DSP Group, Inc.
Q2 2015 Earnings Call Transcript

Published: 1 Aug 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the quarter two 2015 DSP Group, Inc. earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dror Levy. Please go ahead, sir.

[Dror Levy:]

Thank you. Good morning, ladies and gentlemen. I am Dror Levy, Chief Financial Officer at DSP Group. Welcome to our second quarter 2015 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 the third quarter of 2015 including debt and recovery adjustments as well as home gateways and voice over IP revenues, time table for product shipments in the mobile segment, opportunities for HD Clear, adoption of HD Voice and ULE, opportunities in new technologies and resumption of revenue growth for fiscal 2015. 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 declines in such markets, unexpected delays in commercial launch or mass production of new products incorporating our technologies, the growth of 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 technology 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 2014 Form 10-K and the 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 hope that you had the opportunity to read our press release that was released earlier. I would like to begin this discussion by reviewing our results for the second quarter of 2015, comment on the progression of our plans and provide some context for our updated outlook. In a short while, Dror will provide you with detailed comments on our financial results and outlook for the third quarter of 2015. Second quarter financial results exceeded our guidance in every financial metric. Second quarter revenues of $37.2 million were ahead of the midpoint of our guidance. Revenues for the second quarter increased by approximately 3% versus the second quarter of 2014, but were down 2% on a sequential basis. The revenue increase was mainly attributed to meaningful contribution for new products, including solid growth from voice over IP products and strong demand for home gateways with DECT/CAT-iq. Second quarter 2015 marked the fourth consecutive quarter of year-over-year growth. The higher revenues combined with better gross margins and operating expenditures that included higher R&D investment when compared to the same period last year, but came in at the low end of our guidance range resulted in non-GAAP operating profit of approximately $2.4 million or 6.3% of revenues. Our execution continues to focus around profitability and cash flow generation by leveraging our leading position in our core markets, which despite the weak maturity continues to generate strong profit and cash flows. Concurrently with that, we have been steadily reinvesting our profits and resources to fuel future growth. We believe that we are already on track to meet the objective this year. The second quarter financial results continue to demonstrate the success of these investments. During the second quarter, revenues from these new products accounted for a record of 28% of revenues compared to 20% a year ago. Now I would like to give you some specific updates about our progress in each segment, starting with an update on the home segment. In the DECT market, our second quarter DECT revenues, which include cordless phones, home gateways and ULE accounted for approximately 79% of revenues versus 84% for the first quarter of 2015. DECT revenues were down both year-over-year and sequentially declining by 1% and 8% respectively. Looking forward, we expect to see softer demand for DECT products in the third quarter. We attribute the weakness to inventory level adjustments following five straight quarters of solid demand. Sales of our DECT product for the European and rest of the world end markets were down 4% year-over-year and 18% on a sequential basis and accounted for approximately 43% of our revenues. Demand for DECT product for the North American end markets were better than expected, mainly related to strong demand for home gateways. Sales were up by 4% year-over-year and also up 6% sequentially. DECT 6.0 products for the North American end markets accounted for approximately 35% of our revenues. Now to home gateways. The underlying market trend behind the integration of DECT into home gateways is the growing adoption of high definition voice. The usage of this product is becoming more popular and many phone calls made today already run these high-definition voice codecs. Many service providers are in the process of upgrading their infrastructure and home gateway terminals to support high-definition voice and deliver to their users benefits like superior voice quality and better voice call intelligibility. DECT/CAT-iq technology is the preferred medium for transmitting wireless high-definition voice in an indoor location and is highly regarded for its superior range and link reliability. Second quarter home gateways of approximately $4.2 million were ahead of our expectations, representing year-over-year growth of 49%. We believe that the strong demand for home gateway products in the first half of this year was exceptional and we attribute this strength to higher than average demand and volume concentration around new product launches which took place in the first quarter of the year. Therefore, we would expect revenues from home gateways to moderate during the third quarter. Turning to ULE. We are pleased with the market recognition and the growing customer traction for our ULE technology. More players and new geographies are starting to realize the essential key attributes that DECT and ULE bring to the IoT market. These merits include better home coverage and longer range, interference free and dedicated band and natural support for two-way data, voice and video. During the quarter several customers launched new products based on ULE, including an OEM that launched a home video monitoring system based on our DECT ULE products and Panasonic which started offering its ULE-based home automation solution in Europe and mainly in the United Kingdom. Moreover, we expanded our product portfolio and began offering a ULE-based module. The module is built around our DHX91 SoC and enables developers to easily integrate ULE with only minimal knowledge of the standard, thereby reducing effort, cost and time to market. We already received strong indication from prospective customers and are excited by the additional opportunity the ULE module opens for us, including a more rapid expansion of the customer base. During the quarter, we continued to expand our ecosystem and made our DECT ULE available on additional leading platforms. We announced a joint offering with ProSyst, a leading IoT middleware provider and GreenPocket, a leading IoT cloud service provider of a ULE/OSGi cloud-based IoT solution, which enables service providers to leverage existing OSGi-based gateways and launch ULE services and products at faster time to market. To summarize, we are successfully progressing in a number of engagements and are well positioned to continue and grow the market adoption and revenues from ULE this year. Moving from the home to the office vertical. The second quarter was a record quarter for our office voice segment. Revenues of $5.2 million were ahead of the midpoint of our guidance, reflecting an increase of 37% year-over-year and 41% sequentially. During the quarter, we continued our strong design activity and secured three new IP phone design wins based on our DVF99 SoC as well as a new win for a multiport ATA or voice over IP gateway with SGW and Excelocity. We also saw solid demand for our voice over IP products by our first Tier 1 customer and expect revenues from this customer to continue and contribute in a meaningful way throughout the second half of this year. We are excited about the business momentum and our design pipeline and expect our revenues in this segment to grow on a sequential basis and be in the range of $5.5 million and $6.5 million in the third quarter. Now, to an update on the mobile segment. Today our HD Clear products are designed into two products of a leading mobile customer. The first is a high-end smartphone and the second is a wearable product. However, we do see a slower than expected progress in these projects due to recent delay in the production launch dates of these products. Therefore we expect a shift in HD Clear revenue starts. This is of course disappointing, as we had previously expected to start generating revenues late in the second quarter. Nevertheless, we view these delays as temporary and we expect to commence shipments and realize revenues in the fourth quarter. Notwithstanding this delay, we continue to see a solid near-term market opportunity for our HD Clear products, including for our DBMD4, our newest always-on voice announcement product, which features the lowest power consumption and best-in-class performance. This is evidenced by the solid traction and interest we are receiving from leading OEMs. The interest is centered around ultra-low-power voice processing, always-on functionality and innovative noise and echo suppression technology. Leading mobile OEMs have already started evaluations of this solution for a variety of new products which are expected to launch early next year. Now to an update on our outlook. We expect a slowdown in revenue for the third quarter. The expected weakness is attributable to key main factors. The first is a delay in our HD Clear revenue from the third to the fourth quarter and number two is our expectation of weaker demand for DECT product. Based on forecasts received from customers, our current backlog and our own assessment, we expect revenues for the third quarter to be in the range of $34 million to $36 million. Regardless of this near-term weakness, we do expect to continue and generate non-GAAP operating profit in the third quarter. In summary, we have completed a successful first half with revenues up by 9% year over year and new products contribution reaching 26% of revenues for the first six months of the year. Despite the near-term revenue slowdown, we are well positioned to meet our goal of resuming revenue growth for the full fiscal year. More importantly, the successful market adoption of our new initiatives continues to increase our confidence in our long-term growth in both revenues and profit. And 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 second quarter of 2015 from top to bottom. For each line item, I will provide the U.S. GAAP results as well as the equity based compensation expenses included in that line item and the expenses related to previous acquisitions. Our revenues for the quarter were $37.2 million. Gross margin for the quarter was 40.9%. Gross margin for the quarter included equity based compensation expenses in the amount of $0.1 million. R&D expenses were $8.9 million including equity based compensation expenses in the amount of $0.6 million. Operating expenses for the quarter were $14.6 million including equity based compensation expenses in the amount of $1.3 million and amortization of acquired intangible assets in the amount of $0.3 million. Financial income for the quarter was $0.3 million. Provision for income taxes for the quarter was $0.2 million and the included tax benefits resulting from amortization of deferred tax liability related to intangible assets in the amount of $0.1 million. Our net income was $0.7 million and included equity based compensation expenses of $1.4 million, amortization of intangible assets of $0.3 million and the tax benefits resulting from amortization and deferred tax liability in the amount of $0.1 million. Non-GAAP net income, excluding the items I have just described, was $2.4 million. Diluted GAAP income per share was $0.03. The negative impact of equity based compensation expenses on the EPS was $0.07. The negative impact of the amortization of acquired intangible assets on the EPS was $0.01. The positive income of tax benefits resulting from the amortization of deferred tax liability on the EPS was $0.01. The non-GAAP diluted earnings per share, excluding the items I just described, was $0.10. 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. Accounts receivable decreased from $26.5 million at the end of the first quarter of 2015 to $22.7 million, representing a level of 55 days of sales. Inventory increased from $13.5 million at the end of the first quarter of 2015 to $14.1 million representing a level of 58 days. Our cash on marketable securities increased by $1.9 million during the second quarter and were at the level of $120.1 million at the end of June. Our cash and marketable securities position during the quarter was affected by the following, $8 million of cash provided by operations, $0.6 million of cash was used for purchase of property and equipment, $5.2 million was used for repurchase of approximately 453,000 shares of our common stock at an average price of $11.5 per share, $0.3 million of cash was received from stock option exercised by employees and $0.6 million was a change in the market value and amortization of marketable securities. Now I would like to provide you with our projections for the third quarter of 2015. Our third-quarter projections on a U.S. GAAP basis including the impacts of equity based compensation expenses and acquisition related amortization expenses are as follows. Revenues are expected to be in the range of $34 million to $36 million. We expect our gross margin to be in the range of 41% and 42%. R&D expenses are expected to be in the range of $8.5 million to $10 million. Operating expenses are expected to be in the range of $14 million to $16.5 million. Financial income is expected to be in the range of $0.25 million to $0.35 million. Provision for income tax for the third quarter is expected to be approximately $0.1 million to $0.3 million. And shares outstanding are expected to be approximately 24 million shares. Our third-quarter projections include approximately $0.3 million of amortization of intangible assets. Our third-quarter projections also include the following amounts forecasted for equity based compensation expenses. Cost of goods sold include approximately $0.1 million. R&D expenses include $0.5 million to $0.7 million. And operating expenses include $1.2 million to $1.4 million. And now I would like to open up the line for questions-and-answers. Operator, please?

[Operator:]

[Operator Instructions]. Our first question comes from Rajvindra Gill from Needham & Company. Please go ahead.

[Josh Buchalter:]

Hi. Thank you for taking my question. I am sorry. This is Josh, in for Raj, by the way. So it looks like there was a nice step up quarter over quarter in VoIP and you are expecting another step up in the third quarter. Should we expect a continued one-year ramp in this business? How should we think about that going forward? Thank you.

[Ofer Elyakim:]

Hi, Josh. And thanks for the question. So in our VoIP business, as we discussed, we do see a sequential increase from quarter-to-quarter and this is what we expect also for the remainder of the year. And as we have announced during the last 12 months about the three Tier 1 design wins, the first of which already got into production late in the first quarter and continued into the second quarter and we expect that to contribute in a meaningful way also in the second half of this year. Into next year, we expect additional Tier 1 design wins to go to production. So that will basically fuel the next layer of growth in this voice over IP model. So we are extremely excited and comfortable with the continued growth in this segment and we believe there is a very exciting market opportunity for us and I believe that today we are involved in many of the upcoming designs for the following year, the year 2017. So we see basically a linear type of sequential ramp in this business.

[Josh Buchalter:]

Okay. So just to clarify, so you have entered production for one design win. You are expecting two more to come online in 2016. Is that correct?

[Ofer Elyakim:]

Correct. Yes. So I believe in the first half of 2016 we will see two additional Tier 1s go to production.

[Josh Buchalter:]

Great. Thank you. And then with HD Clear, can you maybe talk about what led to the delay? And how should we think about the magnitude, once it does come online in the fourth quarter? Thanks, guys.

[Ofer Elyakim:]

Yes. So as I have described, we did see a delay. Our expectations were that we will be able to start shipment late in the second quarter of the year. However, we see that there is a delay in the production start. Based on the focus that we are getting from this OEM, we should be able to start shipment in the fourth quarter. And we believe that this is a temporary delay. So these products will go to production in the fourth quarter. And in addition, we are also now participating in the upcoming design cycle for next year's product. So we believe that we have a very good chance of being successful both in the products that we already designed into as well as upcoming projects that will go for production early next year. So in terms of the way we are thinking about it, so we do expect to see revenues in the fourth quarter, albeit we expect these revenues to be lower than what we originally anticipated. So I would say, this will be, let's say in the $1 million dollar or so. This is what we expect right now. So this would be, let's say, the range of what we would expect for the fourth quarter.

[Josh Buchalter:]

Okay. Great. Thanks so much and congrats on the progress.

[Ofer Elyakim:]

Thank you.

[Operator:]

Out next question comes from Matt Robison from Wunderlich Securities. Please go ahead, sir.

[Brian Freed:]

Good morning. This is Brian, on for Matt. We were curious about, you had spoken about the expectation for weaker revenue in the third quarter that was down sequentially year-over-year. But we were curious about your insight or any insight you could give about expectations for the fourth quarter? Obviously, you just alluded to delay in the production from the OEM with the HD Clear product. But any more insight in terms of expectations for your business in the fourth quarter, specifically alluding to you are maintaining that you expect year-over-year revenue growth for the remainder of the year or for the total year?

[Ofer Elyakim:]

Yes. So thank you, Brian. We did say this. We are expecting to see full-year revenue growth, which is and was our goal when we started the year and we believe that we are on track to meet that. With respect to the fourth quarter, I would say that right now it would be too early to provide any real commentary beyond our expectation here and there in the very specific product lines. But what I would say is that we are expecting some correction in demand for DECT product. As I indicated that we believe that there is an inventory adjustment cycle occurring in the third quarter. We would like to see that this correction will end in the third quarter and that will mean that there will be a solid demand or more solid demand in the fourth quarter. But I would say that right now our visibility into exactly how the fourth quarter looks, especially given the fact that still a majority of our revenues is concentrated in DECT, is at this stage too early to call. I did indicate that we do expect to see HD Clear to ramp in the fourth quarter. We do expect to see a solid contribution from voice over IP and in total we expect to see strong contribution from the new product initiative. So we expect that to continue and represent a growing percentage of our sales. I also did indicate in my opening comments that in home gateway we did see a pretty much front-end loaded year in terms of spectacular growth coming from demand from gateways that, in our view, was mainly concentrated around new product launches that occurred early in the year and basically we are seeing the tail of that demand and we do expect demand to moderate. So we do expect to see revenue growth in the home gateway but we do expect to see numbers that are slightly lower or lower than in the first half.

[Brian Freed:]

Perfect. Thank you for answering.

[Operator:]

Our next question comes from Charlie Anderson from Dougherty & Company. Please go ahead.

[Charlie Anderson:]

Yes. Thank you for taking my questions. I want to ask about usage of the cash. You are still sitting with quite a bit of cash on the balance sheet and I know in the past, Ofer, we have talked about, it's nice to have it as you go into these bake-offs at Tier 1s and now that you have proven you can win some of the Tier 1s, I wonder if the thought process has changed around the use of cash?

[Ofer Elyakim:]

Hi, Charlie. And thanks for the question. So in terms of the usage of our cash, so far we have been maintaining a cash balance of approximately $120 million. Of course, we do not need all of that cash for our operation and as we discussed, there is definitely a lot of excess cash in this number. We do, however, need to maintain today a strong balance sheet. This is especially required for our ability to be designed in a good way with leading OEMs, whether this is in the enterprise space or in mobile space. But as you can see, we have been using a lot of that cash for share repurchase and we actually have been over the last year very active on that front. We are just kind of in the midst or in the tail of the current buyback program of $10 million. So we do expect to continue our share buyback, especially if our shares continue to pull back from where they are today.

[Charlie Anderson:]

Great. And then as it relates to mobile, obviously there has been a lot of, call it, musical chairs in that industry and a lot of sockets that have been up for grabs and some that went in other places than they have been historically. I just wonder how you are viewing that into 2016 and 2017, the opportunities that are there for you? And just better put into context what our expectation should be for what you can do in that type of a business?

[Ofer Elyakim:]

So I would think that our expectation going into 2016 and these are what we have also articulated in the previous call, is to be in production this year. And this is a very important milestone for us to achieve. And when we look into the next cycle, the next design cycle or into 2016 revenues, where we would want to be positioned is, we would want to be positioned in like leading sockets of OEMs. So that means we would expect to generate a much higher revenue than, let's say, a low single-digit million. So we want to be well above that, so say kind of high single to teens type of revenues coming from this segment.

[Charlie Anderson:]

Great. And then last one for me. I think in the past few calls, you have talked about some service provider wins for you ULE. And I just wondered if you could update us on when some of those engagements might ramp?

[Ofer Elyakim:]

Sure. Yes. So thanks and actually this was missed in my prepared comments. So we ended last year announcing a number of service provider design wins and also in the previous quarter we announced a fourth design win with a leading service provider. The first security service provider is actually supposed to enter production in the fourth quarter. So this is our expectation that the first security service provider will be in production in the fourth quarter of this year. We have another leading European service provider which is now in the midst of a major field trial that they are running and they hopefully also in the fourth quarter of this year will convert from trial to full launch. The Tier 1 European service provider, we expect that milestone to occur or a service launch to occur next year, in the second half of the year. And in terms of the North American service provider that we have discussed, we expect that to occur in 2016. So from our expectations, we may see maybe initial revenues this year but it's more of a 2016 launch.

[Charlie Anderson:]

Thank you so much.

[Operator:]

[Operator Instructions]. Our next question comes from Bob Sales from LMK Capital Management. Please go ahead.

[Bob Sales:]

Hi. A few questions. On the VoIP market, you describe that your first Tier 1 win started in Q1, continues to contribute this year and that you will have two additional Tier 1 wins that begin production next year. My question is, can you help us understand whether or not the additional Tier 1 wins you have, how they compare in size to the first win that you have established?

[Ofer Elyakim:]

Sure. So I would say that the additional Tier 1, so the two additional design wins that we expect to go to production today basically these products are in development and we would expect to see a transition to production in the first half of next year. One of these designs is comparable to the Tier 1 design win that we are shipping today. The other one will ramp in two phases. So at first it will be, I would say, a solid but not as big as the first two, but going into the following year it will ramp up to significant quantities as well. So we do expect a very nice and growing ramp. In addition, we do expect to win additional Tier 1 business this year. So actually our expectations haven't been better in the enterprise segment.

[Bob Sales:]

Okay. And if I look at that business and I do just kind of a simple math of the current quarter annualized to say, call it, a $20 million business right now and that's just a benchmark. Can you give us a sense of, given the other players that have left open room for you, how big you think that market opportunity is? And what is a reasonable market share for you to obtain over the next few years?

[Ofer Elyakim:]

Yes. You know, in the past we have tried to size up the market and we tried to look for, first of all, market research data. This is not a market that is heavily followed by market research. But when we size up that market, we see about $150 million to $200 million worth of SoC value. We believe we can grow significantly in this domain. I would say that if we take, let's say the next five years including 2015, our expectation would be to grow to approximately to bring $100 million of revenues from this market.

[Bob Sales:]

Okay. Good. And then on the DECT side, the inventory adjustment looking at Q2, Q3 looks to be kind of a classic DECT phone inventory adjustment. I guess my question is, do you have any sense of what retail sellthrough has looked like, which is probably a smoother number for us to appreciate the growth or lack thereof of the market?

[Ofer Elyakim:]

Right. Yes. So our two main markets for DECT phones, the first is North America, really U.S. and the second is European market. What we have seen over the course of this year was a moderation in the level of decline. If last year declines were in the teens, mid-teens, this year they are more convergent to the single-digit type or high single-digit type of rate. We do attribute some of that to a stronger overall real estate market and we do see that as kind of the one of the catalysts for a replacement of this type of system. So this is our view and also this is the indication from the sales group. In Europe, we have seen a very similar phenomenon that we believe has been related more to the recovery in each of the big European countries. And so we have seen in Europe a moderation of the level of decline. But of course this is something that does change on a monthly basis. But so far during this year we have seen a significant moderation in the level of decline in this industry. However, in the third quarter from where we sit in the supply chain, we do see this inventory adjustment.

[Bob Sales:]

Got you. And when to talk about those numbers, that is the DECT phone market and you are not including the gateway side of the business?

[Ofer Elyakim:]

No. This is retail cordless.

[Bob Sales:]

Yes. Understood.

[Ofer Elyakim:]

So just to put that in brackets. This is just cordless in retail, U.S. and Europe.

[Bob Sales:]

Okay.

[Ofer Elyakim:]

Not including any sales for product.

[Bob Sales:]

Okay. And then on the mobile business, I guess my question is this, you are attempting to enter into a tough market from two standpoints. One is the consolidation of the end customers and two the sophistication of some of the solutions that you are up against from players like Cirrus Logic. And I guess I am trying to understand two things. One, what is it that you think will enable you to grab a socket from a big player that will really make a difference in your business? And two, is there a point at which you feel like if you don't get major design wins early next year that you are hoping for that that business needs to be reassessed?

[Ofer Elyakim:]

So first of all, we do run a very prudent approach of justifying our investments in each of the market segments that we are in. And we do that thoroughly every month, every quarter. So we definitely exercise very careful justification for being in a market domain and also being mindful to the changes that are happening in the landscape. Now when we look at the mobile opportunity, we have been investing heavily in penetrating one major OEM customer. I believe we have built enough routes and also have created enough differentiator in our functionality and performance. And I alluded to some of that in my prepared comments, including the lowest power consumption. So our ability to actually make devices function as always-on without really impacting the user experience vis-à-vis the battery power or the battery life and we see that as a growing trend in mobile devices, whether we are talking about smartphones or wearable products. We are seeing a change in the way also the OS vendors are looking at demand and they are today opening up their operating system to be fully controlled via voice with basically unlimited access to both the OS well as to the applications themselves using also and kind of the main trigger for that is always-on. So once you are tapping on a device, you might as well continue to use the touch, but if you actually want to use voice, the best way and the real benefit will come when you do that without touching the device. That means you would need the device to be in listening mode waiting for these commands to come in. And in that factor, we do have a major differentiator today in the market with our capability to support that at very, very low power consumption. So we are seeing the opportunity in the socket. It is true that it has been slower than we initially expected, but we are very confident in our ability to win that socket. And as I said earlier, we also will be very prudent in terms of a justification if we see that we are not successful in doing so.

[Bob Sales:]

Yes. I will agree with that. I will commend you on being very prudent in how you approach the market. But I hope you can appreciate me asking the question. The last question I have for you is on the ULE. Assuming the opportunities that you have with security and other service providers and then some of the do-it-yourself monitoring or home automation stuff gets traction, can you help us understand how, what kind of revenue per year opportunity you think ULE could materialize as over the next perhaps two years?

[Ofer Elyakim:]

Yes. Well, first of all, it is important to note that ULE is a product which is in production today. It is shipping every quarter. So we do have customers. We do have volumes. However this is basically the start. We started last year. This is the first full year of shipment. So today the shipments are kind of ramping off of that relatively low base. We do expect the unit volume to increase as we get more designs, we introduce or our customers introduce more product and we get the benefit to ship more. However, to actually quantify that today, I would say that we would want to see this year that we are getting to a level of around $1 million or so than we would want to see that grow into, I would say, mid-single digit millions in 2017. So this is kind of the ramp that we would expect to see in this category. And ULE today is a new standard and we are basically still in the adoption and learning curve of the standard and it is gradually also converging into products that are going to production. And so this is kind of the ramp that we do expect. And I would say that also the IoT market, especially kind of the home security, home automation is today embracing more and more of these systems. And we believe that we stand to benefit with more adoption of devices as more and more OEMs and service providers do realize the very clear benefits that ULE brings to the table including the range, the dedicated frequency band, the ability to support any type of communication which gives you kind of a future-proof technology to conduct any type of transaction that you would want.

[Bob Sales:]

Okay. Thank you very much.

[Ofer Elyakim:]

Thank you.

[Operator:]

[Operator Instructions]. Your line is now open, sir. Please go ahead.

[Unidentified Analyst:]

Hello.

[Ofer Elyakim:]

Yes.

[Unidentified Analyst:]

Can you hear me? Because I cannot hear the operator.

[Ofer Elyakim:]

We can hear you. If you would like to ask a question, please do.

[Unidentified Analyst:]

Yes, I would. Just a couple more follow-ups. Is the gross margin profitability, how would you describe the gross margin profitability of your VoIP business compared to the rest of your business and to your DECT phone business?

[Ofer Elyakim:]

So we do see that the new products in general are contributing a higher gross margin than the corporate growth average and I think you can see that also in the way gross margin has been progressing.

[Unidentified Analyst:]

Okay. And then my last question on the DECT gateway business. It seems like it's been a good start and then you were seeing some lumpiness, as you expressed in your guidance for the second half the year. So in your DECT gateway business, can you just provide a little bit more detail in terms of the magnitude of the market opportunity and whether or not there are comparable service provider design wins as you look forward?

[Ofer Elyakim:]

Sure. So I would characterize the trend slightly different than lumpiness. I would call it, there is a lot of volatility around the service providers or the companies that we sell to or the ODMs that are building these boxes. And the volatility is such that there is a lot of concentration around new product launches and these in 2015 took place, occurred in the first quarter and this is why we see a front-end loaded type of demand. Now the way these revenues grow are by new product launches. So a new box gets launched and then there is the volume that is ascribed to that. We did say in previous calls and provided some commentary around the market size of the home gateway. I would say that we look at it as more of a 20% type of grower, give or take. So this is the way that we see this market growing. The sum is basically the amount of CPEs that are shipped every year, whether these are based on DSL, fiber, cable, other. Other means of broadband access. And DECT gets integrated into the CPEs as connectivity to enable high-definition voice and in the future also to enable ULE services. And this is a market of roughly 100 million units that are shipped today and the sum is based on CPEs that include voice termination. So not all the CPEs but just those that have the voice termination. And I would say that going into this year I believe we see about 15% or higher attach rate, 15% to 20% something attach rate already and this is up from like single digits about three years ago.

[Unidentified Analyst:]

Okay. Thanks again.

[Operator:]

[Operator Instructions]. Just to confirm, that there are no further questions in the queue. So I will turn the call back to you, sir, for any additional or closing remarks.

[Ofer Elyakim:]

Thank you all for participating and we look forward to reporting in 90 days. Thank you.

[Operator:]

Ladies and gentlemen, just to confirm that this now concludes today's conference call. Thank you for your participation. You may now disconnect.