DSP Group, Inc. (NASDAQ:DSPG) Q3 2020 Earnings Conference Call November 2, 2020 8:30 AM ET

Company Participants

Tali Chen – Corporate Vice President and Chief Business Officer

Ofer Elyakim – Chief Executive Officer

Dror Levy – Chief Financial Officer

Conference Call Participants

Charlie Anderson – Collier Securities

Denis Pyatchanin – Needham & Co

Ethan Potasnick – Cowen and Company

Jaeson Schmidt – Lake Street

Suji Desilva – ROTH Capital


Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 DSP Group Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session [Operator Instructions]. I must advise you that this conference is being recorded today.

I would now like to hand the conference over to your first speaker today, Ms. Tali Chen. Thank you, and please go ahead.

Tali Chen

Thank you, Maria. Good morning, ladies and gentlemen. I’m Tali Chen, Corporate Vice President and Chief Business Officer at DSP Group. Welcome to our third quarter 2020 earnings conference call. On today’s call, we also have with us Mr. Ofer Elyakim, Chief Executive Officer; and Mr. Dror Levy, Chief Financial Officer.

Before we begin, I would like to remind you that during this conference call, we will be making forward-looking statements, including our financial guidance for the fourth quarter of 2020; recovery from near-term weakness in the unified communications products line as early as the fourth quarter and into next year; optimism about our business outlook for SmartVoice and SmartHome; believes that is surge of demand for cordless product will accelerate in the fourth quarter, SmartVoice being the pivotal growth driver; optimisms that the ADT launch will pave the path for ULEs broad market adoption in the U.S. and the security industry; and optimism that our products and technologies will play pivotal role in the accelerated voice centric market trends, which positions the company for sustainable long term growth.

We assume no obligation to update these forward-looking statements. More information about the risks and factors that could affect the forward-looking statements made herein could refer to the risk factors discussing our 2019 from 10-Q and other risk report we have filed.

Now I would like to turn the call over to Ofer Elyakim, our Chief Executive Officer. Ofer, the floor is yours.

Ofer Elyakim

Thank you, Tali. Good morning, everyone and thank you for joining us. I hope that you had the opportunity to read our press release, which we distributed earlier today. I would like to begin by reviewing our results for the third quarter, commenting on the progression of our business plan and providing context for our outlook. In a short while, Dror will provide you with detailed comments on our financial results and the outlook for the fourth quarter.

Our third quarter results were impacted from short-term business disruptions as a result of the pandemic, while highlighting the strategic importance and long-term potential for our audio, voice and connectivity technologies. We ended the quarter with revenues of $26 million meeting the midpoint of our guidance range. Revenues declined by 16% year-over-year and by 8% sequentially. We’re disappointed by this top line result, which was negatively impacted by unexpected yet acute decline in our unified communications revenue.

The pandemic continues to impact the global economy and many aspects of our everyday life. We’re gradually adjusting our living, working, studying and other routine to coexist with the pandemic. Consequently, we’re seeing positive signs, which are advantageous to our business that arise from the following voice centric trend. The first one is a surge in voice calls. Due to the ongoing social distancing restrictions, voice communications have become more essential. Park Associates surveyed leading telecommunications provider and reported that the from home lifestyle has driven dramatic uptick in voice calling in all form. According to the report, voice has literally become a lifeline for many with call volume and duration as much as tripling versus a year ago.

The second trend is voice user interface involvement into a must have feature. Potential health hazards associated with touching common surfaces have accelerated the adoption of voice as a user interface for a broad array of products. And the third is the gradual return to the office. Businesses are gradually transitioning to hybrid models that combine virtual and face to face interactions. This shift should stimulate investment in both on prem and remote work infrastructures. Our customers are aligning their product planning to capitalize on these voice centric trends and we are seeing some near-term benefits already evidenced in our third quarter financials associated with strong demand for SmartVoice and cordless products.

While industry wide supply chain constraints are placing certain limitations on our product deliveries, we’re experiencing improving end market demand across our different segments propelled by these voice centric trends, and we expect our fourth quarter revenues to grow both sequentially and year-over-year. We are excited about the momentum in our business as our products and technologies continue to play a pivotal role, capitalizing on accelerating voice centric market trends. We believe that our leadership in voice AI, IoT and hearables following the acquisition and successful integration of SoundChip positions us well for sustainable long-term growth.

Now I’d like to move on to the business update by segment, starting with SmartVoice. During the third quarter, we generated record high revenues of $7.2 million from sales of SmartVoice products, representing a year over year increase of 45% and a sequential increase of 82%. This achievement is underscored by the strategic milestone of shipping the 100 millionth SmartVoice SoC and demonstrates the importance that voice user interface plays in a wide range of products offered by leading OEMs, including Amazon, Facebook, Google, GoPro, Lenovo, Leviton, Logitech, Samsung and many others. The record SmartVoice results this quarter were driven by an accelerated demand for devices incorporating voice user interface as consumer preference shifted in favor of devices that embrace such interface.

During the quarter, we saw solid demand for the following applications. The first one is [tablet], where we’ve seen a surge in demand for this product category, largely driven by work-from-home and remote learning, which propelled the need for smart screen. We expect this trend to continue as the pandemic lingers. Interest in VUI and voice call enhancements in the PC and tablet is robust. And during this quarter Lenovo and a leading mobile OEM launched a number of new tablet products based on our SmartVoice solution, leveraging our offering as a leading supplier for voice user interface and edge AI solutions.

The second one is cameras. COVID-19 has prompted an increase in contactless home deliveries, as well as increased demand for do-it-yourself home security. As a result, more home owners have installed smart cameras to take advantage of advanced on-site and cloud-based capabilities. In particular, we’ve seen growing interest in our two way voice and VUI solutions for cameras to support use cases, such as front-door monitoring and dialog mode. During this quarter, a leading security camera brand launched two new cameras with our SmartVoice technology. In addition, GoPro launched its Hero9 action camera based on our SmartVoice solution.

The third is hearables. The work from home environment drove increased demand for hearable products, such as true wireless stereo and other types of headphones. We recently entered into this rapidly growing market through the acquisition of SoundChip. And today, our offering includes the industry’s leading low-power voice expertise, wireless capabilities and best-in-class digital hybrid ANC, along with acoustic system-level design to drive best in class voice call quality, accurate playback and ambient noise cancellation.

In summary, we are excited about the growth and momentum of our SmartVoice business on the heels of the above-noted achievements. Coupled with accelerated voice user interface adoption and the growing traction in the hearable market, we believe that our SmartVoice business will continue to be a pivotal growth driver, enabling a broad array of new innovative applications.

Now moving on to the Unified Communications segment. Third quarter Unified Communications results were disappointing and were severely impacted by an expected shortfall in demand for our Unified Communications SoC. As the workforce transitions to work from home, revenues of $2.6 million decreased by 75% on a sequential basis and by 74% year-over-year. However, based on customer forecast and channel checks, we are seeing indications that the excess inventory was mostly depleted and the supply demand situation rebounded faster than anticipated with improved demand from businesses and government institutions. Moreover, businesses around the globe are gradually returning to the office and adopting a hybrid model that includes both on-prem and remote work. This trend should stimulate budget to shift towards renewed investments in on-prem infrastructure, leading to a gradual recovery in this segment starting already in the fourth quarter and into the new year.

Despite the challenging business situation, our customers continue to launch innovative solutions designed for prosumers, small businesses and remote work users leveraging our technologies. Notable achievements included a Tier 1 OEM that launched its top-of-the-line IP phone based on our DVF101 chipsets for enhanced communication. Yealink launched a professional DECT handset, and this is the first product to integrate the new highly advanced LC3Plus audio codec based on our solution. And the third is Panasonic that launched the first 16-line/16-handset single cell DECT solution based on our DCX and DVF SoCs.

The pandemic has also created opportunities for the Unified Communication industry. Newer players as well as the market incumbents are in the process of offering purpose-built hardware designed to fit with the hybrid working model. DSP Group is at the forefront of addressing these needs and is well positioned to intersect with this market transition through our best-in-class product offering for Unified Communication endpoints, as well as portable terminals, headsets and AI on the edge. In summary, despite the acute short-term weakness we experienced in the third quarter, we remain confident about the recovery in this segment, supported by our strong market position and solid engagement pipeline.

Turning to our SmartHome product line. During the third quarter, we generated SmartHome revenues of $3.7 million, representing a year-over-year decrease of 3% and a sequential decrease of 14%. These declines were mainly related to temporary delays in new product introduction, mostly associated with the pandemic. Nevertheless, we are bullish about the solid traction for SmartHome products and expect the positive momentum to pick up in the fourth quarter. Due to the pandemic, people across the globe are communicating through voice calls from home at unprecedented numbers and duration. Deprived from direct physical presence, households find that voice call address the universal need for communication and social connection. All leading service providers have reported spikes in voice call traffic on mobile as well as fixed line networks.

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Consequently, service providers are optimizing their infrastructure to deal with the growth in voice calls. The integration of DECT/ULE into home gateways and CPEs enables higher quality of service, portability, more reliable communications and a full home coverage while offloading the Wi-Fi networks. Notably, during the third quarter, Deutsche Telekom launched its Speedport Pro Plus, a premium gateway for Wi-Fi 6 networks integrating our DECT/ULE SoC. We’re also pleased to see ULE’s increasing adoption and growing ecosystem as evidenced by the commercial launch of ADT’s ULE-based do it yourself security system. The Blue by ADT system is available online on ADT’s web shop and at Best Buy and includes the line of ULE sensors and a ULE-based hub. ULE offers unmatched benefits to the security industry, and we believe that ADT’s launch will pave the path for ULE’s broad market adoption in the US generally and the security industry more specifically.

Moreover, during the quarter, we joined the Connected Home over IP, or CHIP, initiative. DSP Group will contribute its expertise to support this project that was founded by Amazon, Apple, Google and the Zigbee Alliance with the goal of developing a royalty-free IP standard that will improve interoperability among SmartHome protocols. We’re optimistic about the designing momentum and growth of this product category in the fourth quarter and beyond based on strong traction of DECT/ULE engagements in both Europe and the US.

And now to an update on the cordless phone market. During the third quarter, we experienced solid demand for cordless products that increased by 2% year-over-year and by 26% on a sequential basis. Cordless accounted for 48% of total third quarter revenues as social distancing, work from home, remote learning and other outgrowth of the pandemic stimulated a resurgence in voice traffic. This rising tide is lifting all boats and drives an accelerated demand for cordless products. DSP Group, as the market leader, is benefiting from the increased demand for cordless products. And looking forward, we expect the trend to accelerate.

And now to our outlook for the fourth quarter. In light of the improved end market demand across our different businesses, while taking into account some setbacks and risks related to an industry-wide supply chain constraint, we expect our fourth quarter revenues to be in the range of $29 million to $31 million. The midpoint implies revenue growth both year-over-year and sequentially. Moreover, we expect that our IoAT businesses to account for 54% to 58% of fourth quarter revenues.

In summary, we are going through a period of rapid change and unprecedented adoption of new technology that highlights the strategic importance and long-term potential of DSP Group’s audio, voice and connectivity technologies. We are encouraged by the improving momentum and business trends, particularly the move towards a voice-centric future. We are confident that our leadership in voice, AI and IoT solutions position us well for sustainable long-term revenue growth.

Now I would like to turn the call over to Dror, our Chief Financial Officer. Dror, the floor is yours.

Dror Levy

Thank you, Ofer. I will now review the income statement for the third quarter of 2020 from top to bottom. For each line item, I will provide the US GAAP results, as well as the equity based compensation expenses included in that line item, the expenses related to the SoundChip and other previous acquisitions.

Our revenues for the third quarter of 2020 were $26 million. Gross margin for the quarter was 50.8%. 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 in the amount of $0.1 million. R&D expenses were $8.1 million, including equity-based compensation expenses in the amount of $0.9 million and amortization of intangible assets related to the SoundChip acquisition in the amount of $0.1 million.

Operating expenses for the quarter were $15.5 million, including equity-based compensation expenses in the amount of $2.3 million, amortization expenses related to the SoundChip and other previous acquisitions of $0.6 million and transaction expenses related to the acquisition of SoundChip in the amount of $0.25 million. Operating expenses on a non-GAAP basis, excluding the items mentioned above were $12.4 million.

Financial income for the quarter was $0.3 million. Financial income for the quarter included $0.1 million of exchange rate differences related to the accounting standard for long term leases. These exchange rate differences were excluded from our non-GAAP results for the quarter. Income tax benefit for the quarter was $0.1 million. Income tax benefit for the quarter included benefit from deferred taxes changes related to intangible assets and equity based compensation expenses in the amount of $0.2 million.

Net loss was $1.9 million, including equity-based compensation expenses of $2.4 million, amortization expenses related to the SoundChip and other previous acquisition of $0.7 million, transaction expenses related to the acquisition of SoundChip in the amount of $0.25 million, exchange rate differences in the amount of $0.1 million and tax benefits related to deferred taxes in the amount of $0.2 million. Non-GAAP net income excluding the items I’ve just described was $1.3 million.

GAAP loss per share for the quarter was $0.08. The negative impact of equity-based compensation on EPS the was $0.09. The negative impact of amortization of acquired intangible assets on EPS was $0.03. The negative impact of transaction expenses on EPS was $0.01. The negative impact of the exchange rate differences on the EPS was $0.01. And the positive impact of the changes in deferred tax assets was $0.01. Non-GAAP diluted income per share excluding the items I just described was $0.05 for the quarter. Please see the current report on Form 8-K that we filed with the SEC this morning for a full reconciliation of the non-GAAP presentation to the GAAP presentation.

Now turning to the balance sheet. Accounts receivable at the end of the third quarter of 2020 increased to $11.6 million compared to $10.6 million at the end of the second quarter, representing a level of 40 days of sales. Inventory slightly increased from $8.1 million at the end of the second quarter to $8.2 million, representing a level of 58 days. Our cash and marketable securities decreased by $17.4 million during the third quarter and were at the level of $120.1 million as of September 30, 2020.

Our cash and marketable security position during the quarter was affected by the following: $2.9 million of cash was used by operations due to changes in working capital; $14.2 million of cash was used for the acquisition of SoundChip that closed during the quarter; $0.1 million of cash was used for purchase of property and equipment; $0.2 million of cash was a change in market value and amortization of marketable securities.

Now I would like to provide you with our projections for the fourth quarter of 2020. Our fourth quarter projections, including the impact of equity based compensation expenses and acquisition related amortization expenses, are as follows; revenues are expected to be in the range of

$29 million to $31 million; we expect our gross margin to be in the range of 50% and 52%; R&D expenses are expected to be in the range of $8 million to $9.5 million; operating expenses are expected to be in the range of $15 million to $18 million; financial income is expected to be in the range of $300,000 to $500,000; taxes on income are expected to be approximately $0.3 million on a non-GAAP basis; the shares outstanding are expected to be approximately 25.5 million shares.

Our fourth quarter projections include $0.4 million of amortization of intangible assets. And the projections also include the following amounts forecasted for equity based compensation and intangible assets related to the SoundChip acquisition; the cost of goods include $0.2 million, R&D expenses include [$0.9 million] to $1.1 million, sales and marketing include $0.7 million to $0.9 million, and the G&A includes $0.6 million to $0.8 million.

And now I would like to open up the line for questions and answers. Operator, please.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Charlie Anderson from Collier Securities.

Charles Anderson

I want to start with some of the elements of the guidance. I wonder if you can give any directional commentary on the noncordless segments on a sequential and year-over-year basis. And then within that, on cordless, it looks like it’ll be up significantly year-over-year. Obviously, it’s a segment that’s declined anywhere from 15% to 20% in the past few years. It sounds like some of the underlying trends though have changed. So I’m wondering if you could sort of speak to what you view now as maybe the short- and medium-term outlook of that segment in terms of year-over-year trend? And then I’ve got a follow-up after that.

Ofer Elyakim

Charlie, thanks for the question. So let me start with the last part regarding the cordless kind of the midterm trend. So yes, as you’ve indicated, we are expecting kind of resurgence in cordless and for demand to pick up considerably going into the fourth quarter. So sequentially, it should be kind of roughly up or slightly above the third quarter. We actually believe that this level of demand should continue, also, we don’t really have much visibility into the fourth quarter. But based on the level of demand and actually our somewhat inability to actually address all of the demand, I believe that also the coming quarter or two following the fall should also be fairly strong with respect to cordless.

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So at the moment and based on what we have seen, and we are also looking at whether this uptick in demand is associated just with the fact that the supply chain is now running at peak capacity and perhaps companies, OEMs are storing components for inventory. But note that from what we can see is that everything is actually being used to meet kind of the holidays and the period after the holidays. So a lot of these products are even shipped by air. So it’s really based on some actual demand out there that is based on a lot of the topics that we discussed, the significant increase in voice calls, the fact that this device is used widely and people are probably going through like replacement cycles of old with new. So this is with respect to cordless.

And on the other part, so I would say that we’re seeing a nice recovery in Unified Communications as was indicated. So it does seem that the excess inventory was depleted, I would say, faster than expected. Yes, I think that Q3 revenues came lower than what we originally anticipated. But we definitely see a very strong rebound again, not to the levels of a regular market but still a recovery that is probably showing an industry decline of 25% right now. And I think that it will increase and continue to the recovery into the next year, at least from what the information that we have today. So this is encouraging. And number two is on the SmartVoice and the SmartHome products, which we believe should show a year over year growth on both categories. So this is right now kind of where we are. And so I hope I answered the two questions.

Charles Anderson

No, absolutely. And then my follow-up, your gross margins have been remarkably stable despite a lot of volatility in the business mix. So I’m sort of curious if you can maybe talk a little bit about what’s going on there. That was sort of thought perhaps cordless had a lower gross margin if we just go back to years ago, but it’s a higher portion of the mix yet you’re able to keep these gross margins about 50%. So I’m just sort of curious a little bit out of color on what’s going on there.

Ofer Elyakim

So with respect to our gross margin. So as indicated, we reported non-GAAP of 51.6%. And indeed, these are higher than what we would have originally reported vis-à-vis such a mix. But I would say that the large kind of composition of SmartVoice as well as some revenue contributions from the acquisition of SoundChip, and these contributions are mainly royalties. So they’re not associated with much cost of goods. So these are much higher gross margin than our corporate average. I would say that these two work and the contributors to better than expected or better than average for such a product mix.

I would say that looking forward, it just shows you kind of the health and the value that we’re providing our customers. And I think that nothing has changed from the way the gross margins are segmented between the two different products. So the IoAT businesses are running at much higher than the corporate average, while cordless is still lagging and running below the average. But I think that as with better mix and with even more exposure to the higher profitability product, gross margins could continue and improve. And we do want to see that trend going forward.


And your next question comes from the line of Denis Pyatchanin from Needham & Co.

Denis Pyatchanin

I’m asking this on behalf of Raji Gill. So my first question is, when do you guys expect the Unified Communications to recover and what do you think will drive this recovery?

Ofer Elyakim

So as indicated, we’re expecting a recovery already in the fourth quarter, meaning the October, December quarter. And we see or expect to see a significant sequential increase from Q2 to Q4. We still expect that to be slightly below or still below the fourth quarter of last year, but we do expect the recovery to continue. As indicated earlier, there are some constraints with respect to our ability to deliver product. I would say that demand has recovered much better than what we expected. When we spoke about three months ago and had the call, we were thinking about a recovery but not as sharp as the recovery that we’re seeing.

And the drivers, as I’ve indicated, A, there is better demand for this product coming from large enterprises as well as governmental institutions. And number two, as I think we’re all witnessing, is a gradual return back to the office. And as the office front was neglected from, let’s say, early March until perhaps last month, I think that as the return to kind of on-prem is also highlighting the need for on-prem investment. And I think one of the beneficiaries is the Unified Communication endpoints. Moreover, if collaboration sessions in the past when using real collaboration tools, when using technology, were mainly done with third parties but not with employees and colleagues. In today’s world, even when you’re having a call from the office, in most of the cases, you are conferencing people that are working from home. And so the need for more collaboration endpoints increases.

And so I think all of these are drivers. And I think that, in addition, we also included some other kind of purposely built hardware for the new work environment. Meaning, rather than having a person being very close to the desk and the PC, having better tools to enable a much more productive call with the ability of the camera to track the person, with the ability of a microphone array to provide much more robust and high quality capabilities, advanced algorithms that will suppress the noise and everything that has to do with putting the graphics in the best possible way. So I think all of these are really good contributors that are driving this recovery.

Denis Pyatchanin

And then for my follow-up question, could you please speak a little bit on maybe like what do you expect to see from the SmartVoice attach rate on smartphones and personal electronics for next year, and how should we think about the market size for those?

Ofer Elyakim

So on the tablet PC market, I want to say that this year we are seeing significant growth. And I think that this is felt everywhere as every person needs a screen, whether it’s for work, for studying, for any other activity. So in this market segment, we’re seeing a much greater adoption of the voice user interface as well as voice enhancement. Many of these products were not really made or designed to conduct. And the primary purpose of using these devices is really to go on these Unified Communication applications. And I think that the need for a significant upgrade in terms of the voice quality, in terms of the video conference of these devices is on the rise. So these are key drivers, I think, for that industry and we’re seeing that everywhere across our different customers.

I think today on mobile phones, smartphones, voices user interface and newer AI on the edge capabilities are also reflected in all of the high-end and I would say in many of, if not most, of the midrange smartphones. And we’re seeing that also penetrating into headsets. So a lot of the true wireless stereo headsets, what we call the buds, are also embracing these capabilities and many more functionalities to be environmentally aware to enable a much better listening experience. So to actually amplify certain signals that a person perhaps will not be hearing well enough. And so a lot of AI and a lot of VUI, the ability to do simultaneous translation, et cetera, et cetera, all of these today are features that are highly sought after for the next-gen bud.

Another area that we’re seeing a very nice embracement is this kind of professional, more professional working class of products as discussed for voice and video conferencing. So cameras that can track a person from afar so you don’t really have to sit next to the monitor in order to be heard. You can actually roam around, you can sit comfortably afar from the device. But still the other side will see you as well as or even better when they see you in front of your monitor. And so all of these devices are embracing VUI and the capabilities around our SmartVoice are the algorithm front.

So all of that is, I think, is in the cards for next year. As well as, I think, a significant increase in the number of headsets that will incorporate the ambient noise cancellation, which is a market that we’re now gradually entering into. And two products are — actually three products have already been launched with our products, with our technology inside.


Your next question comes from the line of Matt Ramsay from Cowen and Company.

Ethan Potasnick

This is Ethan Potasnick on for Matt Ramsay. I just wanted to follow-up with regard to some of the upside and strength in the smartphone SmartVoice business. I was wondering, could you guys specify any particular wins driving that momentum? And then in the past you guys have sort of given some stats as to smartphone versus non-smartphone application. I was wondering if you could kind of parse out or breakdown between the two buckets in the quarter?

Ofer Elyakim

So I think that the main drivers for that growth in the SmartVoice segment were, as indicated, significant volume increase or increase in demand for categories that are around the tablet, PC area that incorporate our SmartVoice. So I think this was the largest category in the third quarter. And number two was the camera market, cameras that do incorporate to a wave voice, so super wideband voice capabilities with noise cancellation, VUI, et cetera, et cetera. And I think the third, it was the hearable side. So from true wireless to headsets that incorporate our technology from three bud models that we’re in today to some additional headsets that we are shipping technology.

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So these are the three main categories that are the drivers. I think that as indicated in the last couple of quarters that today, the SmartVoice franchise is mostly really diversified. There is not really one customer that is the key customer or like the 50% customer for the category. I would say that we’re much better pace today where there is diversification by customer and also by the end application. With respect to the mix and the mix of the percent of smartphone versus nonsmartphone, I would say that perhaps for this year, smartphones will be less than 10% of the mix, I would say approximately 10% of the mix.

Ethan Potasnick

And then I guess as my follow-up on Unified Communications, I know you guys mentioned some improving kind of trends. But given kind of the fluidity of the environment, I mean, what are some of the things that the large customers are kind of communicating to you guys that kind of underlie some of that improvement?

Ofer Elyakim

So, A, I would say that everyone is still very much cautious and it runs along the supply chain. So last quarter, we reported about our expectation for a fairly sharp decline, the fact that inventories and supply chains have to be readjusted to new demand levels. However, what we have seen and what we’re still seeing is that this rebound happened quicker and stronger than we anticipated. I think that in the areas where we’re seeing today a sharp rebound or recovery, these are places where demand was, I want to say, completely depleted.

And so almost all the parts that we’re shipping, at least to the best that we understand and from the checks that we’ve done, are going straight to customers. They’re not really building buffer stocks or protecting against something that will happen in the future, perhaps in the winter, pandemic, supply chain disruptions, et cetera. But as I said, I think that right now, most of the market participants that got hit pretty badly during the first and second calendar quarter of the year are putting a more cautious tone.

But I think you can also see from the recent reports by some of these market participants, they are mentioning that there is an improvement, and there is a certain rebound. And businesses are consuming. Governments are consuming. So I think that this is a driver for the rebound. And last but not least, it’s really that hybrid model where people are returning to the office. The office is relevant again, not at the same level that it was in pre-COVID era. But I think that this recovery will mandate the need for a renewed investment also on the on-prem side. So I want to say that these are kind of the key trends that are guiding this recovery.


[Operator Instructions] Your next question comes from the line of Jaeson Schmidt from Lake Street.

Jaeson Schmidt

Just sticking with the Unified Communications segment. Certainly, there’s probably been some projects that have been pushed out. But have you seen any projects actually canceled at all?

Ofer Elyakim

So to be very frank, no, we have not seen any programs being canceled. On the contrary, I think that we are actually seeing customers really sticking behind their plans to invest and build devices and refresh certain models for this market, and also the need for very fast adaptation to kind of the new reality and the fact that what works for the office. And with this kind of very fast split into soft clients, et cetera, professionals need more intuitive, higher quality, higher productivity type of devices.

And so we’re also seeing a lot of these designs, the design for kind of the work from home prosumer, devices that are kind of portable that are like over the top that in a way integrate very nicely with the PC, with the video screen, with the TV, with a set-top box. So that people can actually communicate on small screens, large screens, at their desk, dining room, outdoor, bring it to the office, take it to a conference room, take it wherever they go and really achieve the same look and feel, the same quality levels.

So I want to say that so far, we have not really seen any project cancellation. And on the contrary, we’re actually seeing more projects that are basically the need to adopt and take the products and the product road map to kind of the new opportunity, which is this kind of hybrid, the fact that people will be both on and off. So these are the trends that we’re seeing.

Jaeson Schmidt

And then just as a follow up, you mentioned some supply constraints here in the near term. Just curious if you could quantify what sort of impact that’s having to the top line in Q4?

Ofer Elyakim

So this does cap our top line. Without those constraints, probably our guidance would have been up a notch or two. So there is definitely an impact. So there are certain products that we have more limitations in terms of supplying and fulfilling the demand. And I think that this is not DSPG related supply chain constraint, I think it’s kind of really pretty wider industry that is not just semiconductor. It’s also basic components. So there’s definitely a spike in terms of demand and lot of the — our supply chain partners are running at the maximum capacity or very close to that. And getting capacity is something that in order to secure, you really need to have real demand and not just buffer.

And so I think that we’re fortunate to have a really strong partnership in our supply chain and to work with really Tier 1, both the fabs and the back end. And so I think that with our proven track record, we’re getting excellent support. And we do hope that we will be able to fulfill the demand in the next couple of months, meaning Q4 and into Q1. But from what we’re seeing, we’re encouraged that the business environment is improving and that we are where we are. And we do hope that a lot of these constraints will be removed during the course of the next couple of months. But as I said, right now, the supply chain is a big clogged.


And your last question comes from the line of Suji Desilva from ROTH Capital.

Suji Desilva

So in terms of the outlook, looking ahead to the first quarter of ’21, what do you think trends are versus typical seasonality? Obviously, not a typical time, but just to understand, given all the puts and takes, how we should think about the first quarter relative to would typically happen in a normal year seasonality?

Ofer Elyakim

So as we are today, pretty far, so at least two months out of the first quarter and also our average time is roughly eight weeks. So we don’t really have excellent visibility into Q1. But from what you can tell from our comments today, we did say that, right now, demand is higher than our ability to supply. We are seeing very good momentum that looks to be — not just shortly, so not just a matter of one quarter. So I think that we’re seeing very good indicators that we should be optimistic about the period beyond Q4.

But from a backlog perspective, exactly the seasonal trends. It is, I will say, too early to kind of provide any real kind of granular information. So at the moment, I want to say that we feel that we’re very optimistic and pleased by the trends. We don’t believe that they are kind of just Q4-ish type of trends. We see that there are real needs. And we also see the fact that our customers, in most of the cases, are actually shipping by air. That means that there is really starvation out there for product. So I think it’s holidays and perhaps beyond. So that makes us a lot more optimistic that this should continue also in the period right after. But to provide like real granularity, I want to say a little bit early. But so far, it looks very good.

Suji Desilva

And then specifically on the headset segment and the wireless TWS segment, what is the — a few customers already ramping there. What is the timing when those revenues continue to ramp up? Will it be a steady ramp from here? Is there an inflection quarter coming as you integrate SoundChip and focus on the forward opportunity?

Ofer Elyakim

So on the hearable revenues, and these are reported under the SmartVoice segment. So during this quarter, we did see a pretty nice, I would say, kind of the best quarter that we had for hearables and not just because of the SoundChip acquisition, I think that also from a standalone perspective, it would also have marked like a record quarter for us. But yet again, we’re just starting. So these are really the inroads into this market. I think that from a much better ramp with respect to kind of the revenue run rate, probably second half of next year is when we should start to see more customers ramping and better trend line going into of course 2022. So this is where a faster and more solid ramp will take place.


There are no further question at this time. Back to you, Tali.

Tali Chen

Thank you. On November 11th, DSP Group will participate in ROTH Technology Virtual Conference. Thank you for dialing in and for your interest in DSP Group, and we look forward to report back to you in 90 days.


Thank you, everyone. That does conclude our conference for today. You may all disconnect.

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