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Edited Transcript of DSPG earnings conference call or presentation 5-Nov-19 1:30pm GMT

Q3 2019 DSP Group Inc Earnings Call

San Jose Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of DSP Group Inc earnings conference call or presentation Tuesday, November 5, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dror Levy

DSP Group, Inc. - CFO & Secretary

* Ofer Elyakim

DSP Group, Inc. - CEO & Director

* Tali Chen

DSP Group, Inc. - CMO

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Conference Call Participants

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* Charles Lowell Anderson

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst

* Matthew D. Ramsay

Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst

* Rajvindra S. Gill

Needham & Company, LLC, Research Division - Senior Analyst

* Sujeeva Desilva

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Third Quarter 2019 DSP Group Earnings Conference Call. (Operator Instructions).

I must also advise you this meeting is being recorded today on Tuesday, November 5, 2019.

And I would now like to hand the conference over to your host today Tali Chen. Please go ahead.

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Tali Chen, DSP Group, Inc. - CMO [2]

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Thank you, Ella. Good morning, ladies and gentlemen, I am Tali Chen, Corporate Vice President and Chief Marketing Officer of DSP Group. Welcome to our Third Quarter 2019 Earnings Conference Call. On today's call, we also have with us Mr. Ofer Elyakim, Chief Executive Officer, and Mr. Dror Levy, Chief Financial Officer.

Before we begin, I would like to remind you that during this conference call, we will be making forward-looking statements about our financial guidance for the fourth quarter of 2019, recovery from near term weakness in the Unified Communications product line in 2020, confidence about our sustainable revenue growth, SmartVoice being a revenue driver, optimism about our engagement pipeline and design wins in both initiatives for the remainder of 2019 and 2020 and ramp-up schedule of products incorporating our technologies and the positive impact on revenues. We assume no obligation to update these forward-looking statements. For more information about the risks and factors that could affect the forward-looking statement made herein, please refer to the risk factors discussed in our 2018 Form 10-K and other SEC reports we have filed.

Now I would like to turn the call over to Ofer Elyakim, our Chief Executive Officer. Ofer, the floor is yours.

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [3]

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Thank you, Tali. Good morning everyone and thank you for joining us today. I hope that you had the opportunity to read our press release, which we distributed earlier this morning. I would like to begin by reviewing our results for the third quarter, commenting on the progression of our business plan and providing context for our outlook. In a short while, Drov will provide you with detailed comments on our financial results and outlook for the fourth quarter of 2019.

We are pleased with our third-quarter financial results that we're ahead of our guidance on most financial metrics. We ended the quarter with total revenues of $31 million, representing an increase of 7% on a sequential basis and a decrease of 5% year-over-year. Revenues from growth initiatives of $18.7 million, which accounted for 60% of total revenues, increased by 5% on a sequential basis, while declined by 1% versus a year ago.

Growth initiatives benefited from solid results in our SmartVoice product line and the recovery in our SmartHome product line, which offset most of the expected weakness in our Unified Communications product line. Moreover, the favorable mix of products drove GAAP and non-GAAP gross margins to 50.8% and 51.2% respectively at the high end of guidance. We are thrilled by the recent round of cutting-edge product introductions powered by our technologies by Tier-1 customers, including commercial shipment starts of a high volume IP phone, design wins in the third quarter of 2019, which is expect to contribute in a meaningful way to our 2020 revenues in the Unified Communications product line, as well as other noteworthy product launches by (inaudible) .

Number two, record number of innovative product launches by leading Tier-1 brands, including GoPro, Lenovo, TCL, and others embracing voice user interface and AI on the edge, driven by our SmartVoice technology, thereby solidifying our leadership position in 3 promising new market verticals and entertainment cameras and tablets, which together accounted for over 70% of our SmartVoice revenues. The adoptions of ULE in new products and market verticals, including SmartHome, line controllers, home security and industrial IoT. These strategic wins along with our exceptional pipeline of design engagements solidify our success in transitioning ourselves into a rising voice in IoT technology company. These developments further increase our confidence that we are on the right track to return to sustainable revenue growth.

Now I'd like to move on to the business update by segments, starting with SmartVoice. During this third quarter, we generated revenues of $5 million from sales of SmartVoice products, representing a year-over-year increase of 64% and a sequential decrease of 7%, following a record second quarter. We continued to expand our product reach and establish our leadership in 3 market segments, entertainment, which includes remote control, set of boxes, and TVs, tablets and cameras, that in aggregate accounted for over 70% of total SmarVoice segment revenues. This achievement is further demonstrated by a record pace of innovative product launches by leading Tier-1 customers.

In the camera market, we saw a record number of new and innovative products that leverage our SmartVoice voice solution to deliver natural, robust, and high quality far field into a voice capabilities, including GoPro that launched its Hero8 Black with high fidelity audio using 3 microphones and best-in-class wind noise suppression and its cutting-edge camera, the Max, featuring 360 degrees audio combining inputs from 6 microphones using our low power DSP and our multi-core machine-learning SOC, the launch of 3 new IP camera products by a leading IP camera OEM.

Number two, we continue to enhance our leadership position in the PC tablet market and reach a record number of 17 different tablet models by leading consumer brands based on our SmartVoice technology, including Lenovo's launch of its Google Voice Assistant enabled Yoga Smart Tab and it's M8 Smart Tab, TCL's launch of its Alcatel 3T 10 and a leading mobile OEM that launched another new line of tablets based on our solution.

Number three, in the entertainment domain, a number of new development launches including a highly innovative high-quality video communication product, by a leading North American platform company. And moreover, we've formed the partnership with DSP Concept, a leading provider of audio development tools and IPs to deliver accurate highly reliable 360 degrees far field voice controls for applications such as TVs, set-top boxes and home gateway and sound bar that often operate in high noise environment.

Lastly, a leading Chinese platform vendor selected our SmartVoice solution for its new hands-free, the voice-enabled remote controller. These wins combined with recent wins in the smartphone market, including 2 new models by Oppo, the Reno2 and the Realme X2 continue to demonstrate the depth, strength and diversity of our SmartVoice franchise, and our ability to drive down power consumption, while raising the bar on quality and performance for its devices.

A good example of this capability, is our newly launched DBM D7 platform. We drive high-quality audio and machine learning by leveraging an advanced low-power multi-core architecture. The DBM D7 is an ideal edge AI processor at a time during which more content and data are being generated by edge devices with the myriad of highly integrated sensors. With rapidly increasing compute performance from micro-web now available in these edge devices, many applications and capabilities that once could have relied on a gateway, a remote server or cloud connection can now be performed locally.

As a result, more complex analysis and AI processing on the edge devices are now possible with zero latency, with a much higher degree of security and with more efficient use of available bandwidth. With advanced processing, migrating from the cloud to the edge, our customers are taking advantage of our solutions, unique combination of high performance and low power consumption and are using them as platforms upon which to develop advanced context-aware audio and voice processing applications. We believe that our SmartVoice business will continue to be a pivotal growth driver, powering a broad array of exciting new applications.

Moving on to the Unified Communications segment. Third quarter Unified Communications revenues of $10 million increased by 13% on a sequential basis while declining 18% year-over-year, impacted by an expected near-term weakness. At the same time, we continue to strengthen our leadership position in the Unified Communications market and expand our reach into new customers and product categories. A few notable achievements include the commercial shipments thoughts of a high-volume design win in the third quarter. This product is expected to contribute in a meaningful way to our 2020 revenues; Poly that launched its VVX D230, a DECT IP phone based on our DVF99 SoC, eLink launched its WATB and enterprise DECT IP multi-cell system based on our DCX 81 and a major Chinese vendor that launched a line of new IP phones based on our DVF SoC.

The Unified Communications market has been negatively impacted this year by a buildup of higher level of inventories in preparation of the US-China trade war and further exacerbated by weaker-than-expected demand for end products as IT spending by businesses softened during the past 2 quarters. However, based on feedback received from customers, our promising design pipeline and new wins, we remain confident that we are positioned well for our performance and revenue growth in 2020.

Turning to our Smart Home product line, during the third quarter, we generated smartphone revenues of $3.8 million, representing a year-over-year increase of 1% and a sequential increase of 4%. The Smart Home product line comprises of DECT/ULE SoC that are integrated into home gateways and IoT sensors. We are very pleased by the improving business trends and solid traction for Smart Home products and expect that positive momentum to pick up in the fourth quarter. During the quarter, we had the privilege of hosting Orange and Deutsche Telekom in a privately hosted event at the IFA in summer electronics trade show in Berlin, during which both shared their Smart Home journey and the reasons for selecting ULE as their primary IoT technology.

The excitement around ULE was palpable as its potential was being more widely realized as IoT connectivity and voice user interface vastly converge. We are pleased to see ULEs increasing adoption and growing ecosystem as evidenced by the following wins and product launches. A leading home automation company in Europe integrated ULE into its blinds motors solution. This is a new product category for ULE and is a testimony to the momentum around ULE and the need for more ULE-supported products. A leading European OEM launching new ULE-based light bulb as part of its successful Smart Home Offering in Europe and an industrial IoT company selected our ULE technology for its cutting edge factory automation solution that was launched during the third quarter. We are optimistic about the design momentum and growth of this product category in 2019 and beyond on the heels of a strong traction for ULE in both Europe and the US.

And now for an update on the cordless phone market: Our third quarter cordless phone revenues was in line with our expectations. Cordless revenues declined by 10% year-over-year to $12.3 million and accounted for 40% of total third-quarter revenues. Now for an update on our outlook for the fourth quarter: Taking into account forecasts received from our customers in our own assessments, we expect our fourth-quarter revenues to be in the range of $28 million to $30 million. The midpoint of this guidance range implies a year-over-year revenue growth of 11%, driven by solid demand for our SmartVoice and Smart Home products and our expectations for year-over-year revenue growth in the Unified Communications product line, which together more than offsets the expected cordless market decline. The midpoint of the guidance also implies that growth initiatives should account for 64% to 68% of our fourth-quarter revenue.

To summarize, we are excited by the market response to our new products and technologies and believe they will solidify and pave our future success, driven by a solid pipeline of design wins with the leading OEMs, which are expected to materialize gradually during the remainder of the year and in a more significant way in 2020.

Now I would like to turn the call over to Dror, our Chief Financial Officer, the floor is yours.

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Dror Levy, DSP Group, Inc. - CFO & Secretary [4]

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Thank you all Ofer. I will now review the income statement for the third quarter of 2019 from top to bottom. For each line item, I will provide the US GAAP results, as well as the equity-based compensation expenses included in that line item, expenses related to the previous acquisition, and the exchange rate differences related to new accounting standards related to long-term leases. Our revenues for the third quarter of 2019 were $31 million Gross margin for the quarter was 50.8%. Gross margin for the quarter included equity-based compensation expenses in the amount of $0.1 million. R&D expenses were $9.2 million including equity-based compensation expenses in the amount of $0.7 million. Operating expenses for the quarter were $16 million including equity-based compensation expenses in the amount of $1.8 million and the amortization of acquired tangible assets in the amount of $0.1 million.

Financial income for the quarter was $0.4 million, the financial income for the quarter included $0.2 million of exchange rate differences related to a new accounting standard related to long-term leases. This exchange rate differences were excluded from our GAAP results for the quarter. Income tax benefit for the quarter was $0.3 million and included tax benefit resulting from changes in deferred taxes related to intangible assets and equity-based compensation in the amount of $0.1 million.

Our net income was $0.5 million, including equity-based compensation expenses of $1.9 million, amortization of intangible assets of $0.1 million, exchange rate differences in the amount of $0.2 million and the tax benefit effect of $0.1 million. Non-GAAP net income excluding these items as I described was $2.5 million for the quarter. GAAP diluted earnings per share for the quarter was $0.02. The negative impact of equity-based compensation expenses (inaudible) EPS was $0.07. The negative impact of amortization of acquired intangible assets on the EPS was $0.01. The negative impact of the exchange rate difference on the EPS was $0.01 and the positive impact of deferred taxes on the EPS was $0.01. Non-GAAP diluted earnings per share excluding these items as I described was $0.10 for the quarter.

Please see the current report on Form 8-K that we filed with the SEC this morning for full reconciliation of non-GAAP presentation to the GAAP presentation. Now turning to the balance sheet, our (inaudible) end of the third quarter of 2019 increased to $21.6 million compared to $17.1 million at the end of the second quarter, representing the level of 63 days of sales. Inventory decreased from $9.2 million at the end of the second quarter to $8.7 million, representing the level of 53 days.

Our cash and marketable securities decreased by $1 million during the third quarter and were t the level of $120.9 million as of September 30, 2019. Our cash and marketable securities position during the quarter was affected by the following, $0.2 million of cash was provide to the operations, $1.4 million of cash was used for purchase of property and equipment, $0.1 million of cash received from exercise of options by employees and $0.1 million was the increase in market value and amortization of marketable securities.

I'd like to provide you with our projections for the fourth quarter of 2019. Our fourth quarter projections, including the impact of equity-based compensation expenses and acquisition-related amortization expenses are as follows: Revenues are expected to be in the range of $28 million to $30 million. We expect our gross margin to be in the range of 49% and 51%. R&D expenses are expected to be in the range of $9 million to $10 million. Operating expenses are expected to be in the range of $15.5 million to $17 million. Financial income is expected to be in the range of $0.5 million to $0.7 million. We expect a tax benefit of approximately $0.2 million on a non-GAAP basis. And our shares outstanding are expected to be in the range of 24 million shares to 25 million shares.

Our fourth quarter projections include $0.1 million of amortization of intangible assets and also includes the following amount (inaudible) for equity-based compensation expenses. Cost of goods sold includes $0.1 million, R&D expenses include $0.5 million to $0.7 million and operating expenses include $1.6 million to $1.8 million. Now, we would like to open up the line for questions and answers. Operator, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first request is from the line of Matt Ramsay.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [2]

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I guess over one of the things that I wanted to ask you about is, is the voice business obviously had some challenges, in your script you talked about some of the inventory correction and things that have gone on in the market, maybe you could give us a little bit more granular insight as to how you're seeing trends in that business from sort of the design win and pipeline point of view of products with the big customers and what gives the visibility that market does improve as we go into next year, given it's a pretty big part of the P&L now? Thank you.

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [3]

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Thank you, Matt. So with respect to the voice-over IP and the Unified Communication business line, what we have seen at the beginning of the year was the buildup of inventories in anticipation of these trade tensions and preparation for the ability to sell products and escaping a potential tariff. And I believe that across the supply chain inventory was built in order to support that. And that just as one factor in a way a limited or created a limit to the demand.

Number two, the other factor and I think we've seen it over the last 2 GDP reports is the slowdown in business investments and this is kind of very clear to look at the Q2 and Q3 US GDP and I can tell that in Europe business investment is already negative. So I think that both of these are kind of created like a double crunch and kind of limited the levels of demand, reduced the levels of demand.

Now when we look at the fourth quarter, first of all, we do expect to see a return to year-over-year revenue growth. This is point number one. Point number two, is that as we've updated you for the last I think 2 quarters we did secure a fairly significant design win, which is both high volume and high value that it gives us all the confidence we need that despite the market situation and the lackluster demand by businesses we are well positioned for growth next year. As you know, this is a fairly significant design, probably one of the largest, if not the largest in this industry.

So roughly, when you think about us in this market, we are growing by increasing our market share in the Unified Communication business and in a way we can grow and outperform kind of the market growth or decline.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [4]

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Got it. Now, that's really a helpful color there, and as my follow-up question, I wanted to talk about the SmartVoice business and good to see that we're making a ton of progress there. I wanted to talk, if you look out over the next, I don't know, 18 to 24 months, you feel like that business growth is going to be driven by sort of Smartphone and Smartwatch type applications with some of the bigger customers, or is this a business that's going to likely be driven and the growth to be driven by a more diverse set of sort of non-concentrated design wins. Thank you.

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [5]

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Sure. Thanks, Matt. So with respect to our SmartVoice business, what we have been doing over the last couple of years is trying to build a much more diversified business, whereby we diversify both from the customers' standpoint as well from the category standpoint. We believe that voices user interface and the processing of audio and acoustic on the Edge, is not just a matter of the single device category, let it be smartphone or a wearable, it's actually broad based and we see voices user interface, and today, a lot of kind of the acoustic classifies entering into almost any type of consumer electronics category, from appliances to kind of smart devices, a pretty much broad based.

And I think that when we are looking at kind of where we deliver value and the problems that we solve, we would like to see ourselves as a vendor, as a merchant silicon vendor that can address all of these opportunities and we see a lot of opportunities. As you can see during this past year, we've built quite a franchise in the 3 major markets. One is the cameras side, another one is in the tablet/PC market, and the third is in the entertainment market. These markets where fairly small revenue drivers for us in 2018. And this year, as you can see from the third quarter, it is over 70% of the total revenue and in the second quarter, they comprised around 60%. So I would tend to believe that continued growth in this market will come from a diversity of different products.

And for sure, yes, smartphone, it runs and a lot of volume will still be an important category as well as wearables. But I believe that we are also going to continue and diversify into many additional product categories. For instance, I would say it is very clear a product that are going to become another vertical is the hearable or the headset market. All the true wireless type of headsets that we're seeing launch in the market okay. All of these are also going to embrace a lot of voice user interface and acoustic detection and AI on the edge, a lot things that I believe this DSP Group could be a leading vendor for and this is another product category that I believe will be addressed in the next couple of years by us with our new product portfolio.

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Operator [6]

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Your next question is from the line of Raji Gill.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst [7]

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Thank you and congrats on the strength in the growth (inaudible). Question on the gross margin profile of the company going forward, so with the gross margins starting to kind of inflect and moving higher as the growth drivers represent about 60% of revenue, are there more kind of drivers to the margins going into 2020? How do we think about gross margins over the next one to 2 years, any thoughts on kind of other drivers to margins now that we have about 60% is growth versus 40% is legacy.

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [8]

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Yes, thanks Raji. Thanks for the question about the gross margin. So, as you, there has been a very direct correlation between the percentage of growth initiatives as a percent of our revenues and the gross margin trend line and you can see it in our infographics and in our investor presentation and we've been able to drive gross margins from the mid-'30s now to the 50% range. And I think that a lot of it had to do with the fact that we have presented and introduced new valuable technologies to the market. And with those, we were able to drive our gross margins higher. And even today when we are looking at the mix of the 40% cordless, 60% growth initiatives, still cordless is running at much lower gross margins compared to our corporate average, and the growth initiatives are running higher.

So from that perspective, yes as the trend line continues and as our revenues will be more strongly skewed towards growth initiatives, we believe there is room for gross margin expansion. Now there are 2 additional things that you want to bear in mind when you think about gross margins. One is revenue growth, in our cost of goods, not all the cost are completely variable. There are some fixed components. So as revenue growth becomes a driver in our P&L, our gross margins will improve as a result, because the fixed part of the cost of goods are not going to change by that much. And so their factor on the overall cost of goods will be lower. Hence, margins are going to move higher. And the third part is, and I think that you are also able to see that in our thoughts over past year we are gradually moving into a much more kind of higher content, higher-value market segment. So in all of the markets that we've entered we started from the fairly low end, the place where you earn the least ASP and it's kind of the most competitive area. And gradually by demonstrating our capabilities by driving performance and quality, we are gradually moving higher, to much higher, more lucrative product segments where we can earn more for the technology that we bring, and the capabilities, our voice engines, our low power, our AI on-the-edge accelerators, our noise cancellation, all of the things and the attributes that DSPG is bringing to the table are today earning a much higher price in the sockets that we're competing for.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst [9]

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Yeah, that's very helpful. Thank you. And in terms of your competitive positioning in SmartVoice, clearly voice processing, noise cancellation and starting to pick up in these devices, wanted to get your sense in terms of the competitive dynamics on the smartphone side, and other opportunities in the wireline and untethered earphone market where we are seeing a lot of traction with, for instance, the Apple Airpod Pros, for your noise cancellation or any of your voice processing capability in that market work.

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [10]

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Yeah, thanks for that. So with respect to our SmartVoice business, first of all, and I think that you've seen it in our comments during the last 3 quarters. We see a lot of convergence. So whatever is being done in delivering excellent quality, low power voice user interface with a lot of the excellent far field capabilities is not only a matter of kind of the consumer product, it's basically much more broad based, you find it today in enterprise products, you find it in industrial products, you find it everywhere and so, you know, our Smart Home franchise is becoming more successful because voice user interface is in demand and together with ULE, you get, kind of the winning combination.

In the Unified Communication market, our SmartVoice product are being introduced and embraced. And as well as in the kind of general, kind of consumer product market as you've seen and heard from our comments earlier. So, we believe that we are well positioned in this domain both from the fact that we have the ability to convert this technology with many other technologies that we have in-house. This is the DNA that we came from and our ability to do that across multi-segment market customer is prudent. So when I think about kind of the future and I think about smartphones and I think about the headset market, I see a great opportunity for a company like DSPG to continue and make excellent progress and deliver a lot of innovation and enable our customers to provide a much better, higher-quality product.

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Operator [11]

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Your next question is from the line of Charlie Anderson.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [12]

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Yeah, thanks for taking my questions and congrats on the great results. Ofer wanted to start on ULE, I wonder if you, maybe just update us on the North American one that you had described maybe a few calls ago, kind of where that stands in terms of ramp. And then just generally the pipeline for ULE opportunities, can I get a follow-up.

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [13]

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Yeah, absolutely. Thank you, Charlie. So with respect to the US service provider opportunity, what we have updated you in the previous quarter, in the second quarter was that we have one fairly strategic and we believe very important win in the US as we started focusing our marketing efforts on the US market and we believe that these service provider represent for us, is very strong and good opportunity to bring the technology, to get it much more widely embraced in the market. Now this design and this engagement is ongoing, we believe that it is on track to launch in the first half of 2020 and we have I think very good expectations from kind of the business momentum that we can generate from that we feel that the customer feels very highly about the decision to go with ULE on the expense of some other technologies that were under consideration. We believe the fact that voice user interface and voice communication is becoming a very important part of driving Smart Home and smart security services, ULE definitely has a great room and place to grow and getting embraced by a wider array of devices, service providers, et cetera, et cetera. So, we feel very strongly we feel we're on track, we are supposed to start seeing results in the first half.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [14]

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Great. And then for my follow up, I was kind of curious on use of cash. I don't know if I caught if there was any share buybacks in the quarter, but maybe just update us on capital allocation, use of cash, as it relates to buyback versus M&A, you might be looking at any update there would be helpful. Thanks.

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Dror Levy, DSP Group, Inc. - CFO & Secretary [15]

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Yes. So for buybacks, we did not do any buybacks during this quarter. Actually, the latest spend that we initiated was about a year ago and it was initiated when the prices were much lower, so currently we have the threshold is actually well below the current share price. So we are not buying back based on the 25 plan that we have. This is the situation for that. We did end the quarter, as I said, with a positive cash flow from operations, as we expect that this will continue throughout the years. So overall for Q4, we also expect to generate the cash flow from operations and to increase the total level of cash and securities of the company.

As well, acquisitions, of course, there is nothing that we could o should update now, but certainly this is something that we are looking into. And that we are open now, that (inaudible) said, the business is more stable, we are now looking into additional ways to grow the business and this is certainly something that it is also on our pipeline.

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Operator [16]

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Your next question is from the line of Sujeeva Desilva.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [17]

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Just a real quick question on the fourth quarter guidance, it's a decline sequentially. Can you talk about how the 4 segments progress roughly in that decline?

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Dror Levy, DSP Group, Inc. - CFO & Secretary [18]

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Yes. Hi Sujeeva. So with respect of fourth quarter with regard to what we do say is that kind of we are guiding for $28 million to $30 million, which at the midpoint suggest an 11% year-over-year growth or 29% at the midpoint, which is sequentially lower than the 31 for the third quarter. Now when we look at kind of the mix, we were looking at generating about revenues from the growth initiatives, and we're seeing, I would say, fairly kind of strong momentum in both the Smart Home and the SmartVoice product line. We are expecting to see a recovery, a year-over-year recovery in the Unified Communications segment, which is I believe a good indication, even though when you look at the numbers last year, they did suffer from lack of the buildup of the inventory. But still, we're seeing a pickup in Q4 year-over-year.

So in a way, all kind of 3 segments are expected to grow some modestly, some more significantly, and cordless is expected to continue and decline in the fourth quarter, and this is kind of the mix and kind of the trend lines.

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [19]

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Sujeeva, just to add on this one. So, if you will take the midpoint of our guidance for the total growth initiatives, so you will see that most or all of the decline between Q3 to Q4 is coming from cordless. So the total new product growth initiatives are actually slightly growing and cordless is declining between the third and the fourth.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [20]

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Great, that's helpful color for sure and then the SmartVoice segment, what is the kind of mix of smartphone, non-smartphone you expect longer term as you seem to diversify it. And do you have the kind of employee and channel infrastructure in place to support the many categories you seem to be going into versus having kind of done with large smartphone customers in the past?

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Dror Levy, DSP Group, Inc. - CFO & Secretary [21]

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Yes, thanks Sujeeva, so with respect to the SmartVoice business, we ended this quarter with a mix of about 70% of the revenues that came from non-smartphone products and less than 30% came from smartphone products. We believe that this kind of 75/25 or these type of three-quarter, one-quarter skewed towards the non-smartphone is kind of probably the right way to look at us going forward. Now, you are absolutely right that when we are looking at such a mix, it does mean that a lot of the products and the designs that we're going to engage with are not going to be as large on a per product basis, as a major win in the smartphone market and this is absolutely true. However, what we have done with respect to the last couple of years as we prepared ourselves for these diversification and actually drove it, we have built the ability to support a large number of product using very common SDK solutions that we're providing to our customers, we're also supported by a pretty significant ecosystem of partners from design houses, model vendors, value-added resellers, et cetera that are significantly strengthening and enable us to really leverage the technologies that we bring and deliver over a much broader-based customer base. So I believe that we are well equipped to continue and grow the business. And despite the fact that you know about 3 quarters of the business will come from, I would say, less volatile part of the market that in a way kind of, they can help us absorb a lot of the volatility that is happening in the other fourth, in the other quarter, that is kind of much more volatile, and where you need to be in the contest every other quarter to a business that is managed in a more kind of solid manner and in a more stable, we hope, trend line.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [22]

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Okay. And then I'll ask a quick question on SmartVoice. 70% is non-smartphone, is any one of the 3 categories, camera, tablet or entertainment dominating that or is it roughly spread out and for tablet, there is notebook, PC, an opportunity, because that would be a large unit TAM? Thanks.

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Dror Levy, DSP Group, Inc. - CFO & Secretary [23]

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Yes, thanks. Sujeeva So I think that none of the categories dominate larger than 70%. So I would say that you can think about it split equally between these categories and then you put another category for a smart speakers and IoT, which probably is about kind of 10% of the over 70, so you can say about 20% for each of these categories cameras, entertainment, and tablets. Now, when we are looking at the tablet, PC market, definitely we believe that there is a very good potential for us to continue and expand in this product category. We believe that a far field voice is going to become a mandatory feature from a perspective of voice user interface in this product line. Just the way you think, when you're thinking about the tablet in the voice user interface category, the notion is that you do not consider that as a personal device but much more as of the center as the main controller that is driving smart security, a Smart Home, all the kind of the audio playback in your home and this is the place where you are in a way on one hand stating the commands, but on the other hand using the touchscreen to see exactly what is going on and in a way kind of having 2 user interfaces in front of you. And in order to do that, you need the capability to drive it from kind of much more of a far field rather than a near field. So we believe that there will be a flight to kind of much higher quality and demand for more advanced features in this domain. And this will create and it's already creating fairly good opportunities for us to kind of penetrate deeper into the kind of the PC, tablet market or as we define, it is kind of the notebook, PC.

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Operator [24]

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(Operator Instructions) And your next question is from the line of Jason Smith. (Operator Instructions)

And it appears we have no further questions at this time. (Operator Instructions) There are no further requests at this time, please continue.

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Tali Chen, DSP Group, Inc. - CMO [25]

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Thanks, operator. During the fourth quarter, DSP Group will participate in ROTH New Industrial and Technology Day on November 13 in New York. And at this point, I would like to close the call. Thank you for listening in and for your interest in DSP Group. We look forward to report back to you in 90 days.

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Operator [26]

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Thank you. That concludes the presentation today. Thank you for participating, you may disconnect.