Update: DSP Group Q2 Earnings - Sales, EPS And Forecast Beat; Stock Up 5%

Aug. 1.14 | About: DSP Group, (DSPG)

Summary

Solid Q2 earnings show GAAP EPS of $0.05, non-GAAP EPS of $0.12, beating by $0.06, revenue down 10% but beating consensus and management forecasts.

The long thesis based on DSPG trading at book value, having very small downside and a strong upside based on a turnaround has played very well.

I reiterate my long thesis. The fair value is $10, offering a ~15% upside within a year.

DSP Group, Inc. (NASDAQ:DSPG), the multimedia chip designer, reported strong Q2 2014 earnings, beating on both revenue and EPS (SEC filing, conference call). While revenue fell roughly 10% Y/Y, it beat DSP's own mid-range forecast. Furthermore, net income increased, reaching $1.1M on revenues of $36,3M, compared to a net income of $0.75M on revenues of $40.7M Y/Y. EPS was $0.05 per share, compared to $0.03 a year ago. Non-GAAP EPS was $0.12 per share vs. $0.15 a year ago, beating estimates of $0.06. Gross margins were 40.7%, exceeding the high end of the guidance. DSPG generated $5.5M cash flows from operations and repurchased ~0.31M shares, or 1.4% of float during Q2.

For Q3 2014, DSP expects revenue of $34M to $37M, roughly flat Y/Y. Adjusted EPS are expected to reach $0.03 to $0.04 per share, down from $0.08 last year, but beating consensus of $0.01 EPS and $33.4M sales. Management comments regarding the Q2 results as well as the future were also very upbeat:

"We are delighted that our investment in new products is paying off and contributing to our strong financial results. In particular, our Office/VoIP products achieved record revenues and the major design wins we secured this year give us high confidence that the growth in this and other segments will continue. We remain well positioned to meet the key milestones we have set forth for this fiscal year and subsequently reach an inflection point in our business in 2015."

In my words, the turnaround continues well. My thesis expected this turnaround to continue. The stock was up 40% at its peak, and is still up 25% in a year since my thesis, and I am reiterating my long case. The updated fair value based on the current results and outlook is roughly $10 per share, offering a 15% upside within 12 months, even after the current post-earnings 5% spike. However, the company still holds a huge net cash pile of $120M, representing roughly 60% of its market cap and 80% of sales. Not counting the money needed for the day-to-day operations and a cash cushion needed as a volatile semiconductor company, DSP still could increase its sales and market value by roughly 40% in an acquisition or through strong share buybacks that have been continuing. Therefore, a temporary upside may be even larger based on a potential acquisition.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.