DSP Group, Inc.
Q4 2016 Earnings Call Transcript

Published: 2 Feb 2017

[Operator:]

Good day, and welcome to the Q4 and Full Year 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to 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 2016 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 2017, including by segment 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 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 and full year, 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 first quarter of 2017. We achieved fourth quarter financial results that were ahead of our guidance on most metrics. Our performance continued to reflect solid revenue contributions from new product, leading to an overall 4% year-over-year revenue growth. Despite the expected weakness in our Mobile segment, going into the fourth quarter, new product revenues were $14.1 million growing by 26% year-over-year. New products accounted for approximately 40% of fourth quarter revenues, and supported margin expansion across our P&L, including the 210 basis points expansion in both GAAP and non-GAAP gross margins of 45.1% and 45.3% respectively, compared with the fourth quarter of 2015. In addition, our GAAP and non-GAAP operating margins increased by 450 basis points and 410 basis points respectively when compared to the fourth quarter of 2015, to 3.1% of revenues and 8.2% of revenues respectively, driving our GAAP and non-GAAP earnings per share to $0.06 and $0.13 respectively. While we are very excited about the great opportunities that lie ahead, we also faced some temporary headwinds especially in the mobile business during the first quarter of this year. However, we are very optimistic about our long-term business trajectory, and are well-positioned to thrive and diversify our revenue base in each of the three segments, namely, Enterprise, IoT, and Mobile. While we expect that our first quarter results will be negatively impacted by seasonal decrease in cordless and weakness in the Mobile segment, we remain optimistic about a gradual improvement in our revenues during the year, as several new design wins reach mass production stage. The R&D investments that we made has paid off and enabled DSP Group access to three new market segments. We successfully accomplished a solid design pipeline across these new product segments and translated that into volume production and revenues with Tier 1 customers. This initiative diversified our revenues and created new growth businesses for the company as evidenced by record revenue contribution from new products in 2016 of $59.3 million, which grew by 48% year-over-year and accounted for a record of 43% of total revenues, compared to only 28% of total revenues in 2015 and 21% in 2014. A record high non-GAAP gross margins of 44% and operating margins of 5.9%, compared to 41.7% and 5.2% respectively in 2015. Landed [technical difficulty] design wins with our HDClear product line beyond the Mobile segment, which enhanced our position as an instrumental SoC vendor, at the same time as the market more widely adopt voice user interface; solidified our leadership position in Voice-over-IP as we began shipping to additional Tier 1 OEMs and continue to expand our market share. With the addition of the DVF101, we have now a complete SoC offering that covers the full range of endpoints. We also began high volume shipments of our DECT ULE solutions for IoT application to major service providers, reflecting a growing traction in the marketplace for using DECT ULE and voice user interface in the smartphone systems. Now I'd like to provide specific updates about our progress in each segment, starting with Mobile. During the quarter, we generated revenues of approximately $2.8 million from sales of HDClear products. Revenues were higher than our guidance of $1.5 million to $2.5 million, driven by better demand from our Tier 1 mobile customer. Looking ahead to the first quarter, we anticipate a decline in our mobile revenues based on our assessment that the leading OEM is unlikely to include our HDClear chip in its upcoming smartphone model. We therefore focus first quarter mobile revenues in the range of $0.2 million to $0.5 million. Based on this assessment, we expect softness in our mobile revenues to persist until the second half of the year when we expect a rebound in our HDClear business driven by new design wins and engagement reaching mass production stage. While we are disappointed with the circumstances, we remain confident in our existing design wins and new engagement pipeline that covers a variety of application ranging from smartphones to smart audio and IoT applications. We are excited with the market dynamics and the Greenfield opportunity in the voice activation and control space. We believe that the growing demand for incorporating voice user interface into a wide range of products will be the major driver of demand for our HDClear products in the future and thus we're well-positioned for sustainable revenue growth in this market. As we look back at the year, 2016 was a breakthrough year for our HDClear product, 2016 was the year in which we shipped significant volume into the market and despite the cancellation of the Galaxy Note 7 smartphone we were able to surpass our revenue goal of $10 million to $15 million for the year. [Indiscernible] 2017, voice user interface took a center stage. Many leading OEMs and ODMs presented plans for voice-enabled products in almost any product category, IoT, smart assistants, PC, wearables, smart speakers, home appliances and automotive. Moreover, we unveiled our new audio and voice enhancement SoC, the DBMD5. This new audio SoC is built to drive clearer human/machine voice interaction in multi microphone-equipped devices. The voice and audio processing integrated into the DBMD5 chip enables better operate devices to add functions such as [ph] always on voice, support voice command and incoming triggers and offer a suite of algorithms for enhanced and clearer communications. In addition, we announced a development platform with Vesper, a developer of advanced acoustic sensors; and Sensory, a leading developer of voice interface and keyword-detect algorithms that will enable the lowest overall power consumption solution for far-field always on voice interfaces for battery-operated IoT devices. Moving on to the Voice and Office segment; we continue to solidify our leadership position in enterprise terminal markets as demonstrated by strong and growing design pipeline with Tier 1 OEMs and other leading customers. For the fourth quarter, we achieved quarterly revenues of $6.4 million, representing a decrease of 9% year-over-year and 16% sequentially. This result was slightly below our guidance of $6.5 million to $7.5 million, and was largely due to lower demand from two of our Tier 1 OEM customers. We had a number of noteworthy announcements this quarter. At CES we unveiled the DVF101, the latest member of the IP communication processors' family. DVF101 targets high performance in Voice-over-IP communication devices in both enterprise and consumer markets. It is ideal solution for high-end voice terminals with high-resolution color displays, rich 3D graphical user interface, full-HD voice, super-wideband acoustic echo cancellation as well as fully secured communication. We also announced a partnership with MERA, a leading provider of software solutions for the connected world, and Media5, a global supplier of multimedia solutions for a complete voice and video application platform based on our DVF1100 processor. This partnership will offer our customers a fully-integrated solution with a significant time to market advantage at a lower cost of ownership. Finally, Avaya launched its new IP phone, the J129, based on our DVF99 SoC that will be available this quarter for our customers. As we look back, 2016 was a successful year for VoIP. VoIP revenues of $26.6 million increased by 20% year-over-year, and placed DSP Group in the number one market position in new VoIP design wins. In 2016, we began shipments to two new Tier 1 OEMs, which significantly expanded our addressable markets. We are confident that with our current product roadmap and design pipeline, we are well-positioned to see solid revenue growth in years to come. For the first quarter we expect VoIP revenues to be flat on a sequential basis, suggesting solid year-over-year revenue growth. We remain very optimistic about the outlook for our VoIP business, and the strength of our design pipeline and product offering which cover both high-end to low-end solutions. We believe this segment is well-positioned for solid revenue growth in 2017. Now, to an update on the Home segment, which includes Home Gateways, IoT, and Cordless, I will start with Home Gateways. Fourth quarter revenues of $2.5 million were in line with our guidance, and decreased by 2% year-over-year, and by 18% sequentially. At CES, we continued to see strong traction from telecom operators interested in integrating HD voice and IoT into their gateways. The underlying market trends behind the integration of DECT into home gateways are the growing adoption of HD voice, where service providers are upgrading their infrastructure, and CPEs to support HD voice which provides us with ample growth opportunities and also an increasing number of telecom service providers are integrating DECT ULE gateway as the connectivity of choice for IoT services, leveraging DECT's key attributes that includes superior range interference-free band, a natural support for voice and video enabling service providers to offer smart home solutions that are built for self-install, plug-and-play, and at a much lower cost of ownership. We expect this quarter Home Gateway revenues to be flat on a sequential basis, and to further accelerate as the year progresses, coinciding with new product launches by a number of telecom operators. Turning to IoT, during the fourth quarter we generated $2.3 million in revenues from IoT, representing growth of 83% year-over-year, and 99% increase on a sequential basis. During the quarter and at CES we continued to expand our IoT ecosystem, and announced a number of new design wins and partnerships. First, Ooma a U.S-based smart communication platform provider for small businesses and consumers launched a smart home offering based on our ULE solutions. Ooma offers a suite of products that include door and window motion and water sensors, as well as part of its new smart home monitoring service. Second, we announced a partnership with SoftAtHome, a leading software provider for operator CPE devices in digital home, in which they will add ULE support to their platform, and offer telecommunication operators with IoT services that incorporate simplicity and ease of deployment based on ULE. Third, Philio Technology, an IT solutions provider, announced an innovative clip of IoT devices, including an intelligent home voice controller, a multifunctional button, and a four-in-one sensor all based on our ULE SoC. Philio's intelligent home voice controller device incorporates also HDClear for always-on processing in addition to the ULE connectivity, offering voices or interface for the smart home in a stylish, small home factor battery-operated sensor. Fourth climate editing supplier of wireless home security systems has selected our ULE solution for its new smart home suite of products. Finally, we announced the partnership with Greenwave Systems, a leading IoT software company and VTech a leading manufacturer of cordless phones and electronic learning products to develop IoT solutions for home automation based on ULE technology. As we look back at 2016 and see we see strong signs of wider adoption of ULE in IoT devices with annual revenues of $5.9 million we surpassed our revenue expectations for the ULE segment of $4 million to $5 million. Moreover we are seeing high interest for adding voices or interfaced with smart home systems, which is viewed as the preferred user interface for the home IoT environment. This trend represents another meaningful growth opportunity for our ULE technology, which is designed to support high quality two way voice and best in class range and propagation. We begin 2017 with the record number of IoT programs concentrated on leading service providers and OEMs, we anticipate the strong momentum to continue during this year and generate solid revenue growth. For the first quarter, we expect a sequential decline in our IoT revenues as our large European telecom customers take support after a strong build in the fourth quarter in preparation for its IoT ULE service launch later this quarter. We therefore expect IoT revenues to be between $1 million and $2 million. And now for an update on the cordless phone market, all figures and comparison in this section are for cordless phone SoCs only and do not include revenues for home gateways and IoTs. Our fourth quarter cordless revenues were in line with guidance. Cordless revenues declined by 6% year-over-year and declined by 5% from the sequential basis and accounted for 60% of fourth quarter revenues. Following the difficult 2016 in which we experienced a significant inventory correction in the first half of the year, we anticipate that the year-over-year revenue decline in 2017 should be more aligned to the general cordless market drop of approximately 10% to 15%. Now turning to an update on the CMOS de-activity. Our program goal was to bring to market a superior seamless product for Wi-Fi 822.11 AC NAX for access point that is for access points based on a breakthrough in our CMOS design. We initially targeted revenues for the second half of 2017. However, in the past six months market dynamics and consumer and customer requirements has changed, today the market demand full time solution versus standalone power amplifier that we have developed, given the significant investments required to develop a full and timing of future revenues, we have decided that it would be in our best interest if we put further investment in this program on hold and reallocate resources and investments to our other new product verticals where we see more immediate revenue opportunities. This decision will lead to some OpEx savings starting in the second quarter, we believe that putting additional focus on the more immediate opportunities in IoT, Voice-over-IP and mobile is the right move for the company and its stockholders. It is a difficult decision we remain committed to make future investments in new product areas that we lead to new growth opportunities for DSP Group. And now to an update on our outlook; based on our revenue expectations across our new product initiatives while taking into consideration the expected softness in our HDClear product line and the seasonal decline in our cordless telephony revenues we expect our first quarter revenues of 2017 to be in the range of $26 million to $29 million which estimates range of guidance suggest a slight a flat to slightly down quarter on a year-over-year basis. To summarize in 2016, we saw strong evidence that our investments in voice, mobile and IoT has paid off resulting new product revenue growth of 48% together with solid margin expansion in both our gross and operating lines. Looking forward, we are optimistic that we shall overcome the temporary weakness and believe that our new product strategy will continued to position us well for long term revenue growth and positively contribute to our operating model in the years to found. 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 fourth quarter of 2016 top to bottom. For each line time I will provide the U.S GAAP results as well as the equity based compensation expenses included in this line items and expenses related to previous acquisitions. Our revenues for the fourth quarter of 2016 were $35.3 million. Gross margin for the quarter was 45.1%, 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 $0.6 million. Operating expenses for the quarter were $14.8 million including equity based compensation expenses in the amount of $1.3 million and amortization of acquired intangible assets and the amount of $0.4 million. Financial income for the quarter was $0.3 million. Income tax for the quarter was $0.1 million and included a tax benefit resulting from the amortization of deferred tax liability related to intangible assets and amount of $0.1 million. Our net income for the fourth quarter was $1.3 million including equity based compensation expenses of $1.4 million. Amortization of intangible assets of $0.4 million and tax benefit resulting from the amortization of deferred tax liability and the amount of $0.1 million. Non-GAAP net income, excluding these items are just described was $3 million, earning per share for the quarter were $0.06. The negative impact of equity based compensation expenses on EPS was $0.06. The negative impact of the amortization, required intangible assets on EPS was $0.02 the positive impact of the tax benefit resulting for amortization or deferred tax liability was $0.01 and our non-GAAP diluted earnings per share excluding items of just described were $0.13. Please see the current report on Form 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; our accounts receivable at the end of the fourth quarter decreased to $19.1 million compared to $22.8 million at the end of the third quarter, representing a level of 49 days of service. Our inventories decreased from $9.9 million at the end of the third quarter of 2016 to $9.7 million, representing a level of 45 days. Our cash and marketable securities increased by $4.3 million during the fourth quarter and were in the level of $124.9 million as of the end of December. Our cash on marketable securities position during the quarter was affected by the following

[Operator:]

Thank you. [Operator Instructions] We will take our first question from Charlie Anderson from Dougherty & Co. Please go ahead.

[Charlie Anderson:]

Yes, thanks for taking my questions. Ofer, I wonder if you could just talk a little bit about your view now of the HDClear business in light of losing the socket at Samsung. Are you going to invest less potentially in it in the future? Are you still targeting smartphones? Does that still make sense architecturally with whatever Samsung decided to do here? And then maybe if you add a full-year view as well considering you'll have the IoT type products in the back-half of the year, where that business -- what that ends up looking like without the smartphone business from Samsung? And then I have a follow-up.

[Ofer Elyakim:]

Hi, Charlie, and thanks for the question. Our plans for HDClear, the product line which is the DBM family has not changed. I think we have a very strong and concentrated roadmap of solutions that are targeting a wide range of devices ranging from smartphones to IoT smart speakers, and additional categories like home appliances, et cetera. In the engagement pipeline and part of kind of the engagement of our -- basically on track to a convert -- to a revenue. We do have several type of devices, including smartphones and the additional IoT devices, wearables, smart speakers. So, from that perspective, we are not really seeing any reason to make changes in the program or to change the level on investment. On the contrary, we actually feel a lot more bullish about our ability to penetrate and get design wins in this market. So if in 2016, this major design win that we had with Samsung for the Galaxy S7 was one of kind of the biggest achievement, and what we targeted for was actually diversifying and achieving design wins outside of that single customer. I think that we have achieved that. And that in a way is enabling us to see more traction, and actually seeing a lot more product categories recognized our products and our offering, which is definitely helping us in seeing this very nice funnel that we have now in terms of engagement. Some of them are confirmed design wins, some of them hopefully are going to materialize into design wins soon. But we are going to start seeing a mass production starting in the second-half of the year. So by that, we do believe that there will be weakness, as was indicated in the first quarter. We believe that it should persist in the second quarter, but there should be a very nice ramp here in revenues in the second half.

[Charlie Anderson:]

Yes. And then as a follow-up, I think you're obviously going to have a negative operating profit in Q1. And then you mentioned having sort of an expense reduction starting in Q2 with the emphasis of the PA. I wonder maybe if you could frame for us how that looks the rest of the year in terms of your operating expenses. And is there an operating margin or profit goal that you have moving forward considering the setback with Mobile? Thanks.

[Dror Levy:]

All right, Charles. This is Dror. So first, you're right; if you take the midrange of our guidance for the first quarter we will be in operating loss. We expect that starting the second quarter, and going through the third and fourth quarter we will have operating income. And for sure, for the year as a whole, we expect to end the year with operating income. In terms of the level of OpEx or again if you take the midrange of our non-GAAP OpEx, so for the first quarter you should get something in the range of, let's say, $13.5 million to $14.5 million on a pro forma basis. And going into 2017 for the second quarter, and on, we should see levels again on a pro forma basis more in the range of I would say $13 million to $12.5 million.

[Charlie Anderson:]

Okay, perfect. Thanks so much.

[Dror Levy:]

Sure.

[Operator:]

And we will take our next 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 wondering if you could help us think about the cordless phone businesses here, I know visibility remains pretty cloudy within that end market. But how should we be thinking about the severity of the decline in 2017?

[Ofer Elyakim:]

Hi, Jaeson, and thanks for your question. So with respect to the market decline of cordless, so what we are seeing from I would say kind of the point of sale data is that we are getting with respect to the key-end markets, mainly the European market and the North American market. We're seeing decline rates at the area of like around 13% or really kind of between this 10% to 15% guideline that we gave. However, our business in 2016 suffered from a much more kind of severe decline than that level. And we do see that the year ended at roughly the 13% decline level, while we ended 2016 well below that. So we believe that in this year there should be some reversion to the main [ph] and we should decline in-line with kind of the general market. So this is kind of where we see things today. Of course, we do not have the crystal ball to predict what level of decline will persist in the market in 2017. We're kind of really basing it on the level of declines that we have seen over the last 13 years, which I -- sorry, over the last three years, which I believe were kind of fairly consistent at that 10% to 15% decline. And it has held up pretty consistently.

[Jaeson Schmidt:]

Okay, that's helpful. And then just looking at the balance sheet, obviously you guys have a ton of cash and no debt, been pretty active from a buyback standpoint. But how should we think about capital allocation going forward? And more specifically, are there any technologies or end markets out there that you don't think you can develop in-house. I know you guys just announced you're scrapping the SPARK PA plan. But how should we think about cash usage going forward?

[Ofer Elyakim:]

Yes, so in terms of capital allocation plans, so I think we have been pretty active in buying back our shares over the last couple of years. And so I believe that as long as we believe that the DSP Groups focus a good investment we shall continue to do so. With respect to other initiatives in [technical difficulty] technologies to other kind of more transformational M&A. Of course, we're at a point today where the business is fairly stabilized. And we have three new businesses that are generating revenue growth that are offering a much better margin profile and profitability profile. And we would look to strengthen these segments. I believe that today in the areas of the voice over IP and let's say enterprise endpoints, and also in IoT we have a pretty comprehensive product portfolio, but of course there is always areas where we could benefit from external talking [ph] technologies. So this may be a way for us, going forward, to allocate some of our capital going forward. But of course there is nothing eminent at this stage to talk about.

[Jaeson Schmidt:]

Okay, thanks helpful. Thanks a lot guys.

[Operator:]

And our next question comes from Suji Desilva from ROTH Capital. Please go ahead, your line is open.

[Suji Desilva:]

Good morning guys. So on to HDClear business, can you help us understand what the timing of the non-Mobile newer programs would be, and then how much that would help recover that run rate from where you're starting off the year?

[Ofer Elyakim:]

Yes, hi, Suji. So from the perspective of the HDClear revenues, so believe we will see a fairly soft first half at first quarter and second quarter, and then a gradual ramp into third quarter and the fourth quarter. I believe that right now where kind of we [technical difficulty] business we believe it's roughly kind of around I would say $5 million to $8 million or something around that million dollars for the year. We believe that the run rate that we will be at in the fourth quarter, we already suggest, is very nice ramp going into 2018, where we believe that the business will be completely rebounded, and we will basically recover what we are losing in the first half of this year.

[Suji Desilva:]

Thanks, that's very helpful, Ofer. And then on the enterprise VoIP business, can you talk about what the customer ramps, how those progress throughout '17, and any issues related to Avaya and their financial challenges?

[Ofer Elyakim:]

Yes, absolutely. So for the voice over IP or office product segment we do believe that this year is another year of growth in double digit rate, should be at or above the growth rate of this year. We are of course seeing a very strong design pipeline. However of course where pretty much the mass production ramp up pretty much subject to the customers' demand patterns, and some customers ramp up fast, others ramp fairly slowly. I think in 2016 we saw two Tier 1 OEMs that ramp up in a more softer way. You mentioned the Avaya situation. Maybe that is part of the explanation of what we've seen during the second half of 2016. Of course we are monitoring the situation to the best we can to see whether and how it has an impact on our business. But there could be kind of two things here, one is the direct impact, the other one is also an indirect impact. We do hope that our business will continue to grow this year. And we are not subject or concentrating on just one account, so we have plenty of customers covering both kind of the on-prem and kind of the U Class [ph] or the cloud based PBX business model. So I think we are in good shape. And also we see a very nice design pipeline going into 2018.

[Suji Desilva:]

Great. Thanks guys.

[Operator:]

And our next question is from Matt Ramsay from Canaccord Genuity. Please go ahead, your line is open.

[Matt Ramsay:]

Thank you very much. Obviously a lot of moving parts here in the business as the mobile stuff and different things happen. So I was just going to try to step back and look at the year as a whole for either of you guys. I mean, do you think this can be a year where total revenue is close to [technical difficulty] or is that too aggressive given all the things that happened in Mobile and just kind of trying to take the puts and takes to the year with still some strong growth in some of the other businesses? Just trying to figure out where things might shakeout, if you have any overall commentary that would be really helpful. Thanks.

[Ofer Elyakim:]

Sure, absolutely, Matt. So with respect to our views right now for the full year, and again, we're not giving any guidance beyond the first quarter of the year. I think that kind of based on where we're starting the year, and based on our observations around Mobile, we believe that right now it looks kind of challenging to see that 2017 is up on a year-over-year basis versus, sorry, '16. So right now we see it a little bit on the challenging side. However, we do believe we are fairly well equipped on all fronts of the business, let's say, beyond kind of the weakness that we see in Mobile in the first half. We see really an incredible momentum in IoT for ULE. We see very strong customer buildup on the Home Gateway space; we just spoke about voice over IP. So all in all we see kind of very healthy trend lines going ahead. Everything is kind of excluding of course the weakness in the first half in Mobile.

[Matt Ramsay:]

Got it, that's helpful. I wondered also if you could talk a little bit about -- I mean it's always hard, I guess, but the specific situation with the mobile customer and Samsung, any insights that they gave you or feedback that they gave you about the product or the program or the reasons they might have chose to make the decision they did. Obviously there's been a bit of turmoil at that particular handset OEM, and they've made quite a few design changes from our understanding on a go-forward basis, but -- they've given any insight to there and what that might mean for other potential customers one way or another?

[Ofer Elyakim:]

So thanks, Matt. And unfortunately there is not much we can say about the business transaction with our customers, as you know we're bound by a confidentiality agreement. And we're not really allowed or can say too much. But what I would tell you is that we do, and as I said both in my prepared comments and in an answer to Charlie's question, we do have in the engagement pipeline for this year additional handsets. So this is not the fact that this one design, at least according to our assessment, is unlikely to include our chip, does not mean in any way that our silicon or our technology is not going to be incorporate into additional handsets of the vendors that we are engaged and working with. So as I said, we don't really see a change in where always-on voice is and the importance the very low power modes that we provide. On the contrary, I think voice user interface becoming a stronger requirement. We actually see that we're coming with some very unique assets in terms of both the ability to do high MIPS or high power type of processing and still do it at a very low power mode, kind of the ability to do kind of barging, noise cancellation, all of that is becoming even I would say a more important feature than it was when we got the design in early 2016. So all in all, I think the offering that we have is still very relevant or much more relevant into even a bigger number of applications which are not just smartphones in which this capability is just another feature for always-on, but in the smartphone you have many different type of feature set and functionality. And in all of the areas that are outside of that market, actually the voice user interface and the processor that handles that is becoming the main SOC. We're talking about much higher dollar content, we're talking about much higher stickiness than there is today, let's say, in kind of the smart fold world. And again, as I said, we still have in our plans for this year additional smartphone volume from new designs. So I hope that color helps.

[Matt Ramsay:]

No it does, thank you. And let me just sneak one, obviously a little bit changing in the models for this year. Any changes in the gross margin outlook with volumes maybe changing around in mix, changing around, or should be expect things to be pretty consistent? Thank you.

[Ofer Elyakim:]

Yes, so in the first quarter again our -- the midrange of our forecast is at 43 to 44 as I said, and throughout the year this should be somehow improved, though it should be like I think the fourth quarter second half of the year we should see the same level that we see in the second half of 2016. So we should see some gradual improvement into the year.

[Operator:]

Our next question is from Matt Robinson from Wunderlich. Please go ahead, your line is open.

[Matt Robinson:]

Thanks for taking my question and I want to respect your NDA relationship but you said something in answer to Matt's question about additional handset in the pipeline it could have been taken that you implied traditional handsets with the same customer, is that would that be appropriate do you or do you mean to suggest only that your additional handsets in the pipeline are with other customers?

[Ofer Elyakim:]

Hi Matt, and thanks for the question, so with that regard I think we don't want to talk about specifics here but I just wanted to kind of make this comment that our solution has advantages and the value for customers including in the mobile handset world, the reason why we are not included is probably kind of we will be able to speak about them once the product is in production and but with respect to additional wins, I think we have them in kind of as part of the engagement pipeline, I think we just don't want to be too specific about the origin of these designs.

[Matt Robinson:]

Dror, can you give specifics for operating cash flow CapEx and depreciation?

[Dror Levy:]

Yes sure, so operating cash flow for the fourth quarter was $10.6 million and for the full year it was $16.5 million, depreciation for the fourth quarter was around $400,000 and for the full year which was $1.7 million and CapEx was $0.6 million for the quarter and $2.1 million for the year.

[Matt Robinson:]

Thanks.

[Operator:]

[Operator Instructions] We will take our next question from Robert Mertens from Needham & Company. Please go ahead.

[Robert Mertens:]

Great. Thanks for taking my question. I just wanted to give that real quick to noble HD clear and product and just quickly make sure I have the numbers correctly you are guiding to $0.2 million to $0.5 million in 1Q 17 and do you see that flat from 1Q 17 to the second quarter before ramping?

[Dror Levy:]

Hi, Robert thanks for the question so, right now we are giving guidance for the first quarter and yes you got that right in terms of the numbers in terms of Q2 I would say then at the market for obviously should be I would say at that level the kind of where how it is - give much more color may could be slightly above that but roughly at those levels and then ramp that we expecting to third quarter and also in the fourth quarter.

[Robert Mertens:]

Okay, thank you. And just a quick follow-up, I know we talk to the legacy product decline about 13% for the whole year is there any sort of sensualities see within that business throughout 2017.

[Ofer Elyakim:]

Yes, so the question is around cordless, right the seasonality in cordless revenues.

[Robert Mertens:]

That's correct.

[Dror Levy:]

Yes, I would say that perhaps we can look at Q1 as the, kind of lower seasonal type of a quarter compared to the remainder of the year and but its going to still very hard to point to real repeating seasonality type in the cordless space but, just from where things are and if we see the compared we have the last year et cetera so actually quarters this year is starting half of the kind of lower point then Q4 much lower point in Q4 and then hopefully we see some gradual improvement in Q2 and may be also Q3 but as I said kind of quarter has been chopping up predictable in terms of kind of the quarter but that will be kind of best guess right now.

[Robert Mertens:]

Okay, great. Thank you. Appreciate it.

[Operator:]

And we will take our next question from Matt Robinson from Wunderlich. Please provide your…

[Matt Robinson:]

Thanks for the follow-up. Just wanted to see if you could in the past have been able to get the backlog number in events at this point on this call and I was hoping if you could provide that?

[Dror Levy:]

Sure, it was as of end of December it was $23.4 million.

[Matt Robinson:]

So, about $6.2 million above the year number then.

[Dror Levy:]

Yes right.

[Matt Robinson:]

Thank you. That is it.

[Operator:]

[Operator Instructions] There are no questions at the moment.

[Daniel Amir:]

Great. So, thank you for dialing in for the call. We look forward to reporting to you in 90 days. Thank you, and have a great day.

[Operator:]

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