DSP Group, Inc.
Q3 2015 Earnings Call Transcript

Published: 28 Oct 2015

[Operator:]

Good day and welcome to the third quarter 2015 DSP Group Earnings Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Dror Levy, CFO. Please go ahead sir.

[Dror Levy:]

Thank you. Good morning ladies and gentlemen. I am Dror Levy, Chief Financial Officer of DSP Group. Welcome to our third 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 fourth quarter of 2015, outlook for the debt market, solid growth of home gateway revenues and optimism about growth in our new product segment, including HDClear, Voice over IP and ULE products and the greater contribution to our revenue mix in the future periods. Actual results or trends could differ materially from our forecast, including softness 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 products incorporating our new technologies, including HDClear, Voice over IP and ULE; the growth of new market verticals, our ability to manage operating expenses, our ability to secure additional design wins and greater than 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 and 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 today. I would like to begin this discussion by reviewing our results for the third quarter of 2015, comment on the progression of our business plans and provide context on our outlook. In a short while Dror will provide you with detailed comments on our financial results and outlook for the fourth quarter of 2015. We achieved third quarter financial results that were better than our guidance in almost every financial metric. Our performance reflects strong revenue contributions from new products and a successful achievement of the major milestone events with initial high volume shipments of HDClear products to our Tier 1 mobile customer. Additionally, we generated record results in our Office and VoIP segment and one significant contract for DECT and ULE product. These positive developments demonstrate the successful execution of our business plan and focus on these strategic growth initiatives. Third quarter revenues of $35.2 million were ahead of the mid-point of our guidance range but down by approximately 4% versus the third quarter of 2014 and down by 5% on a sequential basis. The decline in third quarter revenues was a result of a softer market environment for DECT phone, which we expect to persist in the fourth quarter. Nevertheless, new product revenues accounted for 28% of revenues driven by record revenues in our Office/VoIP segment. We generated non-GAAP operating profit of approximately $1.6 million or 5% of revenue. This resulted from high revenues, record gross margins of 41.6% and operating expenditures that included higher R&D investments when compared to the same period last year, but nonetheless came in at the low end of our guidance. Our execution continues to focus around profitability and cash flow generation by leveraging our leading market position in our core markets, which despite, with maturity continues to generate ample profit and cash flows and concurrently we have been steadily reinvesting our profits and resources to fuel future revenue growth and enhance our profitability. These investments are bearing fruits today as evidence by one, record high non-GAAP gross margins of 41.6%, which we expect will continue and expand in the coming quarter as our product mix shifts in favor of new products. Number two is the solid contribution and growth from new products which grew by 9% year-over-year and accounted for a record of 28% of revenues compared with 24% a year ago. Now I’d like to provide specific updates about our progress in each segment, starting with an updated on the mobile segment. We are very excited to share with you an important development in our business. One of our key business goals for this year was to secure design wins and start commercial shipments of our HDClear product and I am delighted to report that we successfully accomplished this goal and started commercial shipment to a Tear 1 mobile OEM for a flagship wearable product with Always-On Voice. This is a milestone event for HDClear business and marks our successful entry into the mobile market. We expect shipments to this OEM continue and ramp up in the fourth quarter and to a much great extent in 2016. Moreover, we are very happy with the positive traction of our newest Always-On Voice enhancement HDClear product, which features the lowest power consumption and best-in-class performance. Today we are engaged in a number of strategic designs and expect this engagement to materialize into design wins and shipments in the coming quarters. Our key values are centered on Ultra-Low-Power Voice Processing, Always-On Voice sensing functionality and Innovative Noise and Echo Suppression technology. We are therefore optimistic about the outlook for the mobile segment and together with accomplishing the milestone event of commencing shipments of our HDClear products with Tier 1 mobile OEM customer, and our progress on the design and engagement front, we are on track for a solid run in this business next year. We expect to capitalize on this market opportunity and see a solid path for incorporating our HDClear product in Tier 1 OEMs, Smartphones and wearable products. Moving on to the VoIP and Office segment, we are excited about the Voice over IP market opportunity and continue to focus our execution on growing our footprint in this market. We estimate that the market opportunity ahead of us is in the range of $200 million. Moreover we continue to solidify our leadership position as demonstrated by a strong design pipeline with Tier 1 OEMs and other leading customers. We are confident about our long term outlook and our growth prospects in the Voice over IP business. The third quarter was another record quarter for the Office/VoIP segment. Revenues of $6.3 million were close to the higher end of our guidance, reflecting a 44% year-over-year growth and 20% on a sequential basis, driven by solid demand for VoIP products by our first Tier 1 customer. We expect revenues from this customer and other customers to continue and contribute in a meaningful way throughout the fourth quarter and expect our revenues to grow on a sequential basis. Now to an update about the Home segments and we’ll start first with the home gateway. As expected, home gateway revenues reflect a front-end loaded year. Third quarter revenues were $2.3 million, down by 37% year-over-year, mainly due to the seasonal volatility. However for the first nine months of the year, home gateway performance was strong, generating revenue growth of 22% versus last year. We believe that the strong demand for home gateway products in the first half of this year was exceptionally, driven by higher than average demand and volume concentration around new product launches. We expect revenues from home gateways in the fourth quarter to remain at roughly Q3 level and expect this category to pose solid growth for the full year. The underlying market trends behind the integration of DECT into home gateways is the growing adoption of high definition voice, and many service provides are in the process of upgrading their infrastructure and home gateway terminals to support High Definition Voice. During the quarter we had a number of note worthy achievements, including number one, a major U.S. telco provider designed our DECT and ULE product for its next generation home gateways. This design win is of major strategic importance, both from the business potential and from the anticipated traction of High Definition Voice and its adoption by other leading server providers in the U.S. Number two, TP-Link the leading global provider of consumer and business networking product launched a new line of home gateways with our DCX81 for High Definition Voice and ULE support targeting the retail channel, and Swisscom launched its new line of home gateways integrating our DCX81 for wireless High Definition Voice and ULE support. Now turning to IoT. We are encouraged by the market recognition and the growing customer traction of our ULE technologies. More players and new geographies are starting to realize the essential key attributes that DECT and ULE bring to the IoT market and these merits include better home coverage and longer range, and interference free dedicated band and natural support for two-way data, voice and video. During the quarter several customers launched new products based on our ULE products and they include a leading Tier 1 security service provider that launched its new security system including DECT ULE for voice enabled sensors, which according to market’s feedback received by this customer, that such voice enabled sensors are game changers in the home security market. A leading U.S. consumer brand launched a home safely and monitoring system for the U.S. market based on our DECT ULE chipset, and Panasonic launched its ULE-based home safety and automation solution in Germany at the IFA Consumer Show in Berlin in close cooperation and collaboration with the Alliance Insurance Group. Moreover, we have expanded our product portfolio and design pipeline on the heels of our ULE model offering, which is generating exceptional interest in the market. Our ULE module enables developers to easily integrate with only a minimal knowledge of the standard, thereby reducing effort, cost and time to market. Another note worthy development during this quarter is that the ULE alliance began supporting the AllSeen alliance all joint frameworks as part of the ULE standard, resulting in an expansion of a global IoT ecosystem, thereby bringing consumers more choice and capabilities. To summarize, we are successfully progressing in a number of engagements in our own track for a record shipment of ULE products in the fourth quarter and to post strong growth for ULE revenues this year. Now to an update on the DECT phone market. Starting in this conference call, all revenue numbers and comparisons including in this section are for quarter’s phone SoC only and do not include from gateway, ULE and home monitoring revenues. Sales of our DECT products for the European and rest of the world cordless phone end markets were down by 8% year-over-year and by 5% on a sequential basis. Sales of our DECT products for the European and rest of the world cordless phone end markets accounted for approximately 33% of our revenue. Demand for DECT product across the North American cordless phone end markets was weaker with revenues down by 13% year-over-year and 11% sequentially. DECT 6.0 products for the North American cordless phone end markets accounted for approximately 28% of revenues. We anticipate the demand for DECT products will remain weak throughout the fourth quarter. Total revenues from cordless phone chipset, which includes both DECT technology, as well as other technologies accounted for 72% of our revenues and were down by 8% year-over-year and by 5% sequentially. And now to an update on our outlook. We expect fourth quarter revenues to be a tad level on a sequential basis due to continued weaker than expected demand for DECT SoCs for cordless telephony products. Based on forecasts received from customers our current backlog and our own assessments, we expect revenues for the fourth quarter to be in the range of $33 million to $35 million. Nevertheless we expect to continue and generate non-GAAP operating income in the fourth quarter, to continue and improve our gross margins and to meet our goal of revenue growth for the full year. In summary, for the first nine months of 2015 we have successfully generated revenue growth of 4% year-over-year with 26% of revenues coming from new products. And going forward, we’ll continue to reinvest our profits and resources to drive future growth and maximize value for our shareholders. More importantly, the successful market adoption of our new initiative in VoIP, mobile, home gateway and ULE market makes us confident in our ability to sustain revenue growth this year and beyond. 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 of the third 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 $35.2 million. Gross margin for the quarter was 41.4%. The gross margin for the quarter included equity based compensation expenses in the amount of $0.1 million. R&D expenses were $8.7 million, including equity based compensation expenses in the amount of $0.5 million. Operating expenses for the quarter were $14.5 million, including equity based compensation expenses in the amount of $1.2 million and amortization of the acquired intangible asset in the amount of $0.3 million. Financial income for the quarter was $0.2 million. Provision for income taxes for the quarter was $0.1 million and included a tax benefit resulting from the amortization of deferred tax liability relating to intangible assets in the amount of $0.1 million. Net income was $0.2 million including equity based compensation expenses of $1.3 million, amortization of intangible assets of $0.3 million and the tax benefit in the amount of $0.1 million. Our non-GAAP net income excluding these items I’ve just described was $1.7 million. Diluted GAAP EPS was $0.01. The negative impact of equity based compensation expenses on the EPS was $0.06. The negative impact of amortization of acquired intangible assets on the EPS was $0.01 and the positive income of the tax benefit resulting from amortization of deferred tax liability was $0.01. Non-GAAP diluted earnings per share excluding the items I just described were $0.07. Please see the current report on Form 8-K that we filed with the SEC this morning for the full reconciliation of the non-GAAP presentation to the GAAP presentation. Now, turning to the balance sheet. Our accounts receivable at the end of the third quarter of 2015 were $22.7 million, same as of the end of the previous quarter, representing a level of 58 days of sales. Inventory decreased from $14.1 million at the end of the second quarter to $12.1 million, representing a level of 53 days. Our cash and marketable securities decreased by $3.5 million during the third quarter and were at the level of $116.6 million at the end of September. Our cash and marketable securities position during the quarter was affected by the following

[Operator:]

[Operator Instructions]. I will now take our first question from Charlie Anderson of Dougherty & Company. Please go ahead.

[Charlie Anderson:]

Yes, thank you for taking my questions. I want to start with HDClear. Ofer, you sound very excited about the prospects for that product based on some of the recent design wins. Can you maybe expand on the point a little bit in terms of some of the design win traction you see in to next year or maybe you have some visibility now on some products that could ship in the first half of ’16. Do you have Smartphones at this point? Any additional color there will be helpful.

[Ofer Elyakim:]

Hi Charlie, thanks for the questions. So yes, indeed we feel much more optimistic about HDClear and now at the end of October. First of all, we are very excited with the fact that finally we are shipping to the mobile markets. This was a major milestone that we had to complete in order to be a player in this market and we are very excited that this milestone has been met and it has been met with the Tier 1 consumer or mobile type of OEM. So we’re very excited with this opportunity and we believe that this opens the door for many more engagements, for flagship product just like this wearable product is, also in the Smartphone side and in other fronts as well. In addition, we are already today in engagement and in designing phase with a number of additional OEMs in the mobile side, mainly on the Smartphone but also on other kind of wearable and other device front and they include – they always want voice and also noise suppression and other factors that relate to voice announcement. So right now we feel very confident that we are on the right track to see very solid contribution next year and this will be backed by these engagements that we are very hopeful will mature in the next coming months through design wins and thereafter to products that will be shipped to the market. So I think that if we compare the notes from the last earnings call to today so you can see that the tone is very optimistic. We’re very upbeat about the potential and the progress that we’ve made and I think a lot of that is first of all around the fact that we are today qualified and shipping, but also around the innovation that our team has put together around the new product, which we discussed also on the last earnings call, the DBMD4 which today achieves by far the lowest power consumption. This is a very, very key attribute for always-on functionality and also the software support that we are providing with all the algorithms and the frameworks.

[Charlie Anderson:]

Sorry, I was going to say, I know you have a reporting segment there for mobile. I wonder, was there any contribution in the quarter and then what should we think about in Q4 as far as the mobile contribution?

[Ofer Elyakim:]

Yes, so for the third quarter it was over 100K, but all of that came from shipments for this wearable product. So these are kind of commercial shipments, these are not like sample and this is where we want it to be and this happened during the kind of September timeframe. And in the fourth quarter as we discussed before, we believe that for the year we should be roughly around $1 million and we expect a much faster and significant ramp starting in the first quarter as we get more product and as this product of course ramps into higher quantities.

[Charlie Anderson:]

Great. And then a follow-up for me on the home segment. You have cordless as a drag and then home gateway is sort of become a drag because of the timing of products. Do you view both issues as somewhat transitory, maybe inventory correction, timing of orders or are these issues that could persist a few more quarters from your perspective and if that is the case, do you need to do anything on the operating expense side given where your operating margins are today?

[Ofer Elyakim:]

Sure. Charlie I make a very clear distinction between home gateway, which is the growth category and we expect home gateways to continue and grow and you can see the announcement that we just put together on our earnings release and also here repeated in the script, leading U.S. telco and TP-Link, Swisscom, etcetera, etcetera, so home gateway is the growth category. So the growth rate as we discussed in the past are in the range of I would say 10% to 25% per year. This is what we are expecting depending on the size of the opportunities that are launching and the way the kind of the seasonal pattern takes place. DECT phone as you see are a very different market. This is a mature market which we expect that it will continue and decline and we take a number of 10% decline as kind of an indicative figure to kind of project how the category is doing. So a very clear distinction between the two. Today of course we are very focused on protecting our market position in the cordless phone market, but we have seen a number of quarters where the performance was good and right now we’re seeing two quarters, so Q3 and Q4 calendar which are weaker than expected. Some of it has to do with an inventory correction cycle, which by nature is transitory. But there is a built in decline in this market of about 10% and we believe that we are going to grow together with this 10%. So we believe that the contribution and the net growth of new products is going to be more significant than the 10% decline and just to kind of give you an idea of how to think about it, so we think 2015 we have one major growth driver that was contributing which was the Voice over IP. In 2016 we’re going to have at least two growth engines that are going to contribute significant growth. So this is why we are very confident in our ability to grow despite the inherent decline coming from the mature category. Another point for thought [ph] is that when you take a look at the DECT market performance, for the last three years it was shy of 10%. So we’re factoring 10%. It’s very hard to know and we don’t have the crystal ball to know exactly what the rate of decline to be, but we believe that it’s not very far from the 10%. We say it’s between 10% and 12%. It depends on the years and the consumer patterns around that. But we don’t see any change in the category today to indicate worsening or a lower decline rate for DECT.

[Charlie Anderson:]

Perfect. Thank you so much.

[Operator:]

We are now moving to the next question from Daniel Amir of Ladenburg. Please go ahead.

[Daniel Amir:]

Great, thanks a lot and congratulations on the quarter. A few questions here. So just continuing here on the DECT side, given that the historical seasonal trends have somewhat changed in this segment and now you have some inventory correction, I mean how should we be looking into the first half of the year given that you have the post holiday season. Is this inventory correction going to continue into Q1 as well or Q1 will be more similar like it was Q1 of last year on the DECT side?

[Ofer Elyakim:]

Hi Daniel. Thanks for the question. So in terms of modeling DECT, so while we have seen in the third quarter of this year inventory correction and some of that is also in the numbers also for the fourth quarter, we do expect the quarterly seasonal pattern to change somewhat, but from the full year perspective, I do believe that we still see this kind of 8%, 10% around that percent decline year-over-year. With respect to the quarterly seasonality, I would say it’s very hard to kind of make any really comment. Since we don’t really have that level of visibility, I do believe and hope that the first quarter we’ll see a comeback in the replenishment cycle rather than the depletion cycle that we are witnessing now. But it’s probably kind of too early to be sure about that, because we don’t really have any kind of supporting evidence. But just from the way the market behaved, we are expecting a correction to happen soon. So it’s Q1, but this is kind of where we are. So the way you need to look at DECT I think is much more from a yearly perspective and unfortunately it is true that this type of supply chain corrections do take place once in every two years or so and this is nature of this business.

[Daniel Amir:]

Okay, great. Now on the VoIP business this continues to do extremely well. I mean being up 44% year-over-year here this quarter. I mean does this change in terms of your outlook on this segment compared to a couple of quarters ago in terms of your optimistic view on this or is this just continuing to be steady growth here and your continuing to gain share here.

[Ofer Elyakim:]

So I think Daniel we’re very pleased with the progress that we’ve made. We actually could have been doing better. Let’s say all of our customers have been – they are well performing this time around. We continue to be very optimistic and do expect to see sequential growth. So as we discussed in the previous call, we have two additional Tier 1 that haven’t really ramped up and they are expected to ramp up during the first half of next year and we expect the growth from these Tier 1 to be significant to our overall revenue growth. And so we right now see a very solid path for continued strong revenue growth into Voice over IP business as we continue to grab more share and increase our footprint in that business. We’re working today on 2017 and ’18, frankly, on the design front. So right now we’re very encouraged and pleased and feel very confident about the fact that we have enough design wins to cover and support very fast growth also next year.

[Daniel Amir:]

Okay, great. So I guess last question for me and then I’ll get back into queue. It’s just on the, so your R&D expenses, it looks like you’re seeing some further increase I guess this quarter, slightly I guess. Can you just expand a bit? Is that focused on the HD mobile or what’s the thought process around I guess OpEx going forward?

[Dror Levy:]

Yes, so hi Daniel, its Dror. So yes, we are if you’ll take the midpoint of the range that that provided. You will see that your about costing hundreds or thousands of dollars higher in Q3, but still the things that are on the run rate and Q4, but still on the run rate it will be like around $8.5 million or something like that, which was also the run rate for the first half of the year. Overall it’s mostly investment discretion, investments I would say in Voice over IP during the last two or three quarters less in the mobile segment. I think of this as like the one that you should also expect for the next couple of quarters.

[Daniel Amir:]

And regarding – so is that comment steer for OpEx overall. I mean pretty much the same OpEx range.

[Dror Levy:]

You mean going forward?

[Daniel Amir:]

Yes.

[Dror Levy:]

Yes, yes this maybe slightly up. This should be more or less in the range of our OpEx, yes.

[Daniel Amir:]

Okay, all right. Thank you.

[Operator:]

Thank you. Matt Robison from Wunderlich. Please go ahead. Your line is open.

[Matt Robison:]

Thanks for taking the question. So hopefully I guess, how is your visibility now given the ramps in new products in the Tier 1 you mentioned and also HDClear, the Tier 1 office customers. How should be the build for that ramp offsetting the cordless effect in the first half given it looks like you’ve got somewhat tough comparisons on the top line.

[Ofer Elyakim:]

Thanks Matt. So our visibility and when I translate visibility I typically translate it to the order book that we have. So our visibility hasn’t really changed. It’s actually in the range of six to kind of eight weeks ahead. So that today unfortunately doesn’t really cover much on the first half. But our expectation and based on the designs that we have in the back, both in Voice over IP and as well as in the first design win in mobile, which is in production and also our expectation for additional wins to start ramping next year does position us well, first of all for full year revenue growth next year. It’s too early to provide any more color. It is true that in the first quarter there is a tougher comp, but I would say that right now it will be premature to kind of discuses and give kind of a further color on kind of the first quarter revenue. But you can sense that we are felling upbeat about our ability to grow in a significant way next year as we will have two growth engines, working and contributing in a more significant way and this we believe that the net growth in these businesses will be well in excess of any decline that will come in cordless. And as we’ve indicated, there also is a change that we will see the market, the DECT market being stronger in the first half of the year just as replenishment cycle will take place and still it’s very hard to say that this will happen, that we are expecting to see some kind of seasonal shift as a result of the environment, the soft environment that we are seeing right now.

[Matt Robison:]

Do you have any sense of customer timing for home gateways that might create a kind of growth that you saw in early ’15 for the first half?

[Ofer Elyakim:]

We do expect a number of launches in Q1, Q2. This is kind of the period of the home gateway launches. So I would say like mostly Q2, but also starting in Q1.

[Matt Robison:]

Okay, Dror what kind of cash flow do you expect in the fourth quarter?

[Dror Levy:]

I think it should be – from an operating perspective it should be inline or even better than the third quarter. So third quarter was $1.8 million, so for the fourth quarter we should expect something which is inline or better.

[Matt Robison:]

So you don’t think it will be anywhere near like it was in the fourth quarter of ’14?

[Dror Levy:]

I don’t have the number of the fourth quarter of ’14 in front of me, but give me a second.

[Matt Robison:]

Free cash flow is $6.4 million in the fourth quarter of ’14.

[Dror Levy:]

No I think it would be hard to reach that level. But we should be better than the third quarter of this year. Overall for the year we should be with operating cash flow which is either inline of better than EBITDA, better than something between operating income and EBITDA.

[Matt Robison:]

Okay. What was the CapEx for the third quarter?

[Dror Levy:]

$0.4 million.

[Matt Robison:]

And as far as OpEx goes, I think I heard you indicated to a prior question that there was nothing, you don’t expect anything sort of one time or major takeouts or anything like that to drive R&D higher versus SG&A. I think it’s going to be pretty much the same as it was in the third quarter.

[Dror Levy:]

R&D is slightly higher in Q4 than it is Q3. So R&D if you take the midpoint excluding the equity based compensation, for the midpoint it should be something around $8.5 million, $8.6 million which is about half a million higher or $400,000 higher than the third quarter. SG&A should remain the same.

[Matt Robison:]

Thank you.

[Operator:]

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

[Bob Sales:]

Hi, a couple of questions. Can you hear me okay?

[Ofer Elyakim:]

Yes we can. Go ahead.

[Bob Sales:]

When we look at your VoIP revenue of $6.3 million, I think was up 44% year-over-year and then I think you are talking about two additional Tier 1 that ramp in the first half of 2015. How would you manage your expectations in terms of being able to sustain that rate of growth as we look out into the second half of 2016?

[Ofer Elyakim:]

Thanks Bob. So the growth rate that we posted in the third quarter was 44%, which kind of brought revenues to $6.3 million, and now you are asking about how should you think about 2016 in terms of growth. It’s premature to provide kind of any real guidance for the next year in terms of VoIP, but we do believe that the VoIP should continue and support this level of growth rates and as we ramp very significant businesses next year. Again since the product has not really reached mass production phase, it’s kind of very hard to put like any exact date, but we do expect a significant contribution starting in the first half and into the second half and this should be kind of on top of the layers that we saw in 2015. So just to kind of summarize, we do expect strong growth rate, very similar to what we are seeing now to continue.

[Bob Sales:]

And in that arena, what are you seeing? I know you’ve been the beneficiary of a couple of bigger players deemphasizing that space. What are you seeing now in terms of your, the competitive landscaper on new designs?

[Ofer Elyakim:]

Yes sure. So you need to understand that first of all we are the beneficiary, but we are the beneficiary also because we have a very dedicated focus on this market and we bring to this market a lot of IP from the telephony side. And of course the best win that we’ve enjoyed because of the deemphasize increased our changes to be a winner and to become the new leader in this domain. Now when we think about the way this market works, is we need to understand that this market is a much more conservative market in which new products come to design once in every three or sometimes even longer than that, so three years or longer and so in a way the cycle, we are just in the beginning of the cycle. So we still have a lot more product conversions to do and to grab more new designs that we’ll convert from an existing income in silicon to ours. So there is still a lot of work ahead of us vis-à-vis the programs and products that they are still running on another vendor silicon that we are hopeful we will be converted and run on our DVF series.

[Bob Sales:]

Okay and in the mobile side, I guess my first question is, are you hopeful to be able to – without specifically forecasting, are you hopeful to be able to achieve a $5 million quarter in mobile revenue at some point in 2016 or is that a little bit too aggressive for our thinking.

[Dror Levy:]

Again Bob, too early to provide any concrete guidance on mobile, but really depends on the way the seasonal pattern will work and the design wins that we will secure and that hopefully will be in production next year. It’s a possibility, but it’s kind of too early to say whether you know $5 million type of quarter is in the cards or not. So I believe this is definitely possible, so I don’t think its remote, but we are just too early to tell exactly where and how revenues are going to shape up next year.

[Bob Sales:]

Right and in 2016, do you expect your growth to be more on the wearable side or more on the mobile handset side?

[Dror Levy:]

I would say both again. So we know that the volume, the major high running volume is really on the phone side, wearable. Smart watches are starting to growth and become real market. Probably next year they will exceed 100 million units for the year, but we expect both to happen, so both on the wearable side, as well as on the Smartphone side.

[Bob Sales:]

Got you, and then lastly on that business. When you are engaged for a product socket, do you typically find yourself competing against the core application processor that provides, additionally provides the function that HDClear does or do you find that the OEM has already decided that there is going to be a discreet socket for Always-On Voice and then you are competing against other players that have that point functionality.

[Ofer Elyakim:]

Okay. So it’s typically when we are talking about Always-On Voice functionality in which the phone is always – so the microphone is always in listening mode. So the phone is basically always kind of opening the microphone and the processor to process any type of sound that it gets on the environment. That of course then tells the need for a very low power consumption and to see no real impact on the user experience on the battery life and that usually will entail kind of the second part of your question, so that it will be a discreet type of silicon rather than an application processor, which has significant leakage and it cannot really support with very low power, given it is a high performance type of a processor. So it would typically be a discreet solution and then we will be competing with companies that are sitting on that side of the market. So kind of mixed signal guys, dedicated always on these types of vendors.

[Bob Sales:]

Okay, good. Thanks for taking my questions and keep it up.

[Ofer Elyakim:]

Thanks Bob.

[Operator:]

[Operator Instructions]. There are no further questions. I would like to turn the call back to our host for any additional or closing remarks. End of Q&A

[Ofer Elyakim:]

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

[Operator:]

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