DSP Group Inc. (Nasdaq: DSPG) is celebrating its 32nd anniversary - a ripe old age in Israel's world of high-tech. Although DSP Group is striving to enter new fields of technology and to expand its target markets, many still ask, "Isn't that the wireless phone company? Or maybe it's the digital answering company?" even though the company is phasing out operations in those sectors.
The shift to new fields of technology and the two technological revolutions that DSP Group has already undergone have created what the company calls "DSPG 3.0." The company's original technology brought digital recordings to the world using an embedded electronic circuit chip (SOC), instead of old-fashioned recordings. In its second technological reincarnation, the company entered the wireless home phone line industry with DECT technology. In its latest phase, DSP Group is targeting the smart home industry and voice activation.
DSPG develops electronic chip technology for voice processing and short-range communications. These are chips at a minimal cost - a few dollars - which are embedded in the devices of global electronics giants such as Samsung, Panasonic, Cisco, Logitech and GoPro, and in cooperation with service giants such as Amazon, Google, Deutsche Telekom, France Telecom and Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ). DSPG's strategy has not changed over the years: riding on the shoulders of giants with advanced technology and low prices.
DSP Group CEO Ofer Elyakim says, "The field of landlines became outdated, mainly because of smartphones, so we decided to utilize the company's proven assets - voice processing and wireless communications - with new customers."
Elyakim became CEO in 2009. Since then hundreds of startups have been established and closed down, technologies have developed and disappeared, Israeli companies have been sold, merged, and faded away, all while DSP Group, though not a large company, continued to survive. Elyakim is interviewed near a table full of voice-based technology products. Occasionally, when the name of his Amazon digital assistant Alexa is mentioned, she wakes up and asks how she can be of assistance. But sometimes, when Elyakim calls her, she does not respond. Such is life in the technological age.
From traditional phones to smart homes
In the company's annual report published last month, it notes that income from new technologies has surpassed traditional ones and reached 55% of revenue. Wireless telephony still accounted for 41% of the company's revenue in the fourth quarter of 2018, representing a 70% shared of a shrinking global market. Even though new technologies capture a more substantial share of the company's revenue, they are unable to compensate for the decline in revenue from the traditional fields. In 2018, revenue dropped by 6% to $ 117 million. Since 2010, when DSP Group's revenue was $226 million, revenue has declined each year.
DSP Group is convinced that this is a transition period between technologies and that it has a bright future. Investors are also apparently optimistic: in the last two months the stock surged 20%, after a 10% drop in 2018. The company's market cap is $290 million and it has $124 million in cash. "Our company is getting a low valuation because people are looking through glasses of 'It's a wireless phone company,' which is not the product today," says Elyakim.
"In 2018 there was a decline in revenue, but we forecast organic growth of 5% -10%, beginning next year. Two trends must be recognized: Revenue from the home telephony world, where there are annual declines of 15-20%, while a startup is already selling $70 million and growing every year in strong percentages. Someday there will be a turning point, where the new surpasses the old, and when that happens, the aggregate growth becomes greater. "
Despite the continued decline in revenue in recent years, the bottom line is that DSP group has maintained net profitability on a non-GAAP basis, and teetered between profits and losses on a GAAP basis. In 2018, the company lost $2 million on a GAAP basis and posted an adjusted net profit of $5.4 million, up 37% from 2017.
DSP Group today focuses on three growth areas: corporate telephony communication, smart home and voice activation. In corporate communications, the company sells VoIP chips to prominent companies such as Cisco and AudioCodes Ltd. (Nasdaq: AUDC; TASE: AUDC). In the smart home industry, the company is pushing DECT ULE technology against competing technologies in the IoT home and business markets. Here DSPG's customers are operators like France Telecom, Orange and Deutsche Telekom. Revenue from this sector reached $14.8 million in 2018, lower than the company's expectations, which they attribute to the weakening of trade with China.
The third area is much more exciting: voice recognition, smart voice in the professional terminology - or "digital assistant." The DSP Group chip, which measures only a few millimeters in size, is embedded in various devices and allows them to listen to us all the time, waiting for the call of "Alexa," "Hi Google," "Hi Bixby," and so on. "This chip is our 'claim to fame,'" Elyakim says, "A chip that constantly listens and only when you say the magic word is activated, and does everything it needs to, including waking up the processor." In 2018, revenue from this sector reached $ 11 million, up 124% over 2017, but still less than the company had forecasted.
DSP Group's chips can listen to instructions even in noisy environments, up to 5 meters (15 ft.) away from the device. From the moment the operating word is recognized, the chip actively decodes what is said, sometimes using a narrow vocabulary like "open garbage" in a digital trash can, or sometimes referring to a greater selection of words like "turn on the red light bulb" or "dim light to 60%," in a digital lamp. In the more sophisticated devices, such as Alexa, voice commands are decoded in the cloud, with a technology called ASR: the voice file is uploaded to the relevant cloud service, decoded, and the instruction to execute returns to the device in a matter of seconds.
Strategic cooperation with Amazon
In June 2018, DSPG signed a strategic partnership with Amazon to integrate its chip into Alexa-based systems. One example is the tablet that Lenovo presented at the CES exhibition a month ago, which allows Alexa's voice to be activated with the DSP group chip installed in it. Similar chips are installed in dozens of other devices at CES, such as Universal Electronics smartphones that receive voice instructions instead of key presses, Samsung Gear smart watches and a number of new Samsung A series phones, along with a host of Chinese manufacturers, including an international company that DSP Group did not disclose the name of, but notes in reports as a significant source of expected future revenue.
What relationship do you have with Amazon?
"We have a Reference Design (technical blueprint of a system which can be enhanced or modified). It passed Amazon's tests to receive a stamp of approval and we have the lowest price of any comparable company because we make it using only three microphones. In the Amazon "Echo" there are seven microphones. Additionally, we work with all the platforms - in the US these are Amazon, Google, Facebook, Apple, and in China the tech giants are Alibaba, Baidu, and Tencent."
Where does Amazon make a profit, when Lenovo, for example, puts Alexa on its tablet?
"In my opinion, Amazon would prefer not to sell any hardware, but rather have every device in the market using its service, which will enable, for example, voice shopping. Google (Google Home) and Apple (Siri HomePod), would like us to use their service and for all the information to pass through them. Today we know that the information about users is the most valuable thing in the world, and I will create it from voice, both in the car and in other places where there is no screen. "
Are you concerned about the fact that your technology allows you to listen to customers and accumulate information about them?
"We serve as a gatekeeper. I have the ability to do a hard mute, so no information will pass without consent. Our products are in the White House, the Pentagon, the CIA, and within Cisco's devices whose heart is 100% blue and white. The devices listen all the time, but the information does not leave the room if the activation word is not uttered, and only then will it pass to the connected world. "
Is it the same case with phones that are listening to us? Does Facebook listen to us?
"A lot of information that sits on a phone does not necessarily go through our chip. For example, Facebook, on Samsung's A9 phone, does not pass through us. Bixby and Google do. So when you give Facebook permission to use a microphone it does not pass through our chip. The phone should not hear when it's off, not even Facebook. But the phone listens when it's in standby, waiting to hear you say 'Okay Google' or 'Hi Bixby'."
Thanks to the DSP Group voice-activated technology, it is involved in interesting developments. At the CES show, Cybic, the maker of futuristic electric bikes, introduced two models of Amazon's Alexa (£ 1,000) bikes that know how to get voice commands about traffic, step by step navigation, weather forecasts, interesting sights along the way and also adds products to Amazon's shopping list. The chip that enables the driver to hear and decode the rider is DSP Group, a fact that was not mentioned in the publications surrounding the show.
The technological capabilities developed by DSP Group point to future directions, some of which have no market yet, and some of which are in the making. For example, the ability to use microphones like IoT sensors that can monitor production line problems, hear leaking water, hear an elderly woman in her apartment and even hear termites in houses made with wood, just to list some of the systems currently being piloted in customer POCs. The technology can also add new capabilities to smartphones, such as detecting a noisy environment and increasing the intensity of the alerts, or hearing the plane take off and transfer the phone to flight mode, and maybe even a sonic sensor in vehicles, that could hear a child left in the car.
First and foremost an R&D company
DSP Group has a long history. In the mid-1980s, entrepreneur and businessman Davidi Gilo acquired Koltok from Kobi Alexander's Comverse, reorganized it and in 1987 founded DSP Group, which was listed on Nasdaq in 1994 and seized half of the digital subscriber market. A few years later, he divided the cellular activity and founded DSPC, which was sold in 1999 to Intel in the largest deal in Israeli high-tech until then - $ 1.6 billion. In 2002, another DSP Group activity was spun off - the IP division, which merged with Irish Parthus to set up Ceva Inc. (Nasdaq:CEVA); LSE:CVA), which is traded on Wall Street with a market cap of $640 million.
Since then, DSP Group has managed to acquire three companies: Teleman Multimedia in 2003, followed by VoicePump and Bermai, and in 2007 acquired the VoIP division of NXP. Today, the company has 330 employees, 230 of whom are in Herzliya, as well as a branch in the US.
Who are your competitors in the market?
"Mainly US companies: Sinoptics, Cyrus Logic, Qualcomm and Intel. In our fields it's a matter of focus, if you have a goal and good management, you can reach the goal even if there are other companies in the field. As long as the goal is logical, and we are not talking about capturing the entire 5G cellular market... in the wireless phone industry we were number one, and now in the corporate market we are number one, when previously we were 0, so it can be done now as well."
Is today's main effort in marketing?
"Technology is constantly advancing and DSPG is first and foremost an R&D company. Over 50% of operating expenses are in R&D, and the rest is sales, marketing and management. Management sits in the US because it is important to be connected to the main channels of the industry, which are in the US. "
Are you still an Israeli company? Is the intellectual property you are developing registered in Israel?
"Our intellectual property is Israeli. That is one of the challenges because when IP is not Israeli, management is no longer Israeli. The Israeli economy owes a lot to high-tech, which is the main export engine of the country, but without Israeli companies owning the IP themselves, the economy cannot rely on that high-tech engine. If every Israeli company sells out after 5 or 10 years and becomes a foreign company, the IP gets drawn out, even if on the employment level the company is based in Israel, the expertise has effectively drifted."
Multinational companies in Israel, such as Intel, are proud of the thousands of workers they employ in Israel.
"If we know how to manage and set up companies here, then we have an economy, but if we become a labor industry, where we provide outsourced R&D services to foreign companies, then the continued existence of hi-tech as the power engine of the economy is highly questionable. We give our brains for X dollars a year or for a promise of investments in Israel, for example, NIS 40 billion. The idea of a free economy sounds great, but when these local companies become foreign companies, then they compare with China, which also has good engineers, and then why should they prefer Israel? I need the State of Israel to write the check that subsidizes or establishes an infrastructure of companies for Israeli industry."
Published by Globes, Israel business news - en.globes.co.il - on March 3, 2019
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