DSP Group, Inc.
Q2 2017 Earnings Call Transcript

Published: 29 Jul 2017

[Operator:]

Good day and welcome to the Q2 2017 DSP Group Earnings Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Daniel Amir. Please go ahead, sir.

[Daniel Amir:]

Thank you. Good morning, ladies and gentlemen. I’m Daniel Amir, Corporate Vice President for Business Development at DSP Group. Welcome to our second 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 third quarter of 2017 including by segment and second half of 2017; high-level revenue outlook for 2018; optimism about our HDClear product line based on our voice user interface trends; optimism about our ULE product line due to launch by Deutsch Telekom on its Smart Home platform; updates on our cordless business mass production timetable; 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 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 second quarter, commencing with 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 third quarter of 2017. Before we begin we would like to introduce a name change to our Mobile segment. As you know, during the past year we have been working diligently on diversifying and reinvigorating our Mobile business by addressing the need for voice-user interface in our communications that’s spread beyond the smartphone. We’re happy that these efforts have started to materialize and have therefore decided to change the category name from Mobile to SmartVoice. We believe that this new name better reflects the diverse end markets that our existing products serve today. The addressable market goes beyond smartphones and therefore a broader name, like SmartVoice, better reflects our current design pipeline. And now back to an overview of our results. We achieved second quarter financial results that were ahead of our guidance on almost every financial metric. Our performance reflects the successful execution of our new product strategy, evidenced by new product revenues accounting for a record 47% of sales, with record results in our Office/VoIP segment, 80% year-over-year growth in sales of IoT products and a gradual recovery in our SmartVoice and home gateway product categories. This better product mix contributed to a 240 basis point improvement in non-GAAP gross margin, to 46.6%, driving our non-GAAP earnings per share to $0.06. Second quarter revenues were ahead of the midpoint of our guidance, driven by better than expected results in new products. We ended the quarter with total revenues of $31.3 million, representing a sequential increase of 12%, while a year-over-year decrease of 30% mainly related to the expected revenue shortfall in our SmartVoice segment. As noted, new product revenues were $14.7 million and accounted for a record of 47% of sales. New product revenues declined by 7% year-over-year, but increased by 32% versus the first quarter of 2017, with each product in our new product segment showing sequential growth and reflected a continued execution on diversifying our revenue base. Looking forward, we expect a sequential revenue increase in the third quarter, propelled by continued improvements in new product revenues and stable demand for cordless telephone SoCs. We are optimistic regarding our business outlook for both the short- and long-term periods, as our new products across Office, SmartVoice and IoT are widely adopted and driving additional engagement, and a growing design pipeline. We are optimistic that these categories will comprise the majority of our revenue in 2018. Now I’d like to provide you with specific updates about our progress in each segment, starting with SmartVoice. During the quarter sales of our SmartVoice products totaled some $9 million, exceeding the high end of our guidance. We are pleased to inform you that during the second quarter we already started commercial shipments for our DBMD SoC for smart speakers as well as IoT products. We continue to work on diversifying and growing our SmartVoice design pipeline, and we’re happy to inform you that during the second quarter we secured an additional design win for a non-smartphone application for a product that is expected to be launched in the fourth quarter. In addition, during this quarter we announced another design win with iFLYTEK, China’s leading artificial intelligence and speech processing company that selected our DBMD4 SoC for its 2-microphone mobile solution addressing the burgeoning market for voice-user interface in IoT. Looking ahead to the third quarter, we anticipate a sequential increase in our SmartVoice revenue as we begin shipments to an additional customer. Based on our assessment we project third quarter SmartVoice revenues to be in the range of $1.1 million to $1.4 million. We’re excited about the market dynamics for voice recognition and control and see a growing demand for incorporating voices or interface into a wide range of products across different markets. Voice activation is becoming the preferred way for interacting with and activating devices. As an example, in the U.S. smart speakers which are voice-activated now account for almost one-third of all shipments in the home audio hardware category. Demand for voice personal assistants is positioned to become the standard for next-generation consumer electronic devices. We are well positioned to capitalize on these strengths, leveraging our HDClear product portfolio to offer the lowest power consumption and best-in-class performance through enhancing voices or interface, including artificial intelligence, noise suppression, barge-in, beam forming, always-on, voice jitter and command. We have successfully built a promising and diverse engagement pipeline that is starting to materialize, as evidenced by commercial shipments to two new customers and paving a promising path for long-term growth. Moving down to the VoIP and Office segment, we continue to build our leadership position in enterprise thermal markets as demonstrated by strong and growing design pipeline with several Tier 1 OEMs, as well as with other leading customers. For the second quarter we achieved record quarterly revenue of $8.6 million, representing an increase of 17% year-over-year and 31% sequentially. This result was ahead of our previous guidance of $7 million to $8 million. Contributing to the better-than-expected results was stronger demand for voice SoCs in the fast-growing hosted Voice over IP market, as well as a recovery in one of our Tier 1 OEM customers. We expect the positive momentum to continue in the third quarter and for revenues to be in the range of $8.5 million to $9.5 million. Our quarterly results and guidance reflect optimism about the outlook for our Voice over IP business, the strength of the design pipeline and comprehensive product offerings which covers the entire range of enterprise voice and video endpoints. We believe that this segment is well positioned for long-term revenue growth. Now to an update on the home segment, which includes home gateway, IoT and cordless. I will start with home gateway. Second quarter revenues of $2.9 million increased by 9% year-over-year and by 8% sequentially, and are ahead of our expectations. The incremental demand was largely due to an initial ramp-up of a leading U.S. service provider that is expected to launch its new DECT-enabled home gateway in the fourth quarter. We are optimistic that following this launch additional North American service providers will realize the compelling value proposition of DECT and ULE and incorporate this connectivity to their CTE product, thereby increasing adoption of DECT and ULE solutions in the U.S. as well. Moreover, we are excited to share with you that another leading Tier 1 European telco has recently selected our DECT/ULE technology to power its next-generation home gateway. The decision to incorporate DECT and ULE by these two leading telco is an additional example of the growing number of service providers building an infrastructure of DECT-enabled home gateways as a hook to offer subscribers out-of-the-box home-based IoT services which are easy to install, plug and play, offer full-home coverage, and at a much lower cost of ownership. This is a positive long-term trend that should benefit our IoT franchise in the coming years. Given our current backlog in our equipment we expect third-quarter home gateway revenues to further grow on a sequential basis and to be in the range of $3 million to $3.4 million. Turning to IoT, for the second quarter we achieved record quarterly IoT revenue of $2.3 million, representing an increase of 80% year-over-year and 53% sequentially. This result was ahead of our previous guidance of $1.5 million to $2 million. We’re excited to share with you that during the quarter Deutsche Telekom launched its new Magenta Smart Home platform based on its new program, Home Gateway with Speedport Smart, to bring smart home services to its entire subscriber base of 13 million households and alleviating the need for dedicated over-the-top box. Deutsche Telekom stated a goal of making 1.2 million households smart every year. And in connection with this launch, Magenta Smart Home offered a lineup of 7 new ULE-based smart home sensors. Moreover, this launch comes in addition to the QIVICON Home Base II IoT hot launch that we reported about last quarter. Deutsche Telekom’s Magenta Smart Home’s platform launch is a milestone event for DSP Group and the ULE acquisition and marks an endorsement by one of the world’s leading and most innovating telcos. We are extremely pleased with the market feedback and momentum that followed this launch, driving wider adoption of ULE on the European continent and later in the U.S. Propelled by the recent ULE-based smart home launches by service providers and the solid interest for adding voices or interface to smart home systems to enable a better user interface for home IoT, we have recently engaged in several new customer projects that combine SmartVoice solutions with ULE connectivity. We believe that this represents another meaningful growth opportunity for our ULE technology, which is ideal to enable battery-operated devices, always-on functionality high-quality two-way voice and audio, and best-in-class uninterrupted wireless coverage. Year to date, our IoT segment is tracking ahead of plan and we anticipate the strong momentum to continue. For the third quarter we expect sequential decline in our IoT revenues to the range of $1 million to $1.3 million following the strong ramp-up in the second quarter. And now for an update on the cordless telephone market. Our second quarter cordless revenues were slightly below our expectations. Cordless revenue declined by 18% year-over-year and by 1% on a sequential basis, mainly as a result of weaker demand for products servicing the European markets. Cordless revenues accounted for 53% of second quarter revenues. In the third quarter we anticipate that our cordless revenues to increase on a sequential basis due to seasonal factors. And now to an update on our outlook. Based on our revenue expectations and of course our new product initiatives, while taking into consideration our outlook for new product and cordless telephone revenue, we expect third-quarter revenues to grow on a sequential basis and to be in the range of $33 million to $35 million. To summarize, we are very pleased with our financial results for the second quarter, which highlight solid execution and included sequential revenue growth across all of our new products and solid margin expansion in gross margin. We remain optimistic about our business outlook for both the short- and long-term periods and believe that our new product segments position us well to drive year-over-year revenue growth in 2018. 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 second quarter of 2017 from top to bottom. For each line item I will provide U.S. GAAP results, as well as the equity-based compensation expenses included in that line item, and expenses related to business acquisitions. Our revenues for the second quarter of 2017 were $31.3 million. Gross margin for the quarter was 46.6%. Gross margin for the quarter includes 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 expense for the quarter was $15.4 million, including equity-based compensation expenses in the amount of $1.5 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 expenses for the quarter were $0.1 million. The net loss was $0.6 million and included equity-based compensation expenses of $1.6 million and amortization of intangibles of $1.4 million. Non-GAAP net income, excluding these items I’ve just described, was $1.4 million. GAAP loss per share was $0.03. The negative impact of equity-based compensation expense of EPS was $0.07. The negative impact of amortization of acquired intangible assets on EPS was $0.02. Non-GAAP income per share, excluding items as just described, was $0.06 per share. Please see the current report on Form 8-K which 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 second quarter of 2017 decreased to $14.6 million compared to $18.2 million at the end of the first quarter, representing a level of 42 days outstanding. Our inventory increased from $9.2 million at the end of the first quarter to $10.6 million, representing a level of 57 days. Our cash and marketable securities increased by $6 million during the second quarter and was at a level of $125.8 million as of June 30, 2017. Our cash and marketable securities position during the quarter was affected by the following

[Operator:]

Thank you. [Operator Instructions] And we take our first question from Jaeson Schmidt with Lake Street Capital Markets.

[Jaeson Schmidt:]

Just wanted to start on the SmartVoice segment. Could you just talk about what you’re seeing from a competitive landscape?

[Ofer Elyakim:]

Thanks for the question. So with respect to the SmartVoice side, as you know, we are targeting a number of the different product categories, ranging from smartphones to wearables to smart speakers to other consumer electronics. And we are seeing that voices or interface is basically being considered for every device that we’re aware of. We see a very wide range of different devices. As you know there are some leaders in these categories, devices like a Google Home and the Amazon Echo, basically in the virtual assistant type of category, which are kind of driving the market adoption in a very nice way. But recently we are seeing the voice and interface basically being in high demand across a wide range of products. On kind of the competitive offering side, we are seeing companies beyond just ourselves. We’re seeing companies that have their kind of home-grown devices. We’re seeing standard application processors for devices that are connected to the plug. We’re seeing some additional kind of public semiconductor vendors that are focusing on kind of the older category. But I think that all in all we see today that we are definitely in the leading position in the segment as we provide the most comprehensive product portfolio, starting from a low power – and in a way we are the only ones which can really do a voice-user interface on battery-operated devices in very low power – as well as additional products that basically continue the range from a 1-microphone product up to kind of 8-microphone product. And a lot has come in our pipeline.

[Jaeson Schmidt:]

Okay, that’s helpful. And then, just following up on that, is it fair to say that you guys still expect SmartVoice revenue in that $5 million to $8 million range for the year?

[Ofer Elyakim:]

Yes. So on that question, so we did indicate back when we reported fourth quarter revenues and provided the guidance for this year, $5 million to $8 million. In a way this is much more of a back-end loaded, as you can see from taking kind of the actual first half last – our guidance for third quarter and assume that we will see a much more significant increase in the fourth quarter and propelled by additional wins that will actually go to mass production and contribute to our fourth quarter. I would say that right now we’re definitely in that range, I would say most likely towards the lower end of that, around, like $5 million to – around that area, based on kind of what we see. But I can tell you that we have not been more optimistic about the activity and the result in this category as we see our design pipeline improving and we see an enormous opportunity for us into the fourth quarter and on to next year.

[Jaeson Schmidt:]

Okay. And then just a last one for me and I’ll jump back into queue. You guys have seen some really nice gross margin expansion here. How should we think about gross margin longer term and where that could migrate to?

[Ofer Elyakim:]

So with respect to gross margins, as we indicated in the past, we do feel kind of comfortable that we can sustain this kind of mid-40% type of gross margin. I would say that with revenue growth we believe – and as the product mix of course shifts towards new product efforts – as you know, new products do carry higher gross margins than our cordless products do. And as the mix shifts in a more favorable way towards new products and as our revenue base grows and basically as we do show revenue growth, we do believe that we can grow beyond that. So let’s say call it to the kind of high 40s.

[Operator:]

[Operator Instructions] And we take the next question from Matt Ramsay with Canaccord Genuity.

[Matt Ramsay:]

Ofer, you made some interesting commentary on your prepared script there about the link of the growth of your home gateway business to the long-term potential of your ULE and IoT franchises. And I wonder if you might expand upon that a little bit from a strategic point of view, how you guys are thinking about linking those two businesses together and one fueling growth of the other.

[Ofer Elyakim:]

Sure. Thank you for the question. So with respect to kind of connecting the two dots, one is SmartVoi- – one is the home gateway side and the other one is IoT. And I also put in another one; it’s also connecting between ULE and SmartVoice. What we have seen in the last, I would say, 4 years is that more and more telcos and service providers, especially in the European continent but also beyond that – we mentioned in Australia and also in the U.S. – these leading operators are looking for adding more connectivity to their broadband gateway as a way to serve and provide value-added services at the right quality to their subscriber base. One of these technologies is DECT. I’d say that the first reason why they chose to integrate this connectivity was for providing high-definition voice to the subscriber base. But I would say that over the last 2 years we’re seeing a shift. And the primary reason for introducing and adding DECT to the gateway is actually for a future IoT services and in addition, of course, high-definition voice. Right now if we look at kind of globally we have well over 30 million gateways that are deployed in the field that support this connectivity. And most of them today are already upgraded to support also ULE. We have I would say today about 2 key service providers in Europe that are already using those gateways that were shipped to subscribers years ago. And today these gateways are providing ULE services and these service providers have already launched a smartphone, a flash phone with ULE as kind of the leading connectivity for IoT. Deutsche Telekom is just an example from this quarter. And we believe this is going to be some of the milestone for us, seeing ULE being integrated and selected by many additional leading vendors and service providers. So when you look at IoT, one of the key things that are necessary is to bring a box, to bring a hard disk that basically we connect all the nodes. And that type of box of course, it costs a certain amount of money, and to bundle that, together with sensors. Together we do service, of course, you know, take especially if it’s subsidized for subscribers. And when you do that and integrate that into the main program box that sits in every home, you in a way make it much more easy to install and update some new services. And we see many of those service providers that carry back in their indiscernible today really moving and taking a very active approach on doing IoT services on top of DECT or ULE connectivity. So I hope I answered your question.

[Matt Ramsay:]

No, thank you, the color there is much appreciated. And I guess just as a follow-up on the IoT and ULE platforms, sounds like great progress there and some exciting stuff to come with Deutsche Telekom, et cetera. But just for us trying to model that business from afar, it’s small today and pretty lumpy. So if there is any help you could give us with any annual numbers where you might be this year and how you’re thinking about that business from a growth trajectory over the next few years, that would be really helpful.

[Ofer Elyakim:]

Sure. So I think that when we provided the – some sort of kind of annual indication for ranges in the new products, we did provide kind of something along – the $7 million for this year, for 2017. We think that this number should grow incrementally over the next few years. With this launch and also additional launches that we hope that will place in 2018 and 2019. We feel like right now it’s kind of too early to make it very specific. And if of course it does get done and we wait, it gets rolled out and there’s great demand out there, from subscribers for these services. But we definitely do see a very nice ramp in the revenue growth of this business. I would say that once we kind of get closer to kind of one quarter already of deployments we will be able to provide more granularity around what we expect with respect to some of the next years when you model the revenue. But we definitely do believe that we will see significant growth rate of, I would say, 30% to 50% a year.

[Matt Ramsay:]

That’s helpful. And let me just sneak in a couple for Dror. I guess just to follow up on gross margin, obviously great work in Q2. But I was a bit surprised that the margins were guided as strong as they were in Q3 given the mix up of the DECT product line. If there’s any color you have on the gross margin differences between the growth segments in aggregate and the DECT business, that would be helpful. And then, how are you thinking about OpEx growth going forward, given – seems like a lot of new opportunities out there that might need sales and marketing and biz dev support, so just any help there would be great.

[Dror Levy:]

Sure. So I’ll start with the second question about how we see the operating expenses. So I’d just say if you take the midpoint of our guidance, so Q3 already a few have ticked up in OpEx. The midrange in pro forma basis is around $13.9 million, $14 million, compared to $13.5 million in the second quarter. When we look into the fourth quarter we believe that these numbers will be back to the level where they were in second quarter, so around $13.5 million. And overall for the year and I think that this level of $13.5 million to $14 million should be able to support also our growth and also the addition of [indiscernible] I just discussed. And so this is in terms of the operating expenses. In terms of the margin, yes, it’s true that the new products do come with, like, better margins. And if you tried to calculate I would say roughly between 2% to 4% of the difference between the drivers for the quarter and the average of new product are. So it’s true that when we have like a different mix we should see also that margins are different, so it’s a different mix of product. But on the other hand we still see some concessions that we are able to get on our supply chain. And we do think that there like some other factors that affect it. What’s not – so all in all, we expect the margins for third quarter should remain more or less stable compared to the second quarter.

[Operator:]

We take our next question from Sujee Silva from Roth Capital.

[Sujee Silva:]

So on the SmartVoice product you have a couple of customers coming in here. I’m wondering, in terms of the pipeline looking to 2018 whether it’s more likely that it will be these customers that you’re focusing on a ramp, whether you’ll have maybe 2 or 3 new customers or whether the opportunity in customers kind of expand out to maybe 8, 10, 12, that kind of range. Just understanding how the pipeline could convert for SmartVoice and non-smartphone.

[Ofer Elyakim:]

Sure. Thank you, Sujee, for the question. So with respect to SmartVoice, we are contemplating, as I said earlier, a pretty wide range of product, from smartphone to kind of non-smartphone, wearable IoT, smart speakers, smart assistants, et cetera. We do believe that, given kind of the design pipeline and the additional customers who are already in production, that for next year we should be able to grow our SmartVoice revenues likely. The key question is whether we can meet the 2016 level. And I believe that it will be a mix of kind of non-smartphone type of product as well as kind of smartphone type of product. And that will basically be the revenue base. You asked about what is kind of the range. And I’d say it’s too early to discuss like a specific range, but we definitely do expect to see a very – a pretty significant ramp in the SmartVoice category going into 2018.

[Sujee Silva:]

Okay, that’s helpful there. And then on the gateway side, it sounds like you have good penetration in Europe and you just talked about a U.S. telco. Is that your only U.S. customer, or do you have multiple U.S. customers? Or among telco or cable – do you have any cable customers in the U.S.? I just want to understand the penetration there in the U.S. versus I think Europe where you have a strong base.

[Ofer Elyakim:]

Yes. So on the home gateway side, so I would say the home base is really Europe with respect to service providers with DECT/CAT-iq. We did have a major – a cable operator customer in the U.S., which we’re still shipping into. And the North American new design, you know, the product which is about to ship in the fourth quarter, is with a leading U.S. telco. And we believe that with that launch we will see a lot more kind of interest and traction with respect to additional designs by other service providers.

[Sujee Silva:]

Okay. And then last question. To follow up on Matt’s question on IoT and how that revenue plays out, is there going to this lumpiness as you saw with Deutsche Telekom kind of ramp and pause? Is that kind of the linearity we’d expect in IoT where programs ramp up and then pause? Or would that kind of be steady-state level in the next couple of quarters?

[Ofer Elyakim:]

Yes. So thanks for that question. No, I think that what we do is we tend to put most of the focus on the long term and how does it look from kind of the incremental wins and what is the potential for the upcoming years, given the design pipeline. It is harder for us to assess exactly, as you’ve indicated, the ramp/pause effect. But most likely it does come with the territory and it does come with the stock fairly new revenue base which is now kind of starting to build up and is much more prone to volatility as it is just a few customers. And hopefully once we have additional customers, this kind of volatility will calm down. But right now I believe that, as we said, first quarter we were seeing some sort of like a sequential part of a slowdown. But something else, as I said, when we should see very healthy growth rate. And when it comes to this lumpiness, yes, perhaps it will be right now and about – a ramp quarter, a pause, et cetera, and kind of harder to predict that.

[Sujee Silva:]

Okay, thank you. Nice job on the progress, guys.

[Operator:]

We take our next question from Charlie Anderson with Dougherty and Company.

[Charlie Anderson:]

Congrats on the results. I wanted to start maybe with Office/VoIP. I think that was a little bit better than you were expecting in the quarter. And that’s guided up in Q3. If you could maybe just give us a little color on what’s going on there in terms of just how the market is doing and then how design win activity is going.

[Ofer Elyakim:]

Yes, sure. Thanks for the question. And with respect to the – I’ll start first with kind of the market situation. We have been, and should be for the last two years, into two key markets. One is called kind of the on-prem or the enterprise, you know, large type of enterprise market, and also, too, is the market which is called hosted door, the fifth type of market where the OEMs which are shipping the IP phones or the voice gateway, utilize third-party type of call control system. And in this quarter specifically what we did see, that there was a very nice ramp and increased demand coming from the hosted market, while – and that of course the years of – the market trend, this market is – a hosted PBX market is a market of growth. It is a market where you can actually absorb much more cost of ownership for this type of enterprise unified communication. And for the last couple of years we do see very, I would say, slow growth in the enterprise side, on the on-prem side. And in this quarter we highlighted two key factors. One was the increase in demand coming from the hosted side of the market, and you know, companies that – OEMs that sell just the IP phones and the gateways but do not sell the PBX. And in addition to that, we did see a recovery in one of our Tier 1 customers that where we saw kind of little bit of lumpiness in the last, say, two quarters.

[Charlie Anderson:]

Great. And then, as it relates to SmartVoice and smart speaker opportunities, I think most of the volume today is concentrated in speakers that are plugged into the wall. Right? And I think what distinguishes your technology is you’ve got about the lowest power profile out there. As we think about moving into next year, do you have a sense of the mix of the market that will move toward more of that portable phone factor, if we just think about the size and the opportunity for you guys?

[Ofer Elyakim:]

Yes, certainly. So we do see power consumption or the ability to accommodate devices that will be in battery power as a consideration coming from the majority of OEMs that we meet with. So it’s definitely very high up in their priorities. As you know, before this AC class type of speakers, most of the speakers in the market were kind of more of a Bluetooth type of speakers. Most if not all of them were portable, battery-operated. And in a way portability is definitely a consideration and you would want to place these devices wherever you’d like them to be, not close to an AC outlet or have kind of wires running. These are wireless devices. Just like your – a PC is today, a laptop or a smartphone or a tablet, these devices should be portable. So definitely a low-power consumption and the ability to have high performance but still with very low-power flavor is always-on. Now, to size up the opportunity and tell you exactly what will be the trend, I would say that certainly there is – the smart speaker is a terrific lead-in to our battery-operated. Of course they could also be flat, but the key space that you use them is battery operated. I think that we see a growing number of battery-operated devices out there and I think the market will wait for the right technology that could also take the high performance one and make them a low power enough so that they can also extend a battery operation. And so we’re definitely thinking and seeing a trend toward more battery-operated devices.

[Operator:]

We take our next question from Scott Searle with Benchmark.

[Scott Searle:]

Just to quickly follow up on the SmartVoice front, I think a lot of people are trying to get around what is the size of the ultra-low power market when you’re looking at both 2017 and kind of how that ramps up into 2018? Because that’s where you guys really excel on that front. And just to clarify on Charlie’s earlier question, your wins as you’re starting to look out into 2018, are they all in the battery-operated environment or wearable or power-constrained environment? Or are you actually starting to win and be competitive with some of the less power-efficient solutions out there?

[Ofer Elyakim:]

So, thank you, Scott, for the question. So with respect to the low power, part of the SmartVoice opportunity – and, again, also here we’re talking about certain silos, so starting from kind of the high end smartphone market to wearable devices, some kind of eyewear to smart watches and all kinds of fitness types of wearables that will incorporate those – that are a battery-operated. And going now into much more kind of the older category and here were talking about, let’s call them, Bluetooth stickers about that are today incorporating more connectivity and also a voice-enabled type of product into certain IoT products that are battery-operated by nature and would like to incorporate the voice-user interface, that feature. And these are also mostly in battery operated. We do see today an addressable market, if I look behind the smartphone market, about 300 million units a year. That’s what we estimate. And of course if we include the high-end stock hold market we’re talking about several hundred millions more devices. Now I’m going into your questions about the wins. Are they only in or with battery-operated devices? I would say today the answer – the majority of the devices that are shipping is, because they’re battery-operated. Looking into the engagements that we have in the pipe, looking into next year, we do believe we will also grow beyond the battery-operated devices and also be used for devices that are plugged. I would say the key when it will come to these types of devices is power consumption criteria that we would provide would be, I would say, lower than the average solutions that are out there. But I think that what we are going into now is we will see devices that require a lot more performance, but there will still be a fairly significant consideration over the amount of quality devices used in a variety of, like, modes of operation. And I think that this is the market, as we said, that we definitely have where this is a core competence that we bring. And so kind of just to summarize, I would say today, yes, mostly we’re using battery-operated devices. Future, not only – we’re going to be using these devices that are AC plugged. And I’m not sure if I missed a third part of your question, Scott.

[Scott Searle:]

No, that was perfect. And just to follow up quickly on the VoIP front, I’m not sure if I missed it, but has Avaya come back to pre-bankruptcy levels? Are they back in a normalized run rate right now?

[Ofer Elyakim:]

We’re definitely seeing improved trends coming from this customer with respect to bookings and expectations, yes. I don’t feel I can say much more about them. But we’re definitely seeing much healthier type of trends.

[Scott Searle:]

Got you. And just the last item, on the IoT and ULE front, it seems like you’re starting to get some design traction with additional carriers. Creates a little bit of a step function up when that happens. Do you need other RF technologies integrated into what you’re doing to be competitive longer term, whether it’s Wi-Fi, Bluetooth, BLE, or otherwise, to be competitive in that marketplace? Or can you as a standalone ULE solution be successful?

[Ofer Elyakim:]

Sure. So with respect to some of the design pipeline or traction, we do believe that in the next 24 months we’ll see additional Tier 1 type of service providers launch platforms based on ULE. So I think that we have, say, good color about kind of what should happen in the future. Of course we cannot actually indicate exactly when that happens, because that of course tends to vary with respect to readiness, et cetera. And vis a vis the question of the additional RF technologies – so today, typically service providers tend to kind of get comfortable with one technology. However, they typically are open for kind of some – a prevailing and common type of a technology. You mentioned BLE, mentioned Wi-Fi. So definitely these are also a – in consideration I would say there are of course certain pros and cons for each technology. For instance, ULE, we just expand out with providing the best trend, the very low power consumption, the ability to do kind of real-time communication voice-video data. And there will be a handicapping range in Bluetooth, there will be a handicapping range in Wi-Fi. Wi-Fi also come up with some other issues relating to kind of power consumption, et cetera. We are of course interested in serving wider opportunities and also looking at a wider portfolio. But I would say today this does not in any way broker or prevent ULE from getting designed into a product or selected by a service provider. In a way there is no real problem in mixing these technologies. At the end of the day there is great coexistence between ULE and the other technologies that we’re working on, the 2.4 gigahertz. But, yes, of course if we have a richer portfolio we’d be able to address even more opportunities. And this is something that we’re definitely taking a close look at.

[Operator:]

We take our next question from Rajvindra Gill with Needham and Company.

[Rajvindra Gill:]

So follow-up on a previous question with respect to the competitive landscape. So voice is becoming a major interface for smartphones, but also these voice-assisted devices, et cetera. You’ve seen Synaptics recently buy Conexant, and kind of moving into that space. Cirrus Logic is also kind of moving into this space as well. Wondering if you could maybe frame competitively the market as a lot of these new – as a lot of units start to expand and you have a big unit opportunity, maybe your competitive differentiation.

[Ofer Elyakim:]

So with respect to the competitive landscape, I would say that, as I’ve indicated, the market is today splitting to these different silos which I tried to kind of classify. They’re ranging from kind of what we typically see when we think about voice or interface, we typically think about, like, a speaker. But there are also a variety of additional products and categories that are embracing today, which isn’t to say that the majority of them of course is battery operated. And when we look at this landscape today, as I’ve indicated on the battery-powered devices we get from – we do see a very clear indication that we have to be the best performance. In the category in [indiscernible] of course is a additional company. I think that with respect to our offering, it’s I would say very similar to what Conexant has. But of course our portfolio is a lot bigger with respect to what we can cover in the space. With respect to Cirrus, of course both Conexant and Cirrus Logic are very good competitors and they have a very nice product portfolio. But I would say that when it comes to kind of much more of the algorithm, much like the reference design capability, et cetera, we are kind of more similar to the offering of Conexant. And as I said, we believe we have a much broader portfolio of products and I think that that will be seen in the market in the next, say, 24 months.

[Rajvindra Gill:]

And on the Voice over IP TAM, last year you did about $26 million. This year you’re on track to, I think, do $33 million, $34 million. The TAM you had mentioned is about $150 million to $200 million. So that’s, based on last year’s numbers, roughly 15% market share. In terms of the design wins, I was wondering if you could talk about how many of those new design wins are going into production in the relative short term versus those that will be going into production in the next couple of years. And with respect to market share, Broadcom is around 50%, TI is around 30%. And I’m just wondering the reason for the high share that they still have. Is that mainly because of the life cycle of these models is 5, 6 years? And when is the next refresh going to be happening where the market share dynamics could shift more to your direction?

[Ofer Elyakim:]

Yes, thanks for the great, great question. And, again, I think that there are basically kind of two ways to kind of draw these pie chart. One is by revenues. And revenues typically range low AC products to very high AC products the ICN point market. So when you do the math – and as we’ve articulated, this pie chart was of the total revenue. But as you know, we’ve entered this market starting from the very low end part of the market. And I would say that predominantly most if not all of our designs today have been more the low end part of the market. That means the products we are selecting, the relatively low ASP. And most of the design pipeline that we have today going into the future, we’ve been concentrating on the higher end of the market. That means every unit we collect a much higher ASP. And so when we look at kind of the unit volume per se we see ourselves already in the – market share in the 30% when it comes to kind of unit volume pie chart. And of course when you look at it from the value and then of course we are lower as we are mainly addressing the low end of the market with a lower ASP. With our new product portfolio that includes two additional parts of the SoC, targeting this voice and video endpoints we’re kind of well positioned to grow in the call it more of the high end side of that market and in a way kind of – but of course a lot more ASP per unit. And that will kind of drive us forward as we build our position in this market.

[Rajvindra Gill:]

Any kind of color on the range of the ASPs?

[Ofer Elyakim:]

Yes. So I can give you kind of very broadly. I would say you have the different type of endpoint, where the market is of course much smaller. But the ASP is very – you know, the double digits. You have kind of high-end stuff, which are kind of probably think on ASPs, think we have kind of high-single digits. And we have the ultra-low cost, which is basically targeting I would say below the mid single digit target of ASP.

[Operator:]

Thank you. This concludes today’s Q&A session. And I would now like to hand the call back over to our hosts for any additional or closing remarks.

[Daniel Amir:]

Yes. Thank you for joining me for the call today. In coming weeks DSP Group plans to participate in Canaccord Genuity’s growth conference on August 9 in Boston. And we look forward to providing another update in approximately 90 days. Thank you for dialing in.

[Operator:]

Thank you. This will conclude today’s conference call. Thank you for your participation. You may now disconnect.