DSP Group, Inc.
Q3 2016 Earnings Call Transcript

Published: 31 Oct 2016

[Operator:]

Good day and welcome to the Q3 2016 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, Corporate Vice President for Business Development at DSP Group. 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 Third Quarter 2016 Earnings Conference Call. On today’s call, we also have with us Mr. Ofer Elyakim, Chief Executive Officer; and 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 2016, including by segment and full year 2016 preliminary composition of revenues for 2017, anticipated gross margin improvement, gradual recovery of the cordless business, and the anticipated general annual or secular decline of such business. Our ability to secure additional design wins, mass production time tables 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 2015 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 have 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, commenting on the progression of our business plan, and providing context for our outlook. In a short while, Dror will provide you with detailed comments on our financial results and outlook for the fourth quarter of 2016. We achieved third quarter financial results that were well ahead of our guidance in almost every financial metric. Our performance reflect record revenue contributions from new product, propelling an overall 10% year-over-year revenue growth, record new product revenues of $16.6 million which grew by 70% year-over-year, demonstrate the transition of our business model towards new product initiative including mobile, voice and the IoT product segment. These new products accounted for 43% of third quarter revenues and supported the 340 basis point annual expansion in both GAAP and non-GAAP gross margins of 44.8% and 45% respectively. The improved third quarter operating profitability also reflected a continued focus on achieving operating leverage. Our GAAP and non-GAAP operating margins increased by 1,350 and 720 basis points respectively when compared to the third quarter of 2015 to 13.5% of revenues and 11.9% of revenues respectively, driving our GAAP and non-GAAP earnings per share to $0.23 and $0.19 respectively. Third quarter revenues of approximately $38.8 million grew by 10% year-over-year and by 7% sequentially. Revenue growth by better than expected revenues in our voice and mobile segments, as well as by gradual sequential improvement in our cordless phone business. Looking forward, we expect to successfully accomplish our 2016 new product goals for revenue growth of approximately 50% evidencing our successful expansion in to the new market verticals and diversifying our revenue base. While we project year-over-year revenue growth to continue in the fourth quarter, we expect that our fourth quarter revenue results will be negatively impacted by some weakness in our mobile segment. In the third quarter, we made solid progress across all of our new product initiatives and continued to gain traction with both existing and newer tier one OEMs and leading service provides. We remain optimistic regarding our business outlook for both the short and long term periods, as our new product across office, mobile, home and IoP more widely adopted in driving increased interest in a solid design pipeline. We anticipate that these categories will comprise the majority of our revenues in the year 2017. Now I’d like to provide you with specific updates about the progress in each segment starting with mobile. During the quarter we generated better than expected revenues of approximately $4.6 million from sales of HDClear products, which represented the small sequential increase over the second quarter driven by better than expected demand from our tier one customers. We’re happy to inform you that in addition to the design win we announced last quarter, we have secured another design win for a known smartphone application with a leading North American OEM that is expected to launch in the mid of 2017. We are excited about the market dynamics and especially the green field opportunity for voice activation and control. There is a growing demand for incorporating voice user interface in to a wide range of products and voice activation is becoming a preferred way for interacting with an activating devices. As an example, we believe that the digital assistant market alone would increase ten folds in the next three years and with the recent design wins we believe that we are well positioned to capitalize on this trend. Our DBMP and HDClear product offer the lowest power consumption and best-in-class performance for enhancing voice user interface and including noise suppression, barging or (inaudible) with listening voice trigger and voice command. Looking ahead to the fourth quarter, we expect to meet our annual mobile revenue target of $15 million, although we anticipate a sequential decline in mobile revenues for the fourth quarter due to the unanticipated termination of our flagship product by a leading mobile OEM. We therefore forecast fourth quarter mobile revenues to be in the range of $1.5 million to $2.5 million. Moving to the Voice over IP and office segment, we continue to solidify our leadership in the enterprise standalone market as demonstrated by strong and growing design pipeline with tier one OEM and other leading customers. For the third quarter we achieved record quarterly revenues of $7.7 million representing an increase of 23% year-over-year and 4% sequentially. This result was well ahead of our previous guidance of $6 million to $7 million. Contributing to the better results was stronger than expected ramp of one of our tier one OEMs and stronger overall market demand. During the quarter we secured an additional design win with a leading tier one OEM for high-end conferencing system supporting both voice and video communication. Moreover, several customers launched new products based on our VoIP SoCs. As an example, Grandstream launched its new DP750 and DP720 DECT IP phones in a complete new lineup of ATA products based on our Voice-over-IP SoC. Moreover, Panasonic launched its new KXHDP 330 and 430 series including high-end color and video IP phones based on our DVF99 SoC. For the fourth quarter, we expect both VoIP revenues to be in the range of $6.5 million to $7.5 million suggesting a sequential decline mainly as a result of the faster than expected ramp that we experienced from our new tier-one OEM customer in the second and third quarters. We initially expected this ramp up to take place mostly during the third and fourth quarters. We are optimistic about the outlook for our VoIP business and the strength of our design pipeline and our offering which cover both high to low-end solutions and believe that this segment is well positioned for solid revenue growth. Now to an update on the home segment which includes home gateways, IoT, Spark PA and cordless. I will start with home gateways; third quarter revenues of $3.1 million increased by 36% year-over-year and by 18% sequentially, and were ahead of our expectations. The additional demand was largely due to an initial ramp of a leading Australian service provider that launched DECT enabled home gateways and bundled CAT-iq handsets. Both based on our DECT and CAT-iq SoCs. Moreover, ADB a leading European provider and system and software for connected home solutions integrated our DECT/CAT-iq SoC for its latest lines of home gateways. We expect fourth quarter home gateway revenues to be slightly down on a sequential basis, but to further accelerate in 2017 coinciding new product launches by a number of telecom operators. The underlying market trend behind is the integration of DECT in to home gateways and the growing adoption of HD Voice, such as upgrading their infrastructure and a customer premises equipment to support HD Voice which provides us with ample growth opportunities. Moreover, we are seeing a growing number of telecom service providers that are already leveraging their DECT enabled home gateway infrastructure as a hope to over subscribers out-of-the-box IoT services which are easy to install and plug and play and at a much lower cost of ownership. Now turning to IoT, during the third quarter we generated $1.2 million in revenues from our IoT, representing growth of 5% year-over-year and a decline of 9% on a sequential basis. During the quarter, we continued expand our IoT ecosystem and announced a number of new design win a first with EUROtronic, a leading German manufacturer of wireless smart home solutions and we selected ULE SoC for its new smart home product that includes thermostat, wall switch, door and window contacts, all of which are targeted for tier one European service provider. Second, Sercomm, a leading manufacturer of telecom and broadband equipment announced a full series of smart home sensors that are based on DSP groups DECT ULE and targeted for a leading tier one service provider. In addition, Roc Connect, a leading smart homer services platform announced that it will offer its channel partners ULE support across its smart home hub. We expect a strong momentum in our IoT business to continue and demand from customers to accelerate in the fourth quarter, propelled by preparations for smart home service launch by two leading service providers. We are therefore optimistic that we will surpass our previous 2016 annual revenue expectation of $4 million to $5 million in the IoT segment. ULE is gaining traction as an IoT connectivity technology due to its strong technical merits that include better coverage and longer range, interference free and dedicated and natural support for two-way data, voice and video. Moreover, we are seeing growing interest from customers for adding voice user interface to smart home systems, viewed as the preferred user interface for the home environment. This represents another meaningful growth opportunity for ULE technology, which is designed to support high quality two-way voice, and audio and best-in-class range and propagation. Now to an update on the Spark PA, in the beginning of the year we unveiled a new and highly innovative product category that leverages our decades of CMOS RF design expertise. Spark PA is a 5 gigahertz Wi-Fi power amplifier or PA with the highest RF transmit power and best linearity in CMOS technology. Spark PA also supports Wave 2 and Wave 3 802.11ac access point requirement, multi-user MIMO of 4x4 or 8x8 topologies as well as the future 1024 QAM modulation scheme. During this past quarter, we continue to enhance our offering and provide full front end solutions that incorporate our PA, LNA and switch. We continue to engage with selected customers that are undergoing an evaluation phase of our PA and same products. And now to an update of the cordless phone market; all figures and comparison in this section are for cordless phone SoCs only and do not include revenues from gateways and IoCs. Our third quarter cordless revenues continue to recover, following the inventory correction earlier this year, albeit at a slower pace than we originally anticipated. Cordless revenues declined by 13% year-over-year but increased 9% on a sequential basis and accounted for 57% of third quarter revenues. The year-over-year decline was in line with the cordless phone market decline trend of 10% to 15%. In the fourth quarter, we anticipate that our cordless revenues will be down slightly on a sequential basis due to seasonal factors that remain below the 10% to 15% year-over-year secular market decline trend, as the gradual inventory adjustment recover continues. And now to an update on our outlook; based on our revenue expectations across our new product initiatives, while taking in to consideration a sequential decline in HDClear and cordless telephony revenues, we expect year-over-year revenue growth to continue in the fourth quarter. Although, fourth quarter revenues will be down on a sequential basis. We expect revenues for the fourth quarter of 2016 to be in the range of $34 million to $36 million, which at the mid-point of the range is just 4% year-over-year increase. To summarize, we are very pleased with our financial results for the third quarter which highlights solid execution that included revenue growth both sequentially and year-over-year, solid margin expansion, both in our growth and operating line. During the third quarter, we successfully executed on our business objectives which are primarily focused on driving accelerated growth by expanding the market adoption of our new products in voice, mobile and IoT. We also experience a gradual improvement in the cordless telephony segment during the quarter. Despite our expectation for a sequentially down fourth quarter, we are optimistic that our business outlook for both the short and long term and as our new product across the three segments are more widely adopted in driving the increased demand, we anticipate that these categories will comprise a majority of our revenues in 2017. Now, I’d like to turn the call over to Dror, our Chief Financial Officer. Dror, the floor is yours.

[Dror Levy:]

Thank you Ofer. I will now review the income statement for the third quarter of 2016 from top to bottom. For each line item, I will provide the US GAAP results as well as the equity based compensation expenses included in the line item and the expenses related to previous acquisition. Our revenue for the third quarter of 2016 were $38.8 million. Gross margin for the quarter was 44.8%. Gross margin for the quarter included equity based compensation expenses in the amount of $0.1 million. R&D expenses were $8.5 million including equity based compensation expenses in the amount of 0.7 million. Operating expenses for the quarter were $12 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. Our operating expenses for the quarter were net of $2.5 million of other income, resulting from the lack of previous acquisition related provision due to the exploration of applicable statutes of limitation. This reversal of provision has no cash flow effect on our quarter. Our financial income for the quarter was $0.3 million. Income tax expenses for the quarter were $0.3 million and included an income tax benefit resulting from the amortization of a deferred tax liability related to intangible assets to the amount of $0.1 million. Net income was $5.3 million including equity based compensation expenses of $1.5 million, amortization intangible assets of $0.4 million, other income from the reversal of provision in the amount of $2.5 million and a tax benefit resulting from the amortization of deferred tax liability in the amount of 0.1 million. Non-GAAP net income excluding these items I’ve just described was $4.5 million. GAAP net income per share for this quarter was $0.23. A negative impact of equity based compensation expenses on the EPS was $0.06. The negative impact towards the amortization of acquired intangible assets on EPS was $0.02. The positive impact or the reversal of the provision on the EPS was $0.11. The positive impact on the tax benefit resulting from amortization of deferred tax liability was $0.01 and the non-GAAP net income per share excluding the item I just described was $0.19. This is the current report on 8-K that we filed with the SEC this morning for a reconciliation of the non-GAAP presentation to the GAAP presentation. Now turning to the balance sheet; accounts receivable at the end of the third quarter of 2016 increased to $22.8 million compared to 17.1 million at the end of the second quarter, representing a level of 53 days of sales. Our inventory decreased from $12.9 million at the end of the second quarter to 9.9 million, representing a level of 42 days. Our total cash and marketable securities decreased by $2.2 million during the third quarter and were at the level of $120.6 million as of September 30, 2016. Our cash and marketable securities position during the quarter was affected by the following; $1.2 million of cash was received from operations; $0.5 million was used for purchase of property and equipment; $0.7 million of cash was used for acquisitions of the remaining 86% of the outstanding shares of a company in Asia, which was acting as our representative for the last couple of years. This acquisition brings our holding to 100% of this company and will help us to strengthen our strategic position in this region. $2.2 million was used for repurchase of approximately 200,000 shares of our common stock at an average price of $11.1 per share. $0.5 million of cash was received from exercise of option by employees and $5.5 million was a change in the market value and amortization of marketable securities. Now, I would like to provide you with our projection for the fourth quarter of 2016. Our fourth quarter projections on the US GAAP basis including the impact of equity-based compensation expenses and the acquisition related amortization expenses are as follows

[Operator:]

[Operator Instructions] We will now take our first question; it comes from Mr. Jaeson Schmidt from Lake Street Capital Markets. Please go ahead. Your line is now open.

[Jaeson Schmidt:]

Just a quick clarification on the new mobile win with a non-smartphone application, that’s in addition to the one you announced back in Q2 as well?

[Ofer Elyakim:]

Yes, the win is an additional design win. So one in Q2 and the other one in Q3, and as we’ve indicated we see a very nice market opportunity in the area of IoT and smart sticker and a smart audio type of devices, and we believe that this represents a very nice opportunity and a great fit for the offering that we have around voice user interface and all the announcements including noise cancellation to margin capabilities, acoustic echo cancelling etcetera, etcetera and of course always on voice which is becoming a critical factor to enable a voice user interface on battery operated devices.

[Jaeson Schmidt:]

And are you seeing anything different from a competitive landscape or selling strategy within that market compared to the traditional handset market?

[Ofer Elyakim:]

Of course the smartphone market is fairly well established market place with fairly sizeable OEMs that have their generations of the product and the annual type launch schedule etcetera. And on the other hand the IoT market which includes a lot of the devices around IoT from wearable to home type of devices and systems to some outdoor categories as well is a fairly new and vibrant market which today is evolving at a very fast pace with a lot of focus by all major OEMs and is expected to become a market which will have billions of units. Based on kind of what we see out there, we see a tremendous amount of interest for what we and the technologies that we have developed as well as the product, the silicon component that we have. And the market dynamic is basically suggesting that - and devices like Amazon Echo are kind of leading the market and has created a new market nature that’s enabling people without any other interface just voice to do a perfect interaction and do search and listen all kinds of content and we believe that there is a great fit for what we have and there is as I said a tremendous amount of opportunity out there. Our focus continues to be on all the fronts from mobile to wearable to IoT and we are doing our best to engage and take it to the finish line.

[Jaeson Schmidt:]

How should we think about OpEx trending next year, are you guys going to need to make significant investment for some of these newer opportunities?

[Ofer Elyakim:]

I think that on the OpEx front as you’ve seen from last year to this year, there were some incremental additional investment. We expect to have to see some incremental additional investment going forward, but nothing at a very large scale.

[Operator:]

We would now take our next question; it comes from Mr. Matt Ramsay from Canaccord Genuity. Please go ahead. Your line is now open.

[Matt Ramsay:]

Very well done on the quarter, congrats. I guess on the guidance obviously there is the impact from Samsung, maybe you could help us quantify that a little bit in the mobile revenue for the fourth quarter and how you’re thinking about mobile revenue growth in to 2017?

[Ofer Elyakim:]

So around the guidance, especially around mobile, as you know we’ve indicated during the last quarter that our annual revenue goal was to be above $15 million for the year. We did of course also expect a slower Q3 than we actually had reported 4.6 the midpoint of our expectation was around 3.5. And this came ahead, I believe as Samsung began to ramp up in expectation of Note 7. However, the unfortunate termination of the model thus have an impact on our Q4 number, and what we hope that we will see in terms of demand in Q4. The way we see going forward especially around the fourth quarter is that we are also in the Galaxy S7 as one of the key vehicles for growth and this has been contributing most of our revenues this year. That a lot of replacements will go to Galaxy S7 and by that we will be able to benefit it. Very hard to call exactly how the demand will be in the fourth quarter, of course right now it’s kind of more on the defensive side as there is a lot of blurring in the supply chain and uncertainty around the demand, and what self-determination we’ll have and we will of course try to do our best to fulfill the demand and support the customer in the best way we can. With respect to 2017, I believe it it’s too early to quantify because we are in engagement process, but we need that to be concluded in order to be able to provide better color on how should we think about mobile in to next year. One thing that we are working on is the diversification to be able to get design wins with additional leading customers on a variety of segments and we have been updating you guys about the progress we’re making. I do expect that we will make an additional progress in the quarters to come, as we see a great fit what we have and what the market wants. And I think what we’ve achieved in 2015 and ’16 is a great plan to enable us to monetize the momentum in to the market demand as well as in to additional smartphone and customers and wearable vendors.

[Matt Ramsay:]

Thank you for the color, that’s helpful. I understand the situation at Samsung was certainly not - no one was really able to forecast that so I appreciate that. Outside of that mobile part of the business, maybe you could talk a little bit about visibility. I know it’s always a challenge in the home telephony back to markets, but the seasonality this year as you guys have talked about a recovery in the back half of the year was maybe a hair different that I had modeled. But maybe you could talk a little about trends you’re seeing there and the health of the channel in that market going in to the fourth quarter and in to next year that would really help? Thank you.

[Ofer Elyakim:]

So around quarter’s telephony, so as a general benchmark for all this market, and again the benchmark is really based on what we see coming from the point of sale data and the key to end markets; one is North America and the other one is Europe. We see a market decline rate of about 10% to 15%. I would say Europe is more towards a high single digit, US is more in the low to mid-teens and that has not changed. What has changed is really the health of the supply chain and as you know we’re starting in late third early fourth quarter of 2016 going in to the first quarter of 2016, we saw a major inventory correction cycle that started in the North America market and then moved to the European market and from second quarter we are in a gradual improvement mode that we expect to continue. As we said, you’ve seen a sequential increases in Q2 to Q3 and we see right now slightly sequentially down, but that doesn’t really change the picture. The gradual improvement is ongoing and we believe that this will continue. About what to expect in to next year, assuming the secular trends to not change and where we are this year? It was not as that different if we have to look back in to the trends of 2015 or ’14, this was the level. We expect this if we take in to account that these levels would change, we hope to see a reversion to the main, somewhat right like if you take a look at our revenues for this year they are down in the north of 20% for quarters. If we take nine months actual plus the guidance that we gave, so hope to see better trends next year. At the end of the day there should be a reversion to where the market is and the market is 10% to 15% down.

[Operator:]

We will take our next question; it comes from Mr. Matt Robinson from Wunderlich. Please go ahead. Your line is open.

[Matt Robinson:]

On the voice activation design wins, are they all with customers that have cloud resources for speech recognition?

[Ofer Elyakim:]

So around the additional design wins in mobile and mainly you’re asking about the non-mobile design wins as we’ve announced. So these are with products coming I would say from IoT smart speaker wearable type of front. I would say the majority of wins are with companies that do have a cloud, and some of these products are actually going to be a cloud operated, but some could also be operated in a standalone model through additional connectivity capabilities. I think that as we look at our pipeline and the opportunity to fly ahead, it is basically a mix of both connected or cloud based type of voice engines and the ability to voice user interface and naturally speaking, and also some ability to run a limited voice user interface vocabulary locally. So I would say there is a good mix of that like when we look at the opportunities out there on both ends. But there is also a lot of interest around how do we enhance the capabilities of voice to be heard with noises, with the fact that many of these devices also carry in addition to microphone speakers and how do you support barging, how do you do good acoustic echo cancellation. A lot of these types of dynamics of making voice just better and making it work with very good performance. So that - from the threshold of user experience, it will basically be able to meet where the market leading machines are. The real benchmark is of course Alexa or Amazon Echo.

[Matt Robinson:]

Have they gotten very far along in coming up with interface mechanisms to enable the supply chain to offer customer premise devices that are fully viable for facing the cloud. Obviously the smartphone universe has gotten pretty good there, but just curious how far along the residential type functions have gone or if its pretty cut and dry.

[Ofer Elyakim:]

I think there’s a very big difference between OEMs are trying to achieve on the premise equipment or the residential market and the industrial market. And what we have today is smartphone which is a much more of a near filed type of an interaction. Typically you’re within a yard or so from your phone, but in the residential or industrial type of environment, first of all you are prone to many kind of noises that in a smartphone sim you have let’s say hopefully more control or at least an alternative user interface. And number two is the distance from the device itself and how does it need to work when there is perhaps several other people in the same room subject to noises reverberations etcetera, etcetera while you are fairly far away from the device. So all of that accounts for additional used cases and another hurdle in terms of enabling better performance from voice user interface on these types of new devices. I hope that helps?

[Matt Robinson:]

But what’s the timeframe for these guys to get in to production with your initial designs?

[Ofer Elyakim:]

Right now the way we see these gradually throughout ’17, I’d say the best way to model it is that these devices move to production in the middle of the year or so.

[Matt Robinson:]

And how should we think about the market size for this? Is it comparable to home gateway to over a period of some years?

[Ofer Elyakim:]

I think that the opportunity is much greater than where we are in home gateways today over the years. We are right now at the starting line, so we’ve just started these diversifications and started getting design wins and we have a fairly nice pipeline of engagement that we are working on. But the opportunity is by far larger than gateways. Even the units that we see today and we have a belief that this is what we see a lot of from the market research, by talking to customers, their expectations are for this market to grow fairly rapidly.

[Matt Robinson:]

You mentioned certain times talking about Spark, which was a nice update. Is there - have you had any progress in the last quarter, it seems like we’re kind of looking for something maybe by the end of next year for production, but that’s far enough out. It seems like it’s a pretty uncertain estimate. Is there any - can you talk about the progress if anything there’s been in the last quarter?

[Ofer Elyakim:]

Yes, absolutely. We did make a significant progress during the last six months, as this product started to sample and get evaluated by customers or by potential customers. And our goal as we’ve indicated is to see revenues in ’17 and so for that we need to land the design win during the next six months to make it to production in to ’17. Where we are definitely is engagement process with a number of vendors. Some of them are more on the Wi-Fi sub-system to be part of the reference design and some are direct engagement with an OEM to be the PA or a [fan] in a future solution. So on both ends we’re making progress in terms of the engagement side, and what we need to do is carry that through the finish line or to be either a land of designing or be far to the reference design that will enable us to move to of course move to the next step which will be to start commercial shipments and realize revenues. So right now we believe that by late 2017, there seems to be right now a goal to see revenue or an initial shipments from the Spark PA.

[Operator:]

We will now take our next question; it comes from Charlie Anderson from Dougherty & Company. Please go ahead. Your line is now open.

[Charlie Anderson:]

I wanted to focus on really strong gross margin performance. I wondered if you could speak to like for like margins, was there any change there on products or was that just a feature of mix. And then moving forward the sustainability of some of these margins and the long term margin model, if you want to talk about that that would be great.

[Ofer Elyakim:]

On gross margins I think we’ve indicated that our near term goals are to move in to mid-40s. We have over the last three years we’ve kind of gradually step by step saw these margin improvement cycle happening from high 30s in to the low 40s and now this third quarter of course represent a near term high 45. And I think this is where we want to be at these mid-40s. Of course it will be really hard to estimate accurately every quarter, as you know this is of course a calculation based on the mix of products and that each and every one of them has its own margin profile. But the real dynamic behind it is the fact that our new products which are of course - there’s a very strong correlation and not by case, because our new products are carrying a much better gross margins than our cordless telephony products. And as these revenues are representing a bigger part of the mix and as our revenues grow and in our cost of good some of our cost of goods are fixed. So as revenues grow the fixed cost becomes less meaningful. All of that contributes to strengthening in gross margins and we hope that we are definitely staying in kind of mid-40s. With respect to moving beyond the mid-40s, I think that we will need to see revenue growth associated also with business and once we see that, that could help us to focus and realize better margins. But right now I would say that we want to be at the area of mid-40s and I hope that we are there. And all of that is of course benefiting from the new product category which as I said a much higher margins than the cordless telephony business.

[Charlie Anderson:]

And then want to focus on VoIP for a second, I think you mentioned in your prepared remarks that in addition to a customer ramp a little bit earlier in Q3 there was also general market strength. And I wondered if you could address that, what you’re seeing in that market in terms of overall demand and size of the market?

[Ofer Elyakim:]

On the Voice-over-IP market, indeed when we reported second quarter results, our expectations were for a lower type of revenue quarter, and we gave 6 million to 7 million or 6.5 million at the midpoint. Right now we’ve reported $7.7 million. What we’re seeing is just the buildup of lead times, all those etcetera and all of that translates to the quarterly revenues. I think that the overall picture has not changed a bit. We have said, for us it is a strong market that we can become the market leader. We have all the tools and technologies and capabilities to be the SoC in this market, and I think what we have done is really focused on getting designs wins and building the strong pipeline, thereafter that is translating to a commercial shipment and of course that fulfills revenue etcetera, etcetera. Our view has not changed, this is a market of $150 million or north in SoC value, and we are only I would say less than one-third of the way in to the penetration. This year we expect, as you can understand from the guidance, so also from the actual high-20s, I believe that this will continue to be growth market for us in the next couple of years and it will translate as these new tier one OEMs prove out full annual type of shipment volume which is very different let’s say than the ramp up, which is always a gamble between how much inventory they have of the old silicon product versus how much they will take from the new design. And once we’re pass these rounds, we’ll hopefully see the full run rate and that of course will translate to further revenue growth, and we hope that with a design pipeline that we have, more launches will happen in 2017, which will fuel additional growth in ’18 and so on and so forth. So for us this continues to be a very strong and promising market opportunity and I think right now we have the most comprehensive set of solutions and SoC to capture these opportunities.

[Operator:]

We will now take our next question Suji Desilva, ROTH Capital. Please go ahead. Your line is now open.

[Suji Desilva:]

On the mobile, I just want to understand the support intensity of some of these wins and your ability to support additional wins or the customers you’ve won to date requires you guys to focus fairly heavily or is this scalable with the support you have to scale to more mobile wins?

[Ofer Elyakim:]

Around the mobile wins, as you know from the very beginning our offering around the HDClear was around silicon and a lot of softer algorithms including noise suppression, acoustic echo cancellation, always on-voice with very low power consumption. All of these ingredients are highly sought after both in where we are today handsets as well as in the IoC segments or as we say smart speakers, wearable and other IoC products. And I think that there’s very strong correlation between what we have and what customers need. Of course the ability to branch out and support more engagement with new customers and all of the customers that we are supporting and the two customers that we’ve included in our announcement and also in the previous quarter, and our new customers and of course to support these new OEMs and make sure we are successful and they are successful doesn’t tell a strong commitment from our side, but I would say that we are well positioned to tackle and win and broaden the pipeline of designs of customers that we are actively supporting. And I think we’re getting to where there’s a lot of commonality between what each of these customers’ needs from us and also what we have on hand in terms of development. I think we will be successful in handling and fulfilling the needs that are necessary by the customers and with our technology and support.

[Suji Desilva:]

Good now looking for the diversification there. And then on the PA product in particular, what is the timing of customer wins being secured for the product. I know it’s a later ramp, but I’m curious what timeframe is for the design wins there?

[Ofer Elyakim:]

So what we’ve indicated is right now there is an engagement an active engagement process going on with both the Wi-Fi subsystems and as well as we’ve been with customers mainly around access points and mainly are also high end. And the way we’re thinking about it is that these need to continue in to designing design wins probably in to the next year, and hopefully in order to be in production and actually secure revenues we hope that these will concluding design wins, I would say early second half or so and that could then translate to revenues. As you know in the PA market or at least these are more of components, there’s no software associated with the design timeline or let’s say from design win to production is more a hardware type of an exercise rather than a full system software type of an exercise. So it’s (inaudible) big time than what we have in most of our other products.

[Suji Desilva:]

Understood. And then a last quick question, what’s the typical [1Q] seasonality we should be thinking about?

[Ofer Elyakim:]

Suji, can you ask the question again, it was about --.

[Suji Desilva:]

Sure, the typical seasonality you see in the first quarter on average?

[Ofer Elyakim:]

It’s very hard to call the quarters, but I would say that every year has been different. We could see that seasonality will be down in to the first quarter. A lot of it is going to depend on how exactly the mix is. I would say quarters does depend on how holiday season concludes in Europe and the US. In addition we have seen I would say in the last two years that Voice-over-IP starts the year on the low end and gradually improves and we’ve seen that in 2015 and also in 2016. So that’s perhaps the way to think about the seasonality next year.

[Operator:]

[Operator Instructions] We will now take our next question; it comes from Mr. Robert Mertens from Needham & Company. Please go ahead sir, your line is now open.

[Robert Mertens:]

Hi, this is Robert Mertens on behalf Rajvindra Gill. First, congrats on the quarter and thanks for taking my question. You mentioned earlier that the Internet of Things revenue was expected to be higher than previous guidance for the year, I believe within the home automation segment. Could you give me a little bit more clarity on the momentum within this product launch?

[Ofer Elyakim:]

So around the IoT or - of course its mainly around technology which is called ULE which is a connectivity technology for smartphone monitoring security etcetera. The way we modeled or at least our expectation coming in to the year was for about $4 million to $5 million of revenues in the IoT segment. But what we’re seeing is that there is a momentum of very nice demand which is kind of requested in to the fourth quarter in expectation for a smart home service launch by two leading service provider. And that of course creates some upside in to the fourth quarter or let’s say better than expected in the fourth quarter that makes us optimistic about our ability to surpass this expectation of $4 million to $5 million. The way this IoT business is layered is through existing designs that have translated to retail product launches, and some other service provider wins that have translated to commercial shipment. And the way the buildup will happen is by additional - either consumer type of OEM that we launched kind of a home in the box or a security system in the box and then place it in retail or by leading service providers that we launch in a more managed type of services that will be offered to their subscriber base and through getting more subscribers, if this is going to help them out to be growing. And right now what we are seeing is that there will be two meaningful service provider launches that should carry ULE revenues up to the next level, and right now we see the beginning of that trend taking place.

[Operator:]

We have no further questions in the queue. Mr. Amir, I’d like now to turn the conference back to you for any additional or closing remarks. Thank you sir.

[Daniel Amir:]

So thank you for joining us today for your continued interest and support in DSP Group. We will be attending the ROTH Technology Corporate Access Day in New York on November 16 and we invite you to join us there. For further investor information and a calendar of events that we will be attending, please visit our investor website. Thank you and we look forward to report back to you in 90 days. Thanks.

[Operator:]

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