DSP Group (DSPG) CEO Ofer Elyakim on Q4 2015 Results - Earnings Call Transcript

| About: DSP Group, (DSPG)

DSP Group, Inc. (NASDAQ:DSPG)

Q4 2015 Earnings Conference Call

February 2, 2016 08:30 AM ET

Executives

Ofer Elyakim - Chief Executive Officer

Dror Levy - CFO

Analysts

Charlie Anderson - Dougherty & Company

Joshua Buchalter - Needham & Company

Daniel Amir - Ladenburg Thalmann & Co. Inc.

Sergey Vastchenok - Oppenheimer & Co. Inc.

Matthew Robison - Wunderlich Securities Inc.

Robert Sales - LMK Capital Management

Operator

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2015 DSP Group, Inc. Earnings Conference Call. For your information, today's conference is being recorded.

At this time I’d like to turn the call over to your host, Mr. Dror Levy, CFO. Please go ahead sir.

Dror Levy

Thank you. Good morning ladies and gentlemen. I am Dror Levy, Chief Financial Officer of DSP Group. Welcome to our fourth quarter 2015 earnings conference call. On today's call we also have with us Mr. Ofer Elyakim, Chief Executive Officer.

Before we begin, I’d like to remind you that during this conference call we will be making forward-looking statements about our financial projections for the first quarter of 2016 and full-year 2016, optimism about market adoption of our new product, the prospective design wins and commercialization timetable for such products, our short and long-term prospects and the ability to increase shareholders’ value, meaningful revenue contribution from HDClear, present revenue growth for 2016 and greater recovery of cordless business in the second half of 2016.

Actual results or trends could differ materially from our forecast, including the magnitude of decline for our cordless business; unexpected delays in commercial launches or mass production of products incorporating our technologies, including HDClear, Voice over IP, SparkPA, home gateway and ULE, the growth of new market verticals, our ability to manage operating expenses, our ability to secure additional design wins and general market demand for products that incorporate our technology in the market.

We assume no obligation to update these forward-looking statements. For more information, please refer to the risk factors discussed in our 2014 Form 10-K and other SEC reports we’ve filed.

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

Ofer Elyakim

Thank you, Dror. Good morning everyone and thank you for joining us today. I hope that you had the opportunity to read our press release that we distributed earlier today. I’d like to begin by reviewing our results for the fourth quarter and full-year 2015, commenting on the progression of our business plan and providing context on our outlook. In a short while, Dror will provide you with detailed comments on our financial results and outlook for the first quarter of 2016.

For the fourth quarter of 2015, we achieved financial results that were better than our guidance in many metrics. Our performance reflects record revenue contribution from new products and particularly into the end of the quarter a successful achievement of an important milestone event, a major design win for HDClear.

Additionally, we generated record revenue in our Office/VoIP segment and one significant contract with major global telecom provider for our ULE product. These positive developments demonstrate the successful execution of our business plan and the formation of a solid new product business, which positions us well for sustainable revenue growth and higher profitability.

Fourth quarter revenues of approximately $33.8 million were down by approximately 9% versus the fourth quarter of 2014 and down by 4% on a sequential basis. The decline in fourth quarter revenues was a result of softer market environment for cordless phones, which we expect will continue to persist in the first quarter of 2016, but is expected to gradually improve starting in the second quarter of this year. This decline was partially offset by new product revenues which accounted for 33% of revenues driven by record results in our Office and VoIP segments.

We generated non-GAAP operating profit of approximately $1.4 million or 4% of revenues versus $1.2 million or approximately 3% of revenues in the same period last year. The higher profitability was achieved due to record fourth quarter gross margins of 43% and lower operating expenditures, both of which in aggregate more than offset the decline in sales.

Our continued focus on profitability and cash flow generation resulted in strong operating cash flows of $12 million for the full-year 2015 and a healthy cash balance of approximately $122 million at year-end.

Just over three years ago, we made key investments to enable DSP Group access to new market segments, enterprise, mobile and IoT. These investments led to a new product launches, which provided DSP Group with exposure and a highly competitive presence in this growing market, as well as the growing design pipeline with Tier 1 customers by leveraging our core key knowhow and technologies.

Our investments in new products has paid off this year and continue to trend in the right direction also in the fourth quarter as evidenced by record revenue contribution from new products of $11.2 million which grew by 48% year-over-year and accounted for a record of 33% of total revenues compared to with only 20% of total revenues in the fourth quarter of last year.

For the full-year new product revenues accounted for $40 million, representing a solid growth rate of 35% year-over-year. We expect the growth rate of new products to further accelerate in 2016. We also achieved record high non-GAAP gross margins of 43.2%, which we believe can further expand during the course of this year as our product mix shift in favor of new products.

There are plenty of opportunities and challenges that lie ahead. Nevertheless, we’re very optimistic about our business outlook for both of the short and long-term periods and believe these opportunities will continue to create ample shareholder value.

Now I’d like to provide with specific updates about the progress in each of the segment, starting with the mobile. I’m delighted to report that we’ve successfully accomplished our strategic goal of a major design win with a leading mobile equipment manufacturer for HDClear. The accomplishment of this key milestone is further evident that this product segment has passed the market validation test.

We expect that shipments of HDClear product from our new design wins will provide DSP Group with meaningful revenue contribution in 2016. We also project revenues of between $2 million and $3 million for our mobile segment already in the first quarter of 2016.

Our mobile product features a low SAR consumption and best-in-class performance for Always-On Voice and Voice enhancement. And today we have two design wins that are and also in advanced engagements with a number of leading mobile OEMs and expect this engagements to materialize and convert into design wins during the year. We are therefore optimistic about the outlook for our mobile segment and expect our HDClear to become a meaningful growth engine this year.

Moving on to the VoIP and Office segment, the VoIP market represents a core and solid growth opportunity for us. The combination of our expertise, a comprehensive product roadmap and existing and new engagement make us confident about our strong position and future prospect.

During the fourth quarter, we continue to solidify our leadership position in the market and are entering 2016 with a strong design pipeline of leading OEM customers. Moreover, we’re proud that Polycom, a global leader in unified communication chose our DECT and Voice over IP SoC for its next generation DECT and IP phones.

The fourth quarter was another record quarter for our Office/VoIP segment. Revenues from these segments were $7.1 million, an increase of 79% year-over-year and of 13% sequentially, driven by solid demand for VoIP products across the board. For the full-year, Voice over IP revenues were $22.2 million representing growth of 56% versus $14.3 million in 2014.

Based on our backlog and customer focus, we expect first quarter VoIP results to post solid growth on a year-over-year basis to approximately $5 million. Notwithstanding the fact that this quarter is typically a seasonally soft quarter, we also expect to see gradual growth in VoIP revenues throughout this year. We are optimistic about the outlook for our VoIP business and believe it is well positioned for another year of solid revenue growth.

Now to an update about the Home segment. Starting with our newly launched SparkPA. Last month at CS, we launched a new and highly innovative product category that leverages our decade-long of CMOS RF design expertise. SparkPA is a 5 gigahertz Wi-Fi power amplifier or PA, with the highest RF transmit power and best linearity available in CMOS technology.

The initial target market for this PA is the Wi-Fi 802.11ac 5 gigahertz and in particular access points, we believe that this market presents an initial revenue opportunity of approximately $100 million. Moreover, our technology is scalable and is designed to cover several higher volume segment of Wi-Fi PAs, which represents a much wider market opportunity which is in excess of $1 billion. Our IP could also be used to support additional wireless technologies which require best-in-class RF transmit power and linearity.

The SparkPA is a new technology that features outstanding RF performance from a standard CMOS Process and opened for DSP Group a door into a new market opportunity of Wi-Fi PAs. Wi-Fi products would typically shift with four to eight PAs in a high-end home gateway and at least two PAs in a very basic Wi-Fi client. This product by leveraging its superior linearity performance is well positioned also to support the new Wave 2 and Wave 3 of 802.11ac Access Point requirements, and also multi-user MIMO at 4x4 and 8x8 topologies as well as the future 1024 QAM. We expect to start evaluation of SparkPA this year and have targeted 2017 for commercial shipment.

Now to an update on home gateway. As expected, our home gateway revenues were seasonally lower in the second half of 2015 when compared to an exceptionally strong first half. Fourth quarter revenues of $2.6 million, were down by 9% year-over-year, but improved by 15% on a sequential basis.

Looking at the full-year 2015, home gateway performance was inline with our expectation, generating revenues of $13.8 million representing a growth of 14% versus 2014. We expect revenues from home gateway in the first quarter of 2016 to remain at similar level results of the fourth quarter of 2015 and to see sequential pickup in the second half of 2016 coinciding with new product launches.

Over the course of 2015, a record number of service providers have integrated DECT into their gateways and during the fourth quarter a leading service provider in Australia launched a new line of home gateways with our DCX81 for High Definition Voice and ULE support. The underlying market trend behind the integration of DECT into gateways is the growing adoption of High Definition Voice and many service providers are upgrading their infrastructure and home gateway terminals to support High Definition Voice, which provides us with further potential of growth opportunities.

Moreover, we’re seeing a growing number of telecom service providers that are already leveraging their DECT enabled home gateways as they look to offer their subscribers with out of the box IoT services, which are plug and play at a much lower cost of ownership both with the service provider and the end-user.

Now turning to IoT. We are enthusiastic about the market recognition and the growing customer base of our ULE technology. During the past 12 months, eight new OEM and three leading service providers have launched products based on our ULE technology, driven by the key attributes that DECT and ULE bring to the IoT market. These merits include the better home coverage and longer range, interference free and dedicated band and natural support for two-way data, voice and video.

The market recognition and embracement of our technology and product as manifested by two recent strategic announcement. The first is with Turkcell, Turkey’s leading service provider which announced the launch of smart home IoT services including multiple smart home devices, such as smartplug, light bulb [ph], thermostat, smoke detector and several other nodes and sensors all powered by our ULE SoC.

Swisscom, Switzerland’s leading telecom provider launched an innovative programmable button by Askey from Taiwan based on our ULE technology, offering their consumers programmability for buttons to support multiple use cases. For example, managing home Wi-Fi, home control of lighting and many more by a simple press of a button.

To summarize, we’re successfully progressing on a number of strategic engagements with our ULE business, which includes both ULE and DECT products for smart home. We expect to convert these engagements to commercial product launches throughout 2016. We believe that we’re on the right track for solid growth from our IoT based product in 2016.

And now for an update on the cordless phone market. Please note that all the figures and comparison made in this section are for cordless phone SoCs only and not include revenue for home gateways and IoT.

Sales of our DECT product for the European and rest of the world cordless phone end markets in the fourth quarter were down by 20% year-over-year and flat on a sequential basis. Sales of our DECT products for the European and rest of the world cordless phone end markets accounted for approximately 31% of revenue.

Demand for DECT product across North American cordless phone end markets are weaker than expected with revenues down by 39% year-over-year and 33% sequentially. DECT 6.0 products for the North American cordless phone end markets accounted for approximately 20% of revenues.

Total fourth quarter revenues from cordless phone chipsets, accounted for 67% of revenues and were down by 24% versus the fourth quarter of 2014 and by 12% on a sequential basis. For the year, cordless phone revenues declined by 8%, which was inline with our expectations for the full-year.

We anticipate the demand for cordless phone will continue to decelerate in the first quarter of 2016 and expect cordless phone revenues to be down by approximately 30% when compared to the fourth quarter of 2015 due to weaker end market demand that is expected to persist also in the first quarter.

However, we do expect this correction to be over in the -- at the end of the first quarter and to see improving trends of stock replenishment starting in the second quarter. We view the expected decline in the first quarter as abnormal. Point of sales data for the two major geographies, U.S., and Europe, which measure end market demand, do show slower activity of demand in the second half of 2016 for cordless product as well as for many other consumer categories, driven primarily by slower holiday season sales in 2015.

However, the rate of decline in the second half are at the levels of high teens in the U.S and down by low teens in Europe. Based on this data which implies a higher than expected inventory in the supply chain at year-end and our customer assessment, we expect cordless demand this year to recover from the dip of the first quarter and to be down in the high teens on a percentage basis compared with 2015.

And now to an update on our outlook. We expect first quarter revenues to be a combination of two diverging trend line. The record contribution from our new product and a much weaker fourth quarter for the cordless business due to the weaker demand for cordless telephony products.

Based on forecasts received from customer, current backlog, and our own assessments, we expect revenues for the first quarter of 2016 to be in the range of $25 million to $29 million, which will result in a temporary operating loss. Nevertheless we expect the following for the full-year to achieve revenue growth and higher profitability for the full-year of 2016.

We expect revenues from new product to accelerate on the heels of strong contribution from mobile, solid growth in Voice over IP, and new ULE product launches. We want to realize margin improvements from the growth of our new products for the full-year 2016.

To summarize, in 2015, we successfully transitioned the Company and grew revenue supported by record contributions from new products. We executed on our growth initiatives as evidenced by the recent major design win announcement for HDClear, record revenues achieved in VoIP, and winning strategic designs with ULE.

More importantly, we view DSP Group today as a combination of two separate healthy businesses. The first, a profitable yet mature cordless business, which is in decline, but continues to generate significant free cash flow.

The second, and more importantly a growth business with a following financial profile. $40 million in revenues in 2015 at a gratified base of new products, which have a very strong competitive position across the board and addresses large and growing markets. The product [indiscernible] with higher margins than the mature business and a growth rate that is expected to accelerate beyond the 35% achieved in 2015. We believe this gross business will be the foundation upon which we will drive shareholder value. Given the solid execution of our team and the successful market adoption of our new initiatives in VoIP, mobile, home gateway and ULE, we’re confident in our ability to sustain revenue growth in 2016 and beyond.

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

Dror Levy

Thank you, Ofer. I’ll now review the income statement for the fourth quarter of 2015 from top to bottom. For each line item I’ll 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 fourth quarter were $33.8 million. Gross margin for the quarter was 43%. The gross margin for the quarter included equity based compensation expenses in the amount of $0.1 million. R&D expenses were $8.8 million, including equity based compensation expenses in the amount of $0.5 million.

Operating expenses for the quarter were $15 million, including equity based compensation expenses in the amount of $1.1 million, amortization of acquired intangible asset in the amount of $0.3 million, and the write-off of an option related to previous investment in a private company in the amount of $0.4 million.

Financial income for the quarter was $0.3 million. Income tax benefit for the quarter was $0.1 million and included a tax benefit resulting from the amortization of deferred tax liability related to intangible assets in the amount of $0.1 million. The net loss was $0.1 million including equity based compensation expenses of $1.2 million, amortization of intangible assets and option write-off of $0.7 million and tax benefit resulting from the amortization of deferred tax liability in the amount of $0.1 million.

Non-GAAP net income excluding the item I’ve just described was $1.7 million. We have no GAAP earnings per share for the quarter. Negative impact of equity based compensation expenses on the EPS was $0.05. The negative impact of amortization of acquired intangible assets and the option write-off on the EPS was $0.03, positive impact of the tax benefit resulting from the amortization of deferred tax liability on the EPS was $0.01. And the non-GAAP diluted earnings per share excluding these items I’ve just described were $0.07.

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 fourth quarter of 2015 decreased to $19.2 million, compared to $22.7 million at the end of the third quarter of 2015, representing a level of 51 days of sales. Inventory decreased from $12.1 million at the end of the third quarter to $11.5 million, representing a level of 54 days.

Our cash and marketable securities increased by $5.1 million during the fourth quarter and were at the level of $121.7 million at the end of December. Our cash and marketable securities position during the quarter was affected by the following: $8.3 million of cash was provided by operations, $0.7 million of cash was used for purchase of property and equipment, $2 million of cash was used to repurchase of approximately 206,000 shares of our common stock at an average price of $9.8 per share. $0.1 million of cash were received from exercise of those options by employees and $0.6 million was a change in the market value and amortization of marketable securities.

Now, I’d like to provide you with our projections for the first quarter of 2016. Our first quarter ’16 projections on a U.S. GAAP basis including the impacts of equity based compensation expenses and acquisition related amortization expenses are as follows: Revenues are expected to be in the range of $25 million to $29 million. We expect our gross margin to be in the range of 40% and 43%.

R&D expenses are expected to be in the range of $8.5 million to $10.5 million. Operating expenses are expected to be in the range of $14.5 million to $16.5 million. Financial income is expected to be in the range of $0.25 million to $0.35 million. Provision for income taxes for the first quarter is expected to be approximately $0.1 million and the number of shares outstanding is expected to be approximately 23 million shares.

Our first quarter projections include approximately $0.3 million of amortization of intangible assets and also include the following amounts forecasted for equity based compensation expenses. Cost of goods sold includes approximately $0.1 million. R&D expenses include $0.5 million to $0.7 million, and total operating expenses include $1 million to $1.2 million.

Now, we’d like to open-up the line for questions-and-answers. Operator, please?

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] We will take our first question today from Charlie Anderson of Dougherty & Co. Please go ahead.

Charlie Anderson

Yes, thanks. And thanks for taking my questions. Ofer, I just want to make sure I understand what you’re saying on cordless telephony. You’re down considerably in Q1. Are you saying it was sort of down high teens the rest of the year or is that down high teen to the full-year amount, meaning we have some offset to this way down Q1?

Ofer Elyakim

Hi, Charlie. So the latter. We’re talking about mid to high teens for the full-year. So for the full 12 months in 2016, so that’s kind of taking into account the dip in Q1 and then gradual improvement throughout the year.

Charlie Anderson

Got it. And then, should we think about that as the go-forward rate of decline for that business even beyond this year? I know its tough to have that kind of visibility, but I know you’ve always felt in the past kind of 10 to 15 was, or maybe even 10 to 12 was the right way to think about. I wonder how you’re thinking about it now.

Ofer Elyakim

I’d say that we’ve not really changed our view. We are just looking at what is happening in the market and we did see a decline or a harder decline in the second half. As I said, I don’t think it’s just cordless, I think on a much more broader base. But we’ve seen a decline that were worse than in the first half. And we’re also seeing this kind of a supply chain depletion cycle that is kind of hitting very hard in the first quarter, but we also have, I’d say kind of from the assessment of kind of the market and think on where customers are in terms of their inventories etcetera. We believe that this weakness should end by the end of the first quarter.

Charlie Anderson

Right. And then, moving on to the Voice over IP and mobile, I wonder if you could sort of talk about the trajectory of both of those businesses. You’re ramping with a new customer in Q1 in mobile, does that relax for a quarter and you mentioned other OEM, so just kind of understand the trajectory of that business and also Voice over IP down seasonally, but you’re shipping more OEM. So what does that trajectory look like as well?

Ofer Elyakim

Right. So maybe we start first with Voice. The Voice ended ’15 with over -- just over $22 million. So that represented a growth rate of about in the 50s. We believe that kind of this type of growth rate is also suitable for this year. So we’ve a pretty strong design pipeline and expectations to kind of ramp additional customers to production. And again kind of Q1 also last year and I believe the year before as indicated to be kind of seasonally lower quarter. We are not sure exactly why, but this is kind of how it shapes out to be, but since for us this is a growing category in which we’re kind of putting layer after layer and kind of more customers and more model are gradually going into production. We expect again 2016 to be a gradually growing year from Q1 to Q2 to Q3, etcetera. Of course, we don’t have like the visibility, the exact visibility of how each and every quarter will behave, but we believe that this is kind of the case for us as we know that new customers are going to ramp in the second quarter than in the third quarter and in the fourth. And so, for Voice over IP, we do expect another year of very strong growth. On mobile, I’d say that Q1 right now based on our expectations, marks the first three quarter of kind of strong contribution from HDClear. We expect the output to continue and show significant contribution or meaningful contribution for the quarter. I’d say that right now our expectations are to be, I’d say in the high single to maybe kind of very low teens type of revenues as of now. But I believe that, first of all, during the year kind of as a visibility in terms of kind of what exactly to expect and how to look at these design wins and also a design win that we hope to secure and achieve with additional OEMs kind of we will get clear and we will have kind of, I’d say, a better visibility as we make progress throughout the year.

Charlie Anderson

Great. And then last one from me is on gross margin. You had a really good one in Q4. I think your mix of business will be indicative of good gross margin in Q1 as well. But I think its guided down just a little bit sequentially, so trying to understand that. And as we go through the year, with the new products growing faster, do you feel like your gross margins should be moving higher over the course of the year? And then with SparkPA coming in, what is -- how does that influence margins in ’17?

Ofer Elyakim

Sure. So on the overall gross margin, I think that during ’15 we did see a very nice expansion in gross margin of about 170 basis points. You’re correct that for Q1 we will see a little bit of kind of gross margin coming down from a 43% in Q4, but for the full-year ’16 we do expect the trend to continue, meaning I think we’re very well positioned to see a very nice expansion in gross margin, taking into account all our expectations for each segment growth. So, I believe that we’re in well -- really well positioned to see kind of very healthy in gross margin expansion this year.

Charlie Anderson

Great. Thank you so much.

Operator

Thank you. Ladies and gentlemen, our next question comes today from Joshua Buchalter of Needham & Company. Please go ahead sir.

Joshua Buchalter

Hi. Thank you for taking my questions, and congratulations [indiscernible] new progress growth. I was wondering if you could again circle back to the cordless phone market, and maybe you could provide a little bit of details as to what makes you so confident that it can start to maybe that in Q1 to represent that trough in the declaration.

Ofer Elyakim

Sure. Hi, Josh. So the way we look at it, first of all, is we’re supplier to this market for fairly a long time. So we do know how much products were actually shipping in based on customer’s request. And then on the other hand, we also try to do a service with our customers to kind of understand exactly kind of where things are on the supply chain, but in addition to that we also survey the output, which is -- and on the output side we’re relying on point of sales data coming from kind of market research companies. So where we get a sense about how much products are actually shipping out and what are the year-over-year trends. So as I’ve indicated, we did see a little bit of a slow down in demand in the second half of 2015, but there is nothing special to report about in those level of decline. So in a way we see kind of Q1 as another kind of dip that is originating from the fact that the supply chain must have some excess inventory as -- in second half and especially fourth quarter, so meaning November, December sales were much weaker than expected. And in a way Q1 kind of reflect, first of all, kind of we were already in the starting in the third quarter seeing some weakness in cordless phone revenue that prolonged into the fourth and now we see that’s coming in -- also in Q1. So I believe and based on all the information we have that this should end at the end of Q1 and we should see gradual improvement in Q2, taking into account what we know about the end market demand, what we know about customers and what we have as customer focus for the year.

Joshua Buchalter

When you say improvement, do you mean a slower decline or a sequential increase?

Ofer Elyakim

Yes, so a sequential increase meaning also if lower decline year-over-year compared to the decline that we’re seeing in the first quarter, that’s what I mean. But I think on a -- Josh, the big picture is DSPG today is a combination of two companies. One is a cordless company in which DSPG has the lion share and in a way we’re serving the market demand and so this is a mature business. This business will continue to decline. We hope that it will decline slowly, but we’re going to continue and measure the market as often as we can. But this business is today generating very, very nice free cash flows for the Company, that we’re today discretionally investing in our future. And the second business is today a $40 million business, and as you saw we expect that business to grow at a much faster rate than it grow in 2015. So we’ve a real growth story here that, this is kind of where our execution is focused. This is the market in which we can really, I’d say, be more responsible for the kind of the execution and winning the milestone and I think this is kind of how we see the new DSPG and kind of where we’re very much focused on. Cordless is what it is. Its kind of very hard to make changes. I can give you our best estimates about the level of declines and all these kind of big volatility. This volatility existed last year. It was very nice to see increases, but it also came on the expense of kind of very heavy decreases in demand in the second half.

Joshua Buchalter

Thank you. That’s very helpful.

Dror Levy

Thank you.

Joshua Buchalter

I was hoping within the 35%, you said that new products could grow greater than the 35%, they grew in 2015. Could you maybe help us understand and outline some of the key growth drivers? Which business model they expect to contribute the most to that overall growth?

Dror Levy

Yes, sure. So, I think that when we look at the setup for 2016 in terms of new products, we have Voice over IP which ended the year with kind of the low 20s, million in revenues and we said that, we believe that this business should grow at approximately around 50% this year. So that will be the bulk of the new revenue growth and we have HDClear or mobile which is starting to contribute in a more meaningful way and that is the expectation for this year. We have the Home Gateways business that is also a category that in 2015 did generate over $10 million. And the last one is IoT which generated revenues of about, I would say $3.8 million in ’15, and we expect that to grow also in the year in 2016. So that will be kind of the makeup of the new product category in 2016.

Joshua Buchalter

Okay, thank you. And then the last one for me, you mentioned the $2 million to $3 million of HDClear revenue in Q1. Is that primarily derived from the major design win you recently announced?

Dror Levy

Yes.

Joshua Buchalter

Okay. Thank you and congratulations again.

Dror Levy

Thank you.

Operator

Thank you. We will now move to Daniel Amir of Ladenburg Thalmann. Please go ahead.

Daniel Amir

Thanks a lot. So a question here about the comment on growth here for 2016, I know we’ve talked a little of that about here there’s cordless, telephony. But how would the year progress here with $25 million to $29 million growth rate? It’s in the number here for Q1. Do you expect the June quarter to jump substantially, I guess, to the level that it was in Q2 last year, and from there on grow from there. Just trying to get a better idea how the snapbacks is going to happen, or is it much more second half that gives you kind of the confidence that you will have 2016 above ’15 given that you’re in a shortfall of about $11 million, I guess, here on a year-over-year basis given the mid range of guidance here for Q1?

Dror Levy

Yes. Hi, Daniel and thanks for the question. So just kind of to layout kind of where we are. So if you look at 2015, we’re basically seeing a sequential decline in quarter, so that means kind of first half is kind of the tougher comps, and second half should be for 2016 the more easier comp, and we have a business in which we’re seeing real weakness in Q1. So we expect to see the quarters, a category gradually recovering starting in the second quarter. And from what we’ve indicated, we believe that we will see a gradual growth coming from the new product. So actually we believe that our -- the numbers that we should book from new product should grow on a sequential basis. So that kind of gives you an idea about the fact that we do expect to see a recovery for the full -- the overall revenues from Q1 to Q2 to a level, I can't say that we have visibility today in the second quarter to say exactly where it is. But I do believe that we should see a very nice ramp from Q1 to the second quarter and then grow sequentially new products are starting to become a very meaningful part of the overall revenues, and so the growth there is going to matter for the overall revenues.

Daniel Amir

Okay. So just following up on that, so if we -- if we view [ph] ’15, it looks like the cordless telephony business is somewhere around $100 million or so. So ’16 it would be based on your guidance somewhere in the mid 80s or something like that maybe even low 80s. So where do you think it stabilizes? Is it stabilized around, I mean, what's just natural replacement, I guess. Is it $70 million and that’s kind of where the bottom of this business could be or you don’t necessarily see a bottom to this business in the next few years yet?

Ofer Elyakim

So Daniel, this is again a good question, but very hard to answer it. What I did say and I think that we were very consistent in the past about it. There is probably like a certain level of kind of secular or permanent decline. And now there are also on the edges kind of cyclicality that is coming in. So from a real estate activity in the market, that when it slows down the number of units that are being replaced goes down. There is also a consumer confidence and whatever is happening today in China, which is also another event that in a way kind of limits the manufacturer’s ability to make products. So, I would say today we’re in my view really dealing with kind of the cyclical aspect of it. Right now we have nothing to report vis-à-vis like a new permanent reason for decline. So in a way kind of what we are seeing is that during 2015, our customers requested a lot of material from us and hence the minus 8% for total cordless and perhaps the market did poor than that, and in a way kind of Q1 is paying for that, and also Q1 by taking the abnormal weakness in Q1 into the context of the full year. So we will see a slightly, a higher decline for cordless. But other than that we don’t really see any real change in the market. This is today a replacement market, two major geographies, U.S. and Europe. It does well when there’s good consumer confidence. It does well when -- it does better I would say when there is very nice real estate activity, but other than that its kind of very hard to forecast, and it will continue to be volatile.

Daniel Amir

All right, great. Thanks. So just shifting gear to the HDClear, so $2 million to $3 million this quarter, this is -- so just to clarify, this was coming from product announced in Q4, but additional design wins with the Tier 1 OEM that’s starting to shift. And then we should see an additional maybe couple of more products in the market as the year progresses?

Ofer Elyakim

Yes, so I think for this year right now our focus is based only on the design wins that are either are introduction or going to be introduction very soon. So this is where, this is what our focus is based on. I believe that during the year first of all we will have the volume and the growth of the volume coming from these design wins. And what we do hope to see is that several engagement or designs that we’re in will actually get complete and conclude with the design win, and we will start to see revenues maybe kind of close to Q4 or maybe in early next year. But additional products that we’re expecting will be very much kind of in the second half towards kind of the end of the year. I would say the bout of the revenues that we will see this year are from the design wins that we’ve indicated, and we believe that they’re also supported by very nice volume potentially.

Daniel Amir

All right. But just to clarify to the previous caller, so the $2 million to $3 million is related to products from new, from product shipment, from product win from last year; is that correct?

Ofer Elyakim

Yes. So we basically indicated two design wins. The revenues in Q1 are based on these two design wins. There is one design win which is supposed to contribute kind of the lion share of the revenues and the other which is a smaller one.

Daniel Amir

Okay, great. Thanks.

Ofer Elyakim

Thank you.

Operator

Thank you. We will now move to Sergey Vastchenok of Oppenheimer. Please go ahead.

Ofer Elyakim

Hello.

Sergey Vastchenok

Hello. Hi, guys. Just to clarify the guidance, you guided for Q1, ’16 the whole revenue still will be down 30% or cordless revenues will be down 30%?

Dror Levy

No, cordless will be down 30% compared to Q4. Total revenues will be between 25% to 29%, as we [multiple speakers].

Sergey Vastchenok

Okay. So, 30% -- sequential enough 30% year-over-year. Okay, got it. And it means, regarding the new product, you expect HDClear revenues will stay in the level of $2 million to $3 million in a quarter or it will go up?

Dror Levy

It could be at that level or higher. It really kind of depends on how kind of demand would look like throughout the year, but it’s -- I would say a good level for the year.

Sergey Vastchenok

Okay. And the rest of the businesses, you expect the Voice over IP and Home Gateway will be up in 2016 double-digit versus last year?

Dror Levy

Sergey, we said that we expect Voice over IP to post nice growth this year on the heels of additional design wins that should translate to a production to shipment gradually in the year. We did say that we expect in Home Gateway to see a gradual pickup in revenues and in units shipped in the second half, probably kind of around late Q2, early Q3 with new and Home Gateway launches, and that could kind of take the volume shipped higher to a higher level lets say in the run rate of about $2.5 million a quarter, this is what we expect in Q1. And so, that’s what we’ve indicated regarding Gateway and Voice over IP.

Sergey Vastchenok

Okay. Can you elaborate a little bit about the new product SparkPA? What does the competitive environment looks like [indiscernible] position in -- yourself in the market, and [indiscernible] competitive trends versus the products available?

Ofer Elyakim

Sure. So the SparkPA is a Wi-Fi power amplifier, the target is 5 gigahertz Wi-Fi and the technology is the new 802.11 AC which is a one gigabit per second over the air. So it requires the Wi-Fi range, so this could transmit power, but also it is a significant upgrade in terms of the bandwidth compared to 11n, which uses a much more kind of advanced modem, [indiscernible] to 56 type of model, and so that requires like very accurate transmission, this is the linearity. We believe that we’ve taken a seamless technology, the standard of process and actually created out of it a very strong architecture that today achieves a very nice performance, and actually best in class in Wi-Fi and very close or in some cases much better than other competing technologies like gallium arsenide and silicon germanium, this where other PAs, these are the materials that other PAs are made of. The first market that we target as -- for acquisition is the high-end access point market which includes high end Home Gateways et cetera. This market opportunity we decided today we believe it’s approximately $100 million for 11ac PA. These products are shipped with four or more PAs per access point. And we believe that we would start engagements this year, and this will translate to production and shipments in 2017.

Sergey Vastchenok

Okay. And the last question -- and the last question regarding the M&A strategy. You have a lot of cash on the balance sheet, and the run rate of buyback is really not very significant on the quarter basis. So the question is, if you’re looking for opportunities -- for M&A opportunities especially now when we have a market weakness and probably more opportunities, we used to see before?

Ofer Elyakim

Yes. So on the cash as Dror has indicated, we have done quite a lot of the share buyback this year approximately $13 million, I believe that -- we’ve shown that we did make buybacks at this or higher levels during the last couple of years, so I believe that we’ll continue to return cash to shareholders this way also in the future. We are today sitting on a very nice growth engine that was kind of created in DSP using the [indiscernible] basic and organic growth. We have plenty of opportunity ahead of us, as you can see from the variety of new products. We may opt to do packing, technology acquisition to complement areas where we believe we have gaps, certain gap in our roadmap et cetera. I would say that this is kind of where today we’re concentrated in.

Sergey Vastchenok

Okay. Thank you. Good luck.

Ofer Elyakim

Thank you.

Operator

Thank you. We will now take a question from Matt Robison of Wunderlich. Please go ahead, sir.

Matthew Robison

Thanks for taking the question. Can you say what the backlog was exiting ’15?

Ofer Elyakim

Yes, just one second, Matt. Around the end of ’15, it was around $17 million.

Matthew Robison

Okay. And, Ofer, can you give us a flavor of the pattern for these -- the cyclical pattern for the de-stocking and re-stocking in the cordless in the past. I know the broader trend is around 10% decline or something like that, we’ve talked about. But isn’t there, -- that have been sort of historical pattern of how many quarters it goes and then how many quarters it sinks?

Ofer Elyakim

Yes, I would agree with you. I think the OEMs in the market are basically battling two types of battles. One is to kind of better understand kind of how much output the market really needs, and number two is, competing between themselves about market share. So that makes it, I would say a little bit more complicated to get. But when we look -- if I look kind of last three years in terms of these kinds of deflation replenishment pattern, we would see that roughly about every six quarters there is a cycle. Now if you look at the last cycle we had was in Q1 of 2014, and after that we actually saw up until I would say second quarter of ’15 a very nice kind of up recovery cycle. And then now we’re kind of, Q1 will be the third quarter inner correction, and so we expect to see the recovery coming as I’ve indicated is starting in Q2, and then -- I would say based on the historical data, we should see the recovery continuing for a number of overall quarters at least if we take the past as an indication of kind of a future trend.

Matthew Robison

Is it normally a three quarter decline or more like a two quarter decline?

Ofer Elyakim

I’d say that it will be based on kind of the past it will be in 2014, the last two quarters in ’13, were fairly weak. So you can say it’s between a two to three kind of quarter correction cycle, but this can change.

Matthew Robison

Okay. Now when you talked about the HDClear in the first quarter, is that -- do you see that as a stocking period so that it might be unusually high magnitude or can we expect that, that level can be grown from a sequential basis?

Ofer Elyakim

So I think the level that we’ve see in Q1 is actually, I would say a good level kind of to move the loan and I’ve given some indication about kind of what we would like to see and kind of high single low-teen type of millions for the year. So in a way $2 million to $3 million per quarter gets you there.

Matthew Robison

Okay. When you look at that backlog at the end of the year, I presume that that’s principally the de-stocking of cordless and just no orders really for that business. Has there been, with this new business, was there anything reflected in there for what we’re talking about with the new -- the latest design in for HDClear, and how should we think of orders now?

Ofer Elyakim

No, so in that number there were no HDClear or if there was very, very little, a very small number. No, so that’s kind of the indication about what we would like to see in Q1. So backlog, our PO -- when you say backlog, these are kind of POs [ph] that are provided by the customers. And as you’ve indicated, most of them are really coming or proposedly are there to cover a cordless and Voice over IP and Gateway. So this is kind of the bulk of that backlog, and mostly of course queued towards cordless.

Matthew Robison

Are you expecting some significant new Gateway introductions mid-year, is that your backdrop for expected NSGs [ph] and growth in the back half?

Ofer Elyakim

Yes, I think in last quarter on our third quarter I recall, we did mention our biggest design win to date in Home Gateways with North American telco that should start production in the second half. And there are number of additional kind of high volume designs those should also ramp in the second half. So I would say late Q2, early Q3 into Q4.

Matthew Robison

Dror, I didn’t quite catch the margin guidance. Can you repeat that, and then maybe give depreciation and CapEx, and then I’ll be done for now?

Dror Levy

Sure. So margin for the first quarter -- gross margins are expected to be between 40% to 43%. And as we said in an answer to the previous question, we expected to ramp up again in the remainder of the year. So we do expect gross margin for the full year to be higher than this level of, and I’d tell you the mid-range of the 40% to 43%. This is for margins, and CapEx was $0.7 million for the quarter and depreciation was $0.4 million for the quarter.

Matthew Robison

Thanks.

Ofer Elyakim

So Matt, on the gross margins, so for the full year we expect margin expansion compared to ’15. So I think -- I mean that summarizes kind of what the Dror was trying to tell you.

Matthew Robison

Okay. Thanks.

Operator

Thank you. [Operator Instructions] We will now take a question from Bob Sales of LMK Asset Management. Please go ahead.

Robert Sales

Hi. Well, couple of questions. When -- just refresh me again when you describe IoT revenue, which -- does that fall under the traditional, in the bigger bucket of DECT and what are the products the IoT revenue is attributable to?

Dror Levy

Hi, Bob, and thanks for the question. So what we are trying to do when you provide the [indiscernible] the call is to really segment between new products which are growing -- which are growth category, among them is this IoT which is the combination of ULE and regular DECT products. And for the Telephony which is a separate category and this is the category which is maturing, and we’ve discussed a lot about it during this call. Now in the category of IoT we have two main products. ULE is the standard, so any product that is kind of standard compliant is considered ULE, everything else will be considered as DECT. This category today consists of, as we’ve said about eight new OEMs that [indiscernible] to the product this year, and three service providers that launched product this year and also some additional customers that launched product in the prior years. All of that is aimed I would say at kind of smart home IoT, including security, home monitoring, [indiscernible] smart home et cetera. So these are the categories, and all of that contributed in the fourth -- in 2015 $3.8 million, and the fastest growing revenue stream inside this $3.8 million is ULE.

Robert Sales

Okay, got it. And then, on the gross margin, I guess, you answered it twice, I’ll ask it one more time. Can you give just a little more detail as to why the gross margin would be down a bit in Q1, but up the rest of the year? Do you have like mass costs associated with new products or do you have some onetime benefits or losses between Q4 and Q1?

Dror Levy

So, the main reason is for the first quarter for gross margin being down is the fixed portion of the cost of goods. So our cost of goods are mostly direct expenses, direct also the product, but there’s also a certain fixed portion. So when revenues are down, gross margins are down, this is the main reason. And for the remainder of the year, for the total 2016 the same trend that we’ve seen in the last couple of quarters were the percentage or the percentage of new product out of the total product is increasing and gross margin is expected to increase. So also in 2016, as Ofer said compared to ’15, as we expect new product to represent a bigger portion of the total revenues, we also expect gross margin to be higher. And for the first quarter as I said, it’s mostly fixed versus variable cost.

Robert Sales

Understood.

Ofer Elyakim

And Bob, to that point on gross margins; so what you’ve seen I think over the last four years is gradual improvements in the margin profile as new categories started to contribute to revenues which are coming in at higher gross margin compared to the average -- which in the end average it was mainly cordless. And so, gross margins have progressed from, let’s say, kind of the high 30s into kind of the 40% into kind of the low 40s. And I would say kind of the next step for us will be the mid 40s, and this is kind of where now we’re aiming at, not sure we’ll get there by the end of ’16, but we want to see a further progress and expansion in gross margins as we’re adding more new products to the mix which are coming in at better margins.

Robert Sales

Got you, okay. And then, with respect to that, the fixed cost associated with since this is -- especially with the traditional DECT business. Are there plans or there, is there ability to further drive the fixed cost aspects of this business down as the secular decline continues to chip [indiscernible]?

Ofer Elyakim

So, the level, I think there’s two different things. So first of all, what I discussed earlier are fixed costs within the cost of goods, so these are not necessarily related to DECT. And the fixed cost or the investment that we are doing today in the pure DECT or pure cordless business it is quite minimum, so this is already in the DECT.

Robert Sales

Okay, got it. I understand. Okay, that’s all the questions I have and congratulations on the HDClear one.

Ofer Elyakim

Thank you.

Operator

Thank you. We now have a follow-up question from Matt Robison of Wunderlich. Please go ahead.

Matthew Robison

Hi. Thanks for taking that. I was wondering, if you look at the two design wins for HDClear that you’ve talked about for this year, being the principal drivers for this year for that segment. What the -- amongst the more recent one, the mobile device that, if there are multiple models for that product. How do you see your portion of the overall business for that product?

Ofer Elyakim

Hi, Matt, and thanks for the follow-up question. So, right now we cannot really get into further details with respect to exactly kind of how the mobile design win are built in terms of different models et cetera. So, I think that the best way to look at what we’ve said is, we are forecasting $2 million to $3 million for Q1. We believe it is good also, indication to forecast that on a quarterly basis. I would say that as we start shipments and kind of better understand the nature of the demand and how exactly it gets -- is fulfilled, I think we’ll have better color about kind of how to think about the year with respect to an increment or anything of that nature.

Matthew Robison

Okay. Thanks.

Ofer Elyakim

Thank you.

Operator

As we have no further questions, I would like to hand the call back over to Mr. Dror Levy, for any additional or closing remarks.

Dror Levy

Thank you all for participating and we look forward to reporting again in 90 days. Thank you.

Operator

Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.

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