DSP Group, Inc. (DSPG) CEO Ofer Elyakim on Q2 2020 Results – Earnings Call Transcript

DSP Group, Inc. (DSPG) CEO Ofer Elyakim on Q2…

DSP Group, Inc. (NASDAQ:DSPG) Q2 2020 Earnings Conference Call July 30, 2020 8:30 AM ET

Company Participants

Tali Chen – Corporate VP and Chief Marketing Officer

Ofer Elyakim – CEO

Dror Levy – CFO

Conference Call Participants

Jaeson Schmidt – Lake Street Capital Markets

Matt Ramsay – Cowen & Company

Suji Desilva – ROTH Capital Partners

Charlie Anderson – Colliers Securities

Ari Shusterman – Needham & Company

Thank you, Operator. Good morning, ladies and gentlemen. I’m Tali Chen, Corporate Vice President and Chief Marketing Officer at DSP Group. Welcome to our second 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 about our financial guidance for the third quarter of 2020, our expectation of positive prospects for our SmartVoice, SmartHome, and Unified Communications segment, our ability to leverage technological transformation accelerated by the pandemic, and our belief that our innovative technologies and solutions position us as well to take advantage of such trends and emerge as a stronger company, material but temporary downturn in the Unified Communications segment in the third quarter, the acquisition of SoundChip substantially increasing our service addressable market, optimism about adoption of ULE/DECT and market acceptance of ANC-enabled true wireless stereo headsets, as well as optimism about our engagement pipeline and customer product launches.

Furthermore, it should be noted that the pandemic continues to evolve. As a result, the full magnitude of the pandemic will have on the company’s financial condition, liquidity and future results of operation remain uncertain at this time. The following disclosure by management regarding the company’s financial condition and prospects are subject to the duration and severity of the shelter in, and other restrictions related to the pandemic and its impact on the global economy, and the semiconductor and consumer electronic industry specifically. In addition to the pandemic, important factors that could cause actual results to differ materially from the company’s expectations are disclosed under Risk Factors in the company’s Form 10-K and other SEC filings. Forward-looking statements are made only as of the date hereof. Except as otherwise required by law, we assume no obligation to update any forward-looking statements.

Before we begin, I would like to take this opportunity to update you on a changing terminology to describe certain aspects of our business going forward. In 2013, DSP Group defined three initiatives aimed at growing market verticals which align well with our expertise. We call these initiatives, Unified Communications, SmartHome and SmartVoice, which together we refer as growth initiatives. Our strategy with respect to such initiatives proved successful. Starting in 2018, our growth initiatives accounted for a majority of our total revenue. Reflecting our success in turning growth initiatives into our core expertise, we have decided to change the terminology, growth initiatives, to Internet of Audio Things or IoAT, businesses.

With that, 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 thanks for joining us today. I hope that you had the opportunity to read our press release, which we distributed earlier this morning. As we report our second quarter results, the world continues to face a major financial and health crisis, and during this call, we will elaborate on its implications on our business, review our results for the second quarter, comment on the progression of our business plan, and finally, provide context for our outlook. Dror will then provide you with details on our financial results for the second quarter and our projections for the third quarter. Despite the challenging environment in which we all operate in, we delivered a solid quarter with revenues of $28.3 million, ahead of the midpoint of our guidance range. Second quarter revenues were largely flat sequentially, while down by 2% year-over-year.

We are pleased with the performance of our IoAT businesses, which reached $18.4 million. Despite the macro headwinds, these businesses collectively grew by 4% year-over-year and accounted for 65% of our total revenues and benefited from solid demand for SmartHome and Unified Communications products. GAAP and non-GAAP gross margins expanded by 60 and 70 basis points versus the second quarter of 2019, reaching 50.3% and 50.8%, respectively. Gross margins did come in below those we reported in the first quarter and were negatively impacted mainly by a non-recurring one-time royalty expense. We therefore expect our third quarter gross margins to improve and revert to the first quarter levels. Non-GAAP operating expenses of $13.4 million reflect a lower OpEx run rate versus the level of expenditures of $16 million in the first quarter, mainly because of certain discretionary tape-out and other nonrecurring R&D expenses that were included in our first quarter OpEx.

Moreover, during the second quarter, we announced our entering into the rapidly-growing hearable market, and strengthened our offering with the acquisition of SoundChip. By combining our low-power voice expertise, wireless capabilities, and high-quality audio codec designs, with SoundChip’s system level design expertise around ambient noise cancellation we have essentially doubled our service available market. This acquisition is an important milestone for our overall strategy to deliver the highest quality technologies and the most comprehensive solutions for this burgeoning market. I’m happy to update you that the transaction closed in early July, and SoundChip is now an integral part of DSP Group. Moreover, the hearable revenues will be reported under our SmartVoice segment.

Looking forward, we expect our revenues to decline in the third quarter, predominantly related to a shortfall in enterprise spending on IT in general and on Unified Communication endpoints more specifically. We see two contradicting trends. On one hand, work from home is driving record spending on collaboration tools for home offices, and on the other hand, and to a larger extent, businesses, and especially those in hard hit industries including travel, manufacturing and retail, are reducing IT and Unified Communication budgets due to a softer macro environment, and resulting in a temporary reduction in demand for Unified Communication products. However, we believe that this weakness is temporary and that our Unified Communications business will recover. Voice communication is essential. Collaboration users regard voice as the most important element in carrying a productive online meeting, and is their preferred method for communications. Hence, voice endpoints and accessories are a critical factor in the success and expansion of the collaboration market today and in the future.

While we are not immune from the economic impact of a global pandemic, we believe that our technologies and solutions have a unique opportunity to play an instrumental role in the new paradigm under which we are and will continue to be living and working. In this new paradigm, there is significantly more work time spent at home offices, more interactions via collaboration tools substituting travel and face-to-face communications which means more phone and video calls and a preference to control things with voice instead of touch. In addition, individuals and organizations, now more than ever, are focused on deploying more collaboration and communication tools necessary to maintain workforce productivity. Our innovative technologies and solutions are well positioned to play a significant role in these technological shifts that have accelerated as a result of the pandemic. We are uniquely positioned to leverage our leadership in the IoAT businesses to meet these needs and to emerge from this crisis a much stronger company.

In summary, we’re excited about our portfolio of technologies and solutions that enable our customers to develop their upcoming lines of new products that aim to provide a safer and more productive environment, both at the office and at home. Our leading voice AI hearables and IoT solutions position us well for sustainable long-term growth as we capitalize on these accelerating market trends. Now I will address each business segment, starting with SmartVoice. During the quarter, we generated revenues of approximately $3.9 million from sales of SmartVoice products reflecting a year-over-year decline of 26% and a sequential decline of 1%. We attribute the expected decline to the collapse in retail footfall in Europe and North America, exacerbated by the restrictions for social distancing and shelter in place. However, we are optimistic that based on our diversified portfolio of products and the solid momentum around voice as a user interface and edge AI, our SmartVoice business is on track for a record quarter and a full rebound during the second-half of the year. Voice as a user interface has transitioned from a useful feature to a necessity. The pandemic has brought about several technological transformations overnight.

One of them is the beginning of a contactless future. As countries around the globe undergo complete or partial shutdowns to limit the spread of the coronavirus, a switch to a touchless way of controlling things to avoid the pathogen transmission via surface-to-human contact makes perfect sense. During the quarter, we continued to expand our product reach and engagements with leading consumer electronic brands, as demonstrated in the following achievements. in the tablets and PC market, we continued to enhance our leadership position and reached a record of 29 different tablet models, proudly shipping by the leading consumer brands using our SmartVoice technology including new and innovative products launched by key customers, such as Lenovo, TBK and a leading U.S. retail brand that leverage our technologies to deliver a natural, robust and far-field voice activation as well as high-quality, two-way voice communications.

In the home entertainment domain and consumer electronics, a leading Korean OEM launched a second-generation hands-free remote control for its highest running TV model based on our SmartVoice SoC that supports multiple wafer detection simultaneously including Alexa voice services. In such applications, low power consumption and far-field performance are crucial. Our SmartVoice solutions offer industry-leading performance at the lowest power consumption.

Lastly, Technics and Panasonic launched ANC-enabled true wireless stereo headsets based on our new family of advanced hybrid ANC codecs incorporating SoundChip’s Soundflex technology. About 10 product reviews highlighted the superb ANC performance and compared the ANC’s performance to that of other flagship true wireless models. We’re excited to leverage our knowledge and expertise in this burgeoning market. The above-noted achievements, coupled with solid momentum of voice user interface adoption and the growing traction in the hearable market, increased our confidence that our SmartVoice business will continue to be a pivotal growth driver, enabling a broad array of exciting new applications.

Moving on to the Unified Communications segment, IN the second quarter, we achieved revenues of $10.1 million, representing a year-over-year increase of 15% and a sequential decrease of 1%. Amid the pandemic, work from home became mostly mandatory, making collaboration and remote communication tools and their underlying technology essential for organizations to stay safe, connected, secure and carry on their business. Organizations, now more than ever, must focus on building resiliency, agility and mobility, and those who had already invested in these digital capabilities were able to make this shift to work from home more quickly and seamlessly. Nevertheless, we do expect demand for Unified Communication products to slow down in the third quarter, and we attribute the weakness to lower spending by enterprises. We view this slowdown as temporary, and we remain bullish on this category and its recovery. We firmly believe that high-quality voice will continue to be a pivotal ingredient in the Unified Communication and collaboration market which is in rapid growth. Moreover, most of the collaboration endpoints were in wide adoption already before the pandemic started.

Today, we see a new product life cycle emerging with purpose-built hardware to facilitate these needs presented by work from home. Facebook, Zoom, Cisco and several other companies have already started launching dedicated at-home video conferencing systems with multi microphones and wide-angle cameras. DSP Group is at the forefront of addressing these new technology needs and is well-positioned to intersect with new product requirements to better suit work from home and these new market trends through our best-in-class product offering for Unified Communication endpoints. Moreover, in the second quarter, we continued to expand our engagement pipeline and secured the following noteworthy wins: a tier one OEM launching premium conferencing phone with the best-in-class voice experience for smart meetings and sharing based on our DVF platform, a tier one European networking OEM launched a new family of SIP desktop IP phones providing enterprise-grade communication experience based on our DVF SoCs.

In summary, and despite the near-term weakness which is a consequence of the ongoing financial crisis, we believe that voice call is the preferred method of communications. And the role of voice endpoints and accessories are essential to the existence and the proliferation of the collaboration market. We, therefore, believe that demand for Unified Communication products will rebound.

Turning to our SmartHome product line, during the second quarter, we generated approximately $4.3 million in revenues, representing a year-over-year increase of 18% and an increase of 9% on a sequential basis. This growth reflects solid demand for our SmartHome solutions, particularly those going into DECT-enabled broadband home gateways and ULE. Phone calls have made a comeback amid the fact that we are spending more time at home. In response, service providers are optimizing their infrastructure to deal with growth in voice calls. By integrating DECT/ULE into their home gateways, service providers can provide higher quality of service, portability, more reliable communication, and a full home coverage while offloading Wi-Fi networks. During the second quarter, we experienced strong demand for DECT-enabled home gateways including a leading European service provider that selected our DECT/ULE technology for its new SmartHome gateway that is scheduled to launch later this year which leverages our technology to offer reliable two-way voice and IoT services.

In addition, we’re excited about the role that ULE plays in a wider variety of applications and verticals, as demonstrated by the following design wins and product launches: Deutsche Telekom and Orange launched a new smart speaker that leverages our DECT and ULE solution to offer reliable and high-quality two-way voice support. And Orange expanded its SmartHome device ecosystem and launched a ULE-enabled flood detector. The momentum behind DECT/ULE technology is strong, and we expect these trends, coupled with our strong engagement pipeline with security and telecommunication service providers, to fuel expansion of the DECT/ULE ecosystem with additional products by leading brands resulting in its broader adoption by leading service providers.

And now to an update on the cordless phone market, our second quarter revenues came in line with our expectations. Cordless revenues declined by 12% year-over-year and by 1% sequentially to reach $9.9 million and accounted for 35% of total revenues. Due to the evolving pandemic situation resulting in social distancing and a homebound workforce, usage of landline continues to be on the rise, creating increased demand for cordless phone products and contributing to a slower decline in the cordless phone market.

Now for an update on our outlook for the third quarter, taking into consideration the increasing uncertainty and the impact that COVID-19 continues to have on the end markets and our customers’ demand as well as the expected near-term weakness in the Unified Communications segment, we are broadening our revenue guidance range for the third quarter while maintaining financial discipline through prudent management of our operating expenditures. We expect our third quarter revenues to be in the range of $24 million to $28 million. The midpoint of the guidance also implies that our IoAT businesses should account for 57% to 61% of our third quarter revenues.

To summarize, DSP Group is both excited and humbled to have such an important role to play in helping everyone transition to a safer and more productive work and home environment with innovative tools for communication and collaboration. And by the market response to our products and technology, we believe that these trends and accomplishments will support our success during this challenging time and that we will weather the crisis and emerge a much stronger company.

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 second quarter of 2020 from top to bottom. For each line item, I will provide the U.S. GAAP results as well as the equity-based compensation expenses included in that line item and the expenses related to previous acquisitions. Our revenues for the second quarter of 2020 were $28.3 million. Gross margin for the quarter was 50.3%. Gross margin for the quarter included equity-based compensation expenses in the amount of $0.1 million. R&D expenses were $8.5 million including equity-based compensation expenses in the amount of $0.8 million.

Operating expenses for the quarter were $15.6 million including equity-based compensation expenses in the amount of $2.2 million and amortization of acquired intangible assets in the amount of $0.1 million. Financial income for the quarter was $0.3 million. Financial income for the quarter included $0.3 million of exchange rate differences related to accounting standard related to long-term leases. These exchange rate differences were excluded from our non-GAAP results for the quarter. With no income tax for the quarter and our net loss was $1.1 million including equity-based compensation expenses of $2.3 million, amortization of intangible assets of $0.1 million and exchange rate differences of $0.3 million.

The non-GAAP net income excluding these items I just described was $1.6 million. GAAP loss per share for the quarter was $0.05. The negative impact of the equity-based compensation expenses on EPS was $0.09. The negative impact of amortization of acquired intangible assets on the EPS was $0.01. And the negative impact of exchange rate differences on the EPS was another $0.01. Non-GAAP diluted income per share excluding the items I just described was $0.06 per share. 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, our accounts receivable at the end of the second quarter of 2020 decreased to $10.6 million compared to $13.9 million at the end of the first quarter, representing a level of 34 days of sales. Our inventories slightly increased from $8 million at the end of the first quarter to $8.1 million, representing a level of 52 days. Our total cash and marketable securities increased by $9.2 million during the second quarter and were at the level of $137.5 million as of June 30. Our cash and marketable securities position was affected by the following: $8 million of cash was provided from operations, $0.3 million of cash was used for purchase of property and equipment, $1.3 million of cash was received from exercise of employee stock options and $0.4 million of cash was used for repurchase of 29,000 shares. $0.6 million was the increase in market value and amortization of marketable securities.

And now I would like to provide you with our projections for the third quarter of 2020. Our third 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 $24 million and $28 million. We expect our gross margin to be in the range of 50% to 52%. R&D expenses are expected to be in the range of $8 million to $9 million. Operating expenses are expected to be in the range of $14 million to $17 million. Financial income is expected to be in the range of $400,000 to $600,000.

Taxes on income are expected to be approximately $0.1 million on a non-GAAP basis. Our shares outstanding are expected to be in the range of 25 million shares to 25.5 million shares. Our projections include $0.1 million of amortization of intangible assets, and these projections also include the following amount forecasted for equity-based compensation expenses: the cost of goods sold includes approximately $0.2 million, R&D expenses include $0.9 million to $1.1 million, and total operating expenses include $2.2 million to $2.4 million.

Now we would like to open up the line for questions and answers. Operator, please.

Question-and-Answer Session

Operator

[Operator instructions] Your first question comes from the line of Jaeson Schmidt of Lake Street. Please go ahead. Your line is open.

Jaeson Schmidt

Hey guys. Thanks for taking my questions. Just want to start with the Unified Comms segment. Have you seen any projects from the second-half of this year get pushed out, and relatedly, I know in the comments you said you expect a recovery within this segment, just curious if you actually have line of sight to that recovery in Q4.

Ofer Elyakim

Hi, Jaeson. So, thanks for the question. Maybe I’ll start with the first part about any projects being pushed out. We’re sitting in this very interesting time where everyone is trying to conduct the work from home, and in the hardware business, this is of course much harder to do, and so, the general scheme of things, yes, hardware projects are taking longer to materialize and to get to the finish line just because in many areas, in many companies, people are doing it and trying to collaborate online, but to a specific extent, in the Unified Communication market, I can tell you that certain programs that we were competing for that are being concluding and decided on these days have not really — were not really pushed out. So, actually — on the contrary, we actually see a lot of efforts to design, to redesign by the tier 1s that we’re working with, whether these are based in America and in Europe. So, we don’t really see that, but from the general scheme of things, yes, hardware programs today are taking longer, and this is a fact.

And now to the second part of your question about a recovery, so I believe that Q3 will mark a trough with respect to this correction, right? So, as you can understand and also from the print that we just saw this morning, I think, we are in a financial crisis and probably many industries are getting hit by this slowdown and by that timeout that everyone took late in March and maybe started resuming more normality in June, and so I think that perhaps in the end markets, that weakness was already felt in the second quarter. As you can see from our results, in a way, we did not really see that in our second quarter, because we are part of the supply chain, and we’re shipping to the manufacturer, the manufacturer ships to the brands, which then ships to the value-added resellers, up until it gets to the end customers. And so, in a way, most likely, the channel today has a lot of excess material, mainly in the form of finished goods, and we believe that during the third quarter, both the unit volumes, or the volumes that we will ship to the manufacturers, plus the depletion of the existing stock will signal the trough from our perspective. Maybe it’s different when you look at our customers or the value-added resellers or the other links in the supply chain. And I believe that we will start to see some recovery in the fourth quarter. I cannot tell you exactly by much because we don’t really have a good visibility. What we do know, and this is a fact, everyone is making a lot more phone calls. Everyone is participating in a lot more meetings, and the largest and most important common denominator to all of that is voice, and high voice quality and a reliable link, and to hear and to be heard loud and clear is going to be a very important part of the workforce and in continuing to work and be part of a business.

So we don’t see that as — this weakness as any signal of anything that is about to come. I think that what we’re seeing is reactions by cutting budgets, IT that is expected — the IT budgets are expected to decline this year by mid-teens to maybe 20%, and I think that this is a very natural step that companies that are in hard-hit industries are probably cutting more than others, but I think that everything around this communication has just become a lot more valuable and important in carrying our professional work. So I think that we are — from where we sit, we believe that a recovery is coming. We will see a rebound. We’re also going to see a lot more investments in new products, and we’re starting to see that, and a lot more innovative, Unified Communication devices that will fit the work-from-home lifestyle using both audio and video and a lot of sophisticated audio that can really complement the video tracking and AI. So I think the — from where we sit, we’re optimistic about a full rebound and that this business will continue to be a very important part of our revenues going forward, and we also are optimistic about our ability to continue and lead and win more designs and improve our market situation.

Jaeson Schmidt

Okay. That’s very helpful. I appreciate that color. And then just as a follow-up, did I hear correctly? You expect a record SmartVoice revenue in Q3? I think the historical high was sort of around $5.3 million?

Ofer Elyakim

Yes. Yes. So we do expect a record quarter in the third quarter of this year that will be much higher than what — than the previous record that, as you stated correctly, $5.3 million in the second quarter of last year, yes.

Jaeson Schmidt

Okay, perfect. Thanks a lot, guys.

Operator

Thank you. And your next question comes from the line of Matt Ramsay of Cowen. Please go ahead. Matt, your line is open. Can you check you’re not on mute?

Matt Ramsay

Hey, guys. Sorry about that. Good morning everybody and good afternoon over there. Ofer, I wanted to talk about the Unified Communications or VOIP business. Obviously, you guys are going to ramp a big product with Cisco this year, and I just wonder if you could give us a little more context as to what you’re seeing in the trends there. The guidance seems to imply that that business is down pretty materially in the September quarter which I guess isn’t a surprise given everything that’s going on. And how you might be shifting resources within the company to sort of make up for that from a work-from-home headset, in-house sales to support the workforce, et cetera, and the strategies of trying to balance those two as I know it’s a fluid situation? Thank you.

Ofer Elyakim

Hi Matt and thanks. So with respect to the Unified Communications and the major design wins that we won last year and we started to ship a little bit during ’19 but to a much greater extent in Q1 and Q2 of this year, and this is by far the most valuable design I think in the industry. We did achieve I think a full run rate or very close to full run rate in Q1 and Q2. However, as we’ve indicated and very much aligned with the trend line that we see in Q3, in Q3, we’re going to see a major decline in the demand for that product, but I think it’s a much wider weakness. So it’s not just about one company or one OEM. The same weakness exists in our Chinese customers that are selling VOIP products and the American ones and the European ones. It’s pretty much across the board and across the different products.

So, from IP phones that you usually find them on the desk however we know that a lot of people did take these IP phones and reinstalled them in their home offices in order to have the access and the voice quality, the speakerphone capabilities and all of the good things that you get with these devices, but we see it much more broadly. We see it in conferencing solutions with video endpoints. So I think it’s a broad — it’s really a broad-based type of a correction, I would call it, coming from the time that we’re in right after one of the worst crises that we’ve seen, and we attribute it mainly to these IT budget cuts and the fact that offices are shut down mostly or partially. The usage of these offices is today much lesser than it used to be. And up until we see a gradual shift back to the office, perhaps in these industries, the demand will continue to be lower than average. Now with respect to the second question, so when we look at the work-from-home side, the fact that we are seeing a significant growth in devices that are going to home offices, mainly headsets but also personnel conferencing solution, et cetera.

We do have today a lot of products and several designs that are supporting that from best-in-class headsets, whether these are ANC headsets and — that came along with the SoundChip acquisitions, whether these are the new true wireless headsets with ANC. And so we’re definitely shifting a lot of the investment and have been doing so also before the crisis started into the hearable domain and into our — building our high-quality and advanced codec capabilities with ANC and to really deliver the best value proposition from a technological perspective to the headset market. This is point number one. Point number two, we’re engaged today in many different of these new programs that are in a way built for work from home. So these are kind of collaboration endpoints, inexpensive camera, an array of microphones and basically enable very innovative camera tracking and all the complementary capabilities coming from far-field audio and voice to conduct high-quality voice calls even when the person or the people are sitting from afar and providing a really kind of great user experience. So we’re also today busy in supporting our customers to build these type of devices. So I think that the market that we’re in, a, is evolving and changing; and number two, has gone through a certain correction, given the much lower economic activity that is hitting probably a lot of industries and companies, unfortunately. So Matt, I hope that answered the question.

Matt Ramsay

No, it did. Thanks very much, Ofer. I think Dror, to follow up on the moving pieces with the VOIP business, you guys had talked about that I guess historically as being a really strong gross margin franchise. And with it down in third quarter, I was — I guess, I was expecting the gross margin guidance to move in the same direction, but it looks really strong. So maybe you could just step back and remind us of gross margin on a relative basis by segment of your business? And has anything changed there on a relative basis in the last few quarters that would explain how margins are up with the VOIP business potentially down? Thank you.

Dror Levy

Yes. Sure. So first, you’re right, Unified Communications does have, like, a relatively high gross margin, but there is like a new piece in this puzzle, and this is the acquisition of SoundChip that we announced about a month or two months ago, and that does come — and I think we also discussed it when we announced the acquisition that this does come, like, with higher gross margin for the portion of the business that it can take. So in a way, they somehow compensate for the relative reduction in revenues of Unified Communications. This is one thing. The other thing is, as Ofer mentioned earlier, this is the SmartVoice. SmartVoice also entails high margins that are higher than corporate average, and again, expecting record number of revenues coming from SmartVoice in the third quarter. This also drives gross margins higher than where it was in the second quarter and, more or less, to the levels of the first quarter which is again better than where we were in 2019.

Matt Ramsay

Thanks very much guys. Appreciate it.

Operator

Thank you. And your next question comes from the line of Suji Desilva of ROTH Capital. Please go ahead.

Suji Desilva

Hi, Ofer. Hi, Dror. So, a couple of segment questions, the service provider segment, the DECT demand you’re seeing in gateways, is that something that the growth you’re seeing here you expect to be steady over the next few quarters or will that be lumpy?

Ofer Elyakim

Hey. Hi Suji. I think that maybe we kind of touched the home gateway side. So I think you are seeing from a lot of operators that are reporting that they do see very nice strength in broadband, mainly by customers upgrading, ARPU increasing. In today’s world where a lot of the work is done from home, and broadband is the infrastructure to enable you to work from home, you do need a better service. And when you think about the different services that you use, voice is definitely one of them. And so I think that the one plus one really means that a lot of these service providers are looking for ways to deliver better services. So it’s not just about giving you an FXS port, meaning telephony port, at the gateway but more so to deliver you a really high quality of service, meaning if, for instance, when we’re doing a Microsoft Teams, a Zoom, a Webex call, we should be enjoying a wideband audio. And you’re used to that feeling, so why would you settle on a narrow-band call when with DECT-integrated in the gateway, you get even higher quality, up to super wide band of course assuming the other parties can support that. So I think that it’s really about maxing out and enabling a much better user experience. So we are seeing a fairly strong trend that I think we already started talking about in the first quarter that we see more and more service providers rethinking not only broadband but also voice strategies and launching new gateways that can deliver and support a much better quality of service and, in a way, trying to differentiate from the others that don’t provide that and trying to kind of churn more subscribers to come their way. So this is very clear directions that we see, I would tell you, across the board. We’re actually very surprised by the momentum. We were not expecting that, and it’s really nice to see that service providers can act that quickly.

With respect to the cordless front which is more of a retail angle, a completely retail angle, there is a much higher utilization of landlines. People used to have these sets. They were at home, and you used them whenever you needed to, but now we spend a lot more time at home. There is social distancing in place. We want to call — we want to make calls. And not everyone can have a perfect call with our mobile phone or using Wi-Fi. And many do find the landline as the best way to conduct lengthy calls where your line never disconnects, people don’t hear you choppy, so quality of service is steady and consistent. And there, we do see a ramp or an increased level of demand, and we’re seeing that both in — I think we spoke about it in — when we reported Q1. We’re speaking about it now. It does not mean that cordless phone suddenly emerges to become a growth category, but it surely indicates, at least in the — this period of time, that the decline has lessened, that we’re seeing I would say a much slower decline with respect to the pace of the calls in telephony market. And I think that we expect that to continue. I cannot tell you if this is going to be sustainable or not. I believe that at one point, we should and we hope to resume the old normal. And people perhaps remember that this is a great way to have and conduct calls, and the quality is terrific, but I’m not sure how sustainable that is let’s say for more than I would say a year or two, but so far, so good. So it definitely helps to see that the declines have softened.

Suji Desilva

Okay. And staying on sort of the SmartHome arena, these products like the Facebook Portal, Cisco and Zoom’s hardware coming out, what’s the size of this addressable category? And where are you placing those revenues in your segments, just so I’m clear on that? And what are the signs of like market traction here? Is this going to be a material market for you guys?

Ofer Elyakim

Yes. Thank you. So we’re talking about these new emerging products that are kind of specifically built for this work-from-home environment where you need background, where you need the camera to follow you, where you want to appear as the best as you can from a video, but also from an audio perspective, you want to hear well and you want to be heard really well, and for that, you need a lot of tracking. You need, like, very sophisticated beamformers, you need a superb acoustic echo cancellation, and you need all of, like, noise cleansing in order to mask out any background noise. So these products are now in design. Early parts or early products were launched. They’re selling and they’re selling well, but they’re not — I cannot call them a big part of our revenues, whether these are in the Unified Communication part or the SmartVoice part. I would say that I think that for the future, most of these products are going to be part of the Unified Communication product line, assuming that they take the algorithms that belong to the Unified Communication front. The Facebook Portal TV is actually part of our SmartVoice, but that doesn’t mean that with any new product that will be launched, that will be the case. And I do expect that to become a category, especially if work from home continues. And from my perspective, it will continue, and so as time elapses, I think that we will see more and more people substituting the quality that they get from their PC or their iPad or the ways that they’re doing the calls today to something that will deliver a much more robust experience. And I think that this is what you need when you need to accomplish things at your work, and you — with I would say much less trouble and the need to substitute face to face with a kind of virtual — with a virtual domain, this is mandatory. And this is I think the way to go. And so, I do believe that it will become a meaningful category. And I would suspect that it could reach I would say a quarter or even higher than that with respect to the overall mix of products in the UC market.

Suji Desilva

Okay. Thanks for the color there.

Ofer Elyakim

Thank you.

Operator

Thank you. [Operator instructions] Next question comes from the line of Charlie Anderson of Colliers Securities. Please go ahead.

Charlie Anderson

Yes. Thank you for taking my question. Just sticking on Unified Communications, Ofer, I wonder if you had a view into what the true consumption trends are right now. Obviously, you’re up 15% in Q2, and I think it sounds like from your commentary, it’s unlikely that the market was consuming at that rate. And obviously, it looks from your guidance like maybe it will be below what the actual consumption is. So I wondered maybe if you could just level set us on as people are working from home, what those consumption trends look like as we sort of think about how you emerge from this. And then I’ve got a follow-up.

Ofer Elyakim

Yes. Thank Charlie, and a very good question. So we’re also scratching our head to figure out these numbers, but from what we see, indeed, the consumption, so what we will ship out in the third quarter to our customers, in our view, is way less than what the end market is using and consuming in terms of purchases. And as you rightfully said, it is — makes all the logical sense that also what we shipped in Q2 and perhaps also in Q1 maybe overstating or much more than what the market really consumed because in March, we did have this period where end products were not purchased in China because COVID hit. And late March into April and May, we had these global lockdowns which I would assume that also enterprises were not really pushing the gas pedal and installing these UC devices in enterprises and at home. And right now in a way from an end market perspective, we actually should see a recovery which we are not seeing in our Q3 because we are just at the beginning of that food chain where we ship the chipsets into the manufacturer that then ships to the brand that then ships to the value-added resellers that then go to the end customers. So I would suspect that the market is recovering right now, the end market, because we do see a lot more offices being open, and I think that some of the industries are starting to recover and resume operation.

For the year, from what at least we see in terms of IT spending budgets, as I said, around mid-teens type of decline this year, probably, if we had to kind of take a guess, I would say it should be down there, maybe in the 20s type of a decline for this year. This will be my best estimate for our UC products for this year. However, as I indicated for the fourth quarter, because of the trough that we’re in, it is very hard to get the visibility on how Q4 would look like. First of all, we’re very early, and if you take around eight weeks lead time, you can understand that there’s very little in the bag also under normal circumstances. So the visibility I would say is not there or not that clear at the moment, and I think that we’ll have a much better idea when we report next late October, early November. I hope that covers your question, Charlie.

Charlie Anderson

No, thank you for all the color. So, sticking on this point, you’ve made a lot of progress with SmartVoice on tablets. And then you mentioned there’s going to be these discrete products for kind of work from home associated with Zoom and others. I wonder many of us are doing our calls and conferences just on our PCs today. Can you remind us if you have any exposure on the PC or if it presents an opportunity for you as more people just use that effectively as their communications tool?

Ofer Elyakim

Thanks, Charlie. So I do think — so we do have exposure, so we do have engagement on the PC front as well. And I actually do believe that the fact that — I would assume that also PC vendors would want a share of this market which they have just by the fact that people are using their PCs to launch these collaboration tools, and what’s more simple than to use the speakers and the mic or connect a headset to it. So I do believe that this actually presents a golden opportunity for us in the PC space because when you compare the voice quality that you can get and also the video quality that you can get in a PC to what you will be able to get in a proper UC endpoint like let’s say a Portal TV or one of the new Zoom products, et cetera. There is a world of difference in terms of the quality and in terms of — both from image to audio and voice, and a lot of that could also find its way into — in an integration into the PC domain with respect to applying all of these algorithms, putting these voice capabilities in the video side. So we will see. I think PC is also changing. The PC domain has been shipping us these products for many years where the camera was there, the microphones were there, the speakers were there, but no one intended these online meetings to be the majority of our work and meetings. And I think that now there is this opportunity to upgrade both these devices as well as the new hardware that a lot of the Unified Communication companies are going to launch or some of them are already started launching.

Charlie Anderson

Great. Thanks so much.

Operator

Thank you. And your next question comes from the line of Ari Shusterman of Needham & Company. Please go ahead.

Ari Shusterman

This is Ari taking the question for Raji Gill. So I first want to talk about SoundChip. How has the integration there been progressing so far? And I think you mentioned that you expect to realize a 2x increase in TAM. Can you kind of walk us through kind of when do you expect to realize these increases? Thank you.

Ofer Elyakim

Hi, Ari, and thanks for the question. So with respect to SoundChip acquisition, we — the transaction was signed in June, closed in early July. And today, the SoundChip team is an integral part of the DSP Group team, and they’re coming up to speed despite all the travel restrictions and the other restrictions. And I think that the teams that have been working for the last two-plus years together on many programs, one of which we spoke about in today call. This is the Panasonic and the Technic true wireless buds with ANC that are getting rave reviews and getting compared to the topnotch in the market, and I think they will see — and they will fare very nice success. We already start to see that. And so I think we’re very excited about combining the two skill sets together and forming a value add with respect to acoustic design as well as analog design and semiconductor, together with our capabilities around the algorithm which will be very different from the competitive landscape. And in a way, customers will be able to get from us all the support that they need, even those that are first to market with ANC. Those that have never really done ANC and actually want to deliver best-in-class ANC can get from DSPG, with the collaboration of SoundChip, all the expertise from the acoustic design up to the production line testing to enable those customers to realize not only great design and great quality but also the right yields and the right qualities when it comes to manufacturing effectiveness. So I think that on that, we’re very happy.

With respect to the SAM that I indicated in my prepared comments, I would say that so far, the SAM that we’ve indicated, and you can see it in the investor presentation, when you multiply the unit volume with the I would say average churn prices, you would get to a TAM of about $3 or so billion. And the SAM that we are talking about right now is today at least that, if not much higher. And it is built based on the fact that the world is going to move from these stereo units which we’ve seen over the past couple of years, to a much larger SAM that will include a lot of these true wireless products that are going to take and adopt a lot more technologies. ANC is one of them, but ANC is just the beginning. There will be a lot of intelligence that will be incorporated into these assets to understand your environment, to deliver you a lot of additional services, to alert you, to understand your hearing deficiency and fix them. And a lot of these new and smart features are using the elements that are enabling ANC.

And so, we believe that with where we’re heading, the — if we say in our presentation that by 2025, we will address SAM of about $6.5 billion, we believe that the hearable market will give us at least that in terms of SAM value, but of course, as we also move along, we’re also going to incorporate a lot more technologies into our hearable proposition so that we are a one-stop shop for the hearable domain from the entry level to the very high end, but of course, I think that we will mainly compete for kind of the flashy, the high quality that you can find in the market. This is where we’re heading, and I think that most of the market, from a unit and also from a revenue perspective, will be skewed toward the very high end. And I think that this — at least a trend is clear today when you look at the market shares of the different companies in the true wireless domain. People want quality, people want more advanced technology, and they want smaller headsets. They want them to last longer. And I think that this is exactly the direction that we are sharpening with respect to our offering in the hearable market.

Ari Shusterman

Okay. Thank you. And just a quick follow-up, so regarding ULE adoption, can you comment on your design win pipeline? What trends you’ve been seeing? Thank you.

Ofer Elyakim

Yes, absolutely. So as we discussed, we’re seeing ULE is being adopted much more widely today in Europe, and if you look at some of the commentary we made last quarter and also this quarter, this is exactly what we see. There’s a lot more realization that the technology, it does provide you a full infrastructure for doing Internet of Things applications and can deliver both data, voice, audio streaming, full band and also imaging using one RF, which is ULE, delivering you the best propagation in an indoor environment, the best range, interference-free. And I think that all of that also comes with very low power consumption. So I think that we are seeing a lot more penetration and also interest in ULE products. And this comes both from SmartHome providers as well as the security side in which we believe that ULE will play a key role in the future already started with the launch of Blue by ADT, but this is just the beginning. So we definitely have very high hopes, and we are great believers in the role that ULE will play both in America as well as in Europe.

Ari Shusterman

Thank you.

Operator

Thank you. [Operator instructions] There are no further questions coming through at this time. I would now like to hand the call back over to Tali Chen.

Tali Chen

Thank you for listening in and for your interest in DSP Group. We look forward to report back to you in 90 days.

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