DSP Group, Inc.
Q4 2009 Earnings Call Transcript

Published: 27 Jan 2010

[Operator:]

Welcome to the fourth quarter 2009 DSP Group earnings conference call. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation to your host for today’s call Mr. Dror Levy, CFO.

[Dror Levy:]

I am Dror Levy, Chief Financial Officer of DSP Group. Welcome to our fourth quarter and year 2009 earnings conference call. On today’s conference call we have with us Mr. Eliyahu Ayalon, Chairman of DSP Group and Mr. Ofer Elyakim, Chief Executive Officer. I would also like to welcome Irit Jakoby who also recently joined us as a Director of Investor Relations. Irit brings with her years of experience in [inaudible]. I would like to wish you success in your new position. I will now turn the call to Irit.

[Irit Jakoby:]

I am excited to join DSP Group and look forward to working with all of you. Before we begin I would like to remind you that during this conference call we will be making forward-looking statements about our financial projections for the first quarter and fiscal year 2010, our business outlook for the first quarter of 2010 and the year and our views about our XpandR and other new product offerings and their expected contribution to our 2010 and future revenues. We assume no obligation to update these forward-looking statements. Actual results or trends could differ materially from our forecast for a variety of factors including the timing and ability of the market to recover and the corresponding recovery of DSP Group’s customers, fluctuations in gross margins associated with the sale of existing products and new products, the impact of reductions in lead times and inventory levels by our customers and their customers, slower than expected change in the nature of residential communications domain, unexpected delays in the introduction of new products especially the new generation of multimedia products, our inability to develop and produce new products at competitive costs and in a timely manner or failure of such products to achieve broad market acceptance and in general market demand for products that incorporate our technology in the market. For more information please refer to the risk factors discussed in our 2008 Form 10K and other SEC reports we have filed. Now, I would like to turn the call over to Ofer Elyakim, our Chief Executive Officer.

[Eliyahu Ayalon:]

I am glad to open this discussion of our results for the fourth quarter of 2009. I assume that you had the opportunity to read our press release that was released earlier today. In a short while Dror will go through our fourth quarter financial results in detail and then provide our financial projections for the first quarter of 2010 and for the full year. Before doing so I would like to update you on our performance in the fourth quarter, give you some background related to certain market trends and then share with you our business outlook for the coming year. We ended the fourth quarter with revenues of $54.7 million. Our revenues were at the higher end of our guidance range for the fourth quarter. Sales DECT products continues to account for a majority of our revenues representing 72% of revenues as compared to 79% of revenues for the first quarter of 2009. Moreover, we succeeded in improving our non-GAAP gross margins for the fourth quarter to 39% up from 38% in the third quarter. We generated non-GAAP operating profit of $2.2 million in the fourth quarter also at the higher end of the previous guidance. This was achieved namely due to higher revenues, better gross margins and lower operating expenses. Looking at our non-GAAP operating expenses during the fourth quarter of 2009, our op ex levels were 20% lower than the same period in 2008. Notwithstanding our continued R&D investment in new products we achieved lower op ex level by implementing further synergies across our organization. Please review the Form 8K we filed this morning for reconciliation of the non-GAAP figures to GAAP figures as well as other financial information. Now, to our cash flows; we generated $12.7 million in cash from operations in the fourth quarter which adds up to $26.6 million in cash generated from our operations during the year. This is a major achievement given the challenges we faced in 2009. We ended the year with $123 million in cash and cash equivalent up from $122 million at the beginning of 2009. Recall however that in the first quarter of 2009 we repurchased 4.2 million shares of our common stock from [NXP for a total consideration of approximately $20 million. With respect to our multimedia line of products, this year’s Consumer Electronics Show in Las Vegas was a successful event for DSP Group. For the first time several industry participants chose fully functional products based on our expanded chip set that support both Wi-Fi and DECT connectivity. At CES we saw a lot of interest in our wireless multimedia handsets which is the next generation of the cordless phones. These devices are like Smartphones for the home supporting multimedia content and applications with Wi-Fi connectivity and using DECT and CAT-iq for high quality home telephony. Such as devices provides operators and consumer brands an entry point in to the users home at a low price point and easy to use format. That enables [inaudible] specific application using an open and ubiquitous operating system like Google Android as opposed to a [inaudible] approach. We believe that this product could unlock the low price position of cordless telephones. Operators and leading brands OEM and ODM customers are seeing this for an additional entry point in to the home and are looking for solutions like a next generation cordless telephone. At CES DPG presented the first Google Android based multimedia handset and tablets for the home which were based on a fully functional product from two customers. This product target both retail and service providers. In summary, this year we will start to see product launches based on our expanded platform. We expect that these new launches will take place mainly during the second half of the year and should contribute to our second half 2010 revenues. During the fourth quarter we entered in to a strategic partnership with a small privately held company named [Bonton] Communications that develops cutting edge voice and audio technologies targeted at redefining the listening experience in headsets, headphones and surround sound systems. Such a partnership and access to this unique technology are especially valuable for us as this will open a new target market for DSP Group. As part of this transaction we invested $2.2 million for an equity stake and received an option for 24 months to acquire the remaining shares of the company for an additional consideration of approximately $9 million. The technology developed by this company is in its early stages and we do not expect any revenue contribution from this technology in 2010. Now, as we look to 2010 we expect conditions in our major end markets, mainly Europe and the US to improve and there are certain signs of such improvement. Our customers are still reluctant to provide specific and detailed projections for the year however, based on our bottom line forecast which takes in to account forecast and prospects received from customers our own assessment and new business wins we project revenue growth in 2010. Our revenue forecast is in the range of $225 million to $240 million representing an annual growth rate of around 10%. Our 2010 revenue projection assumes a sharp recovery in the first quarter of 2010 versus the same period last year and includes revenues to be generated from new business in new end markets like CAT-iq, DECT usage for non cordless telephony applications, voice-over-IP and multimedia applications using our XpandR chipset. Now, I’d like to turn the call to Dror, our Chief Financial Officer to discuss the financial results of the fourth quarter 2009 and provide more details on our guidance for the first quarter and the year.

[Dror Levy:]

I will now review the income statement for the fourth quarter of 2009 from top to bottom. For each line item I will provide the year’s GAAP results as well as that with the base compensations included in that line item and the expenses related to the acquisition of the cordless and voice-over-IP business from NXP. Our revenues for the quarter were $54.7 million. Gross margin for the quarter was 39.1%. Gross margins for the quarter included equity based compensation expenses in the amount of $.2 million. All-in the expenses were $13.6 million including equity based compensation expenses in the amount of $1.2 million. Operating expense for the quarter were $24.9 million including equity based compensation expenses in the amount of $2.5 million and amortization of acquired intangible assets in the amount of $3.1 million. Financial income for the quarter was $.6 million. Income tax benefit for the quarter was $.1 million. Our net loss was $2.9 million including equity based compensation expense of $2.6 million and amortization of intangible assets of $3.1 million. Non-GAAP net income excluding the items I’ve just described was $2.8 million. Loss per share was $0.13. The negative impact of equity based compensation expenses on the EPS was $0.12. The negative impact of the amortizations of acquired intangible assets on the EPS was an additional $0.13. Non-GAAP diluted earnings per share excluding the items I just described was $0.12. Please see the current report on Form 8K that we filed with the SEC this morning for reconciliation of the non-GAAP presentation to the GAAP presentation. Now, to the balance sheet; accounts receivable decreased from $35.9 million last quarter to $28.4 million representing a level of 47 days of sales. Inventory decreased from $30 million in the last quarter to $12.4 million representing a level of 34 days. Our cash and marketable securities at the end of the quarter were $122.9 million representing an increase of $9.2 million during the quarter. Our cash and marketable securities position during the quarter was affected by the following

[Operator:]

(Operator Instructions) Your first question comes from Daniel Meron – RBC Capital Markets.

[Daniel Meron:]

Can you provide a little bit more details on the tablets and the [downloads] that you’ve gotten so far? What is the expected impact in 2010 and also more importantly in 2011?

[Eliyahu Ayalon:]

You are asking about more color on the tablets and XpandR based products right?

[Daniel Meron:]

Yes.

[Eliyahu Ayalon:]

Well, as we said during the Consumer Electronics Show several of our customers presented next generation handsets that support both DECT and CAT-iq and Wi-FI connectivity running Google Android operating system and our targeted as home telephones and home remote controls. These are expected to be launched to the market in the second half. In addition we also have a XpandR based products that are to be launched in the form of a Wi-Fi handset so Wi-Fi phones. There are products that are subject based, there are other usages of XpandR for home audio like Internet radios and other devices so this is a portfolio of devices that are utilizing XpandR and that have been launched or actually showcased in CES by our customers.

[Daniel Meron:]

How much of the growth prospects that you are forecasting in 2010 is related to the adoption of new devices?

[Eliyahu Ayalon:]

The basket of the new products is a bigger category that includes also a CAT-iq devices, XpandR, that’s for new application that are non cordless telephony per say devices and the total basket accounted for in the guidance that you just saw was about $20 million.

[Operator:]

Your next question comes from Matt Robinson – Wedbush Morgan.

[Matt Robinson:]

First what was backlog exiting the year?

[Dror Levy:]

Backlog at the end of the year was about $49 million.

[Matt Robinson:]

And that is up from $35.1 million last year at this time, right?

[Dror Levy:]

This was up from $35, correct.

[Matt Robinson:]

Now the question that you were just answering was that 10% of your revenue was from these new XpandR applications, did I hear that right?

[Eliyahu Ayalon:]

No, this is part of the guidance so we anticipate that roughly around $20 million from the 2010 revenues will come from this basket of products that include XpandR, CAT-iq and other DECT products for non-cordless telephony type of applications.

[Matt Robinson:]

Would you also include the home gateway applications?

[Eliyahu Ayalon:]

Yes. This is part of that and part also we answered that we have spoken about that included in XpandR the type of [inaudible] growth also targeted for to be used together with a home gateway that has both the DECT and Wi-Fi capabilities already integrated in one device.

[Matt Robinson:]

Your customers have obviously been through a lot of trauma over the last few quarters. Have you see any consolidation or how would you say the progress is of the industry gaining health?

[Eliyahu Ayalon:]

I would say that certainly this financial tsunami has kind of shaken up all the solid players and there is some consolidation and rationalization in the market and we believe this is also adding to stability.

[Matt Robinson:]

Have you seen a shift in geographies where your demand is coming from?

[Eliyahu Ayalon:]

I would say that our two main end markets remain the Americas, namely US and the European region. We are seeing more growth in demand in Asia but still the most dominate end markets are the Americas and Europe.

[Matt Robinson:]

What about the ODMs? Has that footprint changed or are they pretty much in the same region as before?

[Eliyahu Ayalon:]

The ODM’s are pretty much in the same regions so mainly in Europe but also in the US but more stronger in Europe.

[Operator:]

Your next question comes from Daniel Amir – Lazard Capital Markets.

[Daniel Amir:]

A couple of questions here, first of all on the gross margins it seems like you did 39% here in Q4, you guided 37% to 39% and for the year 36% to 40%. Can you highlight kind of why we see gross margins a bit lower here than in Q4? And, kind of what the assumptions here on the margin guidance for Q1 and 2010?

[Dror Levy:]

The way to look at gross margins and the main driver of gross margins is the mix. As the year progresses it is for us we make certain assumptions of how the mix will shape up throughout the year. We make certain assumptions however, the mix could fluctuate if more products and I mean also in the traditional cordless products will shift more to the higher end then you will see gross margins picking up. If you see the mix shifting to the low end of products of course, the margins will tend to go down. This is the reason for the range. Now, I would like to highlight that we believe that we are stable year-over-year in terms of gross margins. This is how we view it and we actually see that the midpoint of the guidance for 2010 is higher than the results achieved in 2009.

[Daniel Amir:]

Do the new products have better gross margins, same gross margins or lower gross margins?

[Dror Levy:]

They tend to have better gross margins.

[Daniel Amir:]

Okay, so if you have higher sales in the back half of the year of the XpandR products that should improve your gross margins at that time?

[Eliyahu Ayalon:]

Yes.

[Daniel Amir:]

On the DECT side, 72% of sales were kind of DECT. Do you think kind of the DECT mix is somewhat stabilized at these levels? Has the complete shift to DECT happened or do you still feel like the DECT share is going to grow overall in the cordless phone market?

[Eliyahu Ayalon:]

This is a good question. If we kind of look a year backward or maybe let’s look in to 2008, in 2008 of course Europe was the most dominate market in terms of DECT and the US was starting to adopt and DECT became a major product but the mix was mainly skewed towards Europe. During 2009 especially in the first half, you saw the US higher in terms of DECT than Europe but I would say that right now the way we see the year going is we see stability in both Europe and the US in terms of DECT usage. I would say that in the US there is still a shift from analog to digital so replacement of analog SKUs in retail for digital ones. I would say that in Europe what we see is a recovery from a major crisis or a shift in demand that we saw last year.

[Daniel Amir:]

My final question is on visibility right now, can you comment a bit how your visibility here in Q1 is? Obviously some of your backlog is better than last year but maybe compared to Q4 is that still improving visibility? What’s kind of the feedback you’re getting from customers in terms of order patterns?

[Eliyahu Ayalon:]

I would say that as we look to the year, Q1 is good as you can see from the backlog and our guidance. With respect to the remainder of the year I would say that there is a lot of uncertainty and still lack of visibility. We tend to get visibility for the coming quarter and as I said the visibility for Q1 is good.

[Operator:]

Your next question comes from Daniel Meron – RBC Capital Markets.

[Daniel Meron:]

I did get a chance to hear the $20 million referred to XpandR but I didn’t get a chance to hear whether you refer to the prospects to 2011. If you could give us a little bit more color on that?

[Eliyahu Ayalon:]

Maybe you did not hear our answer to the end, we said that $20 million addresses a basket of new applications that are connected. One is the CAT-iq devices, number two is DECT attached to home gateways, number three was XpandR that will be used for both multimedia and voice-over-IP, number four was DECT to be attached for non-cordless telephony type of applications. So new uses of DECT.

[Daniel Meron:]

Can you quantify what could be the impact longer term 2011? Is this something you believe can drive a replacement cycle in this market that has not seen a major refresh for the last three, four even five years depending on what region you are looking at?

[Eliyahu Ayalon:]

In January I would say it’s too early to talk about the trends that we will see in 2011. But, what I can say is that we are optimistic that what we are seeing is a trend to replace or that will create a replacement cycle in cordless to unlock the low price point and to bring in devices that are unique for the home that bring a lot of value in terms of communication and connectivity that could be sold at much higher price points than where cordless is selling today and could bring to the consumer a lot more value than just the wireless telephony which cordless today brings.

[Daniel Meron:]

Then the last one for me before I yield the floor, can you provide us with more details on your discussions with carriers and with OEMs on how you’re going to bring these products in to market? I believe that you already have a couple of examples of that, I think the most public one was Telecom Italia that you mentioned before but since then some strategies have increased and I think fixed more about [inaudible] ticking up more traction these days. If you can provide us with more details on that topic?

[Eliyahu Ayalon:]

I think what you asked for is more color on discussions with operators at CES which was kind of the most recent event that we attended. As we said in prior quarter’s call European operators have chosen the DECT for wireless voice and are implementing CAT-iq devices both in the home gateway and the handsets and are looking for additional value added terminals to launch in the homes. So these terminals are going to be tablet type of terminals, they are going to be handset type of terminals. They put a lot of focus on the cost of these devices as they don’t want to launch devices with [inaudible] and I think in that respect we fit very well. I will say that most of the operators and service providers that saw both the handset and the tablet thought that these are well within the type of devices that they are planning. So I will say that even those that are launching this year terminals that are a little different that was based on the technology and ability that was last year are looking forward to launch this type of terminals as they bring a lot more value and a lot more connectivity and a lot more ease of use and application variety, etc.

[Daniel Meron:]

Just for housekeeping what was the mix of DECT versus old other devices 2.4, 5.8 and the other?

[Dror Levy:]

DECT as we said in the prepared remarks were 72% of revenues. Out of that DET 6 was 30% of revenues, DECT Europe and rest of the world was 42%, 5.8 was 2%, 2.4 was 15%, voice-over-IP was 4% and then the other basket was about 7%.

[Operator:]

There are no further questions. I’ll now turn the call back over to Mr. Dror Levy.

[Dror Levy:]

Thank you all for joining us and we look forward to reporting to you again in 90 days.

[Operator:]

Ladies and gentlemen that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.