DSP Group, Inc.
Q3 2017 Earnings Call Transcript

Published: 4 Nov 2017

[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 Third Quarter 2017 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 fourth quarter of 2017, including by segment and optimism about our new product offering and design wins that are anticipated to drive revenues in 2018 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 third quarter and then comment on the progression of our business plan, and finally, provide context for outlook. In a short while, Dror will provide you with detailed comments on our financial results and outlook for the fourth quarter of 2017. We achieved third quarter financial results that were ahead of our guidance in almost every financial metric. Third quarter revenues were ahead of the midpoint of our guidance. We ended the quarter with total revenues of $34.3 million, representing a sequential increase of 9.5%, while year-over-year decrease of 12%, mainly related to the expected revenue shortfall in our SmartVoice and cordless product. Better than expected demand for new products resulted in new product revenues accounting for 47% of sales, including record results for our Office/VoIP segment. Moreover, we are delighted to inform you that during the third quarter, there were eight new product launches and announcements based on our SmartVoice technology. The solid momentum in our SmartVoice business demonstrates our accomplishment in meeting our objective of revenue diversification and the strength of our SmartVoice offering. With just six months ago, was based mostly on a single product. Total new product revenues of $16 million accounted for 47% of sales. New product revenues declined by 3% year-over-year, but increased by 9% on a sequential basis, with Office/VoIP and SmartVoice continuing the positive momentum and delivering solid sequential growth. Looking forward,, we expect our fourth quarter revenues to decline on a sequential basis, mainly due to seasonal factors. The first is weaker demand for cordless SoCs, and number two, lower sequential demand for VoIP products following a record quarter. Operationally, a better product mix drove 190 basis points improvement in our third quarter non-GAAP gross margins to a 10-year high of 46.9%, and resulted in non-GAAP earnings per share of $0.10. Now I’d like to provide specific updates about our progress in each segment, starting with SmartVoice. During the quarter, sales of our SmartVoice products totaled $1.4 million and were at the high-end of our guidance range. We are pleased to inform you that during the third quarter, we successfully executed on our plan to diversify our revenue base with known smartphone application. And I’m happy to report a record number of new product launches based on SmartVoice technology and our DBMD SoCs with eight different OEMs, including some of the world’s leading consumer electronics brands, covering a wide range of product, such as tablets, smart speakers, wearables and IoT product. We expect to end the year by shipping to all eight OEM customers for known smartphone applications. Moreover, we have built a broad and comprehensive product offering that covers both hardware and software algorithms to enhance voice user interface for devices that range from single or dual microphones battery-operated to multi-microphones and high performance ones. In addition, we are very excited to announce a high-volume major design win for a smartphone product with a leading mobile OEM, which is expected to contribute to our results as early as the end of this year and to a much larger extent next year. During the quarter, we had a number of noteworthy developments in our SmartVoice category. First, GoPro launched its Hero 6 black action camera using our DBMD SoC for handsfree voice activation. Second, Samsung launched its new smartwatch, the Gear Sport, and chose our DBMD SoC to run Always-On Voice. Third, four leading OEMs, including top audio brand launched smart speaker product incorporating our SmartVoice technology and our DBMD SoCs and running Amazon Alexa Voice Services. Fourth, a leading Japanese OEM launched an innovative tablet and selected our DBMD SoC for voice user interface enhancement. Fifth, Libre Wireless, a leading embedded voice-enabled audio and multi-protocol IoT solution provider selected our SmartVoice technology for its voice and media streaming module. Finally, LISNR created an advanced low-power acoustic data transmission, also based on our SmartVoice technology. Looking ahead to the fourth quarter, we anticipate that our revenue will increase on a sequential basis to the level of $1.5 million to $1.9 million. While our guidance suggests that our full-year SmartVoice results will come slightly below our annual goal, which is to meet or exceed $5 million in SmartVoice revenues, we view this shortfall as temporary and related to delays in timing of shipments in the fourth quarter. We expect our SmartVoice business to be an important contributor to our future growth with a broad array of exciting applications and remain highly confident in the future success and revenue growth of this product category. Now moving to the VoIP and Office and segment. We continue to strengthen our leadership position in the unified communications endpoint market, as demonstrated by the growing design pipeline with several Tier 1 OEMs, as well as with other customers. For the third quarter, we surpassed $10 million in quarterly revenues for the first time. VoIP revenues of $10.1 million represent an increase of 32% year-over-year and 18% sequentially. This result is well ahead of our previous guidance of $8.5 million to $9.5 million. Contributing to the better than expected results were solid demand from our Tier 1 customers. During the quarter, a leading Tier 1 OEM customer began shipment of its new flagship business conferencing system based on our DVF99 and DVF1100 SoCs. In addition, Yealink launched its new W60 IP DECT phone, targeted – targeting small and medium businesses, which is based on our voice and DECT SoC product. These new product launches go hand in hand with our expectation for increased traction with Tier 1 customers and an expansion of our addressable market into additional product SKUs, such as, conferencing systems and video endpoints. Due to seasonal trends, we expect fourth quarter VoIP revenues to decline on a sequential basis. We project VoIP revenues to be in the range of $8 million to $9 million, which implies a year-over-year growth of 32% versus the fourth quarter of 2016 at the midpoint of guidance. We remain confident that with our current product roadmap and design pipeline, we are well positioned for solid revenue growth in the years to come. Now to an update on the Home segment, which includes home gateways, IoT and cordless. I will start with home gateways. Our third quarter home gateway revenues of $3.1 million increased by 1% year-over-year and by 8% sequentially and was in line with our expectations. Given our current backlog and our assessment, which takes into consideration a slower than expected ramp of one of our new Tier 1 service provider customer, we expect fourth quarter home gateway revenues to be in the range of $2.8 million to $3.1 million. Turning to IoT. For the third quarter, IoT revenues of $1.5 million were ahead with our previous guidance and represent an increase of 24% year-over-year, while down 38% sequentially. We remain pleased with the market feedback and momentum that has followed the ULE Magenta SmartHome product launch at Deutsche Telekom, driving wider adoption of ULE. Several leading European service providers and smart home OEMs are in various phases for evaluations and field trials. And we are optimistic that additional leading service providers will adopt ULE and roll out smart home services based on our technology during 2018 and 2019 timeframe. We are also pleased with the positive traction and engagement for adding voice user interface to smart home systems to enable a better user interface for home and office IoT. We have recently engaged in several new customer projects that combines our SmartVoice solution with ULE connectivity to develop smart assistance in IoT devices that support voice control as well as two-way voice. We see this as another meaningful growth opportunity for ULE technology, which is ideal for building battery-operated devices, always-on functionality, high-quality two-way voice and audio with best-in-class uninterrupted wireless coverage. During the third quarter, we had two noteworthy announcements. First, Cloud of Things, a premier IoT device management company, launched a family of IoT gateways featuring native ULE support based on our ULE solution. The joint solution has been chosen by Howdens Joinery, UK’s largest supplier of fitted kitchens to facilitate their innovative connected kitchen initiative. Second, Greenwave Systems, an IoT service provider combined Philio-Tech voice assistant on its AXON Platform. The voice assistant is a battery-operated device powered by DSP Group’s ULE and SmartVoice technologies. This product exhibits our strategy of going after opportunities where we can cover both ULE and SmartVoice. For the fourth quarter and following a stronger first nine months for our IoT business with year-over-year growth of 47%, we expect a sequential decline in our IoT revenues to the range of $0.9 million and $1.1 million. We believe that this softness is temporary and relates to inventory adjustments at some of our customers. And now, for an update on the cordless phone market. Our third quarter cordless revenues were slightly below our expectations. Cordless revenues declined by 18% year-over-year, while increased by 10% on a sequential basis, mainly as a result of weaker demand for products targeting the U.S. end market that were offset by some recovery in the European end market. Cordless revenues accounted for 53% of third quarter total revenues. In the fourth quarter, we anticipate that our cordless revenues will decline on a sequential basis due to seasonal demand shortfall. However, from a full-year perspective, we expect our cordless revenues to be down by about 13%, which is in line with our expectation for a 10% to 15% annual decline. And now, to an update on our outlook. Based on the revenue expectations across our new product initiatives, while taking into consideration our outlook for new products and cordless telephony revenues, we expect fourth quarter revenues to decline on a sequential basis and to be in the range of $30 million to $32 million. To summarize, we are very pleased with our financial results for the third quarter, which highlight solid execution and included a record quarter in our Voice over IP segment, as well as major design wins and revenue diversification in our SmartVoice segment. Despite some near-term headwinds, we remain highly 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 and margin expansion in 2018 and beyond. 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 third quarter of 2017 from top to bottom. For each line item, I will provide U.S. GAAP results, as well as equity-based compensation expenses, including the decline item and the expenses related to previous acquisitions. Our revenues for the third quarter of 2017 were $34.3 million. Gross margin for the quarter was 46.7%. 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 $15.8 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 expenses for the quarter were $0.1 million and included an income tax benefit resulting from the changes in deferred taxes related to intangible assets and equity-based compensation expenses in the total amount of $0.2 million. Our net income was $0.6 million, including equity-based compensation expenses of $1.5 million, amortization of intangible assets of $0.4 million and tax benefit resulting from changes in deferred taxes in the amount of $0.2 million. The non-GAAP net income, excluding these items I’ve just described was $2.3 million. GAAP diluted earnings per share for the quarter was $0.02. The negative impact of equity-based compensation expenses on the EPS was $0.06. The negative impact of the amortization of acquired intangible assets on the EPS was $0.02, and the non-GAAP income per share, excluding these items was $0.10 for the quarter. 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 receivables at the end of the third quarter increased to $20 million compared to $14.6 million in the end of the second quarter. This represents a level of 52 days of sales. Inventory slightly increased from $10.6 million at the end of the second quarter to $10.7 million, representing a level of 53 days. Our total cash and marketable securities decreased by $3.6 million during the third quarter and were at the level of $122.2 million as of September 30, 2017. Our cash and marketable securities position during the quarter was affected by the following items

[Operator:]

Thank you, sir. [Operator Instructions] We will now take our first question from Jaeson Schmidt from Lake Street Capital Markets. Please go ahead, sir. Your line is open.

[Jaeson Schmidt:]

Hey, guys, thanks for taking my questions. I just want to start with the announcement of that new design win with a smartphone OEM. Just curious if that is with a customer you previously worked with, or if this is a brand-new customer? And wondering if you could help us size the potential opportunity of this win?

[Ofer Elyakim:]

Hi, Jaeson. So thank you for the question. Unfortunately, right now, we won’t be able to say exactly who it is. But I hope that in the next conference call, we will be able to share more. But it is a fairly sizable design that should, I would say, contribute very nicely to our 2018 revenues. So this is an opportunity of over 10 million units – well over 10 million units.

[Jaeson Schmidt:]

Okay. That’s helpful. And then wondering if you could just talk about the competitive landscape in SmartVoice? And if you’ve seen any major changes?

[Ofer Elyakim:]

Yes, absolutely. So on the competitive landscape, as I’ve indicated in our – in my prepared remarks, we have been working on for the last year-and-a-half on building a comprehensive portfolio of products that can cover the devices that in a way participate in voice user interface that in a way range from low-power battery-operated devices with one to two microphones, such as smartphones, wearables, action cameras, et cetera, into kind of the midrange devices, which include kind of some of the smart remotes, smart speakers into kind of the high-end category of a smart assistant. And by doing that in a way, we created both in line of new SoCs, as well as the right algorithms that can support each of these different kind of pillars in the market. From the competitive point of view, so as you can understand, there are potentially different – there’s different competition in each of these kind of market segments, starting from, let’s say, kind of the battery-operated devices to more of the kind of the high-end products. I would say, that as this market has been burgeoning and attracting many companies to invest greatly in providing this mechanism of driving interaction via voice, we have seen a lot of entrants. And I’m pretty sure that this is a market that will drive a lot of interest and has, in my view, a very nice roadmap in future with respect to a lot of increments around artificial intelligence and a lot of areas where voice can play in addition to voice user interface or command and control, but in the form of sensing varieties. So for now, we are seeing a lot of activity ranging from many different SoC vendors that are in the audio or kind of the voice side or companies that originate more from the application processor market side that are trying to build a portfolio of products targeting this type of category. I believe that we are well positioned, both from the point of view that we have today the best-in-class power consumption SoCs. So we can drive a lot of performance and still keep the devices battery-operated. Number two, we believe that our investment in algorithms and our ability to do great acoustic echo cancellation and very good noise reduction definitely helps us in winning design wins in this market.

[Jaeson Schmidt:]

Okay. Thank you. And the last one for me, and I’ll jump back in the queue. How should we think about OpEx ramping in 2018? Do you anticipate needing to add significant head count to go after all these opportunities you have in your new products?

[Dror Levy:]

Hi, this is Dror. So if we look at the OpEx of the third quarter and also the midpoint of our guidance for the fourth quarter, so we are at the range of, I would say, $13.5 million, closer to $14 million a quarter in terms of OpEx in pro forma basis. And I assume that this should be also the range that you should take into account going forward. So to answer your question, we do not expect that we need to increase OpEx in order to support all these opportunities.

[Jaeson Schmidt:]

Okay. Thanks a lot, guys.

[Ofer Elyakim:]

Thank you.

[Operator:]

Thank you. Our next question comes from Matt Ramsay from Canaccord. Please go ahead, sir. Your line is open.

[Matthew Ramsay:]

Thank you very much for taking my questions. Ofer, maybe you could just sort of step back and look at the business a little bit. Obviously, there is some year-over-year headwinds at Samsung and sort of the new growth products categories. But if you look at the results in the third quarter and the guidance for the fourth quarter, it looks like the growth products overall added together are about flat year-over-year in both of those quarters. And maybe you could just talk about how you guys are thinking about the mix of the business between the telephony business and the new products changing over time as they go through the next couple of years? Thank you.

[Ofer Elyakim:]

Yes. Hi, Matt, and thank you for the question. So, with respect to kind of how we’re looking at the mix, you’re absolutely correct that in a way there are like two kind of different businesses here. One is more of a mature and high cash flow generating business, which is cordless, and this business is declining and has been declining for the last couple of years, and in a way, kind of we model it to be declining at about – the rates of about 10% to 15%. And then, we have the new product business, which by itself is built from kind of three main pillars. And looking at where we were last year to this year, we did lose about $15 million of revenue from our smartphone customer. And I think that, we have learned that we need and must diversify our product portfolio in this domain, and that’s exactly what we have done. And I think that, over the course of these 12 months, we’ve shown a lot of execution and just reporting in this conference call about eight new product launches in the third quarter. So it makes us a lot more, I would say, optimistic about our abilities to sustain growth in the market and to continue and see our revenues growing on a gradual basis pretty much like what we have seen on the Voice over IP side, as the foundations are much more solid now, targeting a number of different product segments and in each of them a number of design wins, we’re kind of usually market leaders in our kind of our ability to kind of resume design wins with smartphones. So the way we’re like modeling it forward is, we do expect and anticipate that new products will account for a majority of next year’s revenues. And from that point onward, the way we would want to see – we’d like to see it is that, cordless will become less significant. The decline rates in absolute dollar figures will become less significant, and it will be much easier to offset this decline with new revenues that are coming from new products. So right now, if you ask me about the vulnerability of our new product business, I would say that it’s, for sure, it is much lower than where it was after winning the smartphone business last year. And I would say that, right now, the portfolio is a lot more diversified if we are talking about IoT, a number of service providers, if we’re talking about Voice over IP, many customers. And I think that we’re going to see same happening in our SmartVoice category, and it’s going to become diversified. And I think that, we will be able to kind of to show very nice gradual growth quarter-over-quarter. So I hope that did answer your question.

[Matthew Ramsay:]

Yes, very much so. Thank you. Thank you for the comments. I guess, I just have a couple of follow-up questions. I guess, one, on the business as we look forward here, I appreciate the longer-term commentary about the mix changes in the business. But given maybe a little bit of a shortfall in the fourth quarter guidance, I wonder if you might help us think about seasonality into Q1 and where we might start the year? And then secondly, just a follow-up on some of the last questioning around the potential for higher operating expenses. I just wonder how you guys are thinking about the business here with all these growth opportunities ahead? I guess, the need to invest more capital on an R&D side versus – I mean, you guys have $100 million on the balance sheet and what you might be able to do with that cash pile to really accelerate growth in some of these new areas? Thank you.

[Ofer Elyakim:]

Sure. So with respect to color on the first quarter, I would say that, when we look at seasonality, as we said for the past couple of years, so in a way, in cordless, we kind of lost the seasonal behavior, for the most part. On Voice over VoIP, I think, we have seen during the last two years some sort of like seasonality where kind of Q4 comes in slightly below Q3, and Q1 is kind of the lowest point over the year. So I think, we have seen that. And that could be part of what you should be taking into account when you model Q1. On kind of the SmartVoice side, we definitely do see a gradual growth in that product segment, and we hope to continuing to see that throughout next year. In IoT, as I’ve commented on in my remarks, we did see a very nice traction in the first three quarters of the year, and in a way now it’s a little bit kind of leveling down, mainly as a result of probably some kind of inventory adjustment. So hopefully, that will end either in Q4 or in Q1. And from then, we would anticipate seeing gradual increase in orders and shipments. With respect to like [indiscernible], I think it’s too early to kind of indicate anything around Q1. We see exactly how the cordless business is settling. But for the most part, we don’t see right now anything that will – beyond what we indicated vis-à-vis inventory accumulation. So the only place where there might be some is on the kind of the IoT front a little bit. But other than that, we don’t see like anything that should significantly kind of impact Q1. And the second part of your question was around our cash balance of around $122 million. As we have done over the last couple of years is, we view this cash to buy back our own shares. And I believe that we are doing so, because we believe it’s a good investment. And when we look outside to what we can buy at similar multiples, I’ll tell you, there are no assets that are trading where we are trading. So – but we are interested in building more diversity. We’re interested in building more scale in our business. And we’re definitely interested in expanding our business, especially around the product segments that we’re heavily involved in, that include SmartVoice and IoT. And this is kind of an area where we would like to expand. And definitely, once we do see that there is – there are some nice complementing assets that we can acquire, then this will be a source of funding for that.

[Matthew Ramsay:]

Thank you very much for expanding on that. That was really helpful. Appreciate it.

[Operator:]

Thank you. Our next question comes from Charlie Anderson from Dougherty & Company. Please go ahead. Your line is open.

[Charlie Anderson:]

Yes. Thanks for taking my questions. Ofer, I wanted to talk a little bit about sort of the ASP profile within SmartVoice. I think, historically, we have seen sockets be sub $1, but there is certainly opportunities out there if you deliver something that’s multi-core and they have codec functionalities, you can earn multiple dollars. I wonder if you can maybe just help us understand kind of where we sit today and then with some of the design wins you’re gaining, kind of what type of content we are talking about? And then, maybe some of the headroom for you to grow their with increased functionality?

[Ofer Elyakim:]

Yes. Thank you, Charlie. So with respect to kind of the ASP profile, so again like going through the segmentation of the SmartVoice category, so we have, what we call, kind of more of the low-end, so very low-power, limited processing, one to two microphone type of solutions. These will kind of range from below $1 to slightly more than $1. And beyond that, we do have solutions that target, let’s call this category, smart speaker, which already kind of multi-mix with a number of cores, the right algorithms, et cetera. This will go for like more in the low single-digits. And beyond that, we have kind of a multi-core, high-performance, yet still very low-power targeted for the kind of the smart assistant and beyond type of market. But of course, as the market dynamics change and as the requirements, the user experience change, some of these kind of high-end, what we consider right now as high-end products and technology could also kind of go and skew towards devices where traditionally we sold a single core one to two mic type of solution. And for the third category, the smart assistant category, this will go in kind of the low single to kind of mid single digits.

[Charlie Anderson:]

Great. And if I think about having a really nice smartphone win here, I wonder if you could just maybe characterize what you’re seeing out there in terms of demand drivers from the smartphone companies in terms of flagship versus midrange, where is the demand pull coming from in terms of functionality? Anything there would be helpful? Thanks.

[Ofer Elyakim:]

Sure. So on smartphone, we are seeing a growing interest from device vendors, so – that are designing kind of the next-gen type of smartphones. And the interest is ranging from kind of very high, what you call, kind of flagship to kind of midrange, which are these devices – the midrange devices in terms of characteristics are kind of playing catch up with high-end and gradually rolling out more features that were, just a year ago, in the flagship category. And these are embraced also now in the so-called midrange, which is – these phones are already kind of multi-microphone and, in our view, will support more and more the smart assistant and voice user interface. And the interest is in a way kind of not just limited to kind of singular type of OEM, but is rather broad. And we do expect that as part of kind of the trajectory into next year, we will see a lot more interest and engagement and hopefully, design wins with more OEMs. And what we need to kind of understand that beyond our solutions for SmartVoice, the way our products will go into market is the fact that, we’re really delivering on a single chip the full solution, the full solution for always-on voice, or the full solution for cleansing. So a lot of that is kind of in the deliverable of DSPG that is very much, I would say, different than designing something like from scratch and perhaps integrating this capability to other processor, even though this trend does exist. But we do see that our solution for this market is kind of like differentiated versus kind of what you can do competitively otherwise.

[Charlie Anderson:]

Perfect. Thank you so much.

[Operator:]

Thank you. We will now take our next question from Suji Desilva from Roth Capital. Please go ahead.

[Suji Desilva:]

Hi, Ofer. Hi, Dror. So maybe some questions on the intermediate term here. I think, you talked about 2018 that the new products would be more than half the revs versus the matures are certainly expecting growth. Can you help us rank order among the new products, which one you think – which ones you think will drive the best growth in 2018, just to help us understand the outlook?

[Ofer Elyakim:]

Yes. Sure. So I would say that, right now, from kind of a base, we have Voice over IP which is, of course, kind of in the kind of the mid-30s and has been growing and we believe should grow in the 20s or 30s type of growth rate. We have the IoT side, which is kind of averaging kind of around $7 million this year. And we won’t – we believe we’ll see some growth. But as I said, it does depend on a number of factors. Then, we have SmartVoice, which last year was about north of $15 million. This is year is kind of based on our guidance slightly below $5 million. We believe that given the design pipeline that we have and our expectations for additional design over the next couple of quarters, we believe that this from a percentage wise has, of course, the highest kind of growth profile from absolute dollar perhaps, so still we need to kind of really see how our business plan for 2018 looks like. But I would say that, definitely kind of SmartVoice is well positioned to be kind of the leader in terms of growth for next year. And then, we have kind of home gateway, which is – has been kind of flattish to kind of growing. And so I believe that the same type of trend line will be there. So we do expect growth in home gateway, but it will be smaller or lower than in the other product lines.

[Suji Desilva:]

Okay. Ofer, thanks. That’s helpful color. And then, specifically on SmartVoice, should we think of 2018 as a period where similar kind of design wins come in, in 2017, or it accelerates or more that you are digesting the 2017 design wins and trying to support those to volume?

[Ofer Elyakim:]

So I think, we are – our expectation is that, we will continue to see more design wins, so more engagements converging to designs, converging into product launches and shipments, et cetera. So we do expect to see more of that occurring, leveraging the existing design wins, leveraging the existing customers that we just acquired for next-generation or perhaps broadening their portfolio, new customer acquisition, et cetera. So we do expect to see more activity in the SmartVoice category.

[Suji Desilva:]

And last quick question. You had a lot of smart speaker wins in Amazon and outside Amazon. When do you think we will know if the market outside Amazon is a robust one with strong unit growth, or whether the Amazon continues to dominate this market? What’s the timing of those Amazon competitors seeing units potentially?

[Ofer Elyakim:]

Yes. I believe that as we are seeing a lot of product launches in this category for the holiday season of like 2017, probably kind of in 2018, we will have a better view and kind of – more kind of number, more figures around kind of the success rates of these launches. So probably, it should take into kind of the next holiday season to kind of have a verdict about kind of how successful these third-party products that utilized the voice engines of Amazon and others are doing in the market.

[Suji Desilva:]

Okay. Thanks, Ofer.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Robert Mertens from Needham. Please go ahead, sir. Your line is open.

[Robert Mertens:]

Hey, this is Robert on behalf Raji Gill. Thank you for taking my question. I guess, first, I just wanted to get a little bit more sense of the growth, which within your Office/VoIP product line, obviously you guys had some strong growth this quarter much higher than maybe even I was expecting. And then, we’re guiding a little bit light into the fourth quarter. How should we think about this business line going forward throughout 2018? And maybe some of the main areas of growth there?

[Ofer Elyakim:]

Yes. So Robert, thanks for the question. So around our Office/VoIP category, I think, that from a seasonality perspective, if we look at 2016, 2017 in a way kind of the year is kind of going gradually upwards from Q1 to Q2 to in a way kind of peak in Q3, and then a lighter quarter in Q4, so I think you can see this behavior also last year. Actually, from what we see or view, we believe that in a way, this type of kind of a seasonal pattern could also be in 2018. When you look at Q4, while it is down sequentially, the midpoint of the guidance does suggest a healthy year-over-year growth versus Q4 2016. So perhaps that does align with the kind of the seasonal pattern that I’m describing. And we do expect, therefore to see like Q1 next year perhaps kind of starting at the low point and then building up to Q2 to Q3 and then softening into Q4, perhaps that has to do a lot with the way kind of the enterprise world works with kind of the lead times that we need to factor between our shipments to the device vendors or the manufacturer shipments until enterprises buy them out. And a lot it is around kind of executing on the budget, and Q4 is perhaps kind of a fairly big type of a consumption period. So, probably like, if we are to kind of break it out, probably we would find some alignment and relationship between the two – between the peak kind of Q4 and the calendar Q4 in the market. And with respect to what’s driving that, we have been executing, I would say, fairly prudently in this market and have won a lot of designs, whether they are in kind of the Tier 3 or Tier 2s and the Tier 1s. I think that what we have also been doing is expanding our relationship in solution portfolio within the customers that we have won. And today, as you can see, we’re – we’ve been able to diversify even to kind of the highest quality type of product with the same solution just to show kind of what we are able to deliver in this professional voice and audio market. And I believe that our ability to continue and grow in this business is undisputed, and we will be able to continue and show that in the years to come. Not to say that from a sequential or quarter reporting, there will be some volatility, as there is with any other business, but we believe that the opportunity is there. We believe that we are very well positioned. We have the strongest and most comprehensive portfolio of chipset covering every SKU in the kind of this unified communication endpoint market, and we are kind of very, very well positioned there.

[Robert Mertens:]

Great. Thank you. And if I could just ask one more question, I guess, around the home gateway and IoT areas. It looked like they did pretty decently this quarter, guided down a little bit between the delay at one of the major customers within home gateways and then that inventory that we talked about for IoT. But how should I think about those groups going out into 2018? Do you have much visibility in terms of the long-term growth in either home gateway or IoT?

[Ofer Elyakim:]

Right. So in both cases, and let’s separate my answer to home gateway first, and then go with IoT. So on both segments, we do expect long-term growth in both businesses. On the home gateway front, it is a lot around in new product launches and new home gateway product launches. We had a number this year. There was a one major launch that is getting delayed, and we started shipment, but it’s still getting delayed. And this is the reason of the fact that in a way, Q4 is guided a tad – really a tad below Q3. But we do expect additional wins to happen with major service providers going into 2018, we do expect to see growth there. And the home gateway revenues and the growth will depend on us winning new design wins with home gateway type of service providers and them launching in time and at the right run rate, et cetera. On the IoT, slightly a different picture, this is a market where we are underpenetrated and our technology is also there. But right now and based on the momentum that has been created, especially in Europe by a very bold move by Europe’s leading service provider, Deutsche Telekom, to embrace this technology and offer a wide array of solution for smart home based on ULE and in a way leverage the fact that ULE is in the home gateway already, and they can in a way serve smart homes without a need for any installer or any other book. It’s basically mail in. The subsidy here is close to zero and the ability to actually reduce the service fees does exist with our solution, and it is very hard to find that with any other competing technology. And in a way today, Deutsche Telekom ships about 1 million gateways with smart home integrated. So these are the regular broadband gateways. So their ability to actually cover and serve a subscriber base is there. And potentially, they can basically cover 1 million new subscribers every year, or I would say, gross additions every year with smart home and ULE. So on the IoT front, it’s really around the momentum and the follow-on design wins that will happen during 2018 and 2019. And we do have a lineup of very nice kind of lucrative service providers, OEM that are in the process of evaluating. Some are already trialing ULE, both in the form of just smart home and many of them also by adding voice to that, by adding voice control to the smartphone – to their smart homes using the same exact wireless link that provides full home coverage, propagate excellent within walls, doesn’t matter what the home or the walls are made out of, covers the outdoor front and covers in a multistory, no need for any repeater, any mesh, anything, it’s pretty much plug and -play, self-install. So we want to see these launches happening, and that, of course, will generate the next level or the next phase of growth in the IoT model.

[Robert Mertens:]

Great. Thank you. That’s very helpful.

[Operator:]

Thank you. Gentlemen, we have no further questions. So at this point, I would like to turn the call back to you if you have any additional or closing remarks. Thank you.

[Daniel Amir:]

Yes, thank you for dialing into the call today. And we plan to have our next update in approximately 90 days. Thank you.