DSP Group, Inc. (DSPG) on Q2 2021 Results - Earnings Call Transcript
Company Representatives: Ofer Elyakim - Chief Executive Officer Dror Levy - Chief Financial Officer Tali Chen - Chief Business Officer
Operator: Ladies and gentlemen, thank you for standing by and welcome to today’s Q2, 2021 DSP Group 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. . I must advise you that this conference is being recorded today and I would now like to hand the conference over to your first speaker, Tali Chen, Chief Business Officer. Please go ahead.
Tali Chen: Thank you, Valarie. Good morning ladies and gentlemen. I'm Tali Chen, Chief Business Officer at DSP Group. Welcome to our second 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 had the opportunity to read our press release which we distributed earlier this morning. I'd like to begin this call by reviewing the highlights of the second quarter and to provide you context for our outlook. In a short while Tali will provide you with details on the progression of our business plan, followed by Dror who will discuss our financial results for the second quarter and our projections for the third quarter. To start, we are pleased with our outstanding second quarter results, posting a record quarter on virtually all fronts, exceeding our guidance on most financial metrics and successfully navigating the impact of substantial supply chain challenges. We ended the second quarter with revenues of $35.8 million at the high end of our guidance range, growing by 26% year-over-year and by 10% sequentially. These strong revenues were driven by rising demand for voice-centric products, resulting in record revenues for our IoAT businesses for the second consecutive quarter. In total, IoAT businesses generated almost $25 million. This translates to 35% growth year-over-year and 19% on a sequential basis, and accounts for 69% of second quarter revenues. The higher total revenues which contributed to a lower proportion of the fixed portion of our cost of goods sold combined with the record contribution from IoAT businesses propelled our non-GAAP gross margins to a record high of 54.1%. The global pandemic created new models of living, working and interacting, all of which are increasingly relying on voice-centric usage, which is in-turn stimulating record demand across all of our IoAT businesses.
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 $7.2 million from sales of SmartVoice products, reflecting the year-over-year increase of 82% and a sequential increase of 20%. These strong results match our highest SmartVoice quarter on record, and were driven by solid increased adoption of voice user interface and AI on the Edge across a wide range of applications. This increase underscores what we see as a market shift in consumer preference in favor of voice based interfaces. DSP Group is playing a key role in addressing this needs, with our SmartVoice portfolio and our EdgeAI suite of algorithms, which together are powering a broad array of applications and products, allowing greater flexibility, accuracy and reliability. Moreover, during the quarter we continue to expend and diversify our product reach and engagement with leading consumer electronic brands as demonstrated by the following achievement: In the entertainment domain, a Tier 1 platform company selected our SmartVoice solution for its TVAccessories and Tablet products to enable robust and flawless far field voice activation and control, as well as high quality to a voice interaction. These devices also support dual trigger word and include additional audio related features. A leading U.S. Consumer brand launched a wearable device that relies on our SmartVoice DSP solution to enable a more complete augmented reality experience. The solution also supports up to 40 local voice commands, in addition to cloud based trigger words. GoSund chose our SmartVoice solution to enable voice control in smart switch product. Voice has already made significant inroads into the smart home space, and the COVID pandemic accelerated its trend by transforming the use of voice in devices light switch or other commonly touch control surfaces, from an interesting feature into a necessity, in an effort to avoid contact spread and improve overall hygiene. This achievement, coupled with the strong momentum in voice user interface and EdgeAI as reflected by our pipeline of opportunities, position our SmartVoice franchise is a pivotal growth driver in our ability to enable a broad array of exciting new applications. Moving on to the Unified Communications segment. In the second quarter we generated revenues of $11.8 million, representing a year-over-year increase of 16% and a sequential increase of 19%, reflecting solid market demand and that was only partially met due to the supply constraints. Within the new hybrid environment businesses and employers around the globe had to renovate and adapt the office space to cope with the new challenges derived from an hybrid workforce. This triggered a hardware replacement cycle and purchases of additional devices that support employees at their home or virtual office, as well as the main office.
Dror Levy: Thank you, Tali. I will now review the income statement for the second quarter of 2021 from top to bottom. For each line item I will provide the year’s GAAP results, as well as equity based compensation expenses included in this line item and expenses related to previous acquisitions. Our revenues for the second quarter of 2021 were $35.8 million. Gross margin for the quarter was 53.4%. Gross margin for the quarter included equity based compensation expenses in the amount of $0.2 million and the amortization of intangible assets related to SoundChip acquisitions in the amount of $0.1 million. R&D expenses were $10.6 million, including $1.3 million of equity based compensation expenses and amortization expenses related to SoundChip acquisition. Operating expenses for the quarter were $19.5 million, including equity based compensation expense in the amount of $2.8 million and amortization expenses related to previous acquisitions in the amount of $0.7 million. Operating expenses on a non-GAAG basis including the items just mentioned were $16.1 million. Financial income for the quarter was $0.1 million. Financial income for the quarter included expenses of $0.2 million due to exchange rate differences related to accounting standards related to long term leases. These exchange rate differences were excluded from our non-GAAP results for the quarter. The financial income on a non-GAAP basis was $0.3 million. Income tax for the quarter was $0.1 million. Income tax for the quarter, included benefit from deferred tax changes related to intangible assets and equity based compensation expenses in the amount of $0.3 million. Net loss was $0.4 million, including equity base compensation expenses of $3 million, amortization expenses related to previous acquisition of $0.7 million, expenses of exchange differences in the amount of $0.2 million and tax benefit related to deferred taxes in the amount of $0.3 million. Non-GAAP net income excluding these items as just described was $3.2 million for the second quarter. GAAP loss per share for the quarter was $0.02. The negative impact of equity based compensation expenses on VPS was $0.12. The negative impact of amortization of acquired intangible assets on VPS was $0.02. The negative impact of exchange rate differences on VPS was $0.01 and the positive impact of the deferred taxes was $0.01. Non-GAAP diluted income per share excluding these items as just described were $0.12 for the quarter. Please see the current report on Form 8-K that we filed with the SEC this morning for a full reconsolidation of the non-GAAP presentation to the GAAP presentation. Now turning to the balance sheet. Accounts receivable at the end of the second quarter 2021 increased to $13.5 million, compared to $11.2 million at the end of the first quarter, representing a level of 34 days of sales. Inventory decreased from $7.9 million dollars as of the end of the first quarter to $6.4 million dollars representing a level of 35 days. Our cash and marketable securities increased by $0.9 million during the second quarter and were at the level of $129.9 million as of June 30. Our cash on hand with the security position during the quarter was affected by the following: $6.8 million of cash generated by operation. $0.3 million of cash was used for purchase of property and equipment. $5.2 million of cash used for repurchase of approximately 330,000 shares and $0.4 million of cash was a change in market price and amortization of marketable securities. Now, I will provide the projections for the third quarter of 2021. Our third quarter projections including the impact of equity based compensation expenses and acquisition related to amortization expenses are as follows: Revenues are expected to be in the range of $36 million to $39 million. We expect gross margin to be in the range of 53% and 54%. R&D expenses are expected to be in the range of $11 million to $12 million. Operating expenses are expected to be in the range of $19 million to $21 million. Financial income is expected to be in the range of $200,000 to $300,000. Taxes on income are expected to be approximately 15% of pretax income on new income basis and approximately $0.5 million on a U.S. GAAP basis. Shares outstanding on a diluted basis are expected to be approximately 26 million shares. Our third quarter projections include $0.4 million of amortization of intangible assets. Our third quarter projections also include the following amount focused at for equity based compensation expenses and intangible assets related to the previous acquisitions. Cost of goods include $22 million. R&D expenses include $1.1 million to $1.3 million. Sales and marketing expenses include $0.7 million to $0.9 million and G&A expenses include $0.6 million to $0.8 million. Now, we'd like to open up the line for questions-and-answers. Operator, please.
Operator: Thank you, sir. And your first question comes from the line of Matt Ramsey from Cowen. Please go ahead.
Matt Ramsey: Yes, thank you very much. Good morning, everybody. Ofer obviously really strong results in a challenging supply environment. If you could maybe help quantify for us some of the supply chain challenges, particularly in the cordless business, just a sense of the magnitude would be helpful. Thank you.
Ofer Elyakim: Hi Matt! Thanks for the question. So with respect to the supply chain challenges, so I think as most of you are familiar with what's going on in the industry in general and in our industry more specifically, we do see very strong demand in visibility, but supply solified pretty much across for us which sits in among the traditional technology nodes. The other thing today that challenge the supply environment in a number of our product lines, well this includes of course you’re question, cordless phone, but it doesn't end there also. Unified communication is constrained, as well as the SmartHome and in some portions also the SmartVoice. When we look at the overall imbalance between demand and supply, you can say that right now when you get the second quarter to third quarter, around 25% to 30% of demand is challenged by our inability today to supply it. So this is where it is currently. We do hope that you know the future will enable us to deliver more goods and the ability to serve our customers with more products, but all of that has caused you know the entire supply chain to increase lead times and we're working through that. So far I think this year successfully, but still not being able to meet the demand out there.
Matt Ramsey: Got it, got it, thanks for that. One of the things that piqued my interest on the call was, I think you announced sort of the main product line win for ULE with the home security vendor. I wonder if you might be able to elaborate on that a little bit. Is that a furthering engagement with ADT or you were in the DIY business before? Is it another service provider? And if it is, could you may be shed some light on which geography that's in? Thanks.
Ofer Elyakim: Yes, sure. So this is another security service provider. It's more of a global European part of – so far one of the top three worldwide and basically this design is in our products in ULE as the connectivity standards are to-date part of the main security gate that is launched around Europe and also in other geographies as well. So for us it does represent a pretty significant win. An endorsement for this – for ULE and it’s a fit within you know the main market players and I think that really opens up the door for many more service providers in the security domain, as well as their ecosystem partners as you know when there is a professional install and this is professional type of installed design win. It doesn't just come with the security product. It also comes with an ecosystem of other smart, well-being type of products and services. So it definitely opens up the market for more ULE adoptions and I think that we are very happy with that and as we discussed on this call and also on previous calls, it's a pipeline. So this is not the last one. So there are many additional such service providers in the pipeline that are going to launch products and new services based on what we believe is really the best-in-class as found out for – to meet their needs.
Matt Ramsey: Got it. Just a last quick one from me on drawer on gross margin. 54% is a heck of a milestone. I think since you guys have been working with my team over the last six or seven years, that's 15 points higher than I remember margins back in the day. So congratulations on that! It's quite an achievement. I wonder if you might give us just a little context if you think those kind of levels in the low to mid-50’s are sustainable from here. Thanks.
A - Dror Levy: Yes. So firstly, it's true the thing that you know which we recall and this is something that we have been discussing for a couple of years and now saying that basically we see and we will continue to see the correlation between the percentage of the growth what we used to call growth initiatives to then called the IoT’s. So this is something that we've been discussing for a couple of years now. That one, we will see the products pick up. We’ll also see like a correlation to the percentage of gross margin, because these products are like coming with higher margin, this is one thing. And the second thing is also related to I think the calling, like the percentage of the fixed cost. So once we grow revenues on an absolute basis, the percentage of the fixed costs by buying a budget, but the market decreases and this also pushed the gross margin to these level of low 50’s and yes definitely, we believe and if you look at our guidance for the third quarter, this is still like in this range of 53, 54 and we believe that we'll continue to see margins running in these levels.
Matt Ramsey: Thanks, I appreciate it.
Ofer Elyakim: Thanks.
Operator: Thank you. Your next question comes from the line of Jaeson Smith of Lake Street. Please go ahead.
Jaeson Smith: Hey guys! Thanks for taking my questions. I just want to follow-up on the supply chain. Just curious if you're seeing any programs or designs, maybe not getting officially canceled, but maybe getting pushed out and definitely just given the tightness out there?
Ofer Elyakim: Hi Jaeson, and thanks for the questions. So with respect to the supply chain, I think that at the moment, and again this is – at the moment we don't really know what the features hold, but you know customers are pretty much also our customers as well as their customers. They are pretty much appreciative of the ability to supply, even if it's delayed, you know I think everyone is trying to do the best which is thanks to transportation, with respect to you know applying all kinds of tools to expedite the goods and so far I think that there is patience and customers are appreciative of the efforts that are being made. It is true that you know based on the fact that demand does exceed the ability to supply. By diagnostic it does imply that you know certain customers or products are not being served as well as it should be. This is of course impacting, but at the moment I believe that the demand out there is fairly healthy and the need, this need for product is there and we hope that it remains. So for now I think that the – we believe that the end markets continue to stay healthy and products are being shipped and usually to the most of what we could check in terms of doing certain channel checks, the supply chain is fairly healthy.
Jaeson Smith: Okay, that's really helpful. And just curious if you're seeing anything significant from the inflationary pressure standpoint, and if so, if you're passing along those costs to customers?
Ofer Elyakim: I think it is no secret that with this tight supply chain and situation, costs have moved upwards. I think we see it in almost every aspect of our lives when we consume production services, but also we see that in certain parts of our supply chain. I think that what we tried to do is create a healthy balance between certain costs. That we have got certain costs that we must pass on, but I would say that it's a healthy balance between the two.
Jaeson Smith: Okay, and then just the last one from me and I'll jump back into queue. Looking at that SmartVoice segment, you know it really is nice momentum. I think in the past you've sort of highlighted the PC and tablet market as being some of the near term drivers. Just curious as we look into the second half of this year, do you think those same end markets are really going to be the ones that propel this segment?
Ofer Elyakim: Yes, so I think that according to our expectations these mark-to-markets of PCs and tablets are going to be important players in the product mix of SmartVoice, as well as the entertainment segment, which I think we announced now, a number of products, and I think the third part to that puzzle will be on the wearable front. So I think these are the three main movers and growers with respect to the mix.
Jaeson Smith: Okay. Thanks a lot guys.
Ofer Elyakim: Thank you.
Operator: Thank you. Your next question comes from the line of Suji Desilva from ROTH Capital. Please go ahead.
Suji Desilva: Hi Ofer! Hi Dror, Tali, congratulations on the progress here. So just a quick question on the SmartVoice. As you talk about the EdgeAI capabilities which sound very compelling, what percent of the design wins your seeing now for SmartVoice are leveraging EdgeAI or is it really kind of all of the – it's a feature in the SmartVoice?
Ofer Elyakim: Hi Suji, and thanks for the question. So with respect to our SmartVoice portfolio, also with the older parts in the portfolio we were able to support EdgeAI processing. This was done in mainly utilizing the digital signal processing code, where we can run this type of machine learning classifiers, as well as a traditional type of algorithm. In some of our new products, we do have today dedicated, how to accelerate Total 1 in such products and then I think that you know most of the new designs are really based on such a capability, and some also are leveraging EdgeAI using some of the multi core DSP’s that we have, that really provides a lot of launch sheet memory together with you know pretty robust and capable and efficient multi core processor. So if you were to ask me about, let's say the revenue composition this year, probably over a third will run EdgeAI processing on our silicon.
Suji Desilva: Okay. That's helpful Ofer. And then, can you update us on the headset market and the design-in’s there, the opportunity, how that's tracking?
Ofer Elyakim: Yes, absolutely! So as a matter of fact, just now in the next coming days we are expecting another very important model of headsets to launch with our ANC and also EdgeAI capabilities and this is something that is a plan to launch as I said very soon. That will incorporate our hybrid best-in-class MC together with SmartVoice, Smart Processing and that is – that will be I think a fourth or fifth product that is being launched with our silicon.
Suji Desilva: Okay, look forward to that as well. And then last question from me on the Unified Communications front. Hey just – I mean the enterprise demand replacement cycle seems very strong. Can you talk about your visibility into the sustainability of that, and can you talk of Microsoft Windows 11 upgrade next year, coming as a Voice UI upgrade cycle option EP as well?
Ofer Elyakim: Suji thanks. I didn’t quite capture – the question was on the comments made on the Unified Communication, right?
Suji Desilva: Correct! Enterprise and then more broadly Microsoft Windows 11 as a driver for enterprise.
Ofer Elyakim: So at this console we're seeing in a way a number of drivers in the enterprise. One has to do with the traditional business where we see the need to support over-the-top content, so basically be fully open to a cloud-based platform, because this is what people have being using during the pandemic. It brought in a lot more capabilities, the need to be always connected and then collaborate, and that stays today as to work force gradually returns to the office, and I think that does bring a need to refresh and bring a lot more, how good that does support over the top capabilities. In addition, the fact that in a hybrid working environment, not all the team members are going to be joining decisions in person, some are going to be joining remotely. You need to accommodate a lot of the on-prem facilities to do so, that where a team can meet some in-person, some are joining over video and so that will necessitate the need to do a more upgrade in hardware. And I think the third is the emergence of new hardware and software products that are coming to facilitate mainly those, the professionals that are working from home or from anywhere that will need to equip themselves with better cameras, better speakers, better accessories, headsets etcetera, to be able to collaborate with the right quality and performance. And then, some of the platforms that have been emerging as fairly in wide use of platforms like Microsoft Teams and Zoom and WebEx and many other, where these over the top capabilities are also being complemented with dedicated hardware that can further facilitate and enhance the performance and the quality. And I think the experience of both sides, both the front that is utilizing it as a mic and speaker, but also the other part as well, so the people can listen in and be heard very well, as we believe voice is the lowest common denominator in this online collaboration environment and without it we don't have any collaboration. You can still have a call voice-only without video of course, video is great. But the need for high and great quality voice is mandated, and this is where we feel the investment going and this is what we're supporting. Also now with this Microsoft Team Certification, and of course as the version do get updated, we will of course support all as a necessary certification and criteria.
Suji Desilva: Okay, thank you very much. Thanks guys.
Operator: Thank you. Your next question comes from the line of Derek Soderberg from Colliers Securities. Please go ahead.
Derek Soderberg: Hi everyone! Thanks for taking my questions. I want to start with the guidance. You know we can sort of back out cordless and IoAT revenues, but I'm wondering if you can give us any directional guidance to Q3 within those IoAT segments.
Ofer Elyakim: Sure. So we did not break down the IoAT guide. I think we have not done so for the last couple of quarters. But I think in general as we said in the comments, we do see fairly healthy and robust demand all across and so this is also our expectations for 4Q to continue to see a good trajectory of the performance. Right now all the market verticals which we serve do seem healthy and I think that is also reflected in the IoAT guidance. If you see we’re almost double from where it was there in the same time, Q3 2020.
Derek Soderberg: Awesome! Very fair. And then as my follow-up, you know you guys bought back a decent amount of shares in the quarter. I guess what are your plans going forward on share buybacks? Do you have an authorized program currently in place and do you expect to continue to repurchase shares? Thanks.
Ofer Elyakim: Yes, so the plan that we had in place actually we utilized all of it, so it was like a $10 million that we started utilizing I think early 2020 and now it's fully utilized, so this is of course something that we’ll bring to the board and overall if you look at like the buyback that we've done in the last couple of years, you see that we have done I think in average over $10 million a year. So you can assume that we'll continue to be buying in the market.
Derek Soderberg: Awesome! Thanks.
Operator: Thank you. And your next question comes from the line of Rajvindra Gill of Needham. Please go ahead.
Rajvindra Gill: Hi guys! Thanks for taking my question. I’m here to ask on behalf of Roger Dennis . I’m just wondering, could you provide any more color potentially on the manufacturing capacity situation and wafer capacity from the manufacturing partners? Have they provided any kind of timeframe for when they expect alleviation or what can we expect going through the rest of this calendar year or the next one?
A - Ofer Elyakim: Hi Dennis! So with respect to the manufacturing capacity, so as we all see and from what gets publicized and announced by the vendors, so there is investment in adding a lot more capacity with record CapEx plans, etc. And we do hope that we will also benefit some from such capacity expansions. But at the moment, I think it’s based on what you can see. We are getting very strong support from our manufacturing partners and we do hope that such a tight collaboration and partnerships does continue and enable us to continue to do well also in the future, meaning that the remainder of this year and also into next year. But the availability of such a new capacity build-up, I think we're starting perhaps to see that in our back end and less on the front end, but of course we're keeping pretty close touch with all of our partners to see when exactly this new dry powder can be utilized.
Rajvindra Gill: Got it. Thank you, that was helpful. And then is there anything you can share about what kind of progress is at your new facility in Germany, is it the driving facility any new projects, any kind of designer wins. Kind of what are your plan going forward for that facility?
Ofer Elyakim: Sure. So obviously you’re talking about our new astounding facility that basically was launched a couple of months ago and we have the best-in-class type of quality and lab facilities that enable us to take our game you know one notch higher with respect to our ability to test and prototype that and. What we did announce is that our goal with this facility is also to be able to have an offering of our core competent, which regarding voice processing and order processing and also for the automotive market, which has not been part of the markets that we focused on and I think that we were very lucky and also successful in landing a team that does come exactly from that market that has been serving the Tier 1 players in the automotive markets for decades. So really a team of top experts in the domain of the voice processing and audio in the automotive market and this is where we plan to invest resources and this is exactly what this team is now doing, both supporting our existing opportunities, our existing roadmap map items that relate to enhancing and further securing top notch performance and also in this, creating a diverse skill of such core competence into the automotive market offering.
Rajvindra Gill: Got it! I appreciate the color. That's it from me. Thank you.
Operator: Thank you. We don't seem to have any additional questions. I would now like to turn the call back to Tali Chen for closing remarks. Please go ahead.
Tali Chen: Thank you. I would like to mention that during the coming months we are scheduled to present at the following investor conferences: Jefferies Semi-Conference on Aug 31; Colliers Investor Conference on September 9; and Lake Street Capital Market Conference on September 13. Thank you for listening in and for your interest in DSP Group, and we are looking forward to report back to you in 90 days.
Operator: Thank you ladies and gentlemen, that does conclude your conference call for today. Thank you for participating and you may now all disconnect.
