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Edited Transcript of DSPG earnings conference call or presentation 4-Feb-19 1:30pm GMT

Q4 2018 DSP Group Inc Earnings Call

San Jose Feb 6, 2019 (Thomson StreetEvents) -- Edited Transcript of DSP Group Inc earnings conference call or presentation Monday, February 4, 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, Corporate VP of Finance & 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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Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2018 DSP Group, Inc. Earnings Conference Call. (Operator Instructions) I must also advise you that this conference is being recorded today, Monday, the 4th of February 2019.

And I would now like to hand the conference over to your first speaker for today, Tali Chen. Thank you. Please go ahead.

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

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Good morning, ladies and gentlemen. I am Tali Chen, Corporate Vice President and Chief Marketing Officer at DSP Group. Welcome to our fourth quarter 2018 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 first quarter of 2019 and some projections for the full year 2019, optimism about our engagement pipeline and design wins, the recognition for the benefits of ULE, the prevalence of voice interface and wireless IoT and our ability to leverage such trends, our positioning for 2019 and our growth initiative to represent 2/3 of our total annual revenue. We assume no obligation to update these forward-looking statements. For more information about the risks and factors that could affect the forward-looking statements made herein, please refer to the risk factors discussed in our 2017 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 that we distributed earlier today. I would like to begin by reviewing the results for the fourth quarter and the full year, commenting on the progression of our business plan and providing context about our outlook. In a short while, Dror will provide you with detailed comments on our financial results and outlook for the first quarter of 2019.

Our fiscal 2018 marked the first year in which revenues from growth initiatives accounted for a majority of the company's revenue, comprising 55% of total revenues. This improved product mix also drove our gross margins to an all-time high of 49%. These achievements, coupled with solid momentum across our growth businesses, highlighted by a record new customer engagement activity, including new product launches with 11 new customers in the SmartVoice segment, 10 new customers in the SmartHome segment and 6 new customers in the Office Voice segment, provide us with confidence that we are well positioned for growth and that our growth initiatives are on track to account for over 2/3 of our total revenues in 2019. These are very exciting developments for DSP Group. We are transitioning back into a growth technology company as the legacy code of business becomes a smaller part of the company's revenues, thereby allowing our growth initiatives to play a more meaningful role in driving revenue growth and margin expansion.

Moving now to a review of our fourth quarter results. Fourth quarter results were in line with the guidance we provided in our previous earnings call. Overall, we ended the fourth quarter with total revenues of $26.1 million, representing an expected decrease of 17% versus the fourth quarter of 2017 and a sequential decrease of 20% versus the third quarter of 2018. At the same time, we're happy to report that growth initiatives accounted for a record high of 59% of total quarterly revenues. While we're disappointed with the top line performance, we view this setback as temporary and expect our revenues to recover and grow on a sequential basis as the supply chain correction in cordless telephony gradually eases; and customer demand strengthened, supported by key accomplishments across our growth initiatives, which include mass shipments of SmartVoice product to a Tier 1 Chinese smartphone OEM, securing a high-volume design win with a Tier 1 OEM for our Office/VoIP product; and, finally, a milestone event for ULE, which was selected as the primary IoT technology for Orange's new connected home service in France.

Fourth quarter GAAP and non-GAAP gross margins of 47.5% and 47.9%, respectively, were lower on a sequential basis and attributed mainly to a temporary factor, namely a higher impact of the fixed portion of our cost of goods on a lower revenue base. We expect our gross margins to fully recover already in the first quarter to the level we have seen previously.

Now I'd like to move on to the business update by segment starting with SmartVoice. During the quarter, we generated revenues of approximately $4.1 million from sales of SmartVoice products. Revenues were within our guidance range of $4 million to $5 million, reflecting a year-over-year increase of 83% versus the fourth quarter of 2017. For the full year, our SmartVoice revenues of $10.9 million increased by 124% versus 2017, but were at the low end of our annual guidance of $11 million to $16 million. Our SmartVoice revenues for the quarter and the year were negatively impacted by weaker demand for smartphone products globally, which we experienced both during the year and, to a greater extent, in the fourth quarter. And currently, smartphone is the largest product category within the SmartVoice segment.

At CES in 2019, Voice User Interface took a center stage, and our SmartVoice solutions were an integral part of that. We demonstrated a record number of leading consumer-branded products integrating our SmartVoice technology and leveraging Google and Amazon ASR engines across a wide variety of applications from smartphones, tablets, wearables, hearables, smart speakers, smart assistants and IoT. We're very pleased with the strength, depth and diversity of our SmartVoice franchise, as evidenced by a number of additional noteworthy accomplishments across a variety of different product categories.

The first one is that we began mass shipments of our SmartVoice products with Tier 1 Chinese smartphone OEM. Number two, Lenovo launched a line of smart tablets based on our SmartVoice technology to enable far field voice control for Alexa voice experiences and 2-way voice calls. This is yet another evidence of our leadership position in the voice-activated tablet market. Universal Electronics, the leading provider of remote controls, integrated our SmartVoice technology into a revolutionary, hands-free, battery-operated, low power, voice-activated remote control.

Simplehuman selected our SmartVoice technology and advanced suite of preprocessing algorithms, combined with sensory truly hands-free, to enable the expansion of voice control into home products. We are encouraged that Voice User Interface is going mainstream. We see a growing demand for a solution ranging from ultra-low power voice to high-performance far field voice activated one to machine learning and AI processing on the edge that addresses many innovative use cases, including audio and environmental sensing, for providing a more personalized and contextual response.

Looking ahead, we expect the positive momentum and growth in our SmartVoice business to continue throughout 2019, while somewhat tempered during the first quarter of 2019 due to the softening market environment for smartphone products. To summarize we are pleased with our SmartVoice momentum and expect our SmartVoice business to be an important growth driver this year following a broad array of exciting applications.

Moving on to the VoIP and Office segment. In the fourth quarter, we achieved quarterly revenues of $8.5 million, meeting the mid-range of our guidance while representing a year-over-year decline of 10%. The expected weakness was due to a temporary delay in the timing of orders originating from uncertainties relating to trade war concerns that stimulated overstocking of finished goods material in warehouses outside of China in order to avoid a potential stop.

We ended the year with total revenues of $38.8 million, within our annual guidance of $38 million to $44 million, representing a year-over-year increase of 11%. We're very excited to share with you that during the quarter, we achieved a major accomplishment in our VoIP business by securing a high-volume design win with a Tier 1 OEM for products that are expected to start shipping in the second half of this year. In addition, Audiocodes launched a business phone based on our DVF101 SoC running Microsoft Teams UC client on Google Android operating system.

AtlasIED launched IP-SDMF, an IP speaker leveraging our VoIP communicated solution to expand telepresence with enhanced audio. We're confident that with our exceptional design pipeline and product road map, we're positioned well for solid revenue growth in 2019 and the years to come. For the first quarter of 2019, we expect VoIP revenues to gradually recover and grow both year-over-year and sequentially.

Now to an update on the home segment, which includes SmartHome and cordless. Turning to the SmartHome product line. Our SmartHome product line is comprised of DECT ULE products shipping primarily with IoT sensors and home gateway products. During the quarter, we generated $2.9 million in revenues and exceeded our guidance of $2 million to $2.5 million. However, for the full year, SmartHome revenues of $14.5 million were below our annual guidance of $18 million to $20 million. We're disappointed by this revenue shortfall, which was mainly impacted by a prolonged inventory readjustment at one of our largest ULE customers, combined with softer-than-expected demand for home gateway products. Nonetheless, we're confident about the design momentum and growth potential of this product category in 2019 on the heels of the increased traction for ULE products from existing and new customers and our expectation for a recovery and share gains in the home gateway market.

During the year, we solidified our leadership in the European market and improved the positioning of ULE as the technology of choice for wireless IoT. Moreover, we are excited to report a milestone event for ULE. Orange, the leading French-based service provider, announced in December its new connected home service called Maison-Connectee and selected ULE as its primary IoT technology. This milestone event comes in addition to the adoption of ULE by Deutsche Telekom and the recent adoption by Bezeq, the Israeli service provider. This noteworthy development position ULE as a leading and mainstream and IoT technology and as the choice for leading service providers, whom are leveraging ULE's unmatched benefit, which includes superb range interference-free spectrum and natural and reliable voice and audio support.

This increased traction in Europe makes us confident in the future of ULE as the role it should play in the IoT market. Hence, we have decided to expand our investments and develop ULE's market awareness and presence on the other side of the Atlantic.

We're excited to share with you that Mr. Bill Scheffler, an IoT veteran and legend, joined us as Vice President of Business Development during the fourth quarter. Bill has a strong track record of building highly successful ecosystems. Most recently, he served as an Executive at Sigma Designs, where he built the Z-Wave brand and transformed it to an industry standard. We see it as a strong vote of confidence in ULE's ability to gain a solid market footprint also in the U.S.

Finally, the convergence between Voice User Interface and IoT connectivity is becoming a reality and the level of interest is high. In real time, 2-way communications in the IoT market has never been stronger with the emergence of voice-enabled devices and 2-way voice interaction for smart speakers and other devices. Voice in the SmartHome is far becoming the interface of choice, and DECT ULE is getting ground as the go-to wireless standard for applications requiring transfer of high quality VoIP, as evidenced by Technicolor's announcement of its plan to bring to market 2-way voice-enabled speaker accessories based on our ULE and SmartVoice technologies. This 2-way, voice-enabled accessory use natural language to control many of the SmartHome technologies installed in the customer's home. Elite Computer Systems selected our far field voice activation in ULE 2-way voice to power their next-generation portable smart speaker with Amazon Alexa interference-free voice assistant. For the first quarter of 2019, we expect SmartHome revenues to recover on a sequential basis and improve gradually throughout the year.

And now to an update on the cordless market. Our fourth quarter cordless revenues were in line with our guidance. Cordless revenues declined by 33% year-over-year and declined by 23% on a sequential basis. The steeper decline is primarily attributed to a supply chain correction that we experienced in the fourth quarter. Cordless revenues accounted for only 41% of fourth quarter revenues. As we look back at 2018, our cordless business declined by 21% year-over-year at the high end of our historical range of 15% to 20%. We shall continue to prudently manage this legacy business and reinvest its profits to further develop our well-performing growth initiatives.

As you can tell from the update and significant accomplishment in 2018, a major part of our transition and penetration into the burgeoning growth markets of IoT, Voice User Interface and unified communications is engaging with and acquiring new customers. As you know, we have collectively referred to this group as growth initiatives, and I'm happy to say that today, we're involved in a record number of new customer engagements in all 3 areas. The focus we have placed on expanding our sales efforts throughout the different regions has and will continue to yield an expanded market footprint.

On a long-term basis, we believe several of these new customer engagements have the potential of offering significant contribution to our growth plans. Naturally, such activities are at variable stages of maturity, which inherently will cause some degree of revenue lumpiness within the 3 markets on a quarterly basis. As such, we believe that the most effective way to monitor our progress is by tracking these peer groups' overall transition from legacy to new products.

Looking at the last 3 to 4 years, we have demonstrated continuous transition to new initiatives, representing 28% of overall revenues in 2015 to 55% of total revenues in 2018. As part of this transition, we have also enjoyed a significant improvement of 750 basis points in non-GAAP gross margins.

Looking into 2019 and beyond, we expect this trend to continue and support our long-term model of gross margins in the low to mid 50s and operating income margins in the mid-teens. Accordingly, our guidance going forward will focus on the continuation of this transition. Starting from this call, we shall provide quarterly guidance of overall revenue split into 2 areas: legacy business and growth initiatives. Our quarterly earnings reports will include more granular details and updates.

Based on our revenue expectations across our growth initiatives, including increases in our SmartVoice and VoIP product lines and seasonal declines in our cordless telephony business, we expect our first quarter revenues to be in the range of $27 million to $29 million, implying sequential growth while flattish year-over-year at the midpoint of that guidance. Moreover, we expect revenues from growth initiatives in the range of $16 million to $18 million, implying solid sequential and year-over-year revenue growth at the midpoint of guidance.

To summarize, 2018 was a transition year for DSP Group, a year in which the majority of revenues were generated by growth initiatives. And we shifted from being the company that is based primarily around cordless telephony to a transformed company that is driven by 2 unique growth pillars, IoT and voice. We anticipate that our growth initiatives will continue to be key revenue contributors this year and will account for over 2/3 of our annual revenues, which would more than offset the cordless decline and solidify our future success.

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, Corporate VP of Finance & Secretary [4]

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Thank you, Ofer. I will now review the income statement for the fourth quarter of 2018 from top to bottom. For each line item, I will provide U.S. GAAP results as well as equity-based compensation expenses included in that line item and the expenses related to previous acquisitions.

Our revenues for the fourth quarter of 2018 were $26.1 million. Gross margin for the quarter was 47.5%. Gross margin for the quarter included equity-based compensation expenses in the amount of $0.1 million. R&D expenses were $8.6 million including equity-based compensation expenses in the amount of $0.7 million. Operating expenses for the quarter were $15.2 million including equity-based compensation expenses in the amount of $1.6 million and amortization of acquired intangible assets in the amount of $0.4 million.

Financial income for the quarter was $0.5 million. Income tax benefits for the quarter was $2 million and included tax benefits resulting from changes in deferred taxes related to intangible assets and equity-based compensation expenses in the net amount of $0.8 million. Tax benefits, excluding these deferred tax changes, were $1.2 million. This tax benefit represents mostly tax assets resulting from the tax deferral of R&D expenses that will be utilized at higher tax rates in future years.

Net loss was $0.3 million including equity-based compensation expenses of $1.7 million, amortization of intangible assets of $0.4 million and a tax benefit of $0.8 million. Non-GAAP net income, excluding the items I've just described, was $1 million.

GAAP loss per share was a $0.01 for the quarter. The negative impact of equity-based compensation on the EPS was $0.07. The negative impact of the amortization of acquired intangible assets on the EPS was $0.02. The positive impact of the deferred tax assets related to intangible assets and equity-based compensation was $0.04. The non-GAAP diluted earnings per share, excluding the items I just described, was $0.04.

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 moving to the balance sheet. Our accounts receivable at the end of the fourth quarter of 2018 decreased to $13.5 million compared to $21.4 million at the end of the third quarter, representing a level of 47 days of sale. Inventory increased from $8.2 million at the end of the third quarter to $9.8 million, representing a level of 65 days. Our cash and marketable securities increased by $4.2 million during the fourth quarter and were at the level of $123.9 million as of December 31.

Our cash and marketable securities position during the quarter was affected by the following: $6.7 million of cash was provided to operations; $0.2 million of cash was used for purchase of property and equipment; $0.3 million of cash received from exercise of options by employees; $2.7 million of cash was used for repurchase of 231,000 shares of our common stock at an average price of $11.08 per share; and $0.1 million was the increase in the value of marketable securities and amortization of these securities.

Now I would like to provide you with our guidance for the first quarter of 2019. Our first quarter projection, 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 $27 million to $29 million. We expect our gross margin to be in the range of 49% and 50%. 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 $17.5 million. Financial income is expected to be in the range of $400,000 to $600,000, and we expect to have a tax benefit of approximately $0.3 million on a non-GAAP basis. Our shares outstanding are expected to be in the range of 23.5 million shares to 24.5 million shares. Our first quarter projections include $0.1 million of amortization of intangible assets, and these projections also include the following amount forecasted for equity-based compensation expenses. The cost of goods sold include approximately $0.1 million, R&D expenses include $0.7 million to $0.9 million and the total of operating expenses include $1.7 million to $1.9 million.

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 of Matt Ramsay from Cowen.

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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 for Matt. So on the last call, it was a pretty big impact in voice and cordless -- voice-over-IP and cordless from the China inventory correction you were mentioning really to the tariffs. I was hoping you could provide maybe an update on sort of a quantified amount that impacted the fourth quarter and sort of where things stand as you see them today.

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

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Sure. Hi, Josh, and thanks for the question. So last quarter, we did update that we did see in 2 areas where our business got impacted from these uncertainties regarding a trade war. One was in the cordless front, where we updated about a certain supply chain correction that we expected in the fourth quarter, which indeed took place. And we see that it is gradually improving, but not yet behind us, but we do believe that we will see sequential improvement and gradual improvement in Q1. On the VoIP side, I would say one of the, kind of the, main reasons for the sequential -- the big sequential shortfall in Q4 was attributed to a restocking probably during the year of more finished good items in order to avoid paying a tariff at some point if that were to be the case in Q4 and Q1. So in a way, the supply chain included a lot more finished good products that were stocked outside of China, if you will. Just on the level of impact, so the way we, I would say, understand kind of the -- or value that impact, I would say, it's probably like around $2 million or so of net value of that correction.

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

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Okay. Appreciate all the color. And then on the SmartHome design wins, I mean, obviously, there've been some exciting activity with Deutsche Telekom and Orange. I guess, could you help us maybe think about how we should think about the pace of that generating revenue and when we can sort of see some return to growth in that vertical?

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

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Thank you. So Josh, on the SmartHome side, right, so we have here, in a way, a business that is mainly comprised out of a service provider initiative. These are kind of the what's carrying the bag here with respect to kind of future growth, and it's really ecosystems that are developing around these service providers. And I would say Orange, it's Deutsche Telekom, it's Bezeq and, hopefully, many more that will launch such services in the future, in the near and the midterm future. With respect to a return to growth, so as we've said that during '18, we did see a decline that was mainly attributed to inventory readjustment. And as you can tell from my comments, we believe that this is now over. And number two -- the number two factor was a decline in demand. So decreased demand for gateway product. And we also kind of implied that this is also over. So overall for SmartHome, this year, we expect to see growth. I would say that this market is more at -- much more in the infancy stage compared to the other 2 markets, but still we do expect to see this market growing and gradually improving from quarter-to-quarter.

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Operator [6]

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Your next question comes from the line of Jaeson Schmidt from Lake Street Capital.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [7]

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Ofer, in your prepared remarks, you mentioned that smartphones represent the largest proportion of the SmartVoice segment. Do you expect that to continue in '19?

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

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Sure. So yes, indeed. So smartphones that include -- that incorporate our SmartVoice SoCs do comprise the majority of the revenues, and this comprised the majority of revenues in 2018. We expect that to maybe decline a little bit, but still it will remain a very important and significant category. What we did discuss in the prepared remarks is the fact that when we look at what we expected back in January, February of 2018 and where we are today, and also where we guided in Q4 and kind of the actual results, we do see that there's a fair amount of kind of unit volume uncertainty and kind of weakness in the demand for smartphones. So going into 2018, we have certain expectations versus -- based on what was achieved for such models and forecast that we received that were mainly based on the business back in 2017. But as we all know, during calendar 2018, this category did suffer from a lack of demand from a variety of reasons. I can tell you that looking at the markets today, we do see that there's a fair amount of weakness right now in the China domestic market, which is also a little bit impacting also our forecast going forward. Of course, we've just entered the China domestic market with design wins starting in second half of 18 and, to a greater extent, now with this kind of Tier 1 OEMs that we started shipping to. But there is a fair amount of weakness out there. And also I would say, coupled by limited visibility on that aspect of the market, so smartphones are -- does a much more kind of uncertainty and lack of visibility there.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [9]

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Okay. That's helpful. And sticking with SmartVoice. Given the uncertainty in that space or in the domestic Chinese market, have you seen any significant pricing pressure?

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

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So with respect to kind of the pricing environment, we do not necessarily see that as a factor. I think it is much more around kind of the volatility of demand and kind of how that shapes up to the actual numbers versus kind of the numbers that are kind of forecasted. And I think that from our point of view, our key objective for 2019 is to secure additional wins in the smartphone area in China and also outside of China. And for us, it is still a very important category, given the fairly large unit volume that we can get exposed to. And we believe that we have the right technology for that, having the lowest power consumption and actually a fairly efficient, also cost-effective solution to enable great wake-on voice capabilities with 1 to multi microphones. And so we still believe that this is a great product category for us. And we need to live with kind of the volatility and the lack of visibility that exists in the market, but I think we're well positioned to continue and enhance our footprint in the smartphone domain.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [11]

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Okay. And last one for me, and I'll jump back in the queue. You mentioned increasing your investment in the SmartHome segment. How should we think about OpEx trending overall for this year?

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [12]

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Dror, do you want to take this?

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Dror Levy, DSP Group, Inc. - CFO, Corporate VP of Finance & Secretary [13]

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Yes, sure. So overall, when we look at total '19, I think we should see that OpEx will be slightly above where it was in 2018, but I do want to get back for a second to what Ofer said. So I think what we said is that we are going to increase the level of investment, unnecessarily in R&D, mostly in standard marketing, mostly in marketing efforts that we are doing, mostly in penetrating, as Ofer said, also the U.S. market. But this is unnecessarily going to increase or to bring, like an uplift to the R&D that we invest in this segment.

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Operator [14]

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Your next question comes from the line of Charlie Anderson from Dougherty & Company.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [15]

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I wanted to ask you about the marriage of ULE and SmartVoice, saw a very interesting demonstration of that at CES. I know you've talked in prior calls as well about marrying those 2 technologies. Just kind of curious how the pipeline is stacking up there, what kinds of opportunities are coming your way? Are there service providers interested, other consumer electronics brands that are interested in that solution? And I've got a follow-up.

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [16]

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Sure. Thank you, Charlie. So indeed, we do see this convergence. And actually, the convergence is even bigger than that. The convergence is also between SmartVoice and voice-over-IP and ULE and the example of someone like Bezeq, the kind of smart security for enterprise customers. But in particular, the combination of SmartVoice and ULE, we believe, provides a fairly unique offering to enable smart assistance that will cost a fraction of the cost of a smart assistant today. This is point number one, the ability to actually do that and conduct all of that in a battery-operated device that could last for many hours and could actually really suffice kind of very good kind of home use case, and adding many variants of this type of accessory and keeping great voice quality and the interference-free band and also a spectacular range and including, on top of that, 2-way voice calls and also music playback, to using the great streaming capabilities that you can do over DECT so all of that kind of really creates a pretty unique offering that we are seeing very solid traction. I think that what you saw in CES was just the beginning of this concept. We demonstrated many smart speakers that are embracing ULE, in addition to WiFi and other connectivities, to provide best-in-class audio and voice transmission. We saw that in smart speakers by companies like Deutsche Telekom and Djingo by Orange-France Télécom, Jazz, Elite and many, many others that were demonstrated there. We also provided more color in kind of the press release and also here in the prepared comments about companies like someone like Technicolor, which is a pretty significant networking leader in that domain, who's also kind of building their future voice-enabled products using both SmartVoice and ULE. I think many of our traditional customers are also following and actually putting a pretty significant investment in reviving many new product concepts to take both ULE as the wireless link instead of some of the other relevant wireless links do just in time very high-quality 2-way voice calls, a voice activation as well as a full band audio over DECT. So we see great traction, and I think what we want to do is try to kind of see that going into production this year and try to kind of quantify the potential value. But indeed, we're very excited and happy about the fact that the market finally gets it and kind of is willing to invest and accept this combination. So we'll continue to kind of monitor it and update you on a quarterly basis.

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Charles Lowell Anderson, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [17]

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Great. And then as far as ULE in the U.S. is concerned, you obviously have had traction in Europe between Orange and Deutsche Telekom. Many of the service providers in the U.S. have sort of gone forward with convenient technologies. I guess, I'm curious what's giving you that confidence to want to invest more there. Do you feel like those sockets are available where some of those have chosen Z-Wave or ZigBee, what have you? Any more color there would be helpful.

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

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Yes. Thanks, Charlie. So indeed, nothing is easy in the IoT domain. I think that there are a lot of options for OEMs and service providers. But I think that when you look at the evolution of this market and the unique needs that are being presented, I think there is a need and there is a place and there are sockets, full-forward technology like ULE. So when you think about a technology that needs to support a voice activation or 2-way voice or audio streaming or to record and send wav files and needs just in time, et cetera, there's no other technology that can do it the way that ULE does. And I would say that not many technologies that are addressing today, IoT can really do what ULE does from the voice perspective, not to mention other kind of really key assets like interference-free band. Think about how many -- in today's spectrums, with all the clutter of local wireless, if you really want to guarantee transmission, if you really want to guarantee network quality, you can't really do that and guarantee that in the ISM band. You need a technology that is interference-free. And this is kind of, I think, where ULE can really play a very strong role. Now when you're asking about the U.S., we have not been focused on the U.S. that much in the last couple of years, and I don't think that the level -- the playing field was that open to us. In Europe, before we entered, before Deutsche Telekom chose ULE, they used the ISM band technology. France Télécom used Z-Wave. So Bezeq also used Z-Wave before. So there are plenty of incumbents. There are plenty of sockets where providers have already chosen their preferred technology. However, it does not mean that a technology like ULE will not find a way or cannot find a way to play. We don't necessarily need to replay. We can complement. We can basically do things that the other technologies cannot do. So for a certain number of sensors or devices. So we don't really need to win everything. We just need to convince about the values, about the use cases and find the way into the smart -- and this is exactly the plan for the U.S. is really to develop and build a powerful ecosystem that will range from device vendors, to service providers, to security service providers, which will become one of our primary focus areas because of kind of playing to the merits and the capabilities of DECT ULE.

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Operator [19]

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(Operator Instructions) And the next question comes from the line of Suji Desilva from RCH Capital (sic) [Roth Capital Partners].

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

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Following up on Charlie's question about the U.S. effort, can you give a sense maybe how many customers are now securing their OEM service providers in the 2019 time frame? Would you consider kind of progress that you're expecting given you're expanding in the U.S.? What -- can you help us set expectations for how quickly you think you can penetrate that market?

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [21]

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Right. Thanks, Suji. So indeed, the activity is really kind of measured by the number of engagements that we will establish. And when we say engagement, engagement has many different phases we tried. There's a stage where you're already shipping and mass production, and there's a phase where -- there are phases where the technology's being evaluated, designed in -- but the way we measure ourselves is really by the amount and the quality of the names that we are able to get into and also the potential that such names can represent for our business. Now when I spoke a little bit about the customer traction in 2018, I mentioned about 10 new customers where products are shipping this year. These are not counting traditional or customers that we've already sold to, but these are really new customer engagements with products that are shipping. So I believe that the level that we want to be at is at or above the number that I mentioned for 2018. But for the most part, I think that the way we'll measure ourselves is really about the quality of the names that we will engage with and that we will be able to add to the ecosystem because they can really represent future business. So if you can get to a strategic demand creator, the ability to actually line up ecosystem than those that prefer the mix, the technology products, the sensors, et cetera, is much easier than if you go to a company that is not necessarily today a demand creator. So I think that our focus will be both on quantity, but also very much on the quality and what these potential customers can represent to us from a future business perspective. So I hope that I answered your question.

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

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No, you did. And I appreciate the quality factor. You're not just kind of a numbers game, and that did help, for sure. And then also switching over to China, the smartphone side or maybe just smartphones in general, more so than kind of the wins you're getting, just what is the attach rate of voice UI? Is it always on voice? Is it kind of a niche feature now? Is it becoming mainstream? And if it's not in the S-curve and sort of adoption, what is preventing people from putting it on the phone in greater attach rates?

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

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Yes. Thanks, Suji. So on the smartphone domain and maybe to more kind of a generic description of the market, so we were talking about devices kind of with high volume, devices that are battery operated that include speaker microphone that would like to embrace Voice User Interface. So I believe that the market is there, and I think that smartphone vendors today are trying to find more ways to be attractive, to be different, to do something special for the users. And I think that Voice User Interface is definitely on that list. What I think smartphone vendors have to be convinced is that people are actually using and liking the usage of Voice User Interface, and they believe that the quality is good enough to drive more and more voice command and capabilities. I think that the Tier 1 guys in the market are definitely seeing that. And we do see more and more statistics suggesting that people are using their phones and personal devices more and more via voice. And so I think that also in the China market, you need more companies to jump in and make sure that what they offer, the entire package is really attractive and people will really use it also from a kind of cultural perspective. So I don't think that there's anything that is holding the market back. It's just kind of much more about really coming with the right concepts. And I do hope that in 2019, we'll see plenty of such launches in the market. And we definitely see and feel the interest. We definitely see the traction. So I do hope that we'll also see that in many more products. Another point to mention in and highlight which you maybe did not -- was not so visible in our prepared comment, it was also the market for some additional high-volume, battery-operated devices such as the TV or the remote control. We're going to see that as another play -- a very important play for us in the coming year or 2. So we believe that this is also coming up as one of kind of key market domain that we'll focus on. If last year it was around the development of a farfield or nearfield solution for tablets and kind of personal computers, I think now it's also this type of hands-free, battery-operated devices that are necessary. Either it's on the TV or inside a remote control unit, both will require very low power consumption due to a sort of regulation, one on the battery, the other one on regulation.

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Operator [24]

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And your next question comes from the line of Ari Shusterman from New Hammond.

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Ari Shusterman, Needham & Company, LLC, Research Division - Analyst [25]

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This is Ari talking on behalf of Raji Gill from Needham & Company. So my question is you began mass shipments of your SmartVoice products to a Tier 1 Chinese smartphone OEM. And can you give a bit more color on how China softness in mobile potentially affects these shipments as well as international markets besides China that you're considering penetrating within SmartVoice?

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [26]

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Yes. Ari, thank you very much. So your question, so the first part was more on kind of China smartphone. I think that what we've said is that we see general softness in 2018, and I think it's also true for 2019 in smartphone unit volumes. And I think especially now, following a lot of the uncertainties around kind of the trade war between China and the U.S., the fact that manufacturing is growing at a certain pace offshore and out of China, taking all of that and kind of the entire macro activity points out to probably a weakening consumer market in China. And I think for the most part, we definitely see that in the smartphone area in China. We -- it's also, I think, coupled -- because of the macro situation, it's also coupled with fairly limited visibility. So it's kind of very hard to see kind of beyond to date Q1. We hope that this environment will transition, and we'll get to see a lot more visibility and also a recovery in the unit volume. But all in all, we're definitely excited from our win and the amount of business that it will add to our SmartVoice revenues, and we believe that this is an excellent start to penetrate more models with that OEM as well as potentially with other OEMs. Now to the other part of your question, which was the other market that we're addressing today in SmartVoice, I believe it is more about geographic markets. So I would say the primary market that we're focused on today beyond China and, of course, Korea is the U.S. And U.S. was the largest opportunity with kind of the world's most innovative companies. And we believe that there's a great match between our portfolio of Voice User Interface, DSPs and also our new AI processors for edge devices, there's a great feat between that and what kind of some of the U.S. platform and leading OEMs are looking for. And we are, today, investing a lot in our sales and marketing side in the U.S. in order to make sure that this potential will be materialized over the next couple of years.

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Ari Shusterman, Needham & Company, LLC, Research Division - Analyst [27]

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Okay. And just a quick follow-up, a bit of a pivot to gross margin. Some case of further macroeconomic deterioration and continued softness and the line where you're currently seeing softness in, how do you expect your long-term gross margins to hold on?

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Ofer Elyakim, DSP Group, Inc. - CEO & Director [28]

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So I think that our long-term gross margin model does not change. I believe that as you saw in the fourth quarter, if revenues go down to like a certain level, the fixed part of the cost of good definitely starts impacting the level of total gross margin. But I think that's from a direct contribution. We don't see any real change. Looking into the future with respect to the level of gross margins, I believe that we still stay at the levels that we discussed, that we want to be at the levels of 50%. And I think that this is still where we should be even in kind of more challenging kind of market situations.

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Operator [29]

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And we don't have any further questions at this time. Please continue.

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Tali Chen, DSP Group, Inc. - CMO [30]

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Thank you for participating. We look forward to report to you in 90 days.

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Operator [31]

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Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect.