you said from 40 something percent to about 50%. This is one thing. The other thing that we expect to see in 2020 is growth of revenues. So, a portion of our gross margin, or the cost of goods is also fixed; and once revenue grows, this proportion of the fixed expenses decreases, so we also expect this to have some impact on improvement on gross margins in the first quarter and also throughout the year. These are all I would say the two main factors, the mix and the level of revenues.

[Matt Ramsay:]

Thanks again, guys. Appreciate it.

[Operator:]

Thank you, and your next question comes from the line of Jaeson Schmidt of Lake Street. Please go ahead. Your line is open.

[Jaeson Schmidt:]

Hey guys. Thanks for taking my questions. I just want to start on the Unified Communications segment. I know, excess inventory in the channel really impacted 2019. Do you think that inventory is now cleared out though?

[Ofer Elyakim:]

Hi, Jaeson, so if I understood correctly, your question was on the excess inventory that we saw early last year or even the fourth quarter of 2018, whether this is cleared or not. And so, based on our understanding about the market dynamics, 2019, as calendar year was quite challenging for this category as you accurately mentioned, we started the year with this pile of inventory that originated from the trade war concerns and the need to, perhaps get goods outside of China and have them offshore.So that they won’t be subject to any future tariffs and then, during the year, these concerns continue then actually in October, the tariffs were supposed to hit this category and at the end of the day, there was a deal that was signed.So in a way these tariffs never really took place. But we also saw during 2019, a much slower IT spending that also hit this category and in a way slowed down the depletion of that inventory. From where we are today and again, it’s not that we have very clear visibility into the channel inventory, because this market has multiple layers till you actually reach the end-customer unlike retail.We believe and we are of the belief in that based on our check that the levels of inventories are much, much lower than where they were when we started last year, meaning inventories are much, much closer to normal level. And so, right now, we don’t see inventories or excess inventories as an issue for the execution during this year.And we believe that with the good pipeline of new products that are now in mass production, we are well positioned for revenue growth this year and that a new design win that was prolonged into very late last year is now fully ramp up and in mass production and that basically builds a lot of confidence in our ability to actually mitigate if there will be any weakness with growth in this category throughout 2020.And I think that during this year, we are very hopeful that we will be able to secure even more lucrative sockets that will in a way fuel up our expectations and our ability to outperform also in the next couple of years.

[Jaeson Schmidt:]

Okay. That’s very helpful. And then, just as a follow-up. I think last quarter, non-smartphone applications within SmartVoice was over 70%. Curious what it was in Q4? And if you expect that composition to remain relatively stable in 2020?

[Ofer Elyakim:]

Yes. So, with respect to the SmartVoice product composition, smartphone versus the non-smartphone categories, I believe that for the year, for 2019, it was roughly a 25% smartphone and 75% non-smartphone. And actually, the 75% was quite evenly allocated towards tablets, cameras and entertainment.These are TVs, the remote controls and the over-the-top product. And if I look at Q4, I would tend to assume that it was shy of 20% to smartphones and about 80% for non-smartphones. And smartphones will fluctuate depending on their launch date and usually the lifecycle is fairly short per model. And so, I think there will be - there will continue to be fluctuations also this year.But I would assume that it will be about a 20-80 split in favor of the non-smartphone side. There, we believe that we are actually building lot of franchise businesses as you saw for instance in the entertainment side, as well as on the camera front and the tablet side. We believe there is a lot of value and a lot of ability to grow and to see many more products incorporating these capabilities and I think that the next pillar of this growth over the next three year is a lot of which will be around the AI.So, audio analytics or audio AI on the edge and I think that there will be a lot more value that will be driven there. And on the smartphone front, I believe that audio analytics and the capability to replace a lot of sensing elements inside the phone with the acoustics. This will be a major value proposition that will be well beyond with whatever you can do with waken voice and always listening element.The ability to do that at ultra-low power, the ability to create a lot more value while supporting all of the new requirements for smartphones, an edge-to-edge, let’s say screen and the lack of ability to install any hardware on the front of the device itself. So with that, we believe that our SmartVoice franchise will continue to play a key role in our growth going forward.

[Jaeson Schmidt:]

Okay. Thanks a lot.

[Operator:]

Thank you. And your next question comes from the line of Charlie Anderson of Dougherty & Company. Please go ahead.

[Charlie Anderson:]

Yes, thanks for taking my questions. Couple ones on the guidance real quick. It looks like based on how much growth initiatives will be as a percent of revenue that cordless will actually be up both sequentially and year-over-year? So wonder if you can maybe touch on what’s going on there? And maybe how that impacts the rest of the year if that’s up?And then, secondarily, on the R&D, thank you for the commentary that it will go back to more normal levels for the rest of the year. But I am just kind of curious what was the boost that created the order of level in Q1? Thanks.

[Ofer Elyakim:]

Thank you, Charlie. So, maybe, we start with the latter part of your question. First, with respect to R&D and OpEx. As Dror commented, we believe that Q1 will be temporarily high mainly because of a certain tape out expenditures that we have and we are basically doing and it taped out during this quarter and this will take the Q1 R&D expenses to be higher than average.And they are expected to go back to normal. So these are more on the NRE front. The non-recurring type of expenses. So this basically takes care of the OpEx and R&D expenditures in Q1. And your other had to do with the guidance for Q1 and where cordless is. So, cordless will fluctuate and again, there is very little control that we have vis-à-vis kind of the trend line there.I believe that we are modeling, and I think you guys should also model this decline in the 15% to 20%. So, right now, we do not see a change in the level of declines and yes, there will be fluctuations. As you can appreciate in last Q4 was artificially low and way recovery was slow, maybe that’s kind of the mismatch with respect to the year-over-year comps.So, just like an easy comp in Q4 and also Q1. But I don’t see a change in the trend. I think that, what we are going to see this year, is further increase in the proportion between the growth initiatives that should trend into 70-30 type of a mix or maybe more than that. I think these are the trends that we are expected to see in this year and there would be these kind of quarterly fluctuations that are very hard to kind of understand why in Q1 we actually see good momentum in cordless and good backlog.But I have no real explanations for that. I can only allude that what we believe is the 15% to 20% decline is the right way to model this going forward. And growth across our growth initiatives for the year and this is kind of how we see expansion - gross margin expansion. And we believe that the healthy trends should also continue in 2020.

[Charlie Anderson:]

Great. Thank you so much for that color. And then, for my follow-up on Unified Communications. I know, you have the large win for this year but it also sounded like you are optimistic of potentially a few others as well. I wonder has something has changed in the pattern in terms of replacement cycle there in terms of you guys replace the incumbents?Or is it just so happen that things are sort of lined up well in the past 12 months. Just any commentary on sort of the trajectory of that business over time. Thanks.

[Ofer Elyakim:]

Sure, on the UC front, I do believe that we have seen a lot of changes in the market. And first of all, we’ve seen the UCAS or the SIP trunking or the Unified Communication as-a-service becoming a major part of the market and we see a lot of disruption there with new service providers both for rich media and collaboration solution, as well as endpoints.A lot of new endpoints elements from headsets and to other conferencing solutions, for personal desktop, in-room conferencing, et cetera. So, there is a – I think a lot of investment and change that is driving the market and then perhaps also creating some opportunities for companies like us that has been investing in this market and today have the most comprehensive product portfolio and technologies that, in a way meets all of those requirements.And I think that we are really today, the one stop shop for this market for any vendor that is looking for a high quality, high performing solution. So, what we are doing is, in a way making sure that we are supporting our partners, our customers in this domain and enabling them to upgrade and build new capabilities, better voice quality, better video quality across the solutions.And as we’ve seen, this has been a long type – a long tail type of a market where design and refreshes tend to happen once every couple of years. And we’ve waited patiently and then hopefully a lot of that is will pay out for us in the near future. So, we are – I would say, very optimistic and we believe that we have all the right capabilities and merits to win the sockets that will be available for refresh.

[Charlie Anderson:]

Great. Thank you so much.

[Operator:]

Thank you. [Operator Instructions] Your next question comes from the line of Raji Gill of Needham & Company. Please go ahead. Raji, your line is open. Please can you check you are not on mute?Okay. Moving on to your next question from the line of Sujeeva Desilva of ROTH Capital. Please go ahead.

[Sujeeva Desilva:]

Hi, Ofer. Hi, Dror. I hope you can hear me. The non-smartphone SmartVoice, can you rank order the top two or three revenue contributors you expect in that segment in 2020 and which ones are maybe growing the fastest to help us understand.

[Ofer Elyakim:]

Hi, Sujee. I think the question was around the main contributors in the SmartVoice segment, right?

[Sujeeva Desilva:]

Right. Outside smartphones, yes.

[Ofer Elyakim:]

SmartVoice outside smartphone. Yes, so, if you take the $19.3 million that we generated in 2019, about 25% of that was smartphones, so 75% was non- smartphones. And these sockets, in a way we have three key franchises. One is the entertainment side which includes TVs, remote control. This is close to 25%, a little bit shy of 25% of revenues. Tablets are around 20% of those $19.3 million, maybe a little bit ahead of that.Cameras are about 25% and then we have other IoT. The other IoT category that will include smart speakers and hearables, et cetera. I think that when we look at 2020, we do expect hearables and wearables to become a more meaningful part of that business and to start generating revenues there as well.And that we hope to make it one of the kind of the key five categories, including smartphones, entertainment, tablets and cameras. So, I would say, these are kind of the five categories that today we are focusing on.Our roadmap is targeted to solve a lot of future issues and provide a lot of capabilities and value-added solutions as we discussed in terms of AI on the edge, the ability to really drop the power consumption considerably, while elevating the performance, the ability to conduct far field and very high quality using the battery power design and the ability to run a lot of machine learning classifier in the same time, on-chip, on a battery operated device.So, all of that I think should bode very well for each of these five key categories that we are focusing on today. I hope I answered your questions, Sujee.

[Sujeeva Desilva:]

You did, Ofer. Thank you. And then, the inclusion of AI as a feature there in AIB edge that kind of upgrade, if you would. Is that an incremental revenue or ASP opportunity? Is that just a kind of feature upgrade that keeps you in these platforms? And when does that layer in or is that really already being used by the customers?

[Ofer Elyakim:]

Yes, so first of all, it is – it does basically increase the content. So it does the raise the ASP for the devices that we were in. I think that also, whenever there is a dilemma between, we are just running software versus running it on a dedicated ultra-low-power machine learning type of a chip, then the more capabilities that such chip can provide, the higher the likelihood of the selection of a dedicated processor just for that versus running software on the AP.And today, we do have - and we are running these AI on the edge capabilities, the ability to do a sound event detection and audio analytics are running today in production on our chipset.

[Sujeeva Desilva:]

Okay, great. All right, thanks guys.

[Operator:]

Thank you. [Operator Instructions] And your next question comes from the line of Ari Shusterman of Needham. Please go ahead.

[Ari Shusterman:]

Hey, guys. Good job on the quarter. So this is Ari taking the question for Raji Gill. And my first question is about your Unified Communications business. Can you talk about where you are seeing the business go this year and a bit about on design win pipeline in this business? Thank you.

[Ofer Elyakim:]

Hi Ari, and then thanks for the question. So, in the Unified Communications business for this year, I believe that we are optimistic that we are going to outperform this year. I think, we did see the shortfall that we experienced in 2019 due to the trade war as well as the lower demand, mainly related to business IT spending.We believe that today with the additional wins, with the additional products that we are shipping, we are well positioned to be able to generate a nice revenue growth from the UC product segment. I think that when addressing some of the comments that were made earlier, we believe that the inventory levels today are at closer to normal levels versus the significant or excess inventories that we saw just the year ago.So, by looking at all the fronts, we do hope and believe that we are positioned well for outperformance and revenue growth in this business, mainly coming from our ability to ship and win a lot of new products that are shipping this year, they were not in last year.So, just these are creating the revenue growth for us and I believe that they will be able to absorb even if there will be certain hiccups, which right now, we don't anticipate, but we believe that the traction and our ability to generate revenue growth in UC this year, the chances are very, very good and we are very optimistic.

[Ari Shusterman:]

Yes. And I have a follow-up I wanted to ask if there are any new markets or verticals that you plan to target in the future that you believe will be beneficial to further growth and margin expansion, whether that's through M&A or through organic means targeting new verticals you are thinking?

[Ofer Elyakim:]

Ari, I'm sorry, but we could not – we had some problems hearing you well. So, can you repeat the question please?

[Ari Shusterman:]

Okay. Yes. So, I was just asking if there are any new markets or verticals that you plan to target in the future that would be beneficial to growth and margins?

[Ofer Elyakim:]

I think that from new markets, new market penetration, I believe that today, we are focusing on the three segments of SmartHome with everything that comes behind – under this umbrella, IoT, consumer, service provider, professional, as well as industrial. Unified Communication, which is the professional business market. SmartVoice, which also includes a broad array of many different consumer electronic products.We mentioned, I think and also demonstrated a lot of capabilities around hearables at CES, which you saw from glasses to headsets. And I believe that this will be, as a product category, I think this product category will hold a lot of potential growth and the need to incorporate a lot more technology in order to create more differentiation in the market.And I believe that DSP Group is well equipped with relevant - very relevant technology to meet the market requirements. We are serving for many years the markets of low power, voice, the ability to do low-power processing of value-added to do in sensing capabilities.So, if you're asking about a new product category, yes, that's definitely hearables does look as a promising new product category for us. And we believe that we will be able to serve it with several of the new products that we have launched that you've seen at CES.

[Operator:]

Thank you. There are no further questions at this time. I would now like to hand the call back over to Tali Chen.

[Tali Chen:]

Thank you. During the first quarter, DSP Group will participate in the 32nd Annual ROTH Conference on March 15th to March 17th in Orange County. 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:]

Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you for participating and you may now disconnect.