DSP Group, Inc.
Q1 2017 Earnings Call Transcript

Published: 30 Apr 2017

[Operator:]

Good morning, ladies and gentlemen. I'm Daniel Amir, Corporate Vice President for Business Development at DSP Group. Welcome to our first quarter 2017 earnings conference call. On today's call, we will 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 2017 including by segment, preliminary composition of revenues for 2017, anticipated gross margin improvements, gradual recovery of the cordless business, and the anticipated general annual secular decline of such business, our ability to secure additional design wins, mass production timetables and result revenues and general market demand for products and incorporated 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 2016 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 2017. We achieved first quarter financial results that were ahead of guidance on most metrics. Our performance reflects continued execution of our new product strategy as evidenced by solid year-over-year revenue growth of 30% in office VoIP segment and 42% for our IoT products, respectively, and reflected in the 160 basis points improvement in non-GAAP gross margin. We ended the quarter with total revenues of $27.9 million, representing an increase of 1% versus the first quarter of 2016, despite an expected revenue shortfall in our mobile business as higher revenues in VoIP, IoT and cordless sufficiently offset this decline. New products revenues were $11.2 million and accounted for 40% of sales. New product revenues declined by 12% year-over-year and by 21% sequentially, hurt by the temporary weakness in our mobile segment. We believe that our first quarter was a revenue trough for the year, and expect our revenues to gradually improve from this level. Looking forward, we expect a sequential revenue increase in the second quarter, propelled by improvements in new product revenues and increased demands for cordless telephony SoCs. Specifically, we believe that we are seeing early signs of revenue recovery in our mobile segment, as the design wins we have announced in previous quarters are expected to reach commercial shipments earlier than initially anticipated. Moreover, we are excited about the numerous opportunities and engagements that we are addressing in each of the new product segments, namely, VoIP, IoT and Mobile, that are expected to materialize into revenues in the second half of 2017 and beyond. Now, I would like to provide specific update about our progress in each segment. Starting with Mobile. During the quarter, sales of HDClear products totaled $0.38 million. The lower revenues were expected and mainly an outcome of much softer demand from our Tier 1 mobile customer. Nevertheless, we are working diligently to diversify and reinvigorate our mobile business, and we are happy to inform you that during the first quarter, we secured an additional design win for a non-smartphone application with a leading North American OEM for a product that is expected to launch in the second half of this year. In addition, we had a number of noteworthy announcements, including a partnership with STMicroelectronics, a global semiconductor leader, by revealing a new smart microphone, which is power efficient and delivers keyword detection capabilities in a compact package for small battery-operated devices incorporating our HDClear technology. Second, with Liberty Wireless, a leading embedded WiFi and wireless solution provider that integrated our DECT and voice activation solutions into its voice assistant speaker to enable telephony calls. This feature is in high demand for smart speaker vendors that would like to marry smart speakers, artificial intelligence and telephony capabilities. The third was with Emza Visual Sense, a developer of miniature machine vision devices, that announced the industry's first battery-powered intelligent computer vision always-on visual sensor for residential security and smart building application, which is based on our HDClear technology. Looking ahead to the second quarter, we anticipate a sequential increase in our mobile revenues as we begin shipments to two known smartphone OEMs. Based on our assessments, we project second quarter mobile revenues to be in the range of $0.5 million to $0.8 million. And more importantly, we are uniquely positioned to become a leader in the burgeoning markets for voice user interface, leveraging our proven leadership and expertise in voice processing and low-power design. We have successfully built a promising and diverse engagement pipeline with leading OEMs, covering a variety of application ranging from smartphones, smart audio to IoT application. This pipeline is just starting to materialize and paving a promising path to future growth. Now moving to the VoIP and office segments. In the first quarter, we achieved quarterly revenues of $6.6 million, representing an increase of 30% year-over-year and up 3% sequentially. During the quarter, one of our leading Tier 1 customers began shipments of its new conferencing system based on our DVF99 and DCX81 SoCs. Second, another Tier 1 customer launched a new series of premium IP phones based on our DVF99 SoC. These product launches go hand-in-hand with our anticipation for increased traction with Tier 1 customers and an expansion of the addressable market. We are confident that with our current product roadmap and design pipeline, we are well positioned to see solid revenue growth 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 $7 million to $8 million. Now to an update on the home segment, which includes home gateways, IoT and cordless. I will start with home gateways. First quarter home gateway revenues were $2.7 million, up by 5% sequentially and roughly flat year over year. We continue to see solid traction from telecom service providers interested in integrating high-definition voice into their home gateways, and during this quarter too, a new European service provider has launched gateways incorporating our DECT/CAT-iq solution. Proximus, Belgium's largest telco and Sunrise, a leading telecom operator in Switzerland started shipping DECT enabled on gateways based on our technology. We expect second quarter home gateway revenues to increase on a sequential basis to $2.7 million and $3 million, and to further accelerate as the year progresses, coinciding with new product launches by a number of new telecom service providers. Turning now to IoT. During the first quarter, we generated revenues of $1.5 million from our IoT products, representing growth of 42% year over year and a 34% decrease on a sequential basis following an expected pause by a large European telco that builds strong inventory already in the fourth quarter of last year. We are excited to share with you that during the quarter, QIVICON, Deutsche Telekom's smartphone platform launched its home-based two gateways. It's an IoT hub that incorporates our DECT ULE technology. In connection with the product launch, the new QIVICON gateways are offered with bundled ULE-based sensors, and based on our check, these new products are well-received in the German market. Moreover, propelled by the recent ULE-based smarthome launches by leading service providers, we are experiencing increased interest and strong momentum for ULE technology and consequently a continued expansion in our IoT ecosystem. As an example, LEEDARSON, the world leader in IoT product manufacturing has announced that it decided to integrate ULE into its lighting solutions, security and intelligent lighting controls, all using our ULE model, enabling fast time-to-market and easy integration. Moreover, we are seeing growing interest in adding voices or interface to IoT sensors. The voice is viewed as the prevailing user interface for the smart home environment. This represents another meaningful growth opportunity as our offering includes all the necessary building blocks for voice user interface and wireless connectivity. ULE technology is designed to support high-quality two-way voice and video and best-in-class range and propagation interference-free. Looking at the second quarter, we expect IoT revenues to grow on a sequential basis, and to be in the range of $1.5 million to $2 million. In summary, we began the year with a record number of IoT programs, concentrated on leading service providers and OEMs. We anticipate the strong momentum to continue during the remainder of 2017 and to generate solid revenue growth. And now, for an update on the cordless phone market. Our first quarter cordless revenues were in line with our guidance for modest year-over-year improvement. Cordless revenues increased by 13% year over year, recovering from the inventory correction we experienced in the first quarter of 2016, and declined by 21% on a sequential basis, and accounted for 60% of first quarter total revenues. For the second quarter, we expect cordless revenues to be more aligned with the general cordless market decline of approximately 10% to 15% on an annual basis. And now, to an update on our outlook. Based on our revenue expectations across our new product initiatives, we expect our second quarter 2017 revenues to be in the range of $30 million to $32 million, which at the midpoint of the guidance was just solid sequential growth. Looking ahead, we are very excited with our future prospects and are uniquely positioned to live and thrive in the burgeoning market for voice user interface. Moreover, we believe that our new product strategy will continue to position us well for a long-term revenue growth and positively contribute to the bottom line. Now I'd 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 of 2017 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 expenses related to previous acquisitions. Our revenues for the first quarter of 2017 were $27.9 million. Gross margin for the quarter was 43.8%. Gross margin for the quarter included equity-based compensation expenses in the amount of $0.1 million. R&D expenses were $9.2 million, including equity-based compensation expenses in the amount of $0.6 million. Operating expenses for the quarter were $15.7 million, including equity-based compensation expenses in the amount of $1.4 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 tax benefit in the amount of $0.2 million, resulting from the amortization of deferred tax liability related to intangible assets and the tax benefits related to equity-based compensation. The tax benefit for the quarter excluding these items, was in the amount of $0.1 million. Net loss was $2.9 million, including equity-based compensation expenses of $1.5 million, amortization of intangible assets of $0.4 million and tax benefit in the amount of $0.2 million. Non-GAAP net loss, excluding these items I just described was $1.1 million. GAAP loss per share for the quarter was $0.13. The negative impact of equity-based compensation expenses on the loss per share was $0.07. The negative impact on the amortization of acquired intangible assets was $0.02, and the positive impact of the tax benefit was $0.01. Non-GAAP loss per share, excluding the item I just described, was $0.05. 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. Accounts receivable at the end of the first quarter of 2017 decreased to $18.2 million compared to $19.1 million at the end of the fourth quarter of 2016, representing a level of 59 days of sales. Inventory decreased from $9.7 million at the end of the fourth quarter to $9.2 million, representing a level of 53 days. Our cash and marketable securities decreased by $5.2 million during the first quarter and were in the level of $119.8 million as of the end of March. Our cash and marketable securities position during the quarter was affected by the following

[Operator:]

[Operator Instructions] We will now take our first question from Jaeson Schmidt from Lake Capital Markets.

[Jaeson Schmidt:]

Hey guys, thanks for taking my questions. Wondering if you could just talk about the competitive landscape you're seeing in mobile, and some of the reasons why you're finding so much success against your competitor in non-handset applications?

[Ofer Elyakim:]

Yes, Jaeson, and thank you for the question. So regarding the competitive landscape, look, first of all, we have a pretty comprehensive portfolio today of these type of processors, ranging from more of the high performance, with the ability to process a lot of different algorithms that could be either our own or the OEMs as well as ultra-low processors that could basically enable any device to do always-on voice and to incorporate voice user interface -- acting or being activated by a battery. So I think that first of all, we have a pretty comprehensive portfolio. Number two, I think that the portfolio of the algorithms that we provide are achieving to date a very good performance and being recognized by the market. And I think that we're also today enabling a lot of devices, starting from smartphones and going into wearable products, smart watches, into kind of smart speakers and IoT. So all of that is, I think, a pretty unique proposition. With respect to the other vendors, of course, this domain is attracting many additional software vendors, algorithm vendors and also silicon tech providers. But we do see that we are actually seeing a very nice traction and success in a variety of a different products, and we hope to continue with this momentum and then thrive and grow.

[Jaeson Schmidt:]

Okay. That's helpful. And just following up on that. I think in last quarter you mentioned your outlook for mobile was in that $5 million to $8 million range. Are you guys still expecting revenue to be in that ballpark?

[Ofer Elyakim:]

Yes. Yes, we are. I think that's a fair kind of range for the year.

[Jaeson Schmidt:]

And then, the last one from me, and I'll jump back into queue. How should we think about OpEx trending going forward?

[Ofer Elyakim:]

So I think that the -- with the OpEx guide that we provided for this -- for the second quarter, you can see that kind of the midpoint of that...

[Dror Levy:]

The midpoint is around $13.5 million pro forma, which is slightly lower than when we were in Q1, and for the second half of the year, it should be more or less in the same range, $13.5 million per quarter.

[Operator:]

We will now take our next question from Robert Mertens from Needham & Company.

[Robert Mertens:]

Sorry about that. Thank you for taking my question. I just wanted to get a little bit more clarity about how we should think about cash flow, and if you're thinking about anymore of share buyback?

[Dror Levy:]

Yes. So I'm going to start with the cash flow. So the cash flow for the first quarter was negative, and this is also a phenomena that we had in the first quarter of last year. However, we do expect that for the remainder of the year and for sure for the year as a whole, we will have a positive cash flow. So in the last couple of years, our cash flow [indiscernible] and was even like higher than our EBITDA. So I would believe that this will also be the trend for this year. And in terms of buybacks, we had the latest authorization was, if I recall, for 2016. We got authorization for $10 million worth of shares, out of which, up until the end of the quarter, we did around $8 million. So as of today, as of the end of the quarter we still had about $2 million of authorization for buyback, and I assume that we'll need to deal with that and to increase it sometime during the second quarter.

[Operator:]

We will now take our next question from Rajvi Gill from Needham & Company.

[Rajvindra Gill:]

Thank you for taking my questions and congrats on good results with solid execution. The question I had on the OpEx, just a follow up. How much kind of OpEx savings are you expected to generate from the closure of the PA business? And can you maybe describe the savings from the closure of that particular segment line?

[Dror Levy:]

Yes. So first, this is already included in the numbers that we have provided. So as the second quarter being at $13.5 million, which is slightly lower than the first quarter, this already takes into account this closure of this activity. Overall, this activity consumed, I would say, couple of million, even less than that -- not more than $1 million to $2 million per year and less than that. So this should not have a significant impact on the OpEx.

[Rajvindra Gill:]

All right, that's included. And if you look at -- if we're looking at the Voice over IP market, I just wanted to get a sense of the -- your current market share and your expectations for that market share going forward. You talked about in the past that the Enterprise, Voice over IP, SAM is in the $150 million to $200 million per year, and that's growing at a 12% or 15% CAGR. And I was just wondering if you could talk a little bit about kind of the market share dynamics across Broadcom and TI and yourself, and how we should be looking at kind of the long-term growth rate in that business?

[Ofer Elyakim:]

Yes. Hi Rajvi, this is Ofer. With respect to the market, so yes, you're correct about the kind of the sizing of the market, that we said it's about $150 million in silicon SoC value. And the market is growing on at the eccentrics or kind of the UCA side of the cloud-based Voice over IP or voice and video services. And in a way, it's kind of more in the kind of flattish to maybe slightly growing or around that trend in the on-prem side, which is kind of the large enterprise market. And we are and have been, during the last couple of years, increasing our market share pretty gradually as we've entered really from the low-end side, which suggests kind of lower ASP type of a product for our first few. And as we continue and expand our market share and grow, we're actually kind of getting into more of the mid-range, high-end product, and then we're in a way improving the ASP. So if you were to ask me around kind of, what is our market share today on the unit volume perspective, I would say it's around 30%. If you asked me about what is the -- what is our market share on the revenue side, I would say it's kind of more in the 20s, and so it means that we have a lot of room still to grow. The market is a market that is characterized by low turnover. So each product that is in the market lasts for a number of the year, and hence, also the design cycle is fairly slow. We still see competition from the other two vendors that you've mentioned, mainly Broadcom, but we believe that today we have, by far and large, the most comprehensive set of solutions for this market, all the right and necessary focus from the software side, the algorithm side and the voice engine side. So I think we are really kind of uniquely positioned to continue and expand and be the market leader in this market. So we have got a very good feeling about our future in this market.

[Rajvindra Gill:]

That's helpful. And the other question I had was, if you can be maybe elaborate on your partnership with Emza Visual Sense to create this always-on intelligent vision sensor for security, monitoring -- smart city monitoring. Another semiconductor company, Himax, is also working with them. So I was wondering kind of, what was the rationale for the partnership? And how you think we should kind of look at the opportunity in computer vision and what you're bringing to the table with respect to that partnership?

[Ofer Elyakim:]

So first of all, the relationship and the partnership is about marrying the unique silicon design that we have in one of our mobile-targeted SoCs, which basically can run very efficiently and effectively algorithms at a very low power and in a way enable the always-on functionality. And this is mainly kind of desired if you want to make battery-operated devices, utilize this type of characteristics for processes to run always and do that very efficiently. And in a way Emza brings in their expertise on the more of the ISP side, so the imaging processing front. We're great believers in this front or via visual sensing and processing. And I think that this is a market and a trend that we will continue to be very focused on and continue to do that via forming partnerships or doing our own investments, and I think that we're also well positioned there.

[Rajvindra Gill:]

And just last question from me and I'll hop back on. And this is a follow up as well on the competitive landscape. So I just wanted to get is -- try to get a sense in terms of your -- how you're distinguishing between your low-power voice processors where you are competing with companies like Cirrus Logic, and the entry into noise cancellation market, where you see digital headsets now or adapted noise cancellation headsets starting to include noise cancellation codecs, which is a pretty untapped market. Most of these headphones, headsets or analog. So there's some transition from analog headsets to digital headsets, which has a lot of software algorithms based on that. So I just wanted to get a sense of how we should distinguish between the low-powered voice processor and noise cancellation or they are all kind of part and parcel of the larger product portfolio?

[Ofer Elyakim:]

Yes, Rajvi, thank you. So -- yes, indeed, maybe some clarification is required here just to avoid the confusion. So when we look at the voice user interface domain, we're talking about connecting microphones, which in a way are supposed to be always on and looking for a voice command, looking for the speaker to use a certain trigger, and then after that activate the device and start processing speech and going to the cloud or going locally, converting it back to text, then using NLP and all kinds of additional other algorithms. And in this market, it's really about connecting microphones, a processor and then working together with the speaker, so that you can actually achieve a very good accuracy when the trigger word is being announced. And then also create a great experience for the noise cancellation front, whether it's ambient noise in the room, whether it's noise coming from the speaker while a person is speaking to the microphone via acoustical echo cancellation, and all kinds of other technologies and algorithms. And in this market, it ranges from very low power battery-operated device, the single microphone, two microphones, to a high power, high processing multi-microphones, beam forming, et cetera. So in a way, we support all the use cases from kind of a near field, midfield and also far field. And so this is kind of one market. And in this market, you can categorize smartphone, smart watches, smart speakers, all kinds of IoT devices that are incorporating voice activation, automotive as well. And in the other part of your questions, when you really address the headset market and rightfully saying that, in a way, there is today a trend of conversions from analog to digital, here I believe you're -- when you say noise cancellation, you mainly mean ANC, which is more of the active noise cancellation or just trying to cancel noise by kind of creating an inverse signal to benefit the person who is using the headset. And in that market today, what we have is more of the far field noise cancellation and less the ANC. But, of course, these features and requirements is part of our roadmap and part of our initiative on the audio codec front and to go further into this market. I would say that the demand and requirement today for digital headset is on the rise, but it is a fairly small base today. As you know, mainly one, maybe 1.5 vendors are today embracing this trend of a digital type of connection of the headset into the phone. But, of course, it is part of where we want to be. And I think that in the next couple of years, you're going to see us also incorporating these capabilities, which is very close to where we're coming from. We have, and we still today, a lot of these kind of high-quality analog stuff in every Voice over IP phone in every video conferencing phone and every, even, desk phone.

[Operator:]

We will now take our next question from Matt Ramsay from Canaccord.

[Matt Ramsay:]

I just wanted to ask a little bit over about the integration or the overlap between VoIP business and the emerging ULE or IoT business, particularly HDClear and ULE products for voice-activated or voice-controlled IoT or connected home applications and just wanted to understand a little bit more the strategy of bringing the product to market, and is that a clear differentiator for your ULE program as it starts to ramp into bigger volumes over time?

[Ofer Elyakim:]

Hi Matt, and thanks for the great question. So this is indeed, I would say, kind of one of the key themes that we do see around IoT, is the understanding that it's not just about processing, connectivity, sensing. It's also about the ability to control and activate. And when we look at smart homes or smart offices, et cetera, I think, kind of the -- we see a consensus coming from all the vendors, ranging from the OEMs themselves to the service providers, that are in a way kind of designing the next services and are truly trying to find what is the best way that's going to -- consumers will start embracing these devices and methods. And I think kind of the consensus is that the voice is going to be the prevailing user interface. We see that -- in a way, kind of technology has made a -- it's kind of ripe and ready, and the performance is really good, and you can see it in devices like Amazon Echo and the Google Home and the way they understand and get kind of keywords and are able to process commands and convert them into text in natural language. So I think this is kind of where the world of smart home and smart offices is heading. And I think that by combining both ULE, which is a protocol or a technology that was made for kind of always for real time, always type of communication, supporting voice two way et cetera, is uniquely positioned, both from the fact that it supports great range, so it means that you can really be mobile and roaming through kind of your apartment, home, backyard et cetera, and still be able to connect and continue the dialogue. You can do that interference-free, which is one of the key assets that the ULE technology has. So that means that there is no interference at all with any other short range wireless technology. And on the other side, when we go now into the voice activation side, we do it at very low power assumption. We have today a great ecosystem of additional device vendors ranging from all kinds of smart mix to our own solutions, to our capabilities to drive also all the algorithms for far field and noise cancellation. So all of that kind of bundles into a pretty comprehensive package that we believe kind of will carry ULE forward. And you know, the embracement of this technology will also include a lot of voice activation, and pretty much adding the microphone and the speaker to every sensor.

[Matt Ramsay:]

That's really interesting for context. And thank you for that. I guess, my follow-up question is just a bigger picture one, with some of the headwinds in the mobile business here in the very near term. The growth, as a percentage of the company, of the new products has stagnated a bit. But obviously, the intention is for those new products to become the vast majority of business over the next few years. But if you could just -- either of you guys give a bit of an outlook for the next few years as to where you think that mix goes? And just a reminder of what that means for the gross margin for the company, because things have moved around and perturbated a bit here with some of the disruptions at Samsung, but I think the overall track of the business seems to be moving in that -- in the right direction. And just understanding that timing of that mix shift is important in the longer-term. I appreciate the color.

[Ofer Elyakim:]

Yes, Matt, thanks. So with respect to more kind of longer-term guidance, of course, we're not giving kind of any guidance for the next couple of years. But just to bring things into context. So what we've said also in the prepared remarks is that, right now we're very excited about where the future is taking us, and especially in the mobile segment. And this is a domain where we did see some headwinds -- some temporary headwinds that we predicted in the first half. And also, when you kind of look at our guide for '17 versus the results that we achieved in '16, that also suggest some weakness. But we have been able to successfully get a pretty extensive set of design wins as well as a fairly, I would say, promising engagement with leading OEMs. And we're going to see that translate into significant growth in the next two years. So we're very excited and believe that the pipeline has never been more promising. So we're really, really excited with the where the future is going to take us, and I think that it's very different from where we were in 2016, having just one big customer, we have today a fairly diversified pipeline. And that is also going to be the case in '18 and '19. And I think as we said, we are a fairly fortunate and uniquely positioned to have all the technology and all the capabilities, and really fit very well in these voice user interface domain. I think we've demonstrated that we are able in any type of -- voice processing type of market to build the right portfolio solution, and then get the right market strategy, get the designing in place and drive revenue. And I think this market is also a market that fits really well with the technologies and the products that we have. And we see that happening, we see that coming. And just perhaps takes some patience to see that in revenue growth and -- but I would say that right now, the pipeline is looking really, really promising.

[Operator:]

We will now take our next question from Scott Searle from Benchmark.

[Scott Searle:]

Just a quick follow-up on the VoIP business and then I had a couple of additional questions. But could you comment on Avaya? There have been some headwinds and concerns over the last several months. If you're starting to see that recover and pick up and we're kind of through the woods on that front?

[Ofer Elyakim:]

Hi Scott and welcome to the call. Yes, so the question was on VoIP. As you can tell, since the second half of last year, we had seen some weakness in one of kind of these new Tier 1 OEMs that started to ship in mass production with our DVF SoC. It was Avaya and, of course, the recent announcement and the status today, that suggested that there are some headwinds and we are seeing some of that. But we are hopeful and I think we do see some recovery ahead, and nothing is stepping stone. But I think, kind of the momentum or at least kind of the trend over the last couple of weeks, months, has been on the positive front. And we do hope that Avaya will continue to be successful and we will see our designs and the products that we're shipping today reach nice volume. I would say though that today, the portfolio of Voice over IP solutions that we have and the way they're translated into designs and shipments across the different vendors and SKUs, et cetera, makes us pretty -- kind of diversified. And so today, we have kind of very -- fairly good coverage on the on-prem side. We have fairly good coverage also on the UCA side or the cloud-based type of VoIP front. So in a way, you can understand that this is a market where if one company has temporary weakness, then others are beneficiaries. And so I would say that we are designed fairly well. Of course in the future things can happen. But, so far I think, we've been fairly successful in winning more business. I think we're -- we've been diversifying and adding a lot more customers and designs. The focus still is on kind of the Tier 1s of this market, and we hope to see continued progress and gradual growth over the next quarters.

[Scott Searle:]

And then just a follow up on HDClear front. It sounds like it's very exciting in terms of the pipeline building there. It's a diverse set of customers. But I was wondering if we could get some more granularity in terms of some of the end product categories? I know, it's been a lot of talk about Alexa-like devices, but I thought I heard smart watch in there. And I know you've, or I thought you were engaging as well with some additional smartphone vendors. So how that's kind of parsing out, if you will? And maybe -- and this is possibly dangerous territory, but the design wins that you're getting, kind of the dollar amounts that are attached with that if these products actually go into production? And then to follow-up on one of the earlier questions as well, it seems like there is some combination with ULE bundling. I'm wondering how much of the HDClear success and traction now was coming from bundling on the ULE front?

[Ofer Elyakim:]

So with respect to the kind of the key categories where HDClear designs are focused on. So they're focused on smartphones. And today, we are shipping with the Galaxy S7, which is one of the kind of the key products that we go design into. In the smart watch category, we were -- we did -- we have been designed into the Gear product that are shipping, and this was shipping already since late 2016. And now, we are -- we've started also shipments that we -- with two new OEMs that are basically shipping devices that are more kind of in the smart speaker, smart audio type of front. And we believe that the kind of portfolio of different solutions or different end products is going to continue and expand to all kinds of, kind of activity type of gear to a more smart speakers and more a kind of IoT, smart home type of applications, more smartphones. And so the voice user interface is, basically, touching every device in the market. And the battery-operated ones do require a fairly efficient voice processor that will basically connect the microphones and provide all the capabilities to the larger devices that do -- that won't function and create a great user experience will require a lot of mics and processing capabilities. And also for that, today we have good solutions that meet these requirements. We believe that this product category will, despite the kind of the weakness that we've encountered, is a growth -- is a solid growth category that has a lot of potential starting this year, with these new products that are starting shipping and to gradually grow, and we would see a lot of more product that are, and a lot more OEMs that are selecting our solutions, and we see a very good future for this category.

[Scott Searle:]

Last question, just on the gross margin front. It sounds like there was wide range there, 43% to 46%. I'm assuming some of that potential uptick is related to VoIP. But wondering if there are any other mix issues or anything to be aware of that's kind of impacting that range?

[Dror Levy:]

No, this is Dror. So I would say that this would depend somewhat on the range and also in the level of revenues. As you know we do have like a portion of the gross margin that is a result of fixed expenses. So the higher the total revenues are, this portion has like smaller in terms of percentages. So I would say, these are the two things, the mix and the total revenue.

[Operator:]

We will now take our next question from Matt Robison from Wunderlich.

[Matt Robinson:]

A couple of questions. One is, in the babble of the local area interfaces and IoT interfaces, have you -- can you kind of describe the progress of ULE over the past year or so versus the three or four or maybe more other interfaces that are kind of vying for these applications, and if there has been a particular milestone that has led to relative success for ULE? And the other question I had is, as it relates to HDClear and Mobile, it seems like sometimes the two are used interchangeably where that -- I believe in essence Mobile is sort of a subset of the HDClear opportunity. I wanted to clarify if you said in your earlier comments that you had a mobile device design win that's starting this year or if that -- if it's more just some of the other broader scope of HDClear opportunities that you've been more specific about?

[Ofer Elyakim:]

Yes, Matt. Thanks. So let’s talk first with ULE. So ULE was a technology that, DSPG and some other silicon vendors that had root injected, develop and kind of the technology kind of went live in 2014, '15. And kind of the general competition was for kind of the last meter of IoT. So this is a short range that wireless that is supposed to connect devices, mainly kind of indoors, offices, homes, buildings, et cetera. And kind of the most immediate competition were standards like -- or I would say, established standards like ZigBee, Z-Wave. And then, over the years, what we have, and also the other kind of ecosystem partners have tried to do is, really make a market and prove the use of the -- that the use of ULE actually does solve a lot of issues that others have encountered in this domain. And I think that ULE was able and was very successful to address two key things. The first one was to show that range is not a problem. Indoor range is something that you can very easily address by utilizing ULE, and this is very different in the other technologies. The other issue is that this technology solved was the interference issue. And when you have two technologies that are interfering, it's impossible to solve unless it's really solved at the silicon level. And that is not only just by a single vendor. That's kind of an industry-wide type of a solution. And in technologies that operate in high SAM [ph] band, it's pretty much impossible that these technologies will always be very friendly to one another because technologies are something that are in constant development. And so, DECT ULE, because it operates on a licensed spectrum, because it's the only short-range wireless technology to operate in this frequency band, does guarantee very high stability and no interference. So I think these were kind of the first things that the technology started proving out. I would if you ask for milestone, I would say that this was one of the milestones and I think, a leading service providers like Turkcell, like Deutsche Telekom acknowledged that, companies like Ooma as well, acknowledged that, and that took them to the next level to actually make a bold decision and not go with the selection that everyone else was going with, and actually, put the bet on this technology. And I think that they're seeing very good result for that. I would say that the next milestone after that was really the utilization of voice over ULE, and the fact that you can actually create a voice-enabled sensors. And voice-enabled sensors are not just tell people to do communication and not just for people to activate and control devices or computers, they are also to listen to what's happening in the home and actually be context-aware and be able to identify all kinds of noises, from a door that's being opened, the steps or the number of people that are entering a premise and you know like a dog barking, gunshots, a car that is driving into the garage, et cetera, et cetera. So it's like really an -- the amount of use cases that can be supported are endless. And I think one of our key customers was kind of the first to pick that up, and this was Securitas Direct and Verisure that they have launched a DECT for the security market. And I think this is kind of another milestone, which is now also being converted into a lot of a voice-enabled devices at home that are -- could be smart speakers, could be kind of embedded in every device to do listening, to enable through a voice communication, et cetera, et cetera. So I think all of that is kind of acting as kind of the second milestone. I would say the third milestone is really to marry that with artificial intelligence, and this is part of the examples that we gave today. I think Emza was one of them, and the other one was the partnership with Liberty Wireless.

[Matt Robinson:]

Now with regards to the Mobile versus other category?

[Ofer Elyakim:]

Yes. Sure, so first of all, you're right. So we are kind of mixing Mobile and HDClear. It means the same. So in this segment where we sell the DBM chipset and the HDClear suite of algorithms, and all of that we call HDClear. This is kind of where we are making the designs and the engagement, et cetera. So in a way, it's confusing, but it is interchangeable. So they mean the same exact thing. Now with respect to the design wins or design in, today we have a number of like prospect design-ins for mobile handsets, so more than one. Of course, as this is a fairly competitive unpredictive market, et cetera, we will not choose or elect to choose the word design win up until it's in production, up until we see the CO, but there are a number of these type of designs in progress. So we call it either prospect or design in. And we hope that this will translate into production and volume already into '17, and also improve and grow into 2018.

[Operator:]

[Operator Instructions] We will now take our next question from Charlie Anderson from Dougherty & Co.

[Charlie Anderson:]

Thank you for taking my question. We got a lot of good questions asked already. So I'll just sneak in a quick one, which is, Ofer you had mentioned some renewed interest in ULE. I wondered if you would characterize that as primarily European still, or we seeing any in the U.S. at this point?

[Ofer Elyakim:]

Hi Charlie. So I would say most of the interest today is in Europe, and we have seen three European service providers basically utilize this technology for smart home, and I think that we're going to see a few more in the next 24 months. But gradually, and in parallel, the technology has been noted in these type of selections and fact that the ecosystem today also offers ULE. This has been noticed by the -- by also the North American side. Ooma, as in ITSP, an internet telephony service provider, which is gradually also moving into smart home services, has launched a solution based on ULE in the North American market. But if you're talking about kind of more of the -- a established telco service providers in the U.S. or security vendors, I think that this is in progress. So of course, there is interest. Of course, there are -- there's an engagement, but I would say, we're still not at the level where there is going to be a launch in the near term. But I would say that we have some very good and nice engagement that I hope that within, kind of 12 to 18 months, could materialize into launches. End of Q&A

[Operator:]

There are no further questions in the queue. I would like to turn the call back for any additional or closing remarks.

[Daniel Amir:]

Yes. Thank you for dialing into the call. We're looking forward to providing an update in 90 days. DSP Group will participate in the Jefferies Technology Conference on May 9, in Miami. Thank you for dialing in, and have a great day.