DSP Group, Inc.
Q4 2017 Earnings Call Transcript

Published: 1 Feb 2018

[Operator:]

Good day and welcome to the Q4 2017 DSP Group's Inc. 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 fourth 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 first quarter of 2018, including by segments, preliminary composition of revenues for 2018, anticipated gross margin improvement, the anticipated general annual secular decline of our Codec segment, our ability to secure additional design wins, mass projection timetables, 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 fourth 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 for the fourth quarter, and our outlook for the first quarter of 2018. We are pleased to report that DSP Group has reached an inflection point in which new product initiatives that we have been investing in over the past several years are gaining momentum and will be driving dynamic growth in the years ahead. While this momentum is not entirely evident on our financial result, and is mapped by the long-term decline of our cordless business, recent industry development, design win, and customer engagements bolster our confidence that we're well-positioned for significant long-term revenue growth and margin expansion. Moreover, we're excited about our position and momentum in three dynamic industries

[Dror Levy:]

Thank you, Ofer. I will now review the income statement for the fourth 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 the expenses related to previous acquisition. Our revenues for the fourth quarter of 2017 were $31.2 million. Gross margin for the quarter was 47.8%. Gross margin for the quarter included equity-based compensation expenses in the amount of $0.1 million. R&D expenses were $9.1 million, including equity-based compensation expenses in the amount of $0.5 million. Operating expenses for the quarter were $15.6 million, including equity-based compensation expenses in the amount of $1.3 million, and amortization of acquired intangible assets in the amount of $0.4 million. Financial income for the quarter was $0.5 million. Income tax benefit for the quarter was $0.1 million and included an income tax benefit resulting from the changes in deferred taxes related to intangible assets and related to equity-based compensation expenses, in the total amount of $0.3 million. The income tax on a pro forma basis excluding these items were $0.2 million. Net loss for the fourth quarter was $0.1 million including equity-based compensation expenses of $1.3 million, amortization of intangible assets of $0.4 million, and tax benefits in the amount of $0.3 million. The non-GAAP net income excluding these items was $1.3 million. Loss per share for the quarter was $0.01. The negative impact of the equity-based compensation expenses on the EPS were $0.06. The negative impact of the amortization of acquired intangible assets on the EPS was $0.02 and the positive impact of the tax benefit was $0.01. The non-GAAP diluted earnings per share excluding these items I just described were $0.06. 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 fourth quarter of 2017 decreased to $13.4 million compared to $20 million at the end of the third quarter, representing a level of 39 days of sales. Inventory decreased from $10.7 million at the end of the third quarter to $9.4 million representing level of 52 days. Our cash and marketable securities increased by $7 million during the fourth quarter and were at level of $129.2 million at the end of December. Our cash and marketable securities position during the quarter was affected by the following

[Operator:]

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

[Jaeson Schmidt:]

Hi guys, thanks for taking my questions. Just want to quickly start on the SmartVoice segments. I’m wondering if you could talk a little bit about what your current customer pipeline looks like today from Tier 2 this time last year and how should we think about potential growth rates within that segment this year?

[Ofer Elyakim:]

Sure, hi, Jaeson, and thanks for the question. So on our SmartVoice, I would say when we compare ourselves in the first quarter of 2018 to the same period last year, I would say the difference is really day and night, because right now we see that during 2017 and of course into Q1 of 2018 what we've really done is diversified both from the customer front as well as from the product frontier is at the same time a year ago we were mainly in a handset or one model and today we are shipping to a -- well most of eight different OEM customers and providing solutions for a variety of products from wearables, handsets, smart speakers, IoT, and then many additional type of end products. So we are actually very encouraged and pleased by the diversification efforts that we have been successfully accomplishing. I'd say that as we look into the year in 2018 we believe that how diversification efforts are going to continue, we believe that we will see more eight products with our solutions both on the wearable front, as well as on the many more smart speaker, smarter systems, more handsets. So actually we are extremely encouraged with the sales pipeline and the design activity that we have around SmartVoice and also we believe we are well-positioned also from the point of view of having a fairly comprehensive product portfolio especially for SmartVoice starting with ultra-low power limited type of performance devices up to the smarter systems type of products that require the ability to operate many different microphones, do a lot of heavylifting in terms of algorithms. So we see that today we have really these rich portfolio from end-to-end covering all of these products, the battery power, the smart speaker category, set top boxes, smarter systems et cetera, et cetera. So we feel we are well-positioned. I think we also booked during this year a very good customer testimonials about the quality of our algorithms, the ability to really do Far Field utilizing our algorithms got embraced by market-leading OEMs. So on all of those fronts, we feel really well-positioned. You asked about the revenues, so we believe that the revenues this year should be of course higher than what we achieved last year. Last year we ended the year with about $4.9 million. We do expect to see significant growth this year as we are shipping to many and more products and expect that pipeline to expand as the year progresses. So we should see like gradual expansion in growth in our revenue from quarter-to-quarter. I would say that we are looking at kind of 2018 but next week we are having our Analyst Day, so we are going to talk more about kind of the -- kind of the ranges and we will refine that.

[Jaeson Schmidt:]

Okay. That's very helpful, thank you. And then just looking at that home gateways engagement that got put on hold, do you expect that to come online later this year or is it on hold indefinitely?

[Ofer Elyakim:]

Yes, so thanks, yes, so it’s a good question. I should have actually put more color around it in my prepared remarks. Yes, so that gateway product is put on hold on a temporary basis, so it is expected to be released but in a couple of quarters, so hopefully late this year. On the gateway front, we do see many, many such engagements that and also a lot of our speed -- a lot of our speed that are going now in to the market where ULE is in demand for broadband gateway, so this is also an encouraging sign for us.

[Jaeson Schmidt:]

Okay. And the last one from me and I'll jump back into queue. Looking at OpEx it looks like it's going to be about $14.6 million on a non-GAAP basis in Q1. How should we think about OpEx needing to ramp throughout the year?

[Dror Levy:]

Yes, so, hi, Jaeson, this is Dror. So if you take the mid-point of our guidance excluding the ESOP and the amortization, it's more like a $14.2 million, $14.3 million. Now looking through the reminder of the year I think that we should stay more or less in this range of the numbers, so something in the range of I would say $14 million to $14.5 million per quarter for 2018.

[Operator:]

Thank you. We can now take our next question from Rajvindra Gill from Needham & Company. Please go ahead. Your line is open.

[Rajvindra Gill:]

Yes, thank you, and thanks for taking my questions. Quick question on the legacy business the forecast having a decline, I think 15%, 20% I'd say. Normally what's going on there if you could provide more details in the past it is you have experienced some of these greater than expected declines in that business and then other years it's been less than expected. I wonder if you can give more clarity on that -- on that portion of the business?

[Ofer Elyakim:]

Hi, Raj, yes, and thanks for the question. So you are absolutely pretty correct, there were years where it was kind of more on the extreme declines and some years that there were some relaxation. We don’t have any new piece of information. I think when we look at the end market and we look at the point of sale data, we did see kind of mid-teens type of declines both in the U.S end market and European end market. In 2017 the European end market were down slightly worse than that. But there is nothing that we see that may prompt for a change. The reason why we provided that comment that perhaps that could be the case this year just as a result of the performance during the last quarters of the year, so in the second half and so was implied our guidance for Q1. This is -- we don’t really have any insights into kind of a worsening decline. It's just kind of trying to reflect the level of declines that we have been experiencing. So for sure the declines could improve throughout the year, so we have very little control over that.

[Rajvindra Gill:]

Okay. And on the -- we've talked about the competitive landscape in SmartHome, just wanted to talk if you could discuss your competitive differentiation in SmartHome as voice becomes more of a main interface, a lot of devices, how you're running up against the most, how big is the market growing, and do you think able to absorb multiple competitors and how do you think the share will be divided?

[Ofer Elyakim:]

Sure. Raj your question is about SmartHome, did I understand it correctly to be SmartHome not SmartVoice?

[Rajvindra Gill:]

I’m sorry SmartVoice, not the SmartHome but the SmartVoice business where voice is becoming a bigger and bigger interface for devices.

[Ofer Elyakim:]

Yes. So we see a fairly significant market opportunity ahead starting from let's say start from the top of the pyramid to devices like the smarter systems of today, devices of the nature of Amazon Echo and Google Home and this type of product. We're seeing a surge in the number of units that gets sold. We are well-positioned in this market. We have been able to develop solutions that on one hand it provides very low power consumption. So think about such a device that will be battery operated. So to enable it full flexibility, full portability, and mobility around the home without the need for an outlet in your buy and a wire hanging from the outlet to wherever that this product is placed. This is on one hand. And on the other side very high performance including the artificial intelligence type of engines that can really run in big networks on chip, on the edge to provide new ways for partitioning between cloud and edge. So all of that will enable these devices to be smarter to work much quicker to be able to do a lot of things that today in -- are not really provided by these type of smarter system devices. I think when you visit us at CS; you saw some of the demos of what can be done on the Edge, so all of that I think and it makes up very well-positioned. When we look kind of down the pyramid to devices like set-top boxes and smart speakers, I think that we are also well-positioned there. Again the ability to run things and enable battery power devices, the ability to do a Far Field voice activation with very good quality that we have been demonstrating both on the barging side as well as the informing noise reduction front. When we look at the more of the battery devices that are embracing voice user interface, I think we have the best power today and also great capability to incorporate a number of microphones run a several algorithms. And so from all of those factors I think that we have a group portfolio of very different solutions that are in a way addressing a many different market verticals within the voices or interface space. As we discussed like along that kind of pyramid on the Holy Grail or very high performance have two kind of ultra-low power, highly sensitive type of products.

[Operator:]

Thank you. We can now take our next question from Charlie Anderson from Dougherty & Company. Please go ahead. Your line is open.

[Charlie Anderson:]

Yes, thanks for taking my questions. I think if I look at the implied outlook for growth for the year in the down 15% to 20% in cordless I think the rest of the business grows a little bit more than 20%. I wonder is that the right sort of CAGR to think about for the non-cordless business in the years ahead? And then, may be if you could talk about the gross margin profile obviously your gross margins have been trending up, but if I think about gross margin profile of these new products versus cordless telephony, how wide is that GAAP and how much room is there to go on gross margin? And then I've got a follow-up. Thanks.

[Ofer Elyakim:]

Hi, Charlie. Thanks for the question. So perhaps we start with kind of the CAGR going forward for new products. Yes, I think that this is kind of definitely, kind of in line with what's possible and actually we believe that much higher kind of revenue CAGR. We are well-positioned for that also like I'd say in the next two years, so that our new products to grow even beyond the 20% per year. And as you pointed out correctly the new product or these franchise businesses that we built which are kind of targeting these dynamic market are also going at a better or I'd say like closer to kind of gross margins in the 50s versus what we have on the legacy side in cordless which is of course well below the corporate average. The GAAP is still pretty wide between these two categories the cordless and the other businesses. So we do expect to continue and see a margin expansions as the mix of product changes in favor of these other product categories namely voice, SmartVoice and SmartHome. And we believe that during this year we should also see a margin expansion as we complete this kind of -- the move into this inflection point where the majority of the revenue is really with these businesses, and we also believe that there is enough ability to see margins go further as the mix of product changes in favor of the better margin businesses from the very low depressed margins that we have on cordless. So --

[Charlie Anderson:]

Great. And then my follow-up --

[Ofer Elyakim:]

So for the year, I think -- sorry --

[Dror Levy:]

And maybe I'll try this [indiscernible] just while we see that our gross margin for the first quarter if you take the mid-point of our guidance is lower than Q4 2017. For the whole year 2018 we do expect this margins will be I would say aligned and even better than what we see for Q4 2017. So we start the year with lower gross margin mostly in revenues and then absolute number is also relatively lower than its proportion for the year and then we expect to see gross margin expansion throughout 2018.

[Charlie Anderson:]

Perfect, perfect, great. And then my follow-up I was wondering about Ofer you mentioned in your scripts Smartphones you did win the A8 and I think it sounded like there were some incremental design wins on the Smartphone side. I wonder if you could maybe help us understand the size of the opportunity there, is this flagship, is this mid-range, is this across the board, are there certain app processor architectures, you're sitting next to more than most just any additional color on the trajectory of the Smartphone pipeline for you? Thanks.

[Ofer Elyakim:]

Yes, so absolutely. So we do believe that during this year we would see additional Smartphone wins with additional OEMs and additional models. I would say that we are seeing that voices or interface is being embraced and adopted also in the mid-range categories. We believe we'll see more of that during the year. I also see that and I think that I've been saying that over the last two years we're completely agnostic from a -- as of the application processor and actually can work well with any type of kind of founder of the application processor in the mobile Smartphone domain. And we will I think see that during this year once the products are out and then there will be some tear down reports we'll be able to see that we're actually working alongside a variety of different application processors. So on the Smartphone front, we do expect to see Smartphone volumes and we do expect to see more rollout of Smartphones with our SmartVoice from additional OEMs and to see number of models. And once these models are going to be out, we'll hopefully be able to update about who that is and what are the models.

[Operator:]

Thank you. We can now take our next question from Rob Stone from Cowen & Company.

[Rob Stone:]

Hi guys. I wanted to ask sort of a secular question about the legacy business. Do you see at some point that you reach a baseline, where the business stabilizes or is it possible that this type of functionality eventually gets subsumed into some other multi-purpose product or maybe hybrid product combining some new IoT and voice UI capabilities and I have a couple others? Thanks.

[Ofer Elyakim:]

Hi, Rob, and thanks for joining our call. The cordless categories, hopefully, when we say cordless we're mainly referring to cordless product that are sold at retail. So these are kind of consumer devices that play -- the role that it plays a home phone. We do see a lot of value in the category and we do see that for instance in the small business market which is a primary consumer devices, there's actually a lot of investment by our customers to have enough products and have enough feature set functionality etcetera to be able to compete effectively at very high prices to provide telephony applications. So if you out like thinking about is there a bottom, is there a place where the category does not decline further, yes, I'm sure that there is such a point. If we had to kind of estimate where that is, and kind of it's harder, but I would say that if we size up kind of the more of the professional users for small houses, small businesses, elderlies, people that use these devices every single day and really love the way they sound, the way they work. So I'd say that probably like for us it will be a market of in the 15 million units a year which is probably kind of one-third down the way. So kind of -- this is kind of where it is from our perspective. So we do see DECT is utilizing many different ways and there is a lot of demand for DECT in enterprise. In small media business, as I mentioned, the consumer products which are also utilized by thousands. Now this is just kind of reflect that there is a market that really likes and loves because the category that is there. And well also string investment both in headset, in different handset, the ability to connected to Wi-Fi and Bluetooth to do fix mobile convergence et cetera so all of that happened. It's that I would say that for the masses is that category has been going down this is kind of where people have been cutting the core, hence moving from kind of a pyramid phone to a personal phone, kind of really speaking only on the phone and some of the humans also have stopped speaking on the phone altogether. But for the most part I think that there is a certain bottom. And, now, if we were to kind of think about the category today probably in the 20 million units a year and we are, as I say, like I think on a 15 at least from the way we look at it is kind of like a bottom but we will have to kind of wait and see.

[Rob Stone:]

You also as a follow-up to the question about long-term gross margin opportunities, right now these new categories are in a rapid growth phase and you mentioned a lot of the range of technologies also power and AI and works heavy algorithms et cetera. Did you see as the categories gets bigger and may be increasing competition that the margins perhaps peak and come back to some sort of level or if that's the case what are opportunities for you to add value that would keep the margins in the 50s for the new product categories?

[Ofer Elyakim:]

Yes. So our goal as kind of a -- we transitioned during the last year was to be at the high 40s and I think that we are there in 2018. I think that the opportunities to go into the 50s and we do believe that this is something which is possible and definitely kind of within our target for the next couple of years as we would want to see our margins advance forward as we see that product mix shifting into kind of the higher margin products. Now, when we are designing our future and looking at kind of the product roadmap and what needs to be there in order for us to stay competitive, to be able to generate industry type of gross margins or above, a lot goes hand-in-hand, right, for software is extremely important for everything that whether it's for a SmartHome or connectivity or if it's for the voices or interface demand or if you're talking about the software that we provide to the enterprise. So the combination of hardware the chip, the designs, system design itself as well as the software flavor that gets put inside all of that is going to create the DSP's value proposition. And we believe that by combining these two and staying ahead of our game, we will be able to continue and protect our margins and sell to the market at the ASPs that we're at today and actually our plans and objectives are to grow up in the -- on the ASP ladder the same as we have done in the voice over IP domain.

[Rob Stone:]

Great. My last question is balance sheet and may be strategy related. You've got quite a bit of cash even using some to buy back stock. And any comments on potential uses of cash going forward?

[Dror Levy:]

Yes, remember with stock -- with buybacks so indeed we are this so both relatively it's more number of shares in this quarter but overall for the year I think the number was north of $4.5 million and this is like some to what we did in the last couple of years it was I think in average north of $10 million per year. And this is certainly a trend that we will continue to -- we will continue to see going forward. So we do believe that at current share level we should and we will continue to buyback our stock.

[Operator:]

Thank you. [Operator Instructions]. We can now take our next question from Suji Desilva from ROTH Capital. Please go ahead.

[Suji Desilva:]

Hi, Ofer, hi Dror. So may be first question on the SmartVoice product. The -- I want to understand the ASP dynamic there and you talked about eight OEMs at this point ramping. What do you think that number can be in the years to understand how quickly your pipeline might fill?

[Ofer Elyakim:]

Hi, Suji, thanks for the question. We're looking at kind of a gradual ramp of additional designs and product also throughout 2018. I think that if you're kind of shipping north of eight, our objective will be to see that number kind of grow nicely during the year. I think that the ability to kind of grow that by 50% to 100% during the year is definitely there. And I think that when you look at our design pipeline we do have enough ne customers and OEMs to cover that. What I -- when I said that we're looking to kind of a decline on the ASP curve also in the SmartVoice domain, what I meant and I think that I despite a little bit in the beginning today in the SmartVoice domain, we're addressing a lot of very different market opportunities that will require a very specific type of a solution both on the algorithmic point of view, as well as on the hardware point of view. And in a way what we've build during the last three years is a portfolio of these products that can actually be as low power as to include them in wearable product that could have low power and enough processing capabilities and algorithms to make them work well in a smartphone product that have like enough processing power and algorithms, still low power to provide a solutions for smart speakers and now from what we've demonstrated at CS, I think you saw that we also have the right, right product also to go after the smart system market which is the high end of that domain, the ability to interface with multi-microphones, the ability to run a lot of heavylifting with respect to algorithms, newer networks, kind of AI on the edge. So all of that exist and this is kind of how we're climbing the ASP curve.

[Suji Desilva:]

Okay, great and very helpful. And then maybe you could specifically drill into what happened with Samsung I know you can't maybe talk about a customer specifically but more general the dynamic in phones where you had high end win, flagship win a year ago and then designed out and now you’re in the mid-range, could you just talk about the dynamic that's driving that to the best of your ability?

[Ofer Elyakim:]

Sure. So without going too much into the kind of the specific customer dynamic, I would say that on the smartphone front, we are going to see that voices or interface will be more and more important, will be part of a brand. And so the ability to provide products that are at the right cost, at the right power, and more importantly, provide the right performance level will be key. And I think companies that will have such products and I think that we’re definitely at the forefront of that. We have a socket in many of these devices. It's kind of harder to say where exactly and can a merchant silicon vendor like DSP kind of secure all of the topic, I'm sure that not everything would be covered. But I think that we do have all the relevant product and solution to address that market. We believe there is a lot of opportunity out there. We are today seeing multiple engagements for using our solutions inside smartphones as I said for the most of the matter, now it’s mostly around kind of in mid-range at least from the price point maybe not from the feature set and functionality but from the price points, this is kind of mid-range type of product. But I’m sure that those with a high-end, is definitely on our target list and we will have to kind of see how would the designs materialize in order to kind of provide kind of more specific comments.

[Operator:]

Thank you. That will conclude the Q&A session on today’s call. I would now like to turn the call back over to you for any additional or closing remarks.

[Daniel Amir:]

Yes thank you. So DSP Group is planning to conduct an Investor and Analyst Day on February 7th next week at the Westin Grand Central in New York. We welcome all investors and sell-side analysts to attend the day and if you’re interested in participating, you can contact me directly at [e-mail]. We look forward to seeing you all there next week. Thank you and see you next week.

[Operator:]

Thank you. That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.