DSPG
#Good morning, ladies and gentlemen.
I am <UNK> <UNK>, Chief Financial Officer of DSP Group.
Welcome to our first-quarter 2016 earnings conference call.
On today's call, we also have with us Mr.
<UNK> <UNK>, Chief Executive Officer.
Before we begin, I would like to remind you that during this conference call, we will be making forward-looking statements about our financial projections for the second quarter of 2016, including by segment and full-year 2016 anticipated (inaudible) business, anticipated gross margin improvements, our ability to secure additional design wins, mass production timetables, optimism about our ULE and SparkPA technologies and general market demand for products that incorporate our technologies in the market.
We assume no obligations to update these forward-looking statements.
For more information about the risks and uncertainties that could affect these forward-looking statements made, please refer to the risk factors discussed in our 2016 Form 10-K and other SEC reports that we filed.
Now I would like to turn the call over to <UNK> <UNK>, our Chief Executive Officer.
<UNK>, the floor is yours.
Hi, <UNK>, and thank you very much for the question.
Regarding mobile, though, as we did see the revenues for this quarter ---+ they were ahead of what we had expected of $2 million to $3 million and came in closer to $4 million.
And also, as you've indicated, the guidance suggests sequential growth.
What we can say is that we don't really have a very clear picture about ---+ as to how the year will shape up.
A lot of it really depends on kind of the real demand in the market and how exactly that would translate to the quarterly demand for our product.
So right now, yes, we do see that already first half is kind of the high single digits.
And perhaps, you know, kind of low teens today is kind of more of a target, given that we still have six months to go beyond in the first half.
But I would say that right now we don't really have a very kind of clear goal.
I would say that probably right now kind of low teens should be kind of the new target for the year.
Yes, sure.
As the ---+ we have said in our prepared comments, the cordless business did suffer a fairly deep downturn during the first quarter as a result of both some weakness in the ad market; and, on top of that, this inventory correction cycle that basically impacted both our US or DECT 6.0 revenues and also the DECT Europe and rest of the world part.
As we go into the second quarter, we start to see that this correction is coming to its tail end.
And we can see that ---+ and we are expecting a sequential improvement.
Regarding the visibility, our visibility as not changed.
It remains fairly limited.
I would say that we see about eight weeks ahead.
So basically we still see a ---+ up to, let's say, end of May, this end of May/early June at this point of time.
And this would be kind of, let's say, our visibility.
So for sure, we don't, like, today have the visibility into the end of the second quarter, not to mention anything about the second half.
You know, we do have from time to time some share shifts that are happening in our favor, and sometimes not.
And this year we believe and we hope that this will be in our favor.
So right now we don't have the visibility, but we do believe that such an inventory cycle, which is creating such weak environment for the chipset vendors like ourselves ---+ it's doesn't happen more than, I would say, once a year.
And typically, you take a longer spectrum, it happens every once in six quarters, six, seven quarters.
And so we do believe that during this year and going forward, we should be more exposed to the general market demand.
And we do think that this is a declining category of about 10% to 15% a year.
And I would say that we would want to see our kind of back half be more related to that, and right now we don't.
We believe that as the inventory depletion cycle is over, perhaps we should see some replenishment.
But all in all, we should kind of stay with figures and trend lines that are kind of more resembling the market trend.
So for the remainder of the year, we should not expect operating expenses to grow.
So the level that we have in the second quarter should be ---+ what we had in the first and the second should also be aligned with what we should see for the remainder of the year.
Yes, sure.
Thank you, <UNK>.
And on home gateways, what we did see ---+ we had a extraordinary successful first half last year, with $4.8 million in the first quarter, and then $4.2 million in the second quarter, and then a ---+ to a low of about $2.3 million in the third quarter.
And from that, it started to gradually grow.
But as we said, the change in the quarterly run rate had to do with new home gateway product launches.
And right now we expect ---+ we are expecting the three new product launches to take place in the back half, meaning in the second half of this year.
And with that, I believe it's like we will see a change or kind of a break from this kind of level of $2 million, $2.5 million.
And this is indeed also kind of roughly the number that we expect in the second quarter of 2016.
What we have found is that the operators, when they launch ---+ and we are not selling directly to the service providers or operators; we're actually selling to the ODMs or the EMSs that get engaged ---+ there seems to be quite a big buildup of inventory in order to facilitate the demand that is necessary for the product launch.
And thereafter the inventory gets depleted and the quantities are lower.
All in all, we look at the home gateway category as a growth driver for us ---+ as a category that should grow by about 15% to 20% a year.
This is a kind of long-term view.
We have been able to get this year a number of very lucrative wins, including the North American service provider that is expected to launch at the end of the third quarter a major product.
And to date this is ---+ this should be our biggest design win ever in the home gateway side.
And also two other Europeans bellwethers that are supposed to launch successful models in which we hope to have a much higher market share.
And also complementing that with the design win that we announced today from another kind of Tier 1 service provider in Europe that, for the first time, integrates our DECT in its home gateway.
So all in all, the dynamics are good.
What we need to see in order to break from them the $2.5 million run rate is a new launch.
It rather depends on the operator.
We have seen both cases.
For sure there is more of a kind of stacking in front of the launch, and then kind of gradual depletion kind of six months later.
But I would say that today, kind of I would say these run rates as we see today in a way kind of represent kind of the current need on the back of some excess inventory that perhaps is somewhere in the food chain.
As you can understand, we are very far away from understanding what kind of like quantities the operators or their suppliers are sitting on.
So the North American ---+ this is the first time in which DECT is integrated into the home gateway.
And we do hope that following that launch, there will be a way to see more and more service providers, both on the cable side as well as on the telco side, embrace DECT and high-definition voice.
Because I believe that it's going to be a very important and noteworthy launch.
And on the European side, two of the service providers that I've mentioned already carry DECT, but not necessarily just from DSP Group.
And hence we do expect here to see growth in our market share.
The third European service provider ---+ this is a new design.
It did not carry our DECT in the past, but it did carry DECT of a competitor in some of its models, not across the board.
Q1 revenues were all based on existing customers.
These were customers that we were shipping product to in the second half of 2016.
So I would say Q1 still does not include the additional Tier 1 OEMs that are supposed to launch products during the second half of ---+ sorry, the second quarter and the third quarter of this year.
So we expect one already to start shipping late in the second quarter, and the second Tier 1 late in the third quarter.
So then we should see an increase in the voice-over-IP revenue run rate.
Yes, good question.
So what we had said, and kind of our thought process, is for the IoT category to generate revenues in the area of $5 million this year, I would say kind of with the stronger numbers in the second half, and I would say flattish in the second quarter.
Sure, thank you, <UNK>.
So the question was on kind of the mobile engagement side.
So today we are engaged both with the OEM that we are shipping to today, and it will address in more models as well as with other OEMs, both from the mobile side ---+ you know, smart with wearable, as well as in the IoT arena.
We are at various levels of engagement, mainly for a new product, the D4, which is being well received by the market.
And it does significantly improve the power consumption levels that are required for always-on voice functionality where, in a way, the microphone is becoming an intelligent microphone, with the ability to do processing and achieve all of that without changing or reducing the user experience from the battery.
So that is continuing.
We do expect that these engagements will translate to design wins.
And we try to be, I would say, kind of more stingy on the details on exactly how these engagements are going, just because we are fairly new to the domain.
So not necessarily the way we perceive the status is really kind of the objective way to see the status.
So we try to be kind of a little bit more reserved in our comments.
But I do expect that these engagements will translate to additional wins during this year, both from the existing OEM as well as with the other OEMs that we are today in various levels of engagement.
Yes, sure.
So on gross margins, as you saw, despite an absolute lower top line of $27.7 million, the non-GAAP gross margins did come in at 42.6.
And we believe that the gross margins could continue and expand.
And I think that this is also implied in our second-quarter guidance ---+ that we believe that margins should expand from here, and perhaps also we would see a sequential improvement in margins this year.
So all in all, we do expect margin expansion this year to take place.
And our long-term target is to be at the mid-40s range.
And so I think that this year, if all goes well and the product mix does stay in the way we are forecasting, gross margin should come very close to that ---+ to kind of the mid-40s.
And perhaps we will be able to continue and expand that in the next two years and get at kind of the mid-40s or, let's say, a little bit above that.
In the first quarter and in every quarter, we have a certain percentage of our cost of goods which is fixed.
And this is why I would say we did see that the first-quarter gross margins also implied in our prior forecast were kind of for a lower number.
Because, you know, on the lower revenue base we have a fixed cost of goods, which is in a way kind of taking kind of our margins lower.
And, of course, with a much higher revenue run rate, the fixed costs are a lower percent.
And hence this is why we believe that the run rates during this year of margins would be at the much higher rate than the first quarter.
<UNK>, thanks for the question regarding cordless visibility.
As I've said, our visibility is about 6 to 8 weeks.
So this is roughly kind of the level of visibility that we have.
And it unfortunately has not changed in the last three years.
The way we think about the market, and the way we measure, and from that kind of build what we believe is kind of the secular rate of decline is by looking at the sell-out figures, meaning kind of point-of-sale data, in the two biggest markets for these products, which includes the North America market.
And there are market research companies such as NPD that survey the North American market.
And in Europe, which is the other continent, there are other market research companies, like GfK, that they are surveying that end market.
And we do look at the trends ---+ both the monthly trends, the quarterly trends, the yearly trends to try and see what are the year to date, the ---+ any type of comparison to kind of better understand if there is a shift that is taking place.
What we can see is these markets, despite going through a secular decline, are still very much exposed to consumer confidence to the level of real estate activity.
There's a pretty good correlation with new home sales in both the Europe and the US.
And all of that is kind of driving the cyclical changes inside cordless.
And on top of that, of course, there are the supply chain inefficiencies.
And by that I mean, like, the excess inventory that from time to time is kind of funnel of growth.
And then we go through these depletion and replenishment cycles.
So this is kind of how we look at the domain.
And if we look at the calendar year 2015, what we saw is that the US market was down by about ---+ I would say kind of the ---+ around 13% down.
So 13% ---+ minus 13% down.
While Europe was down by about 8%, 8% to 9%.
So all in all it was kind of low teens together.
For this year, we will continue and survey the market.
Where there was a pretty, I'd say, disappointing fourth quarter in the US in 2015, and a better start this year.
But of course this is a very dynamic marketplace, so hence I don't think that the amount of months that we have today are indicative of any change.
But we are going to continue, and then ---+ so for now, as we said, we believe that that the current kind of secular decline rate that we are taking into our numbers is between 10% and 15%.
As we have indicated, we have today a running engagement with additional OEMs and for additional products.
I did just say as an answer to one of the questions that were asked earlier that we are kind of a little bit more stingy on exactly what the design win means and when we get there, just because we are kind of newer to this domain.
We are not kind of the main SOC, as we are in all of the other product categories that we are in.
And so it is kind of for us harder to say what is the real status of the design.
And I would say that after we kind of finish our first year of being an active vendor in the domain, I think that, you know our ability to sell one design from the other will improve, and hopefully we'll be able to give bit more detail.
But as I have said, we are today engaged with the number of OEMs on a number of products.
The revenues that we've seen in the first quarter and also the second quarter are coming from this one OEM customer that we are shipping products to.
But we do hope that we will expand the number of OEMs and also the number of products gradually throughout this year.
Thank you all for your participation.
We look forward to reporting again.
Thank you.
