DSP Group, Inc. (DSPG) Q4 2020 Earnings Conference Call February 4, 2021 8:30 AM ET Company Participants Tali Chen - Chief Business Officer Ofer Elyakim - Chief Executive Officer Dror Levy - Chief Financial Officer Conference Call Participants Jaeson Schmidt - Lake Street Matt Ramsay - Cowen Suji Desilva - ROTH Capital Derek Soderberg - Colliers Securities Denis Pyatchanin - Needham Operator Ladies and gentlemen, thank you for standing by and welcome to the Q4 and Full Year 2020 Earnings Conference Call. At ...

Acquisitions and Sales - The company reported a preliminary purchase consideration of $442.8 million for the acquisition of DisplayLink Corporation, which closed on July 31, 2020[153]. - The company acquired certain assets from Broadcom for $250 million in cash, which closed on July 23, 2020[154]. - The company generated a gain of $105.1 million from the sale of its LCD Touch Controller and Display Driver Integration product line, which was sold for cash consideration of $138.7 million[155]. - The company received $35.0 million in cash from the sale of limited audio technology intangible assets, resulting in a gain of $34.2 million[156]. Financial Performance - Net revenue for the three months ended December 26, 2020, was $357.6 million, a decrease of $30.7 million or 7.9% compared to $388.3 million for the same period in 2019[163]. - IoT product applications contributed $155.1 million, or 43.4% of net revenue, while PC product applications accounted for $91.5 million, or 25.6%, and Mobile product applications contributed $111.0 million, or 31.0%[163]. - Gross margin for the three months ended December 26, 2020, was 42.1%, an increase of 110 basis points from 41.0% in the same period in 2019[165]. - Operating income increased to $58.5 million for the three months ended December 26, 2020, up 69.6% from $34.5 million in the prior year[163]. - Net income for the three months ended December 26, 2020, was $49.6 million, a significant increase of 150.5% from $19.8 million in the same period in 2019[163]. - For the six months ended December 26, 2020, net revenue was $686.0 million, a decrease of $42.2 million or 5.8% compared to $728.2 million for the same period in 2019[164]. - The company experienced a 36% decline in units sold for Mobile product applications, contributing to the decrease in net revenue[163]. Expenses and Costs - Research and development expenses remained flat at $77.3 million for the three months ended December 26, 2020, compared to $77.0 million in the same period in 2019[168]. - Selling, general, and administrative expenses increased by $8.0 million to $39.5 million for the three months ended December 26, 2020, primarily due to a rise in stock-based compensation costs[170]. - Restructuring costs for the six months ended December 26, 2020, amounted to $6.2 million, reflecting severance costs related to operational restructuring[173]. Cash Flow and Liquidity - Cash and cash equivalents decreased by $453.5 million to $309.9 million as of December 26, 2020, compared to $763.4 million as of June 27, 2020[181]. - Operating activities generated $77.9 million in net cash for the six months ended December 26, 2020, down from $120.0 million for the same period in 2019[182]. - The company borrowed $100 million under the Credit Agreement to increase its cash position due to COVID-19 uncertainties[201]. - The company anticipates sufficient cash flows and available credit to meet working capital and cash requirements for at least the next 12 months[201]. - The company may face adverse effects on liquidity and capital resources due to the COVID-19 pandemic[201]. Tax and Obligations - The provision for income taxes was $2.4 million for the three months ended December 26, 2020, compared to $12.0 million for the same period in 2019[179]. - The effective tax rate for the three months ended December 26, 2020 diverged from the statutory tax rate primarily due to foreign withholding taxes and non-deductible officer compensation[179]. - The company has unrecognized tax benefits of $22.1 million as of December 26, 2020[205]. - Total contractual obligations and commercial commitments as of December 26, 2020, amount to $735.7 million[203]. Operational Strategy - The company relies on a variable cost model for manufacturing, outsourcing all production requirements to minimize capital expenditures[145]. - The company’s gross margin is influenced by ongoing cost-improvement programs and the introduction of new products, which may initially have lower margins[146]. - The company continues to commit to research and development to maintain its market position and adapt technologies for new markets[147]. - The company has a global presence with offices in multiple countries, allowing it to provide local support to customers[144]. Market Conditions - The company’s operations are affected by the COVID-19 pandemic, which may impact financial condition and results of operations in the near term[140]. Stock and Credit Facilities - The company has authorized $1.4 billion for its common stock repurchase program, with $177.4 million remaining available as of December 26, 2020[185]. - The weighted average annualized interest rate on borrowings under the revolving credit facility was 2.73% for the three months ended December 26, 2020[196]. - The company had a balance of $100.0 million outstanding under the revolving credit facility as of December 26, 2020[196]. - The current leverage ratio must not exceed 4.75 to 1.00, adjustable to 5.0 to 1.00 after a material acquisition[199]. - The interest coverage ratio must not be less than 3.50 to 1.0 during the term of the Credit Agreement[199]. - The company has a commitment fee on unused credit facilities ranging from 0.175% to 0.25% per annum[198]. - The company expects to switch to a comparable rate, such as SOFR, after the discontinuation of the LIBOR index[198]. - The company’s annual inventory turns increased from six to nine from June 27, 2020, to December 26, 2020[182]. - The company has registered an aggregate of $100 million of common stock and preferred stock for issuance in connection with acquisitions[200].