DSP Group (DSPG) Q1 2021 Earnings Call Transcript

DSP Group (DSPG)
Q1 2021 Earnings Call
May 03, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the DSP Group first-quarter 2021 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Tali Chen, chief business officer.

Please go ahead.

Tali Chen -- Chief Business Officer

Thank you, Heidi. Good morning, ladies and gentlemen. I'm Tali Chen, chief business officer at DSP Group. Welcome to our first-quarter 2021 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 second quarter of 2021.

Our belief in the strategic importance and long-term growth potential of our audio, voice, and connectivity technologies which will become more essential and uniquely position us to take advantage of trends stemming from the pandemic. The recovery of our Unified Communications segment and optimism about the solid demand for cordless phones, adoption of DECT/ULE, our Unified Communications, SmartVoice, and SmartHome market verticals, as well as engagement pipeline and customer product launches, all of which underlie our belief in a successful 2021. We assume no obligation to update these forward-looking statements. For more information about the risks and factors that could affect the forward-looking statements made therein, please refer to the risk factors discussed in our 2020 Form 10-K and other SEC reports we have filed.

Now, I would like to turn the call over to Ofer Elyakim, our chief executive officer. Ofer, the floor is yours.

Ofer Elyakim -- Chief Executive Officer

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. I would like to begin this call by reviewing the highlights of the first quarter and provide context for our outlook.

In a short while, Tali will provide you with an update on the progression of our business plan, followed by Dror, who will discuss our financial results for the first quarter and provide our projections for the second quarter. We are excited with our financial performance for the first quarter of 2021, which exceeded our guidance on most financial metrics. We ended the quarter with revenues of $32.6 million, above the midpoint of our guidance range. First-quarter revenues grew by 16% year over year and by 2% sequentially.

These strong results were driven by exceptional demand for voice-centric products across our different product categories and in particular, robust demand in our IoAT businesses which delivered, despite supply shortages, record-high revenues reaching $20.8 million, representing 64% of total revenues. IoAT revenues grew by 14% year over year and by 15% sequentially. During the first quarter, we continued to make solid progress, executing on the key drivers of our business that should be the centerpiece of our continued success in the quarters and years ahead. The digitalization of everything markedly accelerated by the pandemic has stimulated innovation while creating new models for work, education, and interaction.

This trend highlights the strategic importance and long-term value of DSP Group's audio, voice, and connectivity technologies. By leveraging on our core competence and expertise, we have developed a world-class technology portfolio that is uniquely positioned to play a pivotal role in three market verticals, namely Unified Communications, SmartVoice, and SmartHome. In Unified Communication, during the past year, two major trends have emerged. These are essential to sustain business continuity and enhance workplace productivity in the enterprise.

The first is work-from-home, and the second is virtual collaboration. These two trends show no signs of losing momentum even as businesses gradually transition back to the office. Both trends are promising catalysts for stimulating the future growth of our UC franchise. On the voice user interface, voice user interface became mainstream through its ubiquitous adoption across different applications.

In addition, more local intelligence and real-time processing have proliferated Edge AI usage. We expect these trends to stimulate demand and differentiation for our SmartVoice solutions, combining ultra-low power with best-in-class performance. IoT connectivity solutions, we have made an excellent entry into the security market. With leading market participants realizing and benefiting from the unmatched value proposition presented by DECT/ULE opening up for DSP Group, a large and promising market segment.

In addition, the large installed base and continued strong demand for DECT/ULE enabled home gateways positions us well to play an even bigger role in IoT. We're excited about the instrumental role our technologies and solutions are playing in addressing these emerging needs as reflected by robust demand across all of our IoAT businesses, thereby driving an improved product mix and propelling our GAAP and non-GAAP gross margins to a record of 52% and 52.7%, respectively. Moreover, in order to further expand and enhance our leadership role in voice and audio technologies and uncover the burgeoning opportunities introduced by the digitalization of everything, we are focusing our R&D investments on developing innovating solutions that combine intelligent sensing, leveraging Edge AI, audible processing and smarter connectivity to offer advanced use cases and differentiated technologies that will further expand our market reach. I'm happy to share with you that during the first quarter, we inaugurated a state-of-the-art audio and AI innovation and testing lab in Germany.

The lab is led by a world-class team of audio and sound experts, bringing unique know-how in voice and audio processing, as well as algorithm development, including in-speaker nonlinear processing, active noise cancellation, rapid prototyping to meet stringent customer specs. The lab also includes a dedicated automotive research and test bed that allows us to address the specific needs of this market and collaborate with customers to meet their custom in-cabin audio voice user interface and active noise cancellation requirements. These are exciting times for DSP Group, and we expect the solid business momentum to continue in the second quarter. And when taking into account the robust demand across our different product lines and considering the ongoing supply chain constraints, we expect to generate strong revenue growth for the second quarter and for revenues to be in the range of $34 million to $36 million.

The midpoint of this guidance range implies a year-over-year revenue growth of 24%. We also expect that our IoAT businesses will outperform and drive our revenue growth in the second quarter and to account for 67% to 72% of our total revenues. To summarize, the shift toward a voice-centric future is driving demand and growth for DSP Group's products and technology. We are thrilled about our business momentum, and we are confident that our leadership in voice, AI and IoT technologies and solutions will determine our future success, coming on the heels of a strong pipeline of design wins with a record number of new customers that are expected to contribute to solid performance and revenue growth this year.

Now, I'd like to turn the call over to Tali to discuss our performance in each of the product segments. Tali, the floor is yours.

Tali Chen -- Chief Business Officer

Thank you, Ofer. I would like to begin by providing you with an update on our SmartVoice business. During the quarter, we generated revenues of approximately $6 million from sales of SmartVoice products, reflecting a year-over-year increase of 50% and a sequential increase of 19%. These results were fueled by an increased demand for devices incorporating voice user interfaces, underscoring a shifting in consumer preference in favor of voice-based interfaces.

We expect this momentum to accelerate with the adoption of more AI capabilities that further enhance the user experience by allowing greater flexibility, accuracy, and reliability. DSP Group is playing an instrumental role in addressing these needs with our SmartVoice portfolio and our Edge AI suite of algorithms, which, together, are already powering a broad array of applications and products. Moreover, during the quarter, we continued to expand our product reach and engagement with leading consumer electronic brands as demonstrated by the following achievements. In the entertainment domain, a leading TV and monitor manufacturer chose our SmartVoice solution for its Smart Display offering for robust and flawless far-field voice control and activation that allows the system to detect and respond to users issuing commands from across the room.

In the tablet PC market, there's a record activity in the design and innovation of products leveraging our SmartVoice solutions to deliver natural, robust, and high-quality far-field voice activation with two-way voice capabilities. During the quarter, Lenovo and TCL launched new tablet models, leveraging our solutions, supporting Google's hotword. These achievements, coupled with the strong momentum in voice user interface and Edge AI, position our SmartVoice franchise as a pivotal growth driver in developing a broad array of exciting new applications. Moving on to the Unified Communications segment.

In the first quarter, we generated revenues of $10 million, representing a year-over-year decrease of 3% and a sequential increase of 21%. We are excited about the faster-than-expected market recovery which began in Q4 2020 following the sudden shift toward work-from-home. The market revival is propelled by two underlying trends. The first one is the comeback of the meeting room and gradual return to office spaces.

As businesses and educational institutes prepare for the return to in-person interactions, meaningful technology investments should follow to accommodate on-prem space to better cope with new hybrid working and learning models which rely heavily on video conferencing and other collaboration tools to connect with remote employees and geographically distressed teams. In parallel, post-pandemic, IDC estimates that the number of remote employees will double from 2019. These employees are likely to go into the office only two or three days a week. And within the next six to 10 months, a true hybrid workforce should emerge.

As such, creating a seamless digital parity is crucial, particularly with respect to voice and video quality, ensuring that remote and work-from-home employees have the same set of connectivity and productivity tools as their in-office counterparts. DSP Group is at the forefront of addressing this technology development and is well-positioned to intersect with these market trends through our best-in-class product offering for Unified Communications endpoints, as well as portable terminals, headsets, IoT, voice user interface, and Edge AI. The wins we have secured during the first quarter of 2021 demonstrates our leadership in these key areas. For example, a Tier 1 Unified Communications brand upgraded its DECT headset with DSP Group proprietary bit protection technology for the most reliable narrowband and wideband audio communication in dense wireless deployments such as offices and even call centers.

A leading U.S.-based UC brand chose our DVF platform for its next-generation IP phones. And last, Lenovo and Foneric chose our voice communication engine for hybrid cooperation endpoint. Most employees working from home take video calls using a variety of popular platform on any given day. Regardless of the platform, voice quality is critical on such calls.

Video can become distorted or disappeared, yet the call can proceed. But if voice quality is compromised, calls quickly come to an end, must be rescheduled, at best, causing delays, at worst resulting in loss opportunities. We remain highly confident in the continued recovery and growth prospects of this segment, propelled by the market dynamics we described coupled with remarkable pipeline of engagement and pending opportunities. Now, turning to our SmartHome product line.

During the first quarter, we delivered record revenues of $4.8 million, representing the year-over-year increase of 22%, while flattish on a sequential basis. We are excited about the successful penetration of the ULE technology into the security market. And during the quarter, we continued to enhance and strengthen the ULE position in this segment and are excited to share that an additional security service provider chose ULE for its smart security offering. ULE's advantages include superior range, interference-free spectrum band, and inherently reliable two-way voice and audio support.

All of these are crucial for security products, as reflected by the record numbers of security service providers in Europe and North America that recognize the unique value of our DECT/ULE offering. Moreover, Our DECT/ULE technology is embedded in more than 50 million broadband gateways globally and deliver higher quality of service, more reliable communication, and full-on coverage and is ideally suited for carrying IoT and two-way voice services. We are extremely excited about the newly launched Alexa-enabled cordless handset by British Telecom this quarter. Customers can simply tap the Alexa button and ask to listen to the news, check the weather, and control smart devices around the home.

On the heels of the increased usage of calls at home and the innovative use cases introduced by British Telecom, we believe this offering will propel more innovative offerings by service providers to support the rising needs in the changing paradigm. Additional example for a use case that leverage DECT/ULE unparalleled technical merits is the audio doorbell that was launched this quarter by VTech for the Japanese market and offer two-way voice based on our DECT/ULE technology. To summarize, the momentum behind DECT/ULE technology is strong, and we expect these trends coupled with our growing engagement pipeline to fuel acceleration of ULE short- and long-term growth prospects. And now, for an update on the cordless phone market.

During the first quarter, we continued to experience solid demand for cordless products. Revenues increased by 18% year over year while declining 14% sequentially. From home lifestyles are driving increased usage in voice calling in all its forms, propelling demand for cordless phone, and we expect cordless revenues to remain at similar levels in the next quarter. Now, I would like to turn the call over to Dror to provide you with financial results and second-quarter projections.

Dror Levy -- Chief Financial Officer

Thank you, Tali. I will now review the income statement for the first quarter of 2021 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 this line item and the expenses related to previous acquisitions.

Our revenues for the first quarter of 2021 were $32.6 million. Gross margin for the quarter was 52%. Gross margin for the quarter included equity-based compensation expenses in the amount of $0.1 million and amortization of intangible assets related to SoundChip acquisition in the amount of $0.1 million. R&D expenses were $10.5 million, including $1.2 million of equity-based compensation expenses and amortization expenses related to the acquisition.

Operating expenses for the quarter were $18.8 million, including equity-based compensation expenses in the amount of $2.4 million and amortization expenses related to acquisitions in the amount of $0.6 million. Operating expenses on a pro forma basis, excluding these items mentioned above, were $15.8 million. Financial income for the quarter was $0.6 million. Financial income for the quarter included $0.4 million of exchange rate differences related to accounting standards related to long-term leases.

These exchange rate differences were excluded from a pro forma basis, and the financial income on a non-GAAP basis was $0.2 million. Income tax for the quarter was $0.2 million. Income tax for the quarter included benefit from deferred taxes related to intangible assets and equity-based compensation in the amount of $0.1 million. The U.S.

GAAP net loss was $1.3 million, including equity-based compensation expenses of $2.5 million, amortization expenses related to previous acquisitions of $0.7 million, income from exchange rate differences in the amount of $0.4 million, and tax benefits related to deferred taxes in the amount of $0.1 million. The non-GAAP net income, excluding these items, was $1.3 million for the quarter. GAAP loss per share for the quarter was $0.06. The negative impact of equity-based compensation on the EPS was $0.10.

The negative impact of the amortization of acquired intangible assets was $0.03. The positive income of the exchange rate differences on the EPS was $0.02. Non-GAAP diluted income per share, excluding the items as described, was $0.05 for the quarter. Please see the current report on Form 8-K we filed with the SEC this morning for a full conciliation of the non-GAAP presentation to the GAAP presentation.

Now, turning to the balance sheet. Our accounts receivable as of the end of the first quarter of 2021 increased to $11.2 million, compared to $11 million at the end of the fourth quarter of 2020, representing a level of 31 days of sales. Inventory decreased from $9.1 million at the end of the fourth quarter of 2020 to $7.9 million, representing a level of 46 days. Our cash and marketable securities increased by $0.5 million during the first quarter and were at the level of $129.1 million as of March 31, 2021.

Our cash and marketable securities position during the quarter was affected by the following: we generated $0.8 million of cash from operations, $0.5 million of cash was used for purchase of property and equipment, $0.8 million of cash was provided by exercise of stock options, and $0.6 million was a change in market price and amortization of marketable securities. Now, I would like to provide you with our projections for the second quarter of 2021. Our second-quarter projections, including the impact of equity-based compensation expenses and acquisition-related amortization expenses, are as follows. Our revenues are expected to be in the range of $34 million to $36 million.

We expect our U.S. GAAP gross margin to be in the range of 52% to 53%. R&D expenses are expected to be in the range of $10 million to $11.5 million. Operating expenses are expected to be in the range of $18 million to $21 million.

Financial income is expected to be in the range of $200,000 to $300,000. And the taxes on income are expected to be approximately $400,000 to $500,000. Our shares outstanding on a diluted basis are expected to be 25 million to 26 million shares. These second-quarter projections include $0.4 million of amortization of intangible assets, and these projections also include the following amounts forecasted for equity-based compensation expenses and intangible assets related to previous acquisitions.

Cost of goods includes approximately $0.3 million. R&D expenses include $1.2 million to $1.4 million. Sales and marketing includes $0.8 million to $1 million, and G&A includes $0.7 million to $0.9 million. Now, I would like to open up the line for questions and answers.

Operator, please.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Jaeson Schmidt from Lake Street. Please ask your question.

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

Hey, guys, thanks for taking my questions. Just want to start on if you saw any supply constraints in Q1? And then if you're baking in to see any sort of headwinds from those constraints here in Q2?

Ofer Elyakim -- Chief Executive Officer

Hi, Jaeson. So with regards to supply chain constraints, so as we did the report last time and this time, there are definitely supply chain constraints. We do see a lot of difficulty to supply and serve the demand that we are seeing. So demand is robust but is somewhat impacted by our ability to deliver products.

We do have a very strong backlog but unable to deliver all of it. So we continue to see that. We did see that in the first quarter. We are continuing to experience that in the second quarter.

And for now, it does feel that for the time being, these supply chain constraints that are coming from the foundry side, as well as the assembly testing areas will remain with us at least till the end of the second quarter.

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

OK. That's helpful. And then just looking at the SmartVoice segment. As, sorry, but your Edge AI suite becomes a bigger part of the portfolio, how should we think about that impact on pricing? Is that really just going to offset traditional ASP erosion? Or will you guys be able to see sort of a lift to overall pricing within that segment?

Ofer Elyakim -- Chief Executive Officer

I think that the latter is probably the right way to model it. So I think that with the adoption of our suite of Edge AI, both the silicon, as well as accompanying suite of algorithms, we will see the premium for basically content added to our average selling prices. We've already actually started selling and shipping such products to Tier 1 OEMs, mainly in the U.S. market, and are seeing definitely the benefit of bundling both Edge AI software and hardware.

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

OK. I'll jump back into queue. Thanks a lot.

Ofer Elyakim -- Chief Executive Officer

Thank you, Jaeson.

Operator

Thank you. Your next question comes from the line of Matt Ramsay from Cowen. Please ask your question.

Matt Ramsay -- Cowen and Company -- Analyst

Thank you very much. Good morning. Good afternoon. Ofer, I wonder if you might talk a little bit about what you and the team are planning for seasonality into the back half of the year.

Given what's going on with COVID and all the supply chain issues, I don't know that there is anything. It's typical seasonality for anybody right now, but obviously, a good bit of upside to your second-quarter guidance, so congrats for that. I just wanted to see about how you're thinking in the different business segments of that continuing into the second half of the year or if there's any sort of one-time pops in the second-quarter numbers? Thanks.

Ofer Elyakim -- Chief Executive Officer

Yes. So thank you, Matt, for the question. So with respect to the back half, what we can see today is that we have -- because of the backlog, because of everyone's aware about this -- of the supply chain constraints. And I think that we do see the difficulty to secure components and also chipsets and anything related to the electronic arena.

And so right now, the demand visibility is fairly robust. So customers are willing to provide very long lead times given the situation that we're in, which is really unprecedented from at least my point of view. What does remain fairly blurry and uncertain is the amount of supply, and it does depend on how the industry will trend in the back half of this year, whether we will see an easement to that supply -- the severe supply chain clog that we started seeing in the first quarter and also during the second -- or we'll continue to see and experience in the second quarter or will we see some sort of an easement and a gradual return to normality. I can tell you from conversations with some of the supply chain vendors, they do see that -- the constraints continuing into the back half, but I do hope that some easements will be seen.

From a demand standpoint, as I said, the supply right now is uncertain, so I cannot really comment about how the back half would look like. But from a demand standpoint, we continue to see fairly robust trends, with product lines continuing to accelerate in terms of growth. So we are very excited about the trends that we are seeing. But of course, a lot of it will depend on our ability to secure capacity, to deliver based on these -- the demand pattern that we see.

Everything that we've provided in the prepared comments, I can tell you that we feel very good in this environment. We believe that our penetration into the security end market in the smart home segment is delivering for us a fresh greenfield for growth. We see the addition of Edge AI and ANC and also our new investment to further proliferate our capabilities in the SmartVoice space and the ability to address more adjacent markets, as well as extend the content that we're selling. And I think that the same is also true for the Unified Communications segment which just hit a trough in the third quarter of last year, and you can see the level of gradual improvement, and we believe that also, this continues into the back half.

But as I said, a lot of what we, at the end of the day, be able to report does depend on our ability to fulfill this demand to our supply chain partners.

Matt Ramsay -- Cowen and Company -- Analyst

Got it. No, appreciate all the color there. Dror, just a quick one, and I'll jump back in the queue. With all the supply chain challenges that folks are facing, different companies have, I guess, given different commentary about input costs going up and their ability to pass those costs or portions of those costs on to customers through increased pricing and things like that.

How are you thinking about -- is that a material thing for you guys? And over the next couple of quarters, does it have an impact on gross margin? Thanks.

Ofer Elyakim -- Chief Executive Officer

Yeah. So thanks for the question. So in a way, the guidance that we provided and the forecast for the second quarter already takes this into account. And also, our results for the first quarter, as you saw, the record gross margin also took into account the fact that we did, like all the industry, had to face some price increases from our supply chain.

I think that what happens in our case is that the mix and the change in the mix toward more new products, more products that are coming with higher gross margins basically helps us to compensate for that. So the average price in our case increases because we are selling like more content and products that are more innovative, and this basically enables us to keep and even improve the margins in this tough environment.

Matt Ramsay -- Cowen and Company -- Analyst

Thanks, guys. Appreciate it.

Operator

[Operator instructions] And your next question comes from the line of Suji Desilva from ROTH Capital. Please ask your question.

Suji Desilva -- ROTH Capital Partners -- Analyst

Hi, Ofer and Dror. Congratulations on the progress here. The SmartVoice segment, I was curious, I know non-smartphone has been growing in the mix, curious where that is and, specifically, how the notebook market may be an opportunity for you guys that's emerging with remote work and all. And then headsets, any update there as well?

Ofer Elyakim -- Chief Executive Officer

Yeah. So hi, Suji, and thanks for the question. So with respect to the composition of the SmartVoice revenues, the contribution of mobile is fairly small. So most of -- the vast majority, 90% of the numbers are coming from the diversification efforts.

And as we said, screen products, meaning tablets and going into, hopefully, the PC market is definitely an opportunity. As I think we reported to you guys during the last couple of quarters, the tablet market, which has become a more important piece for collaboration for having Zoom, Webex, Teams calls has gained a lot of momentum, both incorporating voice call capabilities, as well as incorporating some more advanced far-field VUI capabilities. Moreover, the design cycles in the tablet business, especially the Google-based type of tablet, is fairly short compared to the PC cycle and the non-, let's say, Android tablet type of cycle. So that enables us to see the design momentum, as well as also generate the results, and that has been a very strong growth driver.

I believe that the PC -- the notebook area does represent a very nice opportunity for us. And I do believe that we're going to see a major change in the notebook market going forward. These notebooks do have a set of microphones, a camera, but this was just basically to check the box on the ability to do video conferencing. But I think that the way in which everyone is working today does require much more advanced cameras, as well as voice capabilities.

For us, it means a lot more algorithms, more advanced algorithms that will basically support great productivity, the ability to have many speakers attending from the same PC if necessary and just to make the experience less fatiguing and much more flexible and reliable. And so we do see a big transformation there and also in the world of the accessories that will basically complement such calls, from cameras that basically will have a better AI vision-enabled, accompanied with a lot of audio and voice AI capability to support and provide voice, as well as video. As we said, a collaboration call can continue and go on peacefully and perfectly even if the video is frozen, but you cannot handle it when the voice is choppy or where you don't really hear the speakers well or, let's say, noise is being injected into the conference. And so we believe that also in the accessory market, we will see many new hardware that will be designed and already, we announced a couple of these just this quarter.

On the headset market, we continue to see very strong momentum both on ANC type of headset, as well as non-ANC type of headsets both for the personal, meaning consumer-grade, as well as for call center and enterprise-grade. We believe that we're bringing very strong capabilities, best-in-class voice call performance, as well as excellent ambient noise cancellation capabilities and also building a lot of AI algorithms to complement that and enable more advanced features to really support best-in-class collaboration capabilities across in, let's say, a household or domestic environment.

Suji Desilva -- ROTH Capital Partners -- Analyst

OK. Thanks for all that detailed color, Ofer. And then a follow-up, curious on the German lab announcement and specifically the automotive market. What is the landscape today in terms of microphones or audio if there are any? And who are the players? And what is -- how do you see your opportunity forming in the auto market? It could be a very exciting TAM, but just curious how it develops.

Ofer Elyakim -- Chief Executive Officer

Yes. So I think that today, there are several silicon vendors that are supplying silicon, mainly either application processors or DSPs to this market. There is another layer of software vendors that are supplying algorithms. Some of it is vertically integrated inside the Tier 1s, and some of it comes from like specific type of algorithm and software vendors.

And so the way we're looking at it is both from an angle of the software and the algo front, as well as from the silicon front, meaning being able to sell and qualify our silicon. And right now, we're, in a way, utilizing this new capability to transform and, in a way, kind of migrate a lot of what we have done in the enterprise conferencing far-field side, dealing with a lot of noise suppression into the automotive arena, which has some similar characteristic, as well as some fairly different requirements. And what we will need to do is, in a way, be able to make such a transition and adaptation to our algorithm so that we can support that, whether it comes from the more deterministic type of algorithms that we have or whether it comes much more from the AI side. So all of that is in the plan.

I think it's very exciting and going to be a great journey, and we're very happy with the new talent that we recently acquired and believe we're at the right place at the right time.

Suji Desilva -- ROTH Capital Partners -- Analyst

Thanks. Congratulations again.

Ofer Elyakim -- Chief Executive Officer

Thank you.

Operator

Thank you. Your next question comes from the line of Denis Pyatchanin from Needham and Company. Please ask your question.

Denis Pyatchanin -- Needham & Company -- Analyst

Hey, guys. I just wanted to ask a question here for Raji Gill. So with regards to growth drivers for the VOIP and kind of ULE technologies, what are you guys kind of seeing? Can you add some color about what we can expect and what will be driving the growth down the line?

Ofer Elyakim -- Chief Executive Officer

Yes, absolutely. So maybe we first start with the SmartHome or ULE growth drivers. Today, we have, in a way, penetrated to several SmartHome end markets and designs, namely European large service providers, as well as several consumer type of systems. On the security front, we're already with a much larger presence in terms of the design pipeline.

Also, the technology seems to be of unparalleled fit for the needs and the requirements that are coming from this industry. What we are seeing is that this is a changing market landscape that is basically requiring us to complement, not just provide connectivity solutions, but in a way, complement that with all of the SmartVoice and other capabilities that we're designing. And so I think that our offering for that market for the SmartHome market or IoT markets will basically include not just the DECT/ULE as the best-in-class connectivity, but also, we will be able to extend our content by also delivering the SmartVoice solution, AI sensing, smart processing and then combined with the connectivity to deliver a real IoT type of element to the network, so sensing, processing, as well as communication. We're also now looking at the next generations of our ULE capabilities with respect to addressing a lot of the developing standards and the requirements of this domain.

So these are all in our pipeline and in our roadmap of activities for the next couple of years. On the Unified Communication or VOIP space, as we discussed, we see in a way, too, in a way, different yet converging trends. One is the work-from-home that we believe will continue to exist in a major way. In future years, as the workplace becomes more hybrid than it used to be, that means that everyone will need to have the same set of tools or the same capabilities to be able to conduct his or her work, whether they're in the office or at home.

And that means investments in infrastructure, in better software and algorithms, and also in more hardware. On the enterprise part or on the on-prem part, last year, we saw a complete, in a way, a transition or dislocation of the IT budget away from the on-prem side as people were not really attending work and most of the work was done from the home. In 2021, I believe that we are starting to see the return of those IT investments in order to create a workplace, an on-prem workplace that could meet the need of the hybrid working environment. That means a lot of the meetings will have both participants that are sitting in the same room, as well as other counterparts that are participating from home.

And that means a lot more collaboration capabilities will have to be installed in more conference rooms and a lot -- that means both software, as well as hardware investments that we believe are great catalysts to extend and continue the growth of our franchise. I think that from our customers, we continue to see that even on the traditional side, our customers are continuing to invest and bring to market new hardware, meaning to refresh and engage in new designs for more advanced hardware that really fits the change that has happened to the workplace and the need to have more hybrid capabilities, so devices that can be installed both at home, as well as in the office, devices that can support a collaboration in very good productivity inside meeting and conference rooms. And so I think that we do see that market continuing to, on one hand, recover from the trough that we saw in Q3, and we definitely saw that in Q4 and now in Q1. And also, based on the comments that we provide, I think this is also the expectation for the second quarter, as well as continue to grow as a result of these very changing needs of the professional market.

So I hope that answers your question, Denis.

Denis Pyatchanin -- Needham & Company -- Analyst

Yeah, absolutely. That was definitely a great amount of color. And then for my follow-up, I'm looking here, it looks like your gross margins are definitely holding up pretty well lately. Can you talk a little bit about what is driving the gross margins and if we can maybe expect them to kind of persist at this level?

Ofer Elyakim -- Chief Executive Officer

Yes. So as we said, I think, for a fairly long period of time that we are now in the low 50s range, and we believe and from our long-term -- or I would say, the mid-term model, we believe that our gross margins can expand well into the mid-50s. And the main catalyst for that, and I think you can see that fairly deterministically, is the mix of our products. So we say the more legacy traditional side of our business is bringing to the table a lower gross margins than our corporate average.

The IoAT businesses and especially some of the new technologies are adding a very nice and much higher margins than the corporate average. And all of that, in a way, benefits once the mix is more favorably skewed toward the IoT products. We do definitely see the margin expansion playing out. And so we do believe and also based on the Q2 guide, you can see that we do believe that we can sustain these levels and perhaps maybe even do better, especially in the next couple of years.

Denis Pyatchanin -- Needham & Company -- Analyst

Great. Thank you very much.

Operator

Your next question comes from the line of Derek Soderberg from Colliers Securities. Please ask your question.

Derek Soderberg -- Colliers Securities -- Analyst

Hi, everyone. Thanks for taking my questions. Ofer, just in terms of engagements, PC sounds strong. Can you remind me maybe relative to a year ago what your PC business looked like in terms of number of products there and how that's maybe changed over the last year? And how do you feel about that business as we look to the back half of the year and potentially beyond? Do you think we're sort of seeing a new normal in PCs demanding advanced audio, anything like that? And then I have a follow-up.

Ofer Elyakim -- Chief Executive Officer

Sure. Hi, Derek, and thanks for joining and for the question. So with respect to the PC market, so in a way, we categorize the tablet and PC market as one application segment inside our SmartVoice revenues. And so far, the main driver of the growth in this application were these tablets coming from some of the very large OEMs that are -- were shipping Android-based tablets, and this has been the majority of our revenues.

And I think that when we look ahead, especially following what has happened in the different requirements from the notebook computer, we definitely see that the need to address better collaboration capabilities and more robust voice user interface capabilities are definitely in need in the notebook PC market. And we do hope that we will play an active role in this market as well. This is definitely a plan from the point of view of the engagement pipeline but not yet in revenue. We definitely look forward to see that translating also into revenues from evaluation -- technical evaluation to design and then into a mass shipment.

Derek Soderberg -- Colliers Securities -- Analyst

Got it. Got it. And then just on demand trends, I wonder if you have maybe a sense for consumption rates. Given guidance of pretty nice sequential growth, is the market consuming at this rate? Do you have any sense that there's double ordering or anything like that? Thanks.

Ofer Elyakim -- Chief Executive Officer

Yes. Hi, Derek. Thanks for the second question. So with respect to the consumption.

From the channel checks that we can conduct, we do see that in many of our categories, the demand is coming from new customers, so these are customers that are only now ramping up. So I do believe that this definitely has to do with the ability with the end market consumption capabilities and with the way our customers are ramping up these new products. In other cases where these designs or these customers are more or at -- we have a lot more history, we are doing certain channel checks. And so far, we have not yet seen a major buildup of inventory.

We are also serving some of these end markets and definitely do see that the trend line does mimic the consumption. They sell out data, whether this is coming from the more professional business or the consumer businesses. So far, we do not have indications of a major accumulation of stock. Now, I can definitely say that these are fairly unprecedented times from the point of view of the supply chain and the fact that we're here talking about great visibility from the demand standpoint, however, a fairly blurry visibility from the supply side.

And so that could mean that, in many cases, companies are looking to build some level of cushion. From all the other color that we're getting from customers, we do see that many of them are increasing, right, their inventory days on hand just in order to be able to allow for a much smoother supply chain and the ability to be back in terms of being able to supply to their customers with some sort of standard lead time and not fairly extended lead times. Today, we see that it takes our customers much longer to supply their orders, and so that means they're supplying as much longer lead times. We're supplying at much longer lead times.

So at the moment, we do not see like big pockets of inventory. And we believe that right now, the situation is healthy. This is what at least from my -- where we sit in the supply chain, this is what we can tell.

Derek Soderberg -- Colliers Securities -- Analyst

Great. Thanks.

Operator

Thank you. There seems to be no further questions. So we'll hand back to Tali Chen.

Tali Chen -- Chief Business Officer

Thank you, Heidi. I would like to mention that during the coming months, we are scheduled to present at the following investor conferences: Virtual Needham Tech and Media Conference on May 18, Cowen Annual Technology Media and Telecom Conference on June 1, and ROTH Virtual London Conference on June 21. Thank you for listening in and for your interest in DSP Group, and we look forward to report back to you in 90 days.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Tali Chen -- Chief Business Officer

Ofer Elyakim -- Chief Executive Officer

Dror Levy -- Chief Financial Officer

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

Matt Ramsay -- Cowen and Company -- Analyst

Suji Desilva -- ROTH Capital Partners -- Analyst

Denis Pyatchanin -- Needham & Company -- Analyst

Derek Soderberg -- Colliers Securities -- Analyst

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