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DSP Group, Inc. Reports Third Quarter 2007 Earnings

SAN JOSE, Calif., Oct. 31 /PRNewswire-FirstCall/ -- DSP Group, Inc. (Nasdaq: DSPG), a worldwide leader in developing and providing chip-set solutions for residential wireless connectivity, announced today its results for the third quarter ended September 30, 2007.

Third Quarter Results:

Revenues for the third quarter of 2007 were $61,866,000, a decrease of 3% from revenues of $63,875,000 for the third quarter of 2006. Net loss for the third quarter was $7,496,000 as compared to net income of $8,052,000 for the third quarter of 2006. Earnings per share (EPS) for the third quarter of 2007 were a loss of $0.25 per share, as compared to earnings of $0.28 per share for the third quarter of 2006.

Non-GAAP Results:

Non-GAAP net income and diluted EPS for the third quarter of 2007, excluding the impact of an in-process R&D expense of $10,120,000 and the amortization of acquired intangibles and other acquisition-related assets of $3,704,000, both associated with the acquisition of the Cordless and VoIP Terminals business of NXP B.V.; equity-based compensation expenses of $2,880,000; and the tax benefits associated with such expenses, were $7,615,000 and $0.26 per share on a diluted basis, representing a decrease of 30% from the non-GAAP net income of $10,903,000 and non-GAAP diluted EPS of $0.37 per share for the third quarter of 2006.

Eli Ayalon, Chairman and CEO of DSP Group, stated: "During the third quarter, we completed the acquisition of the Cordless and VoIP Terminals business of NXP and operated as one company for the last three weeks of the quarter. As anticipated, the acquired business had a positive impact on our non-GAAP net income and EPS (excluding the in-process R&D expense and the amortization of acquired intangibles and other acquisition-related assets) for the third quarter of 2007. We believe the acquisition will have a greater positive financial impact in the fourth quarter of 2007 and 2008. In the fourth quarter of 2007, we believe our revenues will double as compared to the fourth quarter of 2006, and we will significantly improve our operating margins."

Mr. Ayalon added: "During the earnings conference call, we will elaborate on the market conditions for traditional cordless telephony, which remains challenging, our activities related to the introduction of our next generation of products, the outlook for the fourth quarter of 2007 and 2008, and the contributions expected from the acquired business going forward."

The Company believes that the non-GAAP presentation of net income and diluted EPS presented in this press release is useful to investors in comparing results for the quarter ended September 30, 2007 to the same period during 2006, because results for the third quarter of 2006 did not include the amortization of acquired intangibles and other acquisition-related assets and the in-process R&D expense. Further, the Company believes it is useful to investors to understand how the expenses associated with equity-based compensations expenses are reflected on its statements of income.

About DSP Group

DSP Group, Inc. is a fabless semiconductor company, offering advanced chip-set solutions for a variety of applications. DSP Group is a worldwide leader in the short-range wireless communication market, enabling home networking convergence for voice, video and data. By combining its in-house technologies of Digital Signal Processors (DSPs), portfolio of wireless communication protocols, including DECT, Bluetooth and Wi-Fi, most advanced Radio Frequency CMOS and SiGe, as well as VoIP ICs, DSP Group is a worldwide leader and a one-stop-shop for a wide range of applications. These applications include ISM band digital 900MHz, 2.4GHz and 5.8GHz telephony, European DECT (1.9GHz) telephony, Bluetooth systems for voice, video and data communication and deployment in residential, SOHO, SME, enterprise and automotive applications. DSP Group's ICs provide solutions for MP3 players, VoIP Phones, Gateways, and Integrated Access Devices and are widely used in Digital Voice Recorders. More information about DSP Group is available at http://www.dspg.com.

Forward Looking Statements

This press release may contain statements that qualify as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995, including the statements made by Mr. Ayalon about DSP Group's belief that (i) the acquisition of the Cordless and VoIP Terminals business of NXP will have a greater positive financial impact in the fourth quarter of 2007 and 2008; (ii) its revenues will double as compared to the fourth quarter of 2006, (iii) the acquisition will significantly improve its operating margins, and (iv) the acquisition will contribute to its business going forward. These forward-looking statements are based on current expectations and DSP Group assumes no obligation to update this information. In addition, the events described in these forward-looking statements may not actually arise. DSP Group's actual results could differ materially from those described in this press release as a result of various factors, including the risk that the acquired business will not be integrated successfully; the risk that the revenue potentials, cost savings and any other synergies from the acquisition may not be fully realized or may take longer to realize than expected; disruption relating to the acquisition that makes it more difficult for DSP Group to maintain relationships with customers, employees or suppliers and other risks and uncertainties associated with the acquisition; slower than expected change in the nature of the residential communications domain, including the VoIP and DECT markets, unexpected delays in the introduction of new products, especially VoIP and DECT products; failure to achieve broad market acceptance of existing and new products by existing and potential OEM customers; DSP Group's inability to add new customers and develop and produce new products at competitive costs and in a timely manner; decline or fluctuations in gross margins and the effect on revenues and profitability; and general market demand for products that incorporate DSP Group's technology in the market. These factors and other factors which may affect future operating results or DSP Group's stock price are discussed under "RISK FACTORS" in the Form 10-K for fiscal 2006 as well as other reports DSP Group has filed with the Securities and Exchange Commission and which are available on DSP Group's Web site (http://www.dspg.com) under Investor Relations.

Earnings conference call

DSP Group has scheduled a conference call for 8:30 a.m. EDT today to discuss the financial results for the third quarter of 2007 and invites you to listen to a live broadcast over the Internet. The broadcast can be accessed by all interested parties through the Investor Relations section (investor message board) of DSP Group's Web site at http://www.dspg.com or link to: http://ir.dspg.com./phoenix.zhtml?c=101665&p=irol-calendar.

If you cannot join the call, please listen to the replay, which will be available for approximately two weeks after the call on DSP Group's Web site or by calling the following numbers:

-- US Dial-In # 1-888-286-8010 (passcode: 83156797)

-- International Dial-In # 1-617-801-6888 (passcode: 83156797)


    For more information, please contact Ofer Elyakim, Vice President of
Business Development, DSP Group Inc. at (408) 240-6839; or e-mail:
ofere@dsp.co.il.



                               DSP GROUP, INC.
                      CONSOLIDATED STATEMENTS OF INCOME
                   (In thousands, except per share amounts)

                                  Three Months Ended      Nine Months Ended
                                     September 30,           September 30,
                                    2007      2006         2007        2006
                                (Unaudited)(Unaudited) (Unaudited) (Unaudited)

    Product revenues and other    $61,866   $63,875     $163,590    $176,565

    Cost of product
     revenues and other            37,201    37,689       98,434     103,676

    Gross profit                   24,665    26,186       65,156      72,889
    Operating expenses:
      Research and development     13,874    12,242       39,095      35,553
      Sales and marketing           4,680     4,357       12,987      12,233
      General and administrative    3,271     2,771       10,196       8,466
      In-process R&D               10,120         -       10,120           -
      Amortization of
       intangible assets            3,057         -        3,057           -

      Total operating expenses     35,002    19,370       75,455      56,252

    Operating income (loss)       (10,337)    6,816      (10,299)     16,637
    Other income :
      Interest and
       other income, net            2,569     3,372        9,148       9,832

    Income (loss) before provision
     for income taxes              (7,768)   10,188       (1,151)     26,469
    Provision for income taxes
     (benefit)                       (272)    2,136        2,016       5,691

    Net income (loss)             $(7,496)  $ 8,052     $ (3,167)   $ 20,778

    Net earnings (loss) per share:
      Basic                       $ (0.25)  $  0.28     $  (0.11)   $   0.70
      Diluted                     $ (0.25)  $  0.27     $  (0.11)   $   0.68

    Weighted average number of
     shares of Common stock used
     in the computation of:
      Basic                        29,436    29,279       28,716      29,543
      Diluted                      29,549    29,748       28,903      30,388



                               DSP GROUP, INC.
                 CONSOLIDATED STATEMENTS OF INCOME (NON-GAAP)
                   (In thousands, except per share amounts)

                                    Three Months Ended     Nine Months Ended
                                      September 30,           September 30,
                                    2007      2006          2007       2006
                                 (Unaudited)(Unaudited) (Unaudited)(Unaudited)


    Product revenues and other     $61,866   $63,875      $163,590   $176,565
    Cost of product revenues
     and other                      36,411    37,563        97,312    103,342

    Gross profit                    25,455    26,312        66,278     73,223
    Operating expenses:
      Research and development      12,424    10,589        33,628     30,975
      Sales and marketing            4,351     4,013        11,771     11,267
      General and administrative     2,313     1,917         6,613      5,516

      Total operating expenses      19,088    16,519        52,012     47,758

    Operating income                 6,367     9,793        14,266     25,465
    Other income :
      Interest and other
       income, net                   2,569     3,372        10,144      9,832

    Income before provision
     for income taxes                8,936    13,165        24,410     35,297
    Provision for income taxes       1,321     2,262         4,291      6,025

    Net income                     $ 7,615   $10,903      $ 20,119   $ 29,272

    Net earnings per share:
      Basic                        $  0.26   $  0.37      $   0.70   $   0.99
      Diluted                      $  0.26   $  0.37      $   0.70   $   0.96

    Weighted average number of
     shares of Common stock
     used in the computation of:
      Basic                         29,436    29,279        28,716     29,543
      Diluted                       29,549    29,748        28,903     30,388



       Unaudited Reconciliation of GAAP to Non-GAAP Financial Measures
                   (In thousands, except per share amounts)

                                  Three Months Ended      Nine Months Ended
                                     September 30,           September 30,
                                   2007       2006         2007       2006
                                 Unaudited  Unaudited   Unaudited  Unaudited

    GAAP net (loss) income       $(7,496)   $ 8,052     $(3,167)    $20,778
    Equity-based compensation
     expense                         143        126         475         334
        Included in cost of
         product revenues
    Amortization of adjustment
     of inventories to market
     values                          647          -         647           -
        Included in cost of
         product revenues
    Equity-based compensation
     expense                       1,450      1,653       5,467       4,578
        Included in R&D
    Equity-based compensation
     expense                       1,287      1,198       4,799       3,916
        Included in SG&A
    Loss related to certain
     marketable securities             -          -         996           -
    In-process R&D                10,120          -      10,120           -
    Amortization of
     intangible assets related
     to NXP transaction            3,057          -       3,057           -
    Tax benefit resulting from
     equity-based compensation,
     loss related to
     certain marketable
     securities, in-process R&D
     and amortization of
     intangibles and other
     acquisition-related assets   (1,593)      (126)     (2,275)       (334)
    Non-GAAP net income          $ 7,615    $10,903     $20,119     $29,272

    Non-GAAP basic earnings
     per share                   $  0.26    $  0.37     $  0.70     $  0.99

    Non-GAAP diluted earnings
     per share                   $  0.26    $  0.37     $  0.70     $  0.96



                               DSP GROUP, INC.
                         CONSOLIDATED BALANCE SHEETS
                                (In thousands)

                                                 September 30,   December 31,
                                                     2007           2006
                                                  (Unaudited)     (Audited)
    Assets
    Current assets:
      Cash and cash equivalents                    $ 38,192       $ 37,344
      Marketable securities and cash deposits        69,830        132,170
      Trade receivables, net                         42,833         21,489
      Inventories                                    16,352         14,366
      Other accounts receivable                      22,564          4,049
      Deferred income taxes                           2,638          1,516

    Total current assets                            192,409        210,934

    Property and equipment, net                      14,926         12,644

    Long term marketable securities                  50,996        179,368
    Severance pay fund                                6,311          5,689
    Deferred income taxes                             4,916          1,987
    Goodwill and other intangible assets            246,429          2,694
    Other assets                                        699            672

    Total assets                                   $516,686       $413,988

    Liabilities and Stockholders' Equity
    Current liabilities:
      Accounts payable                             $ 20,329       $ 12,205
      Other current liabilities                      46,517         28,969

    Total current liabilities                        66,846         41,174

      Accrued severance pay                           6,650          6,065
      Accrued pensions                                1,663              -

    Stockholders' equity:
      Common stock                                       32             28
      Additional paid-in capital                    298,173        216,041
      Accumulated other comprehensive income (loss)     569             28
      Retained earnings                             188,707        195,198
     Less - Cost of treasury stock                  (45,954)       (44,546)
     Total stockholders' equity                     441,527        366,749

    Total liabilities and stockholders' equity     $516,686       $413,988

SOURCE DSP Group, Inc.
10/31/2007
CONTACT: Ofer Elyakim, Vice President of Business Development of DSP
Group Inc., +1-408-240-6839, ofere@dsp.co.il
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Web site: http://www.dspg.com