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Edited Transcript of DSPG earnings conference call or presentation 6-May-19 12:30pm GMT

Q1 2019 DSP Group Inc Earnings Call

San Jose May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of DSP Group Inc earnings conference call or presentation Monday, May 6, 2019 at 12:30:00pm 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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* Ari Shusterman

Needham & Company, LLC, Research Division - Analyst

* Charles Lowell Anderson

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

* Jaeson Allen Min Schmidt

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Joshua Louis Buchalter

Cowen and Company, LLC, Research Division - VP & Research Associate

* 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. Thank you for standing by, and welcome to today's Quarter 1 2019 DSP Group Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, 6th of May, 2019.

And without any further delay, I would now like to turn the conference over to presenter today, Tali Chen. Please go ahead, ma'am.

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

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Thank you. Good morning, ladies and gentlemen. I'm Tali Chen, Corporate Vice President and Chief Marketing Officer at DSP Group. Welcome to our first 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 second quarter of 2019, including certain aspects of the Unified Communications segment during the second quarter and some projections for the full year 2019, optimism about our engagement pipeline and design wins and growth initiatives, including SmartVoice for smart remote controls, cameras and tablets, Unified Communications, smartphone; including the traction with Orange as well as ULE in the U.S. security market, optimism about our transition to a leading global voice technology company and growth initiatives accounting for 2/3 of our total 2019 revenues, and thereby, driving revenue and growth margin increases. We assume no obligation to update these forward-looking statements. For more information about the risks and factors that could affect our forward-looking statements 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 today. I would like to begin by reviewing our results for the first quarter, commenting on the progression of our business plan and providing context for our outlook. In a short while, Dror will provide you with detailed comments on our financial results and outlook for the second quarter of 2019.

We're pleased with our first quarter results, which were ahead of our guidance on most financial metrics. Of significant importance this past quarter were a number of new product announcements and design wins with major OEMs in our SmartHome, SmartVoice and Unified Communications segments, which will have a positive impact on our mid- and long-term business performance.

We ended the first quarter with total revenues of $28.3 million, slightly above the midpoint of our guidance range, representing an increase of 1% versus the first quarter of 2018 and 9% versus the fourth quarter of 2018.

Our top line results were driven by solid performance in our growth initiatives with revenues reaching the level of $17.7 million, at the high end of our guidance and accounting for 63% of total revenues. These numbers represent an increase of 26% year-over-year and of 14% sequentially.

Operationally, the company delivered outstanding GAAP and non-GAAP gross margins performance of 51.1% and 51.5%, respectively, ahead of our guidance and driven by an improved product mix, leading more towards our growth initiatives versus cordless. These results are an outcome of the efforts made by our team to strengthen our value proposition, improve our business model and drive our overall transformation going forward.

While we are confident about our engagement pipeline and project a sequential increase in overall revenues for the second quarter driven by record expected demand for SmartVoice products, we do see near-term softness in our Unified Communications segment due to inventory adjustments by our customers. Nevertheless, we believe, we are -- that we are well positioned for a full rebound in the second half of the year.

Moreover, we expect solid momentum across our growth initiatives to position us well for revenue growth in the second half of 2019, and we reiterate our expectation for growth initiatives to account for approximately 2/3 of our total revenues this year, thereby, playing an instrumental role in driving revenue growth and margin expansion for the overall company.

Now I'd like to move on to the business update by segments, starting with SmartVoice. During the quarter, we generated revenues of approximately $4.1 million from sales of SmartVoice products, reflecting a year-over-year increase of 162% and a sequential increase of 2%. We're excited to share that during the quarter we achieved another key strategic milestone, Oppo, one of China's top mobile OEMs launched its Reno smartphone, relying on our SmartVoice technology for low power, hands-free, always-on, Wake-on-Voice technology for its Reno smart assistant.

In addition, we continue to diversify our engagement pipeline as evidenced by a number of noteworthy product launches, including a leading Tier 1 OEM selected our SmartVoice solution for its smart remote control supporting hands-free voice control for its high-end TVs. Number two, Arlo, America's leading connected camera brand, launched its Ultra 4K camera with our SmartVoice technology. Number three, a leading Chinese OEM launched a new education tablet product based on our SmartVoice solution. These new wins demonstrate the depth, the strength and the diversity of our SmartVoice franchise. Moreover, each represent an entry into a solid market opportunity for our SmartVoice solutions.

One such example is the smart remote controls. Voice-enabled smart remote controls are offered everywhere. In fact, the market for voice-enabled remote controls is estimated to reach 80 million units next year. Voice-activated remotes are gradually evolving from push-to-talk through more advanced always-on, hands-free ones, supporting mid- to far-field voice activation.

Our SmartVoice solutions cover this market segment perfectly as we address the stringent power consumption requirement, best-in-class, far-field voice activation and the smallest form factor. We are pleased with the customer traction and the level of interest by remote control vendors, including the partnership we announced earlier this year with Universal Electronics, the market segment leader.

Another interesting opportunity is the security camera market, where voice is abundant in IP security cameras for basic features such as audio and voice. With the fast upgrade of video quality in security cameras from HD to full HD to 4K, there is a growing expectation by consumers for a parallel upgrade with the voice and audio experience from standard definition to high definition and a need for a natural, robust, far-field, two-way voice capabilities to cover both indoor and outdoor conditions. Our partner in this market, Arlo, is the leading supplier of IP cameras with 40% market share. We believe that Arlo's Ultra 4K camera launch will drive an upgrade cycle to high definition and high quality voice in ordering cameras, thereby, opening a new market segment for our technologies.

Another example is the tablet market, where voice, as a user interface, is becoming the interface of choice in tablet. The voice is often used to control SmartHome and entertainment applications. By utilizing hands-free voice, users can turn on air condition, control SmartHome and receive a visual responses to voice quarries from a far. DSP Group is the leading supplier and enabler of such solutions. Today, our products are shipping with a record number of brands, which are integrating our technology for low-power, hands-free Wake on Voice, including Fujitsu, Lenovo, Samsung and several other Chinese OEMs.

Looking ahead, we anticipate a record demand for SmartVoice products in the second quarter, and we believe that our SmartVoice business will be an important growth driver this year, powering a broad array of exciting new applications.

Moving on to the Unified Communications segment that was previously known as Office/VoIP. In the first quarter, we achieved quarterly revenues of $9.4 million, representing a year-over-year increase of 13% and a sequential increase of 10%. During this quarter, we continued to establish our leadership position in the Unified Communications market, expanded our relationship with a leading OEM and made a few notable achievements, including a new Tier 1 networking OEM that selected our DVF101 for its high-end conferencing systems and NEC, a leading Japanese networking OEM that launched a SIP phone based on our DVF97 SoC. Following the addition of these 2 new customers, we achieved another important milestone of shipping our products to all top 7 networking OEMs in the Unified Communications domain.

As we have indicated on our previous calls, the Unified Communication market is changing with ubiquitous strings and reliable video communications, driving more innovative models of collaboration, thereby creating a need for additional endpoints such as headset, portable speakers, bring-your-own-device docs and over-the-top collaboration systems. We are at the forefront of this evolution and to successfully capitalize on such market trends by leveraging our best-in-class SoCs and software offerings, including solutions for audible terminals, IoT, voice as user interface, artificial intelligence, [all PH] and other.

While we are confident about our strong design pipeline, as noted, we are nonetheless expecting some near-term weakness to impact our Unified Communications business, relating to overstocking across the supply chain, relating to macro concerns, some of which arising out of the trade tensions between China and the U.S. We believe that our Unified Communications' revenues should fully rebound in the second half of the year, attributable to the meaningful design win that is expected to materialize during the third quarter.

Now for an update on the home segment, which includes SmartHome and cordless. During the first quarter, we generated revenues of $4.2 million in our SmartHome business line, exceeding our expectations and representing a year-over-year increase of 2% and a sequential increase of 45%. As we reported last quarter, Orange, the leading French-based service provider, launched its new SmartHome service and selected ULE as its primary IoT technology. Orange is now offering 4 ULE devices as part of its new service: motion sensors, smart plug, smart light bulb and a door/window sensor. All of these devices as well as the home gateway embed the DSP Group's ULE chipset solution to ensure a reliable IoT service and secured communications. These devices are offered across the 600 Orange stores in France as part of an initial soft launch, which should be succeeded by a bigger marketing campaign during the back-to-school period.

Moreover, we are excited about the role that ULE can play in the U.S. security market. ULE is on much benefits, which include superior range, interference-free spectrum and natural and reliable voice and audio support are crucial for security products. Our ULE sales and marketing investments in the U.S. are starting to bear fruit. And during the ISC West, one of the largest security shows in the U.S., we saw a strong interest from leading security service providers and OEM. In fact, Network Thermostat, a leading U.S. connected thermostat company, selected our ULE technology as their primary connectivity device for next-generation smart thermostats.

Finally, ULE continues to gain ground as the go-to-wireless standard for applications requiring high-quality voice communication. A few recent examples include Snips, a European pioneer in embedded voice recognition software, selected the ULE technology to bring a multiroom embedded voice recognition architecture for the SmartHome and smart building verticals. Number two, Gigaset launched a smart speaker product that integrates our DECT/ULE solution for high definition 2-way voice. The new Gigaset's smart speakers unites the best-in-class quality of DECT/ULE for 2-way voice calls with the innovative voice control from Alexa. We are optimistic about the design momentum and the growth potential of this product category in 2019 on the heels of increased tractions for ULE with existing and new customers.

Now to an update on the cordless phone market. Our first quarter cordless revenues came in slightly below our expectations. Cordless revenues declined by 25% year-over-year to $10.6 million and accounted for only 37% of first quarter revenues.

Now taking to account forecast received from our customers and our own assessment, we expect our second quarter revenues to be in the range of $28 million to $30 million. The midpoint of this guidance range implies a modest year-over-year declines while sequential growth. We expect solid revenue growth from our growth initiatives, which should account for 58% to 64% of our overall sales.

To summarize, despite an expected temporary softness in our Unified Communication revenues during the second quarter, we remain confident in our future growth. The strength of our Unified Communication design win pipeline and the recovery of our sales. Additionally, we expect our growth initiative to be meaningful enough to more than offset the continued secular decline of the cordless telephony business and solidify our future success driven by the solid pipeline of the exciting design wins with leading OEMs, which are expected to gradually materialize during the remainder of the year.

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

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

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Thank you, Ofer. I'll now review the income statement for the first quarter of 2019 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 first quarter of 2019 were $28.3 million. Gross margin for the quarter was 51.1%. Gross margin for the quarter included equity-based compensation expenses in the amount of $0.1 million. R&D expenses were $8.9 million, including equity-based compensation expenses in the amount of $0.8 million. Operating expenses for the quarter were $16.1 million, including equity-based compensation expenses in the amount of $1.8 million and amortization of acquired intangible assets in the amount of $0.1 million.

Financial income for the quarter was $0.3 million. The financial income for the quarter included $0.3 million of exchange rate differences related to a new accounting standard, related to long-term leases. These exchange rate differences were excluded from our GAAP results for the quarter.

Income tax benefit for the quarter was $0.2 million and included tax benefit resulting from changes in deferred taxes related to intangible assets and equity-based compensation expenses in the net amount of $0.1 million.

Net loss was $1.1 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 $0.3 million and the tax benefit effect of $0.1 million.

Non-GAAP net income, excluding the items I've just described, was $1.2 million. The GAAP loss per share for the quarter was $0.05. And the negative impact of equity-based compensation expenses on the EPS was $0.08. The negative impact of amortization of acquired intangible assets on the EPS was $0.01. The negative impact of the exchange rate differences was $0.01. The non-GAAP diluted earnings per share, excluding the items I've just described, was $0.05 per share.

Please see the current report on Form 8-K that we filed with the SEC this morning for a full reconciliation of the non-GAAP presentation to the GAAP presentation.

Now turning to the balance sheet. Our accounts receivables at the end of the first quarter of 2019 increased to $15.6 million compared to $13.5 million at the end of the fourth quarter of 2019 (sic) [2018], representing a level of 50 days of sales. Inventory decreased from $9.8 million at the end of the fourth quarter of 2019 (sic) 2018 to $9.3 million, representing a level of 61 days. Our cash and marketable securities decreased by $3.8 million during the first quarter and were at the level of $120.1 million as of March 31, 2019.

Our cash and marketable securities position during the quarter was affected by the following: $3.5 million of cash was used by operations; $1.9 million of cash was used for purchase of property and equipment; $0.9 million of cash was received from exercise of employees stock options; and $0.7 million is the increase in market value and amortization of marketable securities.

Now I would like to provide you with our projections for the second quarter of 2019. Our second 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 $10.5 million. Total operating expenses are expected to be in the range of $16 million to $17.5 million. Financial income is expected to be in the range of $500,000 to $600,000. We expect to have a tax benefit of approximately $200,000 on a non-GAAP basis.

Our shares outstanding are expected to be in the range of 24 million shares to 24.5 million shares. And these projections include approximately $0.1 million of amortization of intangible assets.

Our second quarter projections also include the following amounts forecasted for equity-based compensation expenses. Cost of goods sold includes $1.1 million, R&D expenses include $0.7 million to $0.9 million and operating expenses include $1.9 million to $2.1 million.

And now I 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 the first question comes from the line from Matt Ramsay.

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Joshua Louis Buchalter, Cowen and Company, LLC, Research Division - VP & Research Associate [2]

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This is Josh Buchalter on behalf of Matt. So first I guess I wanted to dig on SmartVoice. Between the last 2 quarters of actuals and your guidance for the second quarter, it continues to put a pretty significant and consistent numbers. To that -- to offset indicates a diversified revenue stream? And I was hoping you could sort of walk us through and provide some more granularity there as well as how that affects seasonality into the second half?

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

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Josh, and thanks for the question. So the question was around SmartVoice and how the kind of the product mix within SmartVoice is impacting seasonality. As we have discussed in the various calls in the past, our SmartVoice business is built out of a number of different products -- segments. The first is the smartphone segment, which of course addresses the highest volume opportunity in which we are today shipping to a number of OEMs, including 2 Tier 1 OEMs, the last one Oppo, which we announced just now in the call for the Reno smartphone. And of course that has the capability to account for a significant part of our revenues and we do expect that to account for significant portion of the SmartVoice revenues. In addition to that, we do have another -- a number of other categories within the SmartVoice that are today becoming a fairly significant as well. One of them was mentioned during the prepared comments, is the tablet segment in which we are today one of the largest suppliers for hands-free in mid- to far-field type of voice activation solutions. And we are supplying to a number of OEMs in this market, including several models with Samsung, Lenovo and Fujitsu and others. The third is the SmartSpeaker market or smart assistant market. These could be SmartSpeaker, smart assistant, so it's pretty much kind of far-field solutions and whether they're incorporated to devices that look like a speaker or sound bars or variety of other domains. And in this market, we also have a pretty significant wins, and I believe that some of which will be announced during the second half of the year and we're looking forward to that.

In addition to that, you've heard today 2 more segments that we believe will become more important and grow as we win additional customers and products. The first one is the remote control, or let's put it the entertainment -- home entertainment markets mainly TV, what we announced today, was a solution within a remote control or smart remote control where voice activation is hands-free. Don't need to touch the remote in order to activate, in order to control the TV. And we believe that there is a market -- a solid market opportunity there. And the last one is the camera market from action cameras, like GoPro, in which we have been shipping our solutions for voice control and activation to security cameras where voices being used also for communication to listen in to what is happening, to get an upgrade to high-definition, to embed a lot of capabilities around noise suppression, whether it's indoors or outdoors. And we group everything else under IoT. So beyond that I believe, as I said at the beginning that a smartphone is the largest category. It accounts for about 40% or so of our total revenues. Give or take, there is volatility between the quarters. Of course the impact of the volumes there are changing throughout the quarters. And with respect to the seasonality factor, right now, we do see a gradual increase, I would say, from kind of Q1 into Q2. I think we need to kind of have a better idea through the booking, et cetera, about kind of how the second half will translate, but we do believe that we should see a solid momentum in this product category this year, given the traction from the variety of product segment. And we believe that we see a very good fit for our solutions that address both low-power, battery-operated devices as well as high-end, far-field devices, which could be plugged, and in many cases standby power is still a very important criteria even in devices that are always plugged in. Hence, the opportunity that we see on the home entertainment market it starts from remote control, but does not necessarily end there as well as in the smart assistant, SmartSpeaker market. I think it's still the fact that DSPG is bringing solutions that address the low-power category as well as excellent far-field capabilities. I think it's a unique blend that also will help us in the future in many of the other categories that are today considered as plugged. So I hope that addresses your question.

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Joshua Louis Buchalter, Cowen and Company, LLC, Research Division - VP & Research Associate [4]

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Yes, for sure. I appreciate all the color. And then for my follow-up, it's sort of unfortunately becoming a quarterly check-in. But in the past, you've given some metrics on your products and that are assembled in China. Is there any way to sort of quantify any of these lingering impacts there? And I guess given that dynamic, what allows you to feel confident in that second half Unified Communications rebound?

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

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Thank you. So I think, well, we have seen a -- during kind of the end of the third quarter of last year into the fourth, we've seen the impact of the kind of China-U. S. commercial tensions around levies on import and then exports from China. And I think that we've backed then, we've seen much kind of much wider impact on all of the categories and also we expect that to also impact the domestic China consumption, which I think is still the case. When we guided this quarter and provided the color on Unified Communication, as you see, as you can tell from our comments, it was pretty much specific to this market. This is a market of much more kind of professional enterprise business consumption. We do see weakness, and we see that the weakness is fairly broad. And if you follow a lot of the companies that have announced results where their specific focus is on the kind of the business side, there does seem to be some inventory -- some excess inventory in the channel that most likely has to be depleted. We believe, according to what we see, that this should be consumed during the second quarter. And we believe that we will see a nice rebound in the third -- starting in the first quarter, first of all, coming from a -- the full kind of consumption of the excess inventory. Number two, we did announce that we expect a fairly kind of high-profile design win to start materializing and moving into shipments, meaning revenues for us during the back half of the year. So we believe that with these 2 tools, we are well positioned to see a rebound in the second half.

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Operator [6]

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Your next question comes from the line from Charlie Anderson.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [7]

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I want to start on the gross margins, obviously, very strong in the quarter. It looks like they're going to hold up decently also in the guidance. So I wonder, beyond mix, is there anything that you would comment on in terms of what's happening in terms of the gross margin trajectory? And then I've got a follow-up.

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

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Charlie, thanks for the question. So on gross margins, we're also very pleased with the performance in the first quarter of the 51.5% of gross margins indeed for us, it's I think a record number. And as we've, I think, explained in the past, we see a very tight correlation between our gross margins and our growth initiative revenues as part of the overall mix. I think you see that direct correlation. And in this quarter, we had -- the composition was 63% coming from the growth initiatives while only 37% coming from cordless. And I think with this type of mix, we were able to see our gross margins ascend and moving into the 50s. I think that for the year, we do expect this to continue. I believe that from the different compositions within the growth initiatives, we actually analyzed it just before the call as a preparation, we do see kind of fairly similar trends, and we do see that all of the categories from SmartVoice, SmartHome, Unified Communications are all got pretty similar -- of course not generating the same gross margins exactly, but fairly similar, well in excess of the corporate average, while kind of cordless is more lingering and behind given this market segment kind of completely, kind of utilized all the power of the supply chain in order to drive demand. But we're still kind of hopeful to see gross margins staying healthy and progressing throughout the year and also hopefully into next year as well.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [9]

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Great. And then a couple of questions on ULE. I think, I noticed in the press see this morning, there was a reference to a U.S. win there. I wonder if you could characterize that as, was that a service provider, was that an OEM? And then given that you now have brought in some new leadership to help in that regard, just sort of your expectations over time on the ULE business in the U.S.? I know you've had a lot of success in Europe, but your thoughts on the U.S. would interesting.

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

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Sure. So on the ULE side, so as we've discussed last quarter. So we did put in investment in marketing and creating the awareness with the ULE technology for all the flavors and unique characteristics that it could bring to both the SmartHome and the security markets in the U.S. We do believe that there's a compelling value proposition here. And I think kind of the team already started executing. And I believe that during the security show that we had in the month of March in Vegas where a lot of the leading security companies of the U.S., both OEMs as well as service providers attended. We saw a very strong traction and solid inputs coming. We did announce a design win with the company called Network Thermostat, which is an OEM of connected thermostats, supporting kind of both homes, multi-dwelling units, businesses, et cetera, et cetera. So it's not about buying 1 thermostat, it's really about a network of different thermostats realizing the unique values of ULE from the range, to the ability to really make and create a unique infrastructure for IoT services in the future. And I think they're trying to leverage that, and they're utilizing interference-free band, which is also one of the kind of the key assets that we have as well as the superior range and the natural support for voice and audio. And with that kind of our -- we'll start shipping towards the -- later in this year and also next year. I think that we see strong traction and very good interest coming from service providers and OEMs. And I believe that our expectation is to start and see that kind of materializing into evaluation, engagements, design wins, revenues.

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Operator [11]

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Your next question comes from the line from Jaeson Schmidt.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [12]

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I'm wondering if you could just talk about your SmartVoice traction? And if you believe that's more a result of an overall growing market, additional socket opportunities or if you think you are taking share within the market?

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

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Jaeson, and thanks for the question. So I think on the SmartVoice, I think that the -- as we've discussed, the market opportunity is tremendous. I believe that voice as a user interface is going to play a role in many more product categories. So from my point of view, we're kind of additive of the iceberg in terms of voice as a user interface and the way it is utilized and used. With respect to us, I think that during the last couple of quarters, we have shown how we're executing on the objective of creating real revenue diversification, both from the end applications as well as from the customer base. And I think that in the past announcements and a lot of kind of the commentary that we've been provided, hopefully it was helpful to show that we have been successful in doing that. There -- the market is highly competitive, for sure, especially on kind of the high-volume fronts of the tablets, smartphones, and some the camera products when it goes into a smart assistant, smart speakers. Of course, there are many players from the semiconductor front to the embedded software front, to the algorithm front that are battling to win. I believe that we have been successful by bringing some unique values to this market, both from the quality and the robustness of our solutions to the low-power, to our ability to be flexible and open, collaborating with many partners in the food chain of voice as a user interface both in China, in the U.S. and in Europe. And I believe that the market opportunities continue to be solid. And when you speak about kind of, "hey, your growth in this market segment, is it mainly coming from taking market share or is it really because the market is growing?" I would say the later. The market is growing. These capabilities embraced today by many more product categories and I think that we will see that continue to propagate and expand. This is my view. And we're executing on our kind of product roadmap and focusing on the areas where we bring value. We see today that artificial intelligence on the edge is becoming a very important topic, and we are addressing that as well by enabling a much more kind of robust immediate response without the ability to -- without the need to go for every transaction cloud and that actually to equip the end product with a lot more capabilities, a lot of kind of processing or running selective kind of new algorithms over newer networks to enable that immediate response so that you can really have a conversation with the device. And I think this is where we're focusing on. And I think that the market is going definitely in that direction to create some segmentation between cloud and endpoint, and I think that, that will kind of lead the way into the next-generation devices. So from at least where we stand and where we see the market, the market is growing. This is where we're getting our new opportunities. And of course, in some cases, we are also winning versus another incumbent or new supplier.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [14]

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Okay. That's helpful. And relatedly, wondering if you could just talk about why you won the Arlo socket, specifically? I think it sounds like you're pretty bullish on the overall security camera market and how that can be additive to the model. So just curious how you just won that SKU?

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [15]

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So I think that on the security camera in general and the Arlo design win specifically, I believe that this DNA is in our veins, and then this is what we do for a living for over 30 years. And this is to provide best-in-class, low-power and also low-cost solutions to enable excellent voice communication as well as excellent voice activation. And with our solutions that, in a way, combined these both worlds, both the communication and the activation, our ability to cleanse and provide excellent noise suppression algorithms as well as the ability to provide robust, full duplex acoustic echo cancellation, I think all of that is really kind of comes to our -- that they are in nature of our -- of where we come from, our core competence. And I think that this is what makes us kind of a unique vendor in the voice space. We really possess all of that intellectual property, everything embedded in a fairly low-power SoC. And I think that this is what brought us or enabled us to compete and later win in this market environment. And I do expect to see a follow-on engagement in the IP security market as the entire market goes from a fairly, I would say, kind of standard, half-duplex, I would say, kind of fairly mediocre voice quality to much higher voice quality that will match the video capability that you're getting out of an IP security camera, thereby really enhancing the experience, your ability to listen in to things that are happening both indoor our outdoors, the ability to conduct a conversation, the ability to hear and be heard. And I think that all of that should be another upgrade cycle in the IP security camera market.

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Operator [16]

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Your next question comes from the line from Ari Shusterman.

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Ari Shusterman, Needham & Company, LLC, Research Division - Analyst [17]

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I'm taking this question for Raji Gill. So I just wanted to start off by talking about your Orange ULE win. Can you talk about how that's ramping and the expected revenue opportunities from this win?

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [18]

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Sure. So as we've indicated, Orange announced this service and their intention to launch their new SmartHome initiatives, called Amazon Connect during the Mobile World Congress. The actual launch -- the soft launch happened in April. So just recently products were shipped into the Orange stores that are spread out in France. So that this service will be offered first in France. Right now what we're seeing is a soft launch, meaning products are on display. There is a certain inventory of product per store. As we discussed right now, 4 devices are for sale and they all link to their home gateway called Livebox. And all of that is basically part of one service for all broadband subscribers of Orange, which are several millions, I would believe around 9 million or so. And we believe that during the back-to-school period, going into kind of Q3, Q4, we will see the significant ramp, and we expect or at least this is what Orange has announced that they will conduct a much more aggressive marketing campaign, where they really push the service and the products and highlight a lot of the capabilities and kind of the unique used cases that you can create with it, how it's different from their previous SmartHome and showcase all the robustness and capabilities with a lot TV commercials and internet campaigns, et cetera, to reach their subscribers which are -- with some very nice promotions expected. So I think that we've seen basically the start of the initial ramp right now in a form of the soft launch, and we do expect to see a much more meaningful ramp going into the back-to-school period, of course, based on the appetite and the volumes that the Orange will provide to their manufacturers. And of course, we would be kind of part of that -- their supply chain.

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Ari Shusterman, Needham & Company, LLC, Research Division - Analyst [19]

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Okay. And one more quick follow-up. So talking about 5G, can you talk about your positioning in 5G? How you -- meaningful opportunity expected to be for your company? Yes, any color will be very helpful.

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [20]

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Sure. So as we look into kind of the 5G rollout, we do believe that there will be a certain partition between kind of high throughput technologies to a much more kind of the low- to mid-throughput that would comply with the IoT world that we are addressing, which is basically to provide a robust indoor range that, even with kind of mobile coverage, sometimes does not really come to fruition indoors. You do get excellent service when you're outdoor, when you're in a building that is kind of well-equipped with a lot of the macro serves, but not necessarily reaching every part of town. So we believe that there will be a certain partition between broadband into the home over 5G. And then a combination with a short-range wireless solutions that could basically extend the range to cover every part and every area inside the indoor environment, whether it's a business or a home. We see that there is definitely a role for ULE, and, let's say, the next generation of ULE to partner and be part of the 5G offering as another solution that will address reaching every point inside the indoor to provide really kind of robust coverage and leverage, all the capabilities and the unique levels that ULE does bring. So we do believe that there will be a nice co-exist for ULE and some of the other short-range wireless technology also in the world where broadband services are being offered and provided over 5G.

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Operator [21]

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And we will now take our last question. The last question comes from the line from Suji Desilva.

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

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Ofer, Dror. Congratulations on the progress here. The opportunity in Unified Communications and the run rate to recover to perhaps the 3Q peak, can you talk about whether that's in the cards or whether there's some structurally -- something structurally changed at the run rate is lower going forward here?

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [23]

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Suji, and thanks for the question. So that question is around the Unified Communication business, whether where -- we have passed the peak, whether we can pass the peak. So I think that if you could tell from my prepared comments, we're very bullish on the Unified Communication domain and our position as a leading SoC vendor. So no doubt, this is a business that we've been very bullish all along for the last couple of years, claiming we have an excellent design pipeline, we are well positioned for a year-over-year growth and that has not changed on the contrary. I think we're even more bullish today. However, during the performance and during -- running a business through the 12 months that constitute a year, there are periods where demand softens from a variety of different reasons and we are in such a period. Going into the second quarter, I think that what we see is broad-based, it's not DSPG SoC demand issue, it's much broader in the market. Some of it, as I have said and I believe, comes from the inventory accumulation that we believe happened both last year and also going into this year that will be depleted during the second quarter, and we believe that we will resume much more normal demand pattern. And in addition to that, and this is I think where we see a very different market opportunity or business opportunity, is that we are well positioned to grow, not just on the market trend, but really from new businesses, or new products, new SKUs that we have won and we'll materialize. One of which we announced I believe in the last quarter which we believe a high-volume, high-profile design with a Tier 1 OEM that should start materializing in the back half of the year, Q3, which should be a major contributor to our overall Unified Communication performance. And I believe that as you've seen from the way we cover the market today, we ship to all the 7. All the top 7 customers are buying products from DSPG. This is a very important accomplishment because it means that they're running our software, they're running our voice engines, basically very well familiar with the quality and the capabilities that we provide and our ability to actually step up and be positioned to gain more content is in much higher probability than it was when we were not shipping to these large OEMs. Today, we ship into all 7. I think that within the 7, there are some customers where we already cover a pretty significant part of their overall portfolio for endpoints, and there are plenty where we're just going to -- scratching the surface, we're just starting shipments. And I believe that this will evolve, and I'm highly confident that of our position and our ability to continue and grow. And I don't think that we've passed the peak of the Q3 last year. So no, I think we are well positioned to do better.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [24]

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Okay. And my other question is on the SmartVoice segment. Can you talk about the mix SmartVoice -- smartphone versus nonsmarthpone and the expected trend there? And is your -- are you seeing smartphone voice UI as a driver for you guys? Or is the momentum better in the nonsmartphone area? Any color there would be helpful.

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [25]

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Yes. So on the mix within SmartVoice, as I've said earlier, we see a number of important categories for us. Of course, the first is the smartphone domain, where today we're shipping to -- into a number of OEMs, 2 Tier 1s. This today comprises approximately 40% also of our revenues. However, looking into the future, the back half of next year, there tends to be within the quarters pretty high volatility with respect to demand for one product segment or the other. But kind of roughly speaking, I would put it in kind of the 40% area. And the others basically comprise the remainder 60% in which we have the tablet market, which for us has been a very nicely growing franchise. And we continue to do well in this market and to win more share. I think that the home entertainment segment is another, a very nice and growing franchise. Cameras, by adding high quality, both voice and audio communication as well as voice activation both near mid and far field. And kind of the remainder is smart assistant, smart speakers and the IoT as kind of a bigger umbrella to cover everything else. But all in all, we see voice as user interface getting into many different products from appliances to bicycles to cars to everywhere. We see demand for voice as user interface everywhere. And then we see it as a compelling market opportunity for us to play in. So I hope, Suji, that this addresses your question.

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Operator [26]

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At the moment, we have no further questions. (Operator Instructions) And at the moment, we have no further questions coming through.

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Tali Chen, DSP Group, Inc. - CMO [27]

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Thank you. During the second quarter, DSP Group will participate in Cowen and Company's 47th Annual Technology, Media & Telecom Conference on May 30 in New York. Thank you for listening in and for your interest in DSP Group, and we look forward to report back to you in 90 days.

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Operator [28]

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That does conclude the conference for today. Thank you all for participating. You may now disconnect.