DSP Group, Inc.
Q1 2018 Earnings Call Transcript

Published: 30 Apr 2018

[Operator:]

Good day and welcome to the Q1 2018 DSP Group's Incorporated Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Daniel Amir. Please go ahead.

[Daniel Amir:]

Good morning, ladies and gentlemen. I'm Daniel Amir, Corporate Vice President for Business Development at DSP Group. Welcome to our first quarter 2018 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 projections for the second quarter of 2018, including by segments, our belief that new product revenues will be a majority of our 2018 revenues, anticipated gross margin improvement, opportunities relating to voice user interface, anticipated general annual secular decline of the cordless business, our engagement pipeline and ability to secure additional design wins, mass production timetables, and result in revenues and general market demand for products that incorporate our technologies in the market. We assume no obligation to update these forward-looking statements. For more information about the risks and factors that could affect the forward-looking statements made herein, please refer to the Risk Factors discussed in our 2017 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, Daniel. Good morning, everyone, and thank you for joining us today. I hope that you had the opportunity to read our press release that we distributed earlier today I would like to begin by reviewing our results for the first quarter commenting on the progression of our business plan, and providing context for our outlook. In a short while, Dror will provide you with detailed comments on our financial results and outlook for the second quarter of 2018. We've achieved first quarter financial results that were ahead of our guidance on most metrics. We ended the quarter with total revenues of $28.1 million representing an increase of 1% versus the first quarter of 2017. More importantly, revenues from our growth initiatives were $14 million, which for the first time accounted for 50% of total sales. Our performance reflects solid execution on our growth initiatives and demonstrate the success of these initiatives in driving revenue diversification, as evidenced by the solid year-over-year revenue growth of 27% in the Office/VoIP segment and a significant year-over-year recovering in our SmartVoice product. Revenues from our growth initiatives increased by 26% year-over-year, while posted an expected sequential decline of 9% due to seasonality which is largely related to our Office/VoIP segment. Our differentiated - our differentiated technologies and improved product mix, coupled with operational efficiencies drove non-GAAP gross margin improvement of 490 basis points to 49.1% and a return to non-GAAP profitability. Moreover, we have successfully built a healthy and diverse engagement pipeline with leading OEMs which makes us excited about the solid growth prospects in each of the new product segments, namely Office/VoIP, SmartHome and SmartVoice, driving our growth beyond the inflection point, defining our future and more and than offsetting the secular decline in the cordless telephony market. Now, I'd like to provide specific updates about our progress in each segment. Starting with an update on SmartVoice. During the quarter sales of SmartVoice product totaled $1.6 million, which were in line with our guidance. We're happy to share with you that during the first quarter we secured additional smartphone's design wins with two Chinese manufacturers for products that are expected to be launched in the second half of this year. In addition, we continue to grow and diversify our SmartVoice engagement pipeline and build our presence in additional end product segments, as evidenced by a number of noteworthy design wins in the first quarter, including a leading Japanese mobile OEM that designed our SmartVoice into its new series of tablet products that started shipping in the first quarter, and a leading European consumer brand that selected our SmartVoice solution for its new smart speaker product. This quarter, we continue to invest our R&D efforts in addressing the next frontier in voice user interface and build an offering around deep neural [ph] networks technologies with a focus on VoIP and audio. We believe that in coming years combining artificial intelligence and edge devices will change the way people interact with their devices. We expect such technologies to revolutionize human device interaction, including intuitive dialogue, voice biometrics, environmental sensing, an artificial ear voice activated chat-box and more. These three groups is well positioned to impress the AI frontier as it takes off in the coming years. Looking ahead to the second quarter, we anticipate a sequential increase in our SmartVoice revenues, as we see gradual ramp up of our previously announced design wins. However, the ramp up is more tempered than what we previously anticipated due to industry saturation that has led to a broader weakness in the smartphone market and a supply chain correction. Consequently this has negatively impacted the demand from some of our SmartVoice customers. Therefore based on our assessment, we project second quarter SmartVoice revenues to be in the range of $2 million to $2.4 million, representing significant growth both year-over-year and sequentially, though a bit less than what we anticipated in the beginning of the year. Nonetheless, we are confident about the value proposition of our SmartVoice technology and the potential of our current engagement pipeline. Now to an update on the Voice/Office segment. We are excited about the emerging trends in the workforce collaboration and the need for higher business productivity through better quality of voice and video communications. These three groups is at the forefront of these industry trends and is the leading vendor of Voice/Office solutions for the unified communications market. As demonstrated by our growing design pipeline with Tier 1 OEMs, as well as with other leading customers. In the first quarter, we achieved quarterly revenues of $8.4 million, which were in line with our guidance range, representing an increase of 27% year-over-year, while showing a sequential decline of 12% due to an anticipated seasonal trend. In addition, during the quarter we had a number of noteworthy new product announcements by our Tier 1 customers. Avaya launched a series of IP phone called the J100 series based on our DVF9919 and DVF9929 SoCs. These phones feature a rich platform and remote access management. Cisco launched a new family of multi-platform analog telephone adapter the ATA 191 and the ATA 192, adding third party UCA [ph] and cloud provisioning based on our DVF9929 SoCs. Polycom launched the Obi2182, a high-end 12 line gigabit IP phone with color display that is based on our DVF9919. We are confident that with our current pipeline of new engagements we are well positioned to see gradual revenue growth during this year and beyond. For the second quarter we expect VoIP revenues to grow on a sequential basis and to be in the range of $8.8 million $9.6 million. And now to an update of the Home segment. Starting with SmartHome. Our SmartHome is comprised of DECT/ULE product shipping with IoT sensors actuators and home gateway products. First quarter SmartHome revenues were $4.1 million, ahead of the high-end of our quarterly guidance, increasing by 13% sequentially, while decreasing by 2% year-over-year. We're excited to share with you that second leading Tier 1 European service provider selected our ULE technology for its next-generation SmartHome service, which is expected to launch in late 2018. This is yet another strong vote of confidence in the ULE technology and its unique fit for the next-generation of Smart IoT services. While SmartHome remains our main focus area, we are seeing a growing interest for DECT/ULE solutions in adjacent market verticals such as the Industrial IoT and Security segment. In order to address the market needs, during the quarter we introduced the DHAN-J, a ULE module based on our ULE SoC for IoT Industrial and Security applications. We believe that the Industrial and Security segments will leverage ULEs advantages, as an ultra reliable and congestion free solution, while utilizing the DHAN-J as a market ready solution that offers fast time to market and an easy path for integration - for integrating the ULE technology and thereby reducing effort, cost and development time. Moreover, we continue to see growing interest in adding voice user interface to ULE IoT centers, as voice is viewed as the preferred user interface for the SmartHome environment. During the quarter SGW Global, a leading designer and manufacturer of cordless product launched a line of truly wireless Alexa-integrated voice activated devices based on our SmartVoice and ULE SoCs. These products include ULE voice enabled assistance based on our SmartVoice and ULE solution. Looking to the second quarter, we expect SmartHome revenues to soften on a sequential basis and to be in the range of $2.7 million to $3.7 million, reflecting temporary weakness in demand from Gateway's and ULE products, mainly attributed to delays in customer product launches. Nevertheless, we do expect a recovery in the second half of 2018, as a result of new home gateway product launches, as well as the new SmartHome service launch in Europe. And now for an update on the cordless phone market. Our first quarter cordless revenues were in line with our guidance and accounted for 50% of first quarter revenues. Cordless revenues decreased by 11% on a sequential basis and by 16% year-over-year and in line with our expectations for cordless industry annual decline of 15% to 20%. And now to an update on our outlook. Based on our revenue expectations across the new product initiatives, we expect our second quarter 2018 revenues to be in the range of $29 million to $32 million, which at the mid range of guidance suggests solid sequential growth. Looking ahead, we believe that we are in a strong position to capitalize on significant opportunities in new and emerging market, in areas of the unified communication, voice user interface and IoP. We have successfully built a promising and diverse engagement pipeline with leading OEMs which is paving a promising path for long-term growth. Now, I'd like 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 of 2018 from 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 and the expenses related to previous acquisition. Our revenues for the first quarter of 2018 were $28.1 million. Gross margin for the quarter was 48.4%. Gross margin for the quarter included equity-based compensation expenses in the amount of 0.1 million. R&D expenses were $9 million, including equity-based compensation expenses in the amount of $0.7 million. Operating expenses for the quarter were $16.1 million, including equity-based compensation expenses in the amount of $1.6 million and amortization of acquired intangible assets in the amount of $0.4 million. Financial income for the quarter was $0.4 million. Income tax for the quarter included income tax benefit resulting from the amortization of deferred tax liability related to intangible assets and a tax benefit related to equity-based compensation expenses in the total amount of $0.2 million. We had no tax provision for the quarter excluding these items. The net loss was $1.8 million, including equity-based compensation expenses of $1.7 million. Amortization of intangible assets of $0.4 million, and tax benefit in the amount of $0.2 million. Non-GAAP net income, excluding these items as I described was $0.1 million. GAAP loss per share for the quarter was $0.08. The negative impact of equity-based compensation expenses on EBS was $0.08. The negative impact of the amortization of acquired intangible assets was $0.02. The positive impact of the tax benefit on the EPS was $0.01 and the non-GAAP earning per share, excluding these items as I described was $0.01. Please see the current report on Form 8-K that we filed with the SEC this morning for a full reconciliation of the non-GAAP presentation to the GAAP presentation. Now turning to the balance sheet. Our accounts receivable at the end of the first quarter of 2018 increased to $15.9 million compared to $13.4 million at the end of the fourth quarter of 2017, representing a level of 51 days of sales. Inventory decreased from $9.4 million at the end of the fourth quarter to $8.4 million representing a level of 53 days. Our cash and marketable securities decreased by $5.6 million during the first quarter and were at level of $123.6 million as of the end of March 2017. Our cash and marketable securities position during the quarter was affected by the following, $3.4 million of cash was due for operations, representing mostly working capital changes, $0.4 of cash was used for investing activities, mostly the purchase of property and equipment, $1.2 million of cash was used for repurchase of approximately 100,000 [ph] shares of our common stock at an average price of $12 per share, $0.2 million of group [ph] received from exercise of options by employees, and $0.8 million was the amortization and changes in the market value of marketable securities. Now I would like to provide you with our projections for the second quarter of 2018. Our second quarter projections on a U.S. GAAP basis including the impact of equity-based compensation expenses and acquisition-related amortization expenses are as follows

[Operator:]

Thank you. And our first question comes from Jaeson Schmidt from Lake Street Capital Markets.

[Jaeson Schmidt:]

Hey, guys. Thanks for taking my questions. Just want to start looking at the year. I know it sounds like there is a little bit of underperformance in the SmartVoice segment for Q2. But is it fair to say that the outlook for the full year given back at the Analyst Day remains unchanged?

[Ofer Elyakim:]

Hi, Jaeson. So thanks for the question. So with respect to the annual guidance that we provided in the Analyst Day, so just for everyone it was between $11 million to $16 million for the year or kind of the midpoint around $13.5 million. So as you correctly mentioned, so right now we do see a little bit of underperformance both in Q1 and Q2 given kind of the correction that is happening in the market. And also you know, some of the – the product launches that are in you know, relatively new and not necessarily generating the volume that we've expected. But I think that with our current design pipeline and then - the new product that we expect to contribute to our second half result, we do believe that we will continue to see a gradual ramp at a much stronger pace than what we are - what we have seen in Q1 and also the trend line to Q2. We’re still standing behind kind of the set guidelines of the range of 11 to 16. However, we do believe that probably it will be right now based on you know, the best guess that we have and we need to see exactly kind of how the market recovers you know, probably like at the middle of that range. So you know, if we said 11 to 16, so probably I would say like right now 11 to 14. But right now - and right now when we look at kind of the bigger picture, we also are not seeing also any reason to change the annual guidance as a whole. So from that aspect.

[Jaeson Schmidt:]

Okay. And looking at the SmartVoice segment, and when we think both the end market breakdown between that is going to be roughly sort of half and half with smartphones versus other devices or any additional color around the end products would be helpful?

[Ofer Elyakim:]

Sure. So with respect to the leap between smartphones and non-smartphone it will vary by quarter. So as you can understand, we have been diversifying and winning a lot of the new designs outside of the smartphone space. But in addition, we've also kind of strengthened again the smartphone position both with a Samsung design wins and now we've announced two additional China ones and we in the pipeline we have some more. So I would want to say that it will probably be kind of be towards going to 60-40 or something like that when we look at it. We believe that we will have some other end market - end product segments that will be kind of a big contributor from kind of smart speakers, the tablet kind of IoT type of devices that will kind of be able generate kind of higher growth or you know, skew that ratio between kind of smartphones and non-smartphones applications. But my best guess would be roughly these type of split.

[Jaeson Schmidt:]

Okay. And then the last one for me and I'll jump back in the queue. Any change on your thoughts regarding the cordless phone business. I know visibility here remains cloudy, but still kind of that 10% to 15% annual decline, a good range to think about?

[Ofer Elyakim:]

So I think that what we’ve said in the previous call was a decline rate of kind of you know, 15 and above, I think that kind of Q1 was kind of 16%. I would say kind of our - based on the Q2 guidance you can interpret that we expect actually Q2 to be a little bit kind of above that trend. So less than 15%. But kind of overall we still see the picture as kind of 15%, maybe 15% to 20% annual decline. Nothing that we can see that kind of changes that picture.

[Jaeson Schmidt:]

Okay. Thanks a lot guys.

[Operator:]

Our next question comes from Rajvindra Gill from Needham and Company.

[Rajvindra Gill:]

Yes. Thank you for taking my questions. So just on the gross margin, so the upside in gross margins I wonder if you could talk a little bit about some of the drivers and then the margins are kind of coming down sequentially. So I wondered if could talk about the gross margins you know, in the profile of the company going forward?

[Dror Levy:]

Sure. Hi, Raji and thanks for the question. So with respect to gross margins, we do anticipate and we did anticipate over the last couple of years that we will see a gradual gross margin expansion that will result from the product mix and as these growth initiatives become a more dominant part of our revenues, and they are generating a much higher gross margins than our corporate average, we will see these gradual increase in the overall corporate cost margins. Right now and based on what we're seeing is that we have - for the first time we see that the growth initiatives are covering 15 – 50%, 5-0 percent of our total revenues and we believe that this is kind of one of the biggest drivers in generating an upward type of gross margin result. You know, when we look at kind of the mix of products inside our new products you know, all of them are coming at - on an average basis of course, of course there are bits and pieces here and there, but for the most part each and every part of these growth initiative is generating a much higher gross margin than our corporate average and in a way kind of cordless is the lagger [ph] here with respect to margin. And we believe that as we look into the second half and into next year and as the profile of the business hopefully will be more skewed towards these growth initiatives, if there is a - you know we can view it in an optimistic way that you know we could get margins to expand gradually towards kind of 49% or 50% and perhaps you know next year even higher.

[Rajvindra Gill:]

All right. Thank you. That's helpful. And on the SmartHome guidance. So softening a little bit in the second quarter due to some product delays or product launch push outs. Can you talk a little bit about you know, the second quarter and also as we look at this business going forward have we kind of understand - have a better sense of seasonality in the business going forward, is there kind of some more insight in terms of how we should be modeling this on a quarter-by-quarter basis? Thank you.

[Dror Levy:]

Sure. So Smart and SmartHome Q2 so maybe if we start with Q1. So Q1 was actually kind of pretty strong mainly because of the both ULE and home gateways. In Q2 we do see some weakness. You know, it stems mainly from certain gateway products that they're shifting from manufacturer A to manufacturer B and there's like these time lag. So for the same operators we're in a way exchanging between two manufacturer - manufacturers and this is kind of causing this kind of delta here of one quarter, but we do expect that to be recovered in the second half of the year. And on the SmartHome front, as we were today sitting to only a few customers that also has an impact on the way our – the revenues are based and in a way kind of certain weakness with one customer B customer could definitely impact the kind of the quarterly performance. But I would say that as we were acquiring today many more customers on the SmartHome frontier, so we will start having a much more diversified portfolio of customers that will help us in terms of kind of seeing perhaps a seasonal trend in the future. But for now I would say that beyond kind of the certain hiccups of the - you know, last year having you know, sold it into a major operator in the first half of the year, this is of course kind of impacting the comps also in the first half of this year. And I would say that once we roll out these new service provider we will have a lot more product shipping and I think that that will kind of help us with respect to seeing kind of a more kind of gradual increase also going into next year. So I hope that color is helpful.

[Operator:]

Our next question comes from Charlie Anderson from Dougherty & Company.

[Charlie Anderson:]

Yes. Thanks for taking my questions. It was great to hear about the service provider to win in Europe, so I wonder Ofer, maybe give us - offer some commentary on what you're seeing in terms of adoption of ULE. What seemed to be the drivers, where it is being adopted and what seems to be the gating factor where it’s not being adopted right now. And then maybe just the overall addressable market as you see it? And then I've got a follow up.

[Ofer Elyakim:]

Sure. Thanks, Charlie. Thanks for the question. So with respect to what we see in the smartphone services, so we say you know, when we first build our DHX portfolio of DECT/ULE product, the main consideration was just connectivity and the battle was around you know, interference free band, better range, you know, cost of the total solution et cetera, and for that we thought that you know, ULE had some kind of fairly interesting characteristics, such as you know the best strength in the industry. It is a non-ISM [ph] it is license spectrum and in a way kind of offers the collision free spectrum which we believe is vital and of the utmost importance, especially when we're speaking about devices that are pretty much faster. This is not a device that you hold in the palm of your hand and control, but rather this is a device that is hooked as – to a ceiling or a wall and it's supposed to kind of generate sense and generate its data. So this was the trend line that we saw about five years ago when we entered the domain, I would say that you know, for the first selection and maybe even for the second selection these are still kind of the key criteria’s and this is kind of the battle of the standards if you will between ULE and proprietary standard, ZigBee, Z-Wave other kind of short range wireless. But as we cross 2019 and when we see that its SmartHome services is really not just about the activity and its about trafficking data, its really about creating an infrastructure that will enable all kinds of modalities to pass over the air, guaranteeing a you know kind of the range, the interference free, he ability to do in addition to data you know, voice sensing, voice control information, visual sensing, video communication or streaming, audio streaming et cetera, et cetera. And we believe that a lot of these devices that are today sold as like a door magnet or smoke detector are actually going to integrate a lot more feature and functionality you know, to make them like a much more powerful with respect of their detection and their ability to actually make decisions or actually open additional channels, not just a data channel. And all of that bodes very, very well for what we have to offer with ULE and in addition to that, as you also kind of heard from my prepared comments with SmartVoice, so that combination is today driving a lot of interest across Europe and you know, and also right now overseas.

[Charlie Anderson:]

Great. And then, as I recall at CES you guys demonstrated a module for SmartVoice that offered a very low cost potential end product. I wondered if you give us update on that product in terms of the level of interest and the adoption that you may be seeing? Thanks.

[Ofer Elyakim:]

Sure. So I think you're referring to reference designs that we showed, combined both SmartVoice and ULE, so ULE has the connectivity, but SmartVoice as voice is sensing. And this product today is in a proof-of-concept stage to evaluation state with a number of leading OEMs, both in the U.S. and also in Europe, mainly in the service provider market [indiscernible] And we see a very good potential for that – for these types of devices. We believe that they are creating a new market vertical for a smart assistance that our battery powered, that are fully portable, that give you full home coverage, that are not today dependent on kind of the Wi-Fi coverage or the Wi-Fi spectrum that is available to add another device at home, but rather enjoy all the ingredients that we can provide, as why ULE which is you know, was created for these type of voice and audio transaction. So we do see a very strong potential and right now it is in PLC [ph] and evaluation stages with a number of you know Tier 1, very large Tier 1 customers or service providers.

[Charlie Anderson:]

Great. Thanks so much.

[Operator:]

[Operator Instructions] Our next question comes from Suji Desilva from ROTH Capital.

[Suji Desilva:]

Hi, Ofer. Hi, Dror. So on the ULE win here – at the European telco, I wonder as to - I wanted to know if you could size that one perhaps relative to the large - the big current European telco you're ramping with relatively?

[Ofer Elyakim:]

Hi, Sufi. And thanks for the question. So with respect to the size of the telco, I would say it's of similar type to the one that we won last year and we believe that they – here the same characteristics will apply the ability to actually serve SmartHome services is via a you know, a broadband gateways that basically incorporates today our chronology and the ability to add a variety of different sensors and actuators and do all of that at fairly low cost of deployment and self install without the ability of any in store. So all of that we believe in the future will reduce significantly the cost of deployment and to that part we’ll make the services available for consumers at much lower cost. And we believe that together with additional value added services like I mentioned before could really create kind of the killer app and have all the stimulus for much wider consumer adoption.

[Suji Desilva:]

So if I understand, the second telco has a similar run rate potential versus the current while you’re ramping with is that correct?

[Ofer Elyakim:]

It is correct.

[Suji Desilva:]

Okay, great. And then my second question is on SmartVoice products. Obviously with the smartphones out in this year. But in the non-smartphone area are you seeing any new applications, new [Technical Difficulty] and pipeline that have incremental volume potential down the road couple of quarters away perhaps?

[Ofer Elyakim:]

Yes, as for sure. So on the SmartVoice segmental, we're talking about designs outside of the smartphone. So you know, we're seeing like slowly traction on the tablets front. We're seeing slowly traction on the hearable front, smart speaker sound-bar, these are the areas. And as I said before from the kind of IoT, so the combination of IS connectivity and smart assistance. So on all of these fronts we are seeing a good traction. And you know, I would say that perhaps as we kind of go along into next year we're probably also going to see some interest coming from kind of the automotive market at the beginning may be - mainly in the aftermarket product.

[Suji Desilva:]

Okay. Thanks, again.

[Operator:]

It appears there are no further questions at this time. So I’d like to turn the conference back to Daniel Amir for any further remarks or concluding remarks.

[Daniel Amir:]

Thank you. During the second quarter DSP Group will participate in the Jefferies Technology Conference on May 9 in Beverly Hills and in the Cowen TMT Conference on May 30th in New York. Thank you for dialing into the call today.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.