DSP Group, Inc. (DSPG) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the DSP Group First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. . Please be advised that today’s conference is being recorded. . I would now like to hand the conference over to your first speaker today, Tali Chen, Chief Business Officer. Please go ahead.
Tali Chen: Thank you, Heidi. Good morning ladies and gentlemen. I'm Tali Chen, Chief Business Officer at DSP Group. Welcome to our first quarter 2021 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.
Ofer Elyakim: Thank you Tali. Good morning everyone and thanks for joining us today. I hope that you have the opportunity to read our press release which we distributed earlier this morning. I would like to begin this call by reviewing the highlights of the first quarter and provide context for our outlook. In a short while Tali will provide you with an update on the progression of our business plan followed by Dror who will discuss our financial results for the first quarter and provide our projections for the second quarter. We are excited with our financial performance for the first quarter of 2021. We succeeded our guidance on most financial metrics. We ended the quarter with revenues of $32.6 million above the midpoint of our guidance range. First quarter revenues grew by 16% year-over-year and by 2% sequentially. These strong results were driven by exceptional demand for voice centric products across our different product categories. And in particular robust demand in our IoAT businesses, which delivered despite supply shortages, record high revenues reaching $20.8 million representing 64% of total revenues. IoAT revenues grew by 14% year-over-year and by 16% sequentially. During the first quarter we continued to make solid progress executing on the key drivers of our business that should be the centerpiece of our continued success in the quarters and years ahead. The digitalization of everything markedly accelerated by the pandemic has stimulated innovation while creating new models for work, education, and interaction. This trend highlights the strategic importance and long-term value DSP Group's audio, voice, and connectivity technologies. By leveraging on our core competence and expertise we have developed a world class technology portfolio that is uniquely positioned to play a pivotal role in three market verticals, namely Unified Communication, SmartVoice and SmartHome. In Unified Communication during the past year, two major trends have emerged. These are essential to sustain business continuity and enhance workplace productivity in the enterprise. The first is work from home and the second is virtual collaboration. These two trends show no signs of losing momentum, even as businesses gradually transition back to the office. Both trends are promising catalysts for stimulating the future growth of our UC franchise.
Tali Chen: Thank you Ofer. I would like to begin by providing you with an update on our SmartVoice business. During the quarter, we generated revenues of approximately $6 million from sales of SmartVoice products, reflecting a year-over-year increase of 50% and a sequential increase of 19%. These results were fueled by an increased demand for devices incorporating voice user interfaces, underscoring a shifting in consumer preference in favor of voice based interfaces. We expect this momentum to accelerate with the adoption of more EdgeAI capabilities that further enhance the user experience by allowing greater flexibility, accuracy, and reliability. DSP Group is playing an instrumental role in addressing these needs with our SmartVoice portfolio and our EdgeAI suite of algorithms, which together are already powering a broad array of applications and products. Moreover, during the quarter, we continue to expand our product reach and engagement with leading consumer electronic brands, as demonstrated by the following achievements. In the entertainment domain, a leading TV and monitor manufacturer shows our SmartVoice solution for smart display offering for robust and flawless far field, voice control and activation that allows the system to detect and respond to users issuing commands from across the room. In the Tablet PC market, there's a record activity in the design and innovation of products leveraging our SmartVoice solutions to deliver natural, robust, and high quality far field voice activation with two-way voice capabilities. During the quarter, Lenovo and TCL launched new tablet models, leveraging our solutions, supporting Google's hotword. This achievement, coupled with the strong momentum in voice user interface and EdgeAI positioned our SmartVoice franchise as a pivotal growth driver in developing a broad array of exciting new applications. Moving on to the Unified Communications segment. In the first quarter we generated revenues of $10 million representing a year-over-year decrease of 3%, and a sequential increase of 21%. We are excited about the faster than expected market recovery which began in Q4 2020 following the sudden shift towards work from home. The market revival is propelled by two underlying trends. The first one is the comeback of the meeting room and gradual return to office spaces. As businesses and educational institutes prepare for their return to in-person interactions, meaningful technology investments should follow to accommodate on prem space to better cope with new hybrid working and learning models, which rely heavily on video conferencing and other collaboration tools to connect with remote employees and geographically dispersed teams. In parallel post pandemic IDC estimates that the number of remote employees will double from 2019. These employees are likely to go into the office only two or three days a week and within the next 6 to 10 months a true hybrid workforce should emerge. As such creating a seamless digital parity is crucial, particularly with respect to voice and video quality, ensuring that remote and work from home employees have the same set of connectivity and productivity tools as their in office counterparts.
Dror Levy: Thank you, Tali. I will now review the income statement for the first quarter of 2021 from top to bottom. For each line item I will provide the 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 first quarter of 2021 were 32.6 million. Gross margin for the quarter was 52%. Gross margin for the quarter included equity based compensation expenses in the amount of $0.1 million and amortization of intangible assets related to SoundChip acquisition is the amount of $0.1 million. R&D expenses were $10.5 million, including $1.2 million of equity based compensation expenses and amortization expenses related to the acquisition. Operating expenses for the quarter were $18.8 million, including equity based compensation expenses in the amount of $2.4 million and amortization expenses related to acquisitions in the amount of $0.6 million. Operating expenses on a pro forma basis, excluding these items mentioned above, were $15.8 million. Financial income for the quarter was $0.6 million. Financial income for the quarter included $0.4 million of exchange rate differences related to accounting standards related to long-term leases. These exchange rate differences were excluded from our pro forma basis, and the financial income on a non-GAAP basis was $0.2 million. Income tax for the quarter was $0.2 million. Income tax for the quarter included benefit from deferred taxes related to intangible assets of equity based compensation in the amount of $0.1 million. The U.S. GAAP net loss was $1.3 million, including equity based compensation expenses of $2.5 million, amortization expenses related to previous acquisition of $0.7 million, income from exchange rate differences in the amount of $0.4 million, and tax benefits related to deferred taxes in the amount of $0.1 million. The non-GAAP net income excluding these items was $1.3 million for the quarter. GAAP loss per share for the quarter was $0.06. The negative impact of equity based compensation on EPS was timeframe. The negative impact of the amortization of acquired intangible assets will present the positive income of the generic differences on VPS was $0.02. Non-GAAP diluted income per share, excluding items as described was $0.05 for the quarter. The list is casual report on FORM-8K with fabulization activity this morning, for a full reconciliation of the non-GAAP presentation to the GAAP presentation.
Operator: Thank you. . Your first question comes from the line of Jaeson Smith from Lake Street. Please ask your question.
Jaeson Schmidt : Hey guys, thanks for taking my questions. Just want to start if you saw any supply constraints in Q1 and then if you're baking in to see any sort of headwinds from those constraints here in Q2?
Ofer Elyakim: Hi, Jason. So with regards to supply chain constraints, so as we did report last time and this time, there are definitely supply chain constraints, we do see a lot of difficulty to supply and serve the demand that we're seeing. So demand is robust, but it is somewhat effected by our ability to deliver products. We do have a very strong backlog, but unable to deliver all of it. So we continue to see that. We did see that in the first quarter. We are continuing to experience that in the second quarter. And for now, it does feel that for the time being, these supply chain constraints that are coming from -- a foundry side as well as an assembly testing area will remain with us at least till the end of the second quarter.
Jaeson Schmidt : Okay, that's helpful. And then just looking at the SmartVoice segment. Sorry about your EdgeAI suite becomes a bigger part of the portfolio. How should we think about that impact on pricing, is that really just going to offset traditional ASP or will you guys be able to see sort of a lift to overall pricing within that segment?
Ofer Elyakim: I think that the latter is probably the right way to model it. So I think that with the adoption of our suite of EdgeAI, both the silicon as well as the accompanying suite of algorithms, we will see a premium for basically content added to our average selling prices. We've already actually started selling and shipping such products to a tier one OEM in many of the U.S. market and are seeing definitely the benefit of the bundling, both EdgeAI software and hardware.
Jaeson Schmidt : Okay, I'll jump back into queue. Thanks a lot.
Ofer Elyakim: Thank you, Jaeson.
Operator: Thank you. Your next question comes from the line of Matt Ramsey from Cowen. Please ask your question.
Matthew Ramsay: Thank you very much. Good morning and good afternoon. Ofer, I wonder if you might talk a little bit about what you and the team are planning for seasonality into the back half of the year, given what's going on with COVID and all the supply chain issues, I don't know if there is anything, it is typical seasonality for anybody right now, but obviously a good bit of upside to your second quarter guidance, so congrats for that, I just wanted to see about how you're thinking in the different business segments of that continuing into the second half of the year or if there's any sort of onetime pops in the second quarter numbers? Thanks.
Ofer Elyakim: Yes. So thank you Matt for the question. So with respect to the back half, what we can see today is that we have -- because of the backlog, because of everyone's aware about all of the supply chain constraints. And I think that we do see the difficulty to secure a components and also a chipset and anything related to the electronic arena. And so right now, the demand visibility is fairly robust. So customers are willing to provide a very long lead time, given the situation that we were in, which is really unprecedented from at least my point of view. What does remain a fairly blurry and uncertain is the amount of supply, and it does depend on how the industry will it trend in the back half of this year. Whether we will see an easement to that supply -- the severe supply chain closure that we started seeing in the first quarter and also during the second quarter -- we continue to see and experience in the second quarter or will we see some sort of an easement and a gradual return to normality. You know, I can tell you from conversations with some of the supply chain vendors, they do see that the constraints continuing into the back half. But I do hope that there is some easements that we'll be seeing. From a demand standpoint, as I said, the supply right now is uncertain so I cannot really comment about how the back half would look like. But from a demand standpoint, we continue to see fairly robust trends with the product lines continuing to accelerate in terms of growth. So we are very excited about the trends that we're seeing. But of course, a lot of it will depend on our ability to secure capacity to deliver based on this demand pattern that we see. Everything that we've provided in the prepared comments it can tell you that we feel it is very good in this environment. We believe that our penetration into the security market in the SmartHome segment is delivering for us a fresh, a greenfield for growth. We see the addition of EdgeAI, NNC, and also our new investment to further proliferate our capabilities in the SmartVoice space and the ability to address more in adjacent markets, as well as extend the content that we're selling. And I think that the same is also true for the Unified Communications segment, which, just hit the trough in the third quarter of last year and you can see the level of gradual improvement. And we believe that also this continues into the back half. But as I said a lot of what we again at the date be able to report does depend on our ability to fulfill this demand through our supply chain partners.
Matthew Ramsay: I appreciate all the color there. Dror, just a quick one and I'll jump back in the queue. With all the supply chain challenges that folks are facing, different companies have, I guess, given different commentary about input costs going up and their ability to pass those costs or portions of those costs on to customers through increased pricing and things like that. How are you thinking about, is that a material thing for you guys and over the next couple of quarters does it have an impact on gross margin? Thanks.
Dror Levy: So thanks for the question. So in a way, the guidance that we provided in the forecast for the second quarter already takes this into account. And also our results for the first quarter, as you saw the record, the gross margin, also took into account the fact that we did like all the industry had to face some price increases from our supply chain. I think that what happens in our case is that the mix, and the change in the mix towards more new products, more products that are coming with higher gross margins, basically helps us to compensate for that. So the average price in our case increases because we are selling like more content and products that are more innovative. And this basically enables us to keep and even improve the margins in this tough environment.
Matthew Ramsay: Thanks, guys appreciate it.
Operator: . Your next question comes from the line of Suji Desilva from ROTH Capital. Please ask your question.
Suji Desilva: Hi Ofer, hi Dror and Tali. Congratulations on the progress here. The SmartVoice segment I was curious, I don't know non-smartphone has been growing in the mix. Curious where that is, and specifically how the notebook market may be an opportunity for you guys at the merging with remote work and all and then headsets, any update there as well?
Ofer Elyakim: Yeah, so hi Suji and thanks for the question. So with respect to the composition of the SmartVoice revenues, the contribution of mobile is fairly small. So most of the vast majority 90% of the numbers are coming from the diversification as well. And as we said, screen products meaning tablets and going into hopefully the PC market is definitely an opportunity as I think we reported to you guys during the last couple of quarters, the tablet market, which has become a more important piece for collaboration for having Zoom, WebEx, Team Scope has gained a lot of momentum both incorporating a voice call capabilities, as well as incorporating some more advanced capabilities. Moreover, the design cycles in the tablet business, especially the Google based type of tablets is fairly short compared to the PC cycle and the non let's say Android tablet type of cycle. So that enables us to see the design momentum as well as also generate the results and that has been a very strong growth driver. I believe that the PC, the notebook area does represent a very nice opportunity for us. And I do believe that we're going to see a major change in the notebook market going forward. These notebooks do have a set of the microphones, the camera, but this was just basically to check the box on the ability to do video conferencing, but I think that the way in which everyone is working today does require much more advanced cameras as well as his voice capabilities. For us it means a lot more algorithms, a more advanced algorithms that we basically support, a great productivity, the ability to have many speakers attending from the same PC if necessary. And just to make the experience less fatiguing and much more flexible and reliable and so we do see a big transformation there. And also in the world of the accessories that we basically compliment at such calls from cameras is that basically we'll have a better AI vision enabled accompanied with a lot of audio and voice AI capabilities to support and provide voice as well as video as we said a collaboration call can continue and go on peacefully and perfectly even if the video is frozen. But you cannot handle it when the voice is choppy or where you don't really hear the speakers well, or, let's say noise is being injected into the conference. And so we believe that also in the accessory market, we will see many new hardware that will be designed and already we announced a couple of these just this quarter. On the headset market, we continue to see very strong momentum, both on A&C a type of asset as well as non-A&C type of assets, both for the personal meaning consumer grade, as well as for call center and enterprise grade. We believe that we're bringing very strong capabilities, a best in class voice call performance, as well as excellent ambient noise cancellation capabilities. And also building a lot of AI algorithms to complement that and enable more advanced features to really support best in class collaboration capabilities across, let's say, a household at domestic environment.
Suji Desilva: Okay, and thanks for all that detailed color, for sure. And then a follow-up, curious on the German lab announcement and specifically the automotive market, what is the landscape today in terms of microphones or audio if there are any and who are the players and what is -- how do you see your opportunity forming in the auto market, it could be a very exciting time, but just curious how it develops?
Ofer Elyakim: Yes, so I think that today there are several silicon vendors that are supplying silicon mainly either application processors or DSPs to this market. There is another layer of software vendors that are supplying algorithms. Some of it is vertically integrated inside the tier ones and some of it comes from like, specific type of algorithm and software vendors. And so the way we're looking at it is both from an angle of the software and the algo front as well as from the silicon front meaning being able to sell and qualify our silicon. And right now we're in a way utilizing this new capability to transform and in a way kind of migrate a lot of what we have done in the enterprise conferencing far field side, dealing with a lot of noise suppression into the automotive arena, which has a similar characteristic as well as some fairly different requirements. And what we need to do is in a way, be able to make such a transition and adaptation to our algorithms so that we can support that whether it comes from the more deterministic type of algorithms that we have, or whether it comes much more from the AI side. So all of that is in the plan. I think it's very exciting and going to be a great journey and we're very happy with the new way -- talent that we recently acquired and believe we're at the right place at the right time.
Suji Desilva: Thanks. Congratulations again.
Ofer Elyakim: Thank you.
Operator: Thank you. Your next question comes from the line of Denis Pyatchanin from Needham and Company. Please ask your question.
Denis Pyatchanin: Hi guys, just wanted to ask a question here up for Raji Gil. So with regards to growth drivers for the VoIP and kind of viewer lead technologies, what are you guys kind of seeing, can you add some color about what we can expect and what will be driving the growth down the line?
Dror Levy: Yes, absolutely. So maybe we still start with the small ULE drivers. Today we have in a way penetrated to several SmartHome end market and designs and mainly a European large service provider as well as several consumer type of systems. On the security front we're already with a much larger presence in terms of the design pipeline. Also the technology seems to build an unparalleled fit for the needs and the requirements that are coming from this industry. What we are seeing is that this is a changing market landscape that is a basically requiring us to complement not just provide connectivity solution, but in a way complement that with a lot of the smart voice and other capabilities that we're designing. And so I think that our offering for that market, for the SmartHome market, or IoT markets will basically include not just the DECT ULE as the best in class connectivity, but also we will be able to extend our content by also delivering the SmartVoice solutions, AI sensing, a smart processing, and then a combined with the connectivity to deliver a real IoT type of element into the network. So sensing, processing, as well as communication. We're also now looking at the next generations of ULE capabilities with respect to addressing a lot of the developing a standout and the requirements of this domain. So these are all in our pipeline and in our roadmap of activities for the next couple of years. On the Unified Communication, or VoIP space, as we discussed we see in a way different yet converging trends. One is the work from home that we believe will continue to exist in a major way in future years as the workplace becomes more hybrid than it used to be. That means that everyone we need to have the same set of tools or the same capabilities to be able to conduct his or her work. Whether they're in the office or at home. And that means investment in infrastructure, in better software and algorithms, and also in more hardware. On the enterprise part or on the on prem part, last year we saw a complete in a way it transition or this location of the IP budget away from the on prem side, as people were not really attending work and most of the work was done from the home. In 2021, I believe that we're starting to see the return of those IT investments in order to create a workplace, an on prem workplace that could meet the needs of the hybrid working environment. That means, a lot of the meetings will have both participants that are sitting in the same room as well as other counterparts that are participating from home. And that means a lot more collaboration capabilities will have to be installed in more conference rooms and that means both software as well as how the investments that we believe are great catalysts to extend and continue the growth of our franchise. I think that from our customers we continue to see that even on the traditional side our customers are continuing to invest and bring to market new hardware meaning to refresh and engage in new designs for more advanced hardware that really fits the change that has happened to the workplace and the need to have a more hybrid capabilities. So devices that can be installed both at home as well as in the office, devices that can support a collaboration in very good productivity inside meeting and conference rooms. And so I think that we do see that market continuing to on one end recover from the trough that we saw in Q3, and we definitely saw those in Q4. Now in Q1 and also based on the comments that we provide, I think this is also the expectation for the second quarter, as well as continue to grow as a result of these very changing needs of the professional market. So I hope that answers your question, Denis.
Denis Pyatchanin: Yeah, absolutely. That was definitely a great amount of color. And then for my follow-up, I'm looking to hear, looks like your gross margins are definitely holding up pretty well lately, can you talk a little bit about what the driving the gross margins and if we can maybe expect them to kind of persist at this level?
Ofer Elyakim: It's actually said I think for a fairly long period of time, that we are now in the low 50s range. And we believe and from our long-term or I would say even mid-term model, we believe that our gross margins can expand well into the mid-50s. And the main catalyst for that, and I think you can see that a fairly deterministically is the mix, the mix of our products. So we feel the more legacy traditional side of our business is bringing to the table a lower gross margins than our corporate average, the IoAT businesses, and especially some of the new technologies are adding is really nice and much higher margins than the corporate average and all of that in a way benefits once the mix is more favorably skewed towards the IoAT products. We do definitely see a margin expansion playing out and so we do believe then also based on the Q2 guide, you can see that we do believe that we can sustain these levels and perhaps maybe even do a better, especially in the next couple of years.
Denis Pyatchanin: Great, thank you very much. Operator Your next question comes from the line of Derek Soderberg from Colliers Securities, please ask your question.
Derek Soderberg: Hi everyone, thanks for taking my questions. Ofer, just in terms of engagements, PC sound strong. Can you remind me maybe relative to a year ago, what your PC business looked like in terms of number of products there and how that's maybe changed over the last year? And, how do you feel about that business as we look to the back half of the year and potentially beyond, do you think we're sort of seeing a new normal in PCs demanding advanced audio, anything like that? Then I have a follow up.
Ofer Elyakim: Sure, hi Derek, and thanks for joining and for the question. So with respect to the PC market, so in a way we categorize it via tablet and PC market as one application segment inside our SmartVoice revenues. And so far, the main driver of the growth in this application were these tablets, coming from some of the very larger OEMs that are in a way shipping an Android based tablet. And this has been the majority of our revenues and I think that when we look ahead especially, following what has happened in the different requirements from the notebook computer, we definitely see that the need to address better collaboration capabilities, and but voices or interface capabilities are definitely in need in the notebook, PC market. And we do hope that we will play an active role in this market as weapon, this is definitely a plan from the point of view of the engagement pipeline, but not yet in revenue. We definitely look forward to see that translating also into revenues from evaluation, technical evaluation to design and then into a mass shipment.
Derek Soderberg: Got it, got it. And then just on demand trends, I wonder if you have maybe a sense for consumption rates, given guidance of pretty nice sequential growth, is the market consuming at this rate, do you have any sense of there's double ordering or anything like that? Thanks.
Ofer Elyakim: Yes, hi Derek, thanks for the second question. So, with respect to the consumption, from the channel checks that we can conduct, we do see that in many of our categories, the demand is coming from new customers. So, these are customers that are only now ramping up. So I do believe that this definitely has to do with the ability -- with the end market consumption capabilities, and with the way our customers are ramping up these new products. In other cases where market -- where these designs or these customers have more ways, we have a lot more history, we are doing certain channel checks, and so far, we have not yet seen a major buildup of the inventory. We are also surveying some of these in end markets, and definitely do see that the trend line does mimic the consumption, the sell-out data, whether this is coming from more professional business or the consumer businesses. So, so far we do not have indications of a major accumulation of stocks. Now, I can definitely say that these are fairly unprecedented times from the point of view of the supply chain and the fact that, we're here talking about great visibility from the demand standpoint. However, a fairly blurred visibility from the supply side. And so, that could mean that in many cases companies are looking to build some level of cushions. From all the other color that we're getting from customers, we do see that many of them are increasing by their inventory base on hand, just in order to be able to allow for a much smoother supply chain and the ability to be back in terms of being able to supply to their customers with some sort of a standard lead time, and not fairly extended lead times. Today we see that it takes our customers much longer to supply their orders and so that means their supply gets much longer lead time. We're supplying it much longer lead times. So, at the moment, we do not see like big pockets of inventory. And you know, we believe that right now, the situation is healthy. This is at least from my -- where we sit in the supply chain, this is what we can do.
Derek Soderberg: Great, thanks.
Operator: Thank you. There seems to be no further questions. So I will hand it back to Tali Chen.
Tali Chen: Thank you, Heidi. I would like to mention that during the coming months, we are scheduled to present at the following investor conferences. Virtual Needham Tech and Media Conference on May 18th, Cohen Annual Technology Media and Telecom Conference on June 1, and Ross we tried London conference on June 21st. Thank you for listening in and for your interest in DSP group and we look forward to report back to you in 90 days.
Operator: This concludes today's conference call. Thank you for participating. You may disconnect,
