DSP GROUP, INC. This report and certain information incorporated herein by reference contain forward-looking statements, which are provided under the "safe harbor" protection of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this report, other than statements that are purely historical in nature, are forward-looking statements. Forward-looking statements are generally written in the future tense and/or are preceded by words such as "will," "may," "should," "could," "expect," "suggest," "believe," "anticipate," "intend," "plan," or other similar words. Forward-looking statements include statements regarding:
? Our belief that, while we are confident about our engagement pipeline and the
potential of each of our growth initiatives, we may face some near-term
softness, mainly related to a shortfall in consumer spending and its
implications on demand for consumer electronic products, as well as the impact
of the lockdowns on the ability of consumers to buy consumer electronics in
outlets beyond the Internet;
? Our expectation that revenues from our growth initiatives will increase in
2020 as compared to 2019?
? Our expectation that revenues from growth initiatives will represent more than
two-thirds of the total revenues in 2020;
? Our belief that our past research and development investments in new
technologies are paying off;
? Our belief that our innovative technical solutions are well-positioned to play
a significant role in the technological trends that are accelerating as a
result of the COVID-19 pandemic;
? Our belief that sensitivity to touching commonly-used surfaces could
accelerate the adoption of voice as a user interfaces (VUIs) for a broad array
of products;
? Our belief that demand for Unified Communications products could increase to
enhance workforces efficiency and productivity during the COVID-19 pandemic;
? Our belief that increased voice calls made from home amid the COVID-19
pandemic could drive demand for the integration of DECT/ULE in home gateways
to ensure quality of service and full home coverage;
? Our belief that our company is uniquely positioned to leverage our leadership
in Unified Communications , SmartVoice and SmartHome markets with world class
technologies and innovative solutions that address the increasing demands of
these markets;
? Our expectation that the increase in revenues from growth initiatives will be
driven mainly by our Unified Communications segment;
? Our expectation that the Unified Communications market will recover in 2020 as
compared to 2019?
? Our belief that new communication access methods, including mobile, wireless
broadband, cable and other connectivity, the traditional cordless telephony
market using fixed-line telephony will continue to decline, which will
continue to reduce our revenues derived from, and unit sales of, cordless
telephony products; and
? Our belief that our available cash and cash equivalents at December 31, 2020
should be sufficient to finance our operations for the foreseeable future.
All forward-looking statements included in this Quarterly Report on Form 10-Q are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement. Many factors may cause actual results to differ materially from those express or implied by the forward -looking statements contained in this report. These factors include, but are not limited to, our dependence on one primary distributor, our OEM relationships and competition, as well as those risks described in Part II Item 1A "Risk Factors" of this Form 10-Q.
Moreover, the full impact of the COVID-19 pandemic continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on our financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on the company's financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not able to estimate the full effect of the COVID-19 outbreak on the company's results of operations, financial condition or liquidity for fiscal year 2020. The following discussions are subject to the future effects of the COVID-19 pandemic.
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This Quarterly Report on Form 10-Q includes trademarks and registered trademarks
of
Overview
The following discussion and analysis is intended to provide investors with a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto.
Business Overview
We are seeing evidence that our past research and development investments in new
technologies are paying off. We believe our innovative technical solutions are
well-positioned to play a significant role in the technological trends that are
accelerating as a result of the COVID-19 pandemic. For instance, with more
employees working remotely, and offices reconfiguring workspaces to cater to
social distancing requirements, high-quality communication and remote
collaboration tools are essential. This could create an increased demand for
In the first quarter of 2020, revenues from our growth initiatives, namely sales
from our
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Our revenues were
Our gross margin decreased to 50.9% of our total revenues for the first quarter of 2020 from 51.1% for the first quarter of 2019, primary due to (i) lower inventory provisions for the first three months of 2019, as compared to the same period in 2020, and (ii) higher royalties expenses paid for the first three months of 2020, as compared to the first three months of 2019. The decrease was partially offset by positive effects from changes in the mix of products sold and mix of customers for the first three months of 2020, as compared to the first three months of 2019.
Our operating loss was
Our operating expenses amounted to
Notwithstanding our success in increasing our revenues from growth initiatives, we expect that our financial condition will continue to be challenged by the expected continued decline of the cordless telephony market. A significant percentage of our revenues continues to be generated from sales of chipsets used in cordless phones that are based on fixed-line telephony.
As of
COVID-19
An outbreak of a new strain of coronavirus, COVID-19, occurred in
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Initially, the COVID-19 outbreak mainly affected our customers' supply chain
operations in
As of the date of this filing, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. In light of the uncertain and rapidly evolving situation relating to the COVID-19 pandemic, we have taken a number of precautionary measures to manage our resources conservatively by reducing and/or deferring non-essential capital expenditures and operating expenses to mitigate the adverse impact of the pandemic. We will continue to assess our business during the crisis to make strategic decisions that we believe are in the best interest of stockholders.
RESULTS OF OPERATIONS The following table represents our total revenues, and our revenues by product family, for the three month periods endedMarch 31, 2020 and 2019 (dollars in millions): Three months ended March 31, 2020 2019 Change Total revenues (1)$ 28.2 $ 28.3 - Cordless (2)$ 10.1 $ 10.6 (5%) Percentage of total revenues 36% 37% SmartHome (3)$ 4.0 $ 4.2 (5%) Percentage of total revenues 14% 15% Unified Communications (4)$ 10.2 $ 9.4 9% Percentage of total revenues 36% 33% SmartVoice (5)$ 4.0 $ 4.1 (4%) Percentage of total revenues 14% 15% 1. The decrease in revenues for the first quarter of 2020 as compared to the same period in 2019 was primarily as a result of a decrease in sales of our cordless, SmartHome and SmartVoice products, partially offset by increased sales of ourUnified Communications products. 2. The decrease in cordless revenues for the first quarter of 2020 as compared to the same period in 2019 was mainly attributable to a decrease in customer demand in all cordless markets. 3. The decrease of our SmartHome product sales for the comparable periods is attributable to a decrease in customer demand mostly for home gateway products. 4. The increase in ourUnified Communications product sales for the comparable periods is mainly attributable to a growth in market demand for ourUnified Communications products that resulted from the growth of our market share within this market. 5. The decrease in our SmartVoice product sales for the comparable periods was attributable to a decrease in customer demand in that market. 25
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The following table shows the breakdown of revenues for all product lines for the periods based on the geographic location of our customers (in thousands):
Three months ended March 31,
2020 2019
United States $ 886 $ 1,329
Japan 3,628 3,045
Europe 1,710 2,172
Hong-Kong 7,275 7,649
China 4,204 4,410
Taiwan 8,932 6,410
South Korea 1,198 2,506
Other 406 755
Total revenues $ 28,239 $ 28,276 Sales to our customers in
Sales to our customers in
Sales to our customers in
Sales to our customers in
Sales to our customers in
Sales to our customers in
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Sales to other customers decreased for the first quarter of 2020, as compared to
the same period of 2019, representing a decrease of 46% in absolute dollars. The
decrease in our sales to other customers for the comparable periods resulted
mainly from a decrease in sales to one of our customers located in
As our products are generally incorporated into consumer electronics products sold by our OEM customers, our revenues are affected by seasonal buying patterns of consumer electronics products sold by our OEM customers that incorporate our products, as well as inventory correction cycles within the market.
Significant customers. The loss of any of our significant customers or
distributors could have a material adverse effect on our business, financial
condition and results of operations. The following table represents our total
revenues, as a percentage of our total revenues, from our significant customers
for the three-month periods ended
Three months ended March 31,
2020 2019
VTech 19 % 21 %
Panasonic 10 % 8 %
Cisco 15 % 10 %
The following table represents our total revenues, as a percentage of our total
revenues, through our main distributors for the three month periods ended March
31, 2020 and 2019:
Three months ended March 31,
2020 2019
Nexty Electronics (1) 12 % 10 %
Ascend Technology (2) 37 % 27 %
(1) Nexty Electronics sells our products to a limited number of customers. One
of those customers, Panasonic, accounted for 10% and 8% of our total
revenues for the first quarter of 2020 and 2019, respectively.
(2) Ascend Technology sells our products to a limited number of customers. One
of those customers, Cisco, accounted for 15% and 10% of our total revenues
for the first quarter of 2020 and 2019, respectively.
Significant products. Revenues from our digital cordless telephony products
represented 36% and 37% of our total revenues for the three months ended
Revenues from our
Revenues from our SmartHome products represented 14% and 15% of our total revenues for the first three months of 2020 and 2019, respectively.
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Revenues from our SmartVoice products represented 14% and 15% of our total
revenues for the three months ended
Gross profit. Gross profit as a percentage of revenues was 50.9 % for the first quarter of 2020 and 51.1% for the first quarter of 2019. The decrease in our gross profit for the comparable periods was primarily due to (i) lower inventory provisions for the first three months of 2019, as compared to the same period in 2020, and (ii) higher royalty expenses for the first three months of 2020, as compared to the first three months of 2019, both of which were partially offset by the positive effects of changes in the mix of products sold and mix of customers for the first three months of 2020, as compared to the first three months of 2019.
As gross profit reflects the sale of chips and chipsets that have different margins, changes in the mix of products sold have impacted and will continue to impact our gross profit in future periods. Our gross profit may decrease in the future due to a variety of factors, including the continued decline in the average selling prices of our products, changes in the mix of products sold, our failure to achieve cost reductions, roll-out of new products in any given period, our success in introducing new engineering processes to reduce manufacturing costs, increases in the cost of raw materials such as gold, oil and silicon wafers, and increases in production, assembly and testing costs. Moreover, our suppliers may pass the increase in the cost of raw materials and commodities onto us, which would further reduce the gross margins of our products. There are no guarantees that our ongoing efforts in cost reduction and yield improvements will keep pace with the anticipated continuing decline in average selling prices of our products.
Cost of goods sold consists primarily of costs of wafer manufacturing and fabrication, assembly and testing of integrated circuit devices and related overhead costs, and compensation and associated expenses related to manufacturing and testing support, inventory obsolesce and logistics personnel.
Research and development expenses, net. Our research and development expenses,
net, increased to
Our research and development expenses, net, as a percentage of our total
revenues were 37% and 32% for the three months ended
Research and development expenses consist mainly of payroll expenses to employees involved in research and development activities, expenses related to tape out and mask work, subcontracting, labor contractors and engineering expenses, depreciation and maintenance fees related to equipment and software tools used in research and development, and facilities expenses associated with and allocated to research and development activities.
Sales and marketing expenses. Our sales and marketing expenses increased to
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Our sales and marketing expenses, net, as a percentage of our total revenues
were 18% and 16% for the three months ended
Sales and marketing expenses consist mainly of sales commissions, payroll expenses to direct sales and marketing employees, travel, trade show expenses, and facilities expenses associated with and allocated to sales and marketing activities.
General and administrative expenses. Our general and administrative expenses
decreased to
General and administrative expenses as a percentage of our total revenues were
8% and 9% for the three month periods ended
Our general and administrative expenses consist mainly of payroll expenses for management and administrative employees, accounting and legal fees, expenses related to investor relations as well as facilities expenses associated with general and administrative activities.
Description of segments.
The company operates under three reportable segments.
Our operating segments are as follows: Home,
A description of the types of products provided by each business segment is as follows:
Home - Wireless chipset solutions for converged communication at home. Such solutions include integrated circuits targeted for cordless phones sold in retail or supplied by telecommunication service providers, home gateway devices supplied by telecommunication service providers which integrate the DECT/CAT-iq functionality, integrated circuits addressing home automation applications, as well as fixed-mobile convergence solutions. During 2017, we consolidated our home gateway and home automation products into a new product line called SmartHome. In this segment, (i) revenues from cordless telephony products exceeded 10% of our total revenues and amounted to 36% and 37% of the Company's total revenues for the first three months of 2020 and 2019, respectively, and (ii) revenues from SmartHome products amounted to 14% and 15% of our total revenues for the first three months of 2020 and 2019, respectively.
SmartVoice - Products for the SmartVoice market that provides voice activation and recognition, voice enhancement, always-on and far-end noise elimination targeted for mobile phone, mobile headsets and other devices that incorporate our noise suppression and voice quality enhancement HDClear technology. Revenues from our HDClear products represented 14% and 15% of our total revenues for the first three months of 2020 and 2019, respectively. No revenues derived from any products in the SmartVoice segment exceeded 10% of the Company's total revenues for either the first three months of 2020 or 2019.
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Segment data. We derive the results of our business segments directly from our internal management reporting system and by using certain allocation methods. The accounting policies we use to derive business segment results are substantially the same as those we use for consolidation of our financial statements. Management measures the performance of each business segment based on several metrics, including earnings from operations. Management uses these results, in part, to evaluate the performance of, and to assign resources to, each of the business segments. We do not allocate to our business segments certain operating expenses, which we manage separately at the corporate level. These unallocated costs include primarily amortization of purchased intangible assets, equity-based compensation expenses and certain corporate governance costs.
We do not allocate any assets to segments and, therefore, no amount of assets is reported to our management or disclosed in the financial information for segments.
Selected operating results information for each business segment was as follows
for the three months ended
Income (loss) from
Revenues operations
Three months ended March 31,
2020 2019 2020 2019
Home $ 14,018 $ 14,730 $ 3,576 $ 4,071
Unified Communications 10,238 9,409 3,709 2,855
SmartVoice 3,983 4,137 (8,294 ) (6,063 )
Total $ 28,239 $ 28,276 $ (1,009 ) $ 863 Sales to our customers in the home segment decreased for the first three months of 2020, as compared to the first three months of 2019, representing a decrease of 5% in absolute dollars. The decrease in sales in the Home segment for the comparable periods was mainly attributable to decreased demands for cordless phones over the comparable periods.
Sales to our customers in the
Sales to our customers in the SmartVoice segment decreased for the first three
months of 2020 as compared to the first three months of 2019, representing a
decrease of 4% in absolute dollars. The decrease in sales to our customers in
the SmartVoice segment for the first three months of 2020, as compared to the
first three months of 2019, was mainly due to a decrease in sales to one of our
tier one customers and sales of our SmartVoice products to
The reconciliation of segment operating results information to our consolidated financial information is included in Note N to our condensed consolidated financial statements.
Amortization of intangible assets. For the first three months of 2020 and 2019,
we recorded an expense of
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Financial income, net. Financial income, net, amounted to
Provision for income taxes. We had
The income tax benefit for the first quarter of 2020 was mainly attributable to
income in an amount of
LIQUIDITY AND CAPITAL RESOURCES
Operating activities. During the first three months of 2020, we generated
Investing activities. We invest excess cash in marketable securities of varying
maturity, depending on our projected cash needs for operations, capital
expenditures and other business purposes. During the first quarter of 2020, we
purchased
Our capital equipment purchases, consisting primarily of research and
development software tools, computers, peripheral, engineering test and lab
equipment, leasehold improvements, furniture and fixtures, totaled
Financing activities. During the first three months of 2020, we paid an
aggregate purchase price of
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In addition, during the first quarter of 2020, we received
Our board of directors has previously approved a number of share repurchase
programs, including those in accordance with Rule 10b5-1 of the Securities
Exchange Act of 1934, for the repurchase of our common stock. In
As of
Our working capital at
In addition, as part of our business strategy, we may evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot assure you that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. See the section of the risk factors entitled "We may engage in future acquisitions that could dilute our stockholders' equity and harm our business, results of operations and financial condition." for more detailed information.
Off-Balance sheet arrangements
We do not have any off-balance sheet arrangements, as such term is defined in
recently enacted rules by the
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