DSP Group, Inc.
Q4 2014 Earnings Call Transcript

Published: 31 Jan 2015

[Operator:]

Good day and welcome to the Q4 2014 DSP Group Earnings Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Dror Levy. Please go ahead, sir.

[Dror Levy:]

Thank you, Operator. Good morning ladies and gentlemen. I am Dror Levy, Chief Financial Officer of DSP Group. Welcome to our Q4 2014 Earnings Conference Call. On today’s call we also have with us Mr. Ofer Elyakim, Chief Executive 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 Q1 2015; optimism about market opportunities for our new product line that should allow us to resume revenue growth in 2015; timetables for product ramp-ups and mass production of products incorporating our technologies by our customers; the ability of ULE and HD Clear technologies; optimism about our successful tender and an ability to meet key milestones and to enter new market domains and create new revenue streams. Actual results or trends could differ materially from our forecast including the impact of reductions in lead times and inventory levels by our customers and their customers; continued uncertainty in consumer demand for traditional cordless telephony products in our major end markets and the magnitude of decline in such markets; unexpected delays in commercial launch and production of new products incorporating our technologies; the growth of our new market verticals; our ability to manage operating expenses; our ability to secure additional design wins; and general market demands for products that incorporate our technologies in the market. We assume no obligation to update these forward-looking statements. For more information please refer to the risk factors discussed in our 2013 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, Dror. Good morning, everyone, and thank you for joining us today. I’m glad to open this discussion about our Q4 and full-year 2014 financial results. I hope that you’ve had the opportunity to read our press release that was released earlier today. I would like to begin this discussion by reviewing our results for Q4 2014 and then comment on the progression of our plans including design wins and recent market developments across our different product offerings. In a short while Dror will provide you with detailed comments on our financial results and update you on our outlook for Q1 2015. We’ve made significant progress in 2014 and have accomplished our strategic and financial milestones. As you know we have focused our attention on two key objectives

[Dror Levy:]

Thank you, Ofer. I will now review the income statement for Q4 2014 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 that line item, and the expenses related to previous acquisitions. Our revenues for the quarter were $37.2 million. Gross margin for the quarter was 39.6%. Gross margin for the quarter included equity-based compensation expenses in the amount of $0.1 million. R&D expenses were $9.2 million, including equity-based compensation expenses in the amount of $0.5 million. Operating expenses for the quarter were $15.1 million including equity-based compensation expenses in the amount of $1.1 million and amortization of acquired intangible assets in the amount of $0.4 million. Our financial income for the quarter was $0.3 million. Income tax benefit for the quarter was $2.6 million including a tax benefit resulting from the amortization of the deferred tax liability related to intangible assets in the amount of $0.1 million. In addition the income tax benefit for the quarter included a reversal of a tax provision in the amount of $0.9 million related to a tax audit that was concluded during the quarter, and also included a tax income of $2.0 million resulting from a removal of a valuation allowance related to deferred tax assets. These tax assets represent the future utilization of previously written off tax advances and tax loss. Our net income was $2.7 million including equity-based compensation expenses of $1.2 million, amortization of intangible assets of $0.4 million and the tax benefit I just described in the total amount of $3.0 million. The non-GAAP net income excluding these items I just described was $1.3 million. GAAP diluted earnings per share was $0.12. Net of these impacts of equity-based compensation expenses the EPS was $0.05. The negative impact of amortization of acquired intangible assets on the EPS was $0.02. The positive impact of the tax benefits on the EPS was $0.13 and the non-GAAP diluted earnings per share, excluding these items that I’ve just described were $0.06 per share. Please see the current report on Form 8(k) that we filed with the SEC this morning for a full reconciliation of the non-GAAP presentation to the GAAP presentation. Now turning to the balance sheet, our accounts receivable decreased from $25.1 million at the end of Q3 to $20.3 million, representing a level of 49 days of sales. Inventory increased from $13.9 million at the end of Q3 to $15.6 million, representing a level of 63 days. Our cash and marketable securities increased by $7.6 million during Q4 and were at the level of $124.9 million at the end of December. Our cash and marketable securities position during the quarter was affected by the following items

[Operator:]

Thank you. (Operator instructions.) We will now take our first question from Charlie Anderson from Dougherty & Company. Please go ahead.

[Charlie Anderson:]

Yes, thank you for taking my questions and congrats on the excellent quarter and guidance. I wanted to maybe start with the ULE design win, I thought that was very interesting, Ofer. You said it was a service provider in the US - if you can give us any added color on whether that’s a cable MSO, a security company, a telco. And then help us understand how the product will actually find its way into homes as far as what specific end devices, number of chips per home - just any added color on that would be helpful.

[Ofer Elyakim:]

Sure, thank you Charlie. So the ULE design win that I mentioned is with a leading US-based telecommunications service provider - a telco that has today a service for a smart home and home security and safety. Our design comes into two-way voice, so these are going to be devices that are going to be part of the service that this service provider is introducing. And they’re going to be sold as one for every room in the home to the subscribers that are going to buy and subscribe to these services. And we do expect a rollout during the later part of this year, so kind of Q4, around that timeframe. It is especially encouraging because our initial thoughts were that the US service providers, or to say the US market was actually kind of closed to new technologies since Z-Wave, ZigBee, all kinds of proprietary technologies and others have basically already gained very nice traction in the US. And coming with a newer technology that was introduced less than two years ago for a market which already has incumbents would be a very significant uphill battle for us. But so far I think service providers are realizing the key benefits that ULE brings - the fact that it is on one hand an ultra-low power consumption type of IoT technology but on the other hand you can run anything, any type of media on ULE. You can get the range. It is pretty much self-installed. The devices can be mailed into every home - you save a lot on truck rolls, installation fees, repeaters, what have you, things that operators really don’t like. So I hope that that answers your question.

[Charlie Anderson:]

Yeah. Maybe just a follow-up

[Ofer Elyakim:]

I believe that at first, in the first inning we are going to be part of a multi-technology type of service and I would say that later with the success of ULE migration well have more room to get a bigger share of those services.

[Charlie Anderson:]

Okay, perfect. And then moving to mobile you mentioned sort of the late stages of qualification, I forget the exact terminology there but it sounds like you’re certainly confident in revenues starting to ramp in Q2. When you say ‘meaningful,’ I’m wondering if you can help define that one a little bit in terms of maybe just quantifying how many phones, or just anything else to sort of help us think about what that business could do in 2015.

[Ofer Elyakim:]

Yes, thanks Charlie. So indeed the kind of qualification of the design is somewhat complicated but you know, from all matters and aspects I would say that most companies that are in the silicon business, the qualification of a design win is basically met. However in the new businesses, the new markets, new customers we try to be a little bit kind of more conservative in the way we define it as you know we’re just kind of entering the market. There could be a lot of unknowns that we are not foreseeing today, but we are confident that HD Clear is going to roll out this year, be in production. And right now our expectation is that Q2 of this year is going to be the timeframe at which we start shipments.

[Charlie Anderson:]

And then last one from me is on the Q1 guidance you’re going to be, I think you said plus 13% year-over-year. VoIP’s at $3 million to $4 million so that suggests to me that maybe some upside is coming from some other places. I wonder if you can sort of give us some added color between DECT and ULE and gateway maybe where we’re seeing that pocket of strength.

[Ofer Elyakim:]

So first right now DECT as you saw from our results is holding in pretty nicely, so we don’t see right now like a significant decline. I’m not indicating that that could not happen during the year but right now we think that DECT is holding in pretty stably. We are seeing good momentum and pretty solid growth from home gateway and we do expect home gateway to continue and grow this year with the driver of the high definition voice. And it is true that right now it will provide a pretty big range, between $3 million and $4 million - however this is kind of like our confidence in the backlog and how that will actually play into revenues. But we’re very confident in the revenues that we’re going to generate within voice over IP this year so they’re going to be strong. We’re going to see another year of very strong growth and we expect the tier one business that we announced in Q1 ’14 to actually be in production starting in Q2, so that will enable us to add another significant layer of revenues to the existing layers of revenues that we have in voice over IP. We have as we said a very nice pipeline of designs and customers that are going to be in production during the year, and as you heard we also said that we already won a second tier one OEM for enterprise phones. So we’re very, very confident in that. So just to summarize, in Q1 we are seeing strength in home gateway. Voice over IP is also pretty strong compared to Q1 2014 which was just a little bit above $2 million. Home gateway I said, so that kind of summarizes the growing aspects that are contributing to the guidance.

[Charlie Anderson:]

Perfect, thank you so much.

[Ofer Elyakim:]

Thank you.

[Operator:]

We will now take our next question from Daniel Amir from Landenburg. Please go ahead.

[Daniel Amir:]

Thanks a lot and congratulations on a good quarter here. A couple questions

[Ofer Elyakim:]

Hi Daniel, thanks for the question. So on the gross margins if you look into the performance that was achieved last year, so you can see that we were already at these types of levels - the 40% to 41%. It is an uptick from where we were at Q4 and the main kind of contributors to this uptick are both an HD stability but mainly, mainly is this kind of better product mix - our expectations for a better product mix.

[Daniel Amir:]

And so going forward is this the new level of margins or is it what it was historically kind of in that 39% range?

[Ofer Elyakim:]

I would say that we always said that we want to be at these types of revenues around 40%, so I would say 40%, 41% could be a good level for this year.

[Daniel Amir:]

Okay, great. The second question related to R&D. You’ve seen some uptick here in R&D. Is this related to the mobile segment now that you’re entering kind of the final phase of design for this customer or is it related to some of the other activities? Just to get an idea at kind of this R&D level are you going into some sort of an investment mode here?

[Ofer Elyakim:]

Yes, so on the R&D level, last quarter we already said that we are going to see an uptick in our investment and it’s really related to our confidence in our growth and in our ability to capture and seize the opportunities that we went after in 2014. And once we’re at that level of confidence what we want to do is to make sure that we’re not missing out on any future cycles. And as you know our R&D takes place but only two or three years later we actually see the results, so what we’re doing now is really kind of building the layers of products that are going to contribute in 2016 and ’17 in each of these market segments - whether it’s in mobile - in order to make sure that we have the right product portfolio to serve during those years and also in voice over IP enterprise as well as in ULE. And so I think the level of R&D expenses that you have seen in Q4 and that I think is pretty much in line also for Q1 should be kind of assumed… During the year of course there will be ups and downs as our expenses are not evenly throughout the year - they’re taped out, there are all kinds of NRE expenses that are expensed when we use these resources.

[Daniel Amir:]

Okay. And then my last question is kind of related to the enterprise voice segment. So you have a second tier one design win here. I’m assuming that there’s a kind of high confidence level that you can get a third tier one design win here in the next couple quarters and basically control the market now that you will have basically all the major design win customers here?

[Ofer Elyakim:]

Yes. So our pipeline and our expectation is that we will be successful in securing additional tier one design wins. We are expecting to expand our market footprint in the voice over IP domain. Today we’re really working on the 2016 revenues - these designs are going to mainly contribute in 2016, the tier one design wins that we announced now and ones that we will hopefully secure during this year. And that will enable us of course to expand our market footprint. We have a great product offering for this segment. Today I think we’re one of the kind of most dedicated and focused SoC vendors in that space. We’re not controlling the market, nor do we plan to control the market but we do plan to grow and become the market leader in this space. I think we have a great roadmap for our customers and I think what we want to see is that we continue and secure more and more business and really become that market leader.

[Daniel Amir:]

Okay, great. Thanks a lot.

[Ofer Elyakim:]

Thank you.

[Operator:]

We will now take our next question with Rajvindra Gill from Needham & Company. Please go ahead.

[Rajvindra Gill:]

Yes, thanks and congrats as well on good results. Just wondering if you can provide some color on the puts and takes with the gross margins both in the quarter and heading into 2015. I believe you said margins would remain at this level or slightly higher but could increase from the contribution of HD Clear or ULE, so I was wondering if you could talk about some of the puts and takes and kind of how to look at the long term gross margin trajectory.

[Ofer Elyakim:]

Hi Raji, thank you. So with respect to gross margins, so if we look at 2014 we were at the level of about 40% on a non-GAAP basis. Looking at this year we are hoping to get some improvement in our gross margins as we expect this year to be a year of growth. As you know part of the expenses included in our cost of goods sold are fixed so any growth in revenues also improves our gross margins. As I told Daniel the gross margin improvement, our ability to sustain the level of 40% has to do a lot with some pricing stability; and on the other hand it also has to do with mix. So of course it is always very hard to fine tune either the 1% or the 50 basis points if gross margins are going to be higher or lower, but I do think that this should be or we expect these levels to become stable throughout the year. And I think that the contribution of the products, of the newer products are of course higher than our more mature businesses. But I do think that the year should kind of come in in line with the 40% to maybe 41%, somewhere in this range.

[Rajvindra Gill:]

And could you provide maybe some details on the margin by product segment - which is kind of higher, lower?

[Ofer Elyakim:]

Yes, so I think the way we’d like to segment it is that the newer businesses, meaning ULE, VoIP and also mobile should be higher than the gross margin average of the corporate. However of course gross margins will fluctuate and any entry into a domain must come at very competitive pricing which will of course then be kind of stabilized and improved throughout the cycle. But you know, generally speaking our new products - ULE, VoIP, HD Clear - should command a higher gross margin than the corporate average but that of course varies with entering a new customer or entering a new market and then stabilization, etc., etc. And just for the full picture, for the full year I do expect to see margins at that level - the 40%, maybe slightly higher than 40%.

[Rajvindra Gill:]

And how would you look at OPEX as revenue ramps? It looks like it remained mostly flat throughout the year. You saw a slight uptick in Q4 particularly in R&D. Should we expect a similar trend in 2015? Should it be OPEX growing at sort of half the rate of revenue now that you’re entering into a period of growth, an inflection point so to speak? How should we look at the OPEX trend, and in Q4 what was the R&D uptick related to?

[Ofer Elyakim:]

Yeah, so on R&D I think that you can take the Q4 run rate which was basically pretty much the run rate that we’ve guided to in Q1 and you can kind of take it across the year. I think that will kind of resemble the level at which we’re running. So this is kind of a small uptick compared to 2014. As I told Daniel we are today investing in our segments and especially the new product segments in order to make sure that we are well positioned to get a bigger piece of the market silos that we’re going after. And that will require of course us to invest. We have been executing very prudently on costs and have been taking costs down year after year, and I think 2014 was kind of a record low year in terms of OPEX. And now when we look at our growth segments and we see that we must be very competitive and offer all the right products for the future we are taking R&D of course very prudently and we’re going to examine it every quarter. We’re taking it slightly higher in order to make sure that we can seize these opportunities.

[Rajvindra Gill:]

Great. That’s it for me. Thanks and great progress.

[Ofer Elyakim:]

Thank you.

[Operator:]

(Operator instructions.) We will now take our next question from Bob Sales with LMK Capital. Please go ahead.

[Bob Sales:]

Hi, a couple questions - first of all nice quarter. Within the quarter, and I probably ask this every time I see you guys, but can you break down, repeat one more time the percentage of revenue that was DECT versus the gateway revenue which I think is still largely within that DECT category?

[Ofer Elyakim:]

Hi Bob. Yes, you are correct. I will repeat the Q4 DECT revenues as a percent of sales. What we said is that DECT as a category including also home gateway inside was 83% of revenues. DECT Europe was 50% and DECT Europe actually includes also rest of the world, and DECT US - which is North America really - was 32%. And inside that there was also the home gateway revenues which last quarter we said we had about $12 million of home gateway revenues during this year. And this is included in the DECT revenues. We don’t segment the home gateways by the type of frequency. Of course we could do that but we just look at it as a category, as a separate category.

[Bob Sales:]

So for the year DECT was somewhere in the neighborhood of the 80%-some level, and of that the gateway revenue was $12 million.

[Ofer Elyakim:]

So for the full year 2014 DECT was $117 million or 82% of sales. Out of that DECT revenue home gateway was $12 million.

[Bob Sales:]

Okay, got it. And then I’m just looking at Q4, and if I look at the VoIP was $4 million; the DECT revenue, if I’m doing the math right was like $31 million. What was the other revenue? There’s kind of like $2 million additional. What is that?

[Ofer Elyakim:]

You’re correct. When we talk about our home revenues we say that it’s mostly DECT. We still have some other radio frequencies for cordless phones that are sold around the world from 2.4 gigahertz that is sold today in China and India, 5.8 gigahertz that is sold around the world, and many other types of legacy technologies that we are selling. And this is the additional $2.5 million in Q4.

[Bob Sales:]

And that is not included in the DECT, right?

[Ofer Elyakim:]

Yes, because these are not DECT. DECT is a frequency band in 1.7 and 1.9 - these are not DECT products.

[Bob Sales:]

Yes, understood. It would be interesting perhaps next quarter to break down the DECT revenue between cordless and gateway but obviously at your discretion - it would be helpful for me at least. Within the mobile, I think the question was asked but now that you’re firmer in your design wins and you think you’ll have revenue in Q2, would you be willing to provide a range of what you think your mobile revenues could be for the full year?

[Ofer Elyakim:]

Yeah. I would say, Bob, it is too early to specify precisely what the revenues are going to be but I can tell you from kind of a high-level perspective it could be around a few million dollars, so low- to mid-singles; and it could be higher than that. We are still doing all the preparations in terms of like getting all the right forecasts and basically kind of starting that, and I think that during the next quarter we should have a better picture on kind of how the year is going to be. But as you understand we expect meaningful, several millions of dollars at least.

[Bob Sales:]

Understood. And then for the year your VoIP revenue was up very, very strongly, and I think so far you’ve said that Q1 will be $3 million to $4 million and then in Q2 you’ll have a new design win kicking in so you’d look for strong growth. Are you comfortable providing a range of growth for the VoIP revenue over the full year?

[Ofer Elyakim:]

So we do expect our voice over IP revenues to grow strongly this year as it did also during 2014. So when we look at kind of how the year should shape up revenues should be in the area north of $20 million - between $20 million and I would say $25 million. This is kind of the range.

[Bob Sales:]

Okay great, great, great. And then given that you’ve hit an inflection point in the business and are seeing growth on a full year basis, the question was asked about operating expenses but I’m curious whether you as a management team have defined internally what a goal for an operating margin might be at a certain revenue level or within a certain timeframe that will help us model the potential of the company given these new growth markets?

[Ofer Elyakim:]

Yes, so we have related that. Actually you can find this information on our investor presentation deck which is on our website. But just to answer your question, so indeed we do plan to see operating leverage coming. We need to see higher revenues in order to get that leverage up. We would like to see gross margin improvement; we would like to see the operating margins which are now around kind of the mid-single digits go to mid-teens or could be higher - it really depends on the revenue’s run rate. We are today serving three growth segments - two of them are not even producing real revenues. So one of them just started production which is ULE; the other, mobile, should start production this year. We’re serving them today - no revenue is being achieved in order to kind of shelter these costs. So we do believe that DSP Group is destined for real operating leverage so what we need to do is bring in higher revenues. So if you know, hypothetically speaking, you put a $300 million type of revenue on the company I believe that we’re going to see substantial leverage on that number. And we alluded to some of the long-term abilities on how we see EPS go from where it is today at $0.30, the non-GAAP EPS into the future using let’s say a 15% type of operating margin.

[Bob Sales:]

Perfect. Excellent job, thank you.

[Operator:]

(Operator instructions.) As there are no further questions in the queue that will conclude today’s question-and-answer session. I would now like to turn you back to the host for any additional or closing remarks.

[Dror Levy:]

Thank you. Thank you all for joining our call today and we look forward to reporting back again in 90 days. Thank you.

[Operator:]

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