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DSP Group, Inc. Reports Fourth Quarter and 2004 Earnings

Diluted EPS for 2004 Increased 97% and 4%, on GAAP and Pro Forma Basis, Respectively

Strong Backlog at Year End Leads to Improved Visibility and Updated Projections

SANTA CLARA, Calif., Jan 25 /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 fourth quarter and year ended December 31, 2004.

Fourth Quarter Results:

Revenues for the fourth quarter of 2004 were $28,555,000, a decrease of 25% from revenues of $38,136,000 for the fourth quarter of 2003. Net income for the fourth quarter was $1,229,000, a decrease of 79% from net income of $5,961,000 for the fourth quarter of 2003. Diluted earnings per share (EPS) for the fourth quarter of 2004 were $0.04, a decrease of 80% from $0.20 for the fourth quarter of 2003. Results for the fourth quarter of 2004 included a one-time write-off in the amount of $2,682,000 for in-process research and development related to the acquisition of Bermai Inc.'s WiFi assets in October 2004.

Year End Results:

Revenues for the year ended December 31, 2004, were $157,511,000, an increase of 3% over 2003 revenues of $152,875,000. Net income for 2004 was $51,094,000, an increase of 102% from $25,355,000 for 2003. Diluted EPS for 2004 was $1.70, an increase of 98% from $0.86 for 2003.

Pro Forma Results:

Pro forma net income for the fourth quarter of 2004, excluding the one-time write-off of in-process research and development related to the Company's acquisition of the assets of Bermai Inc. and related tax benefit, as stated above, was $2,972,000, a 50% decrease compared to $5,961,000 for the fourth quarter of 2003. Pro forma diluted EPS were $0.10 for the fourth quarter of 2004, a 50% decrease from $0.20 for the fourth quarter of 2003.

Results for 2004 included an aggregate capital gain of $44,448,000 resulting from the sale of all of our holdings in the AudioCodes Ltd. stock and the Tomen Corporation stock. The tax effect of these capital gains was $16,450,000. 2004 results also included a one-time write-off in the amount of $2,682,000 for in-process research and development related to the Bermai acquisition and related tax benefit of $939,000, as well as a one-time goodwill impairment charge of $4,304,000 arising from the GAAP-required re-evaluation of the remaining goodwill associated with the acquisition of VoicePump Inc. in March 2000. The capital gain is included in the Company's statements of income, and the write-off and impairment charge are included in the Company's operating expenses.

Results for 2003 included a one-time write-off in the second quarter of 2003 in the amount of $2,727,000 for in-process research and development related to the Teleman Multimedia Inc. acquisition and a one-time capital gain of $241,000 from the sale of Tower Semiconductor Ltd. shares. The related net tax benefit arising from the write-off and capital gain was $272,000.

Pro forma net income for the year 2004, excluding the effects of the aforementioned capital gains, as well as the write-off and impairment charge and related tax benefit, was $29,143,000, a 6% increase compared to $27,569,000 for the year 2003. Pro forma diluted EPS were $0.97 for the year 2004, a 4% increase over $0.93 for the year 2003.

The Company believes that this pro forma presentation of net income and diluted EPS is useful to investors in comparing results for the quarter and year ended December 31, 2004 to the same periods during 2003, because it excludes items that management does not consider meaningful for purposes of analyzing the Company's operating results and making budget-planning decisions.

Eli Ayalon, Chairman and CEO of DSP Group, stated: "In 2004 DSP Group accomplished major technology and strategic achievements. Our customers won five CES "innovative product awards" at the last Consumer Electronics Show in Las Vegas. All these products are powered by our new chip-sets. We launched our new DECT chip-set product line targeting the European market that offers a one-stop-shop concept for residential wireless connectivity products. We designed and added new video, data and CoIP (Cordless over IP) capabilities to the traditional voice enabled market. Recently, we enhanced our future product roadmap by adding Wi-Fi technology for transmission of voice, video and data in the residential markets. These achievements, new market opportunities and new product offerings give us confidence in the future growth of our business."

Mr. Ayalon added: "As we all know the second half of 2004 was challenging for the consumer electronics industry. The industry has encountered demand and inventory issues which impacted our business. We believe that these issues are now behind us. The strong flow of orders in the fourth quarter of 2004 resulted in a backlog of $40 million at year end, which gives us very good visibility into the first quarter of 2005. Based on these factors and additional input from our marketing channels we have updated our projections for the first quarter of 2005 and year 2005, and shall give further details in our scheduled conference call today."

Moshe Zelnik, VP Finance & CFO of DSP Group stated: "Despite increasing research and development expenses in the year 2004 and a challenging market environment in the fourth quarter, we are proud to report an increase in our net profit and diluted EPS in 2004 as compared to 2003."

During the fourth quarter of 2004, the Company repurchased 90,000 shares of its common stock at an average price of $20.31 per share, for approximately $1.8 million, bringing the total number of shares repurchased in the year 2004 to 1.6 million shares at an average price of $20.09 per share and an aggregate repurchase of $31.7 million worth of common stock. As of December 31, 2004, approximately 3.7 million shares remained available for repurchase from previous Board authorizations. Our cash position at year end, consisting of cash, cash equivalents and marketable securities, reached a level of approximately $331 million. We generated $27.4 million of cash from operating activities in 2004.

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 world leader in the short-range wireless communication market, enabling home networking convergence for voice, video & 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 world leader and a one-stop-shop for a wide range of applications. These applications include, but are not limited to: ISM band digital 900MHz, 2.4GHz, 5.8GHz telephony, European DECT (1.9GHz) telephony, Bluetooth systems for voice, data and video communication and are deployed in residential, SOHO, SME, enterprise and automotive applications. DSP Group ICs provide solutions for MP3 players, VoIP Phones, Gateways, and Integrated Access Devices (IADs) and are widely used in Digital Voice Recorders (DVRs). More information about DSP Group is available at www.dspg.com.

Earnings conference call

DSP Group has scheduled a conference call for 8:30 a.m. EDT today to discuss the financial results for the fourth quarter and year of 2004 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 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:  73336102)
    -- International Dial-In # 1-617-801-6888 (passcode:  73336102)
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 statements made by Mr. Ayalon concerning new market opportunities, his confidence in the future growth of our business, the end of the demand and inventory issues that impacted the last half of 2004, and our visibility into the first quarter of 2005. 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 unexpected delays in the introduction of new products; failure of DSP Group's new products to achieve broad market acceptance, especially in the European markets; DSP Group's inability to develop and produce new products at competitive costs and in a timely manner; declines or fluctuations in selling prices and gross margins as a result of entry into new markets; challenges faced by the consumer electronics industry; changes in silicon manufacturing costs; and general market demand for products that incorporate DSP Group's technology. Further, although the backlog information is useful, it may not be a reliable measure of our sales for any future period. These and other factors which may affect future operating results and DSP Group's stock price are discussed under "RISK FACTORS" in the Form 10-K for the year ended December 31, 2003, as well as other reports, including Form 10-Qs, DSP Group has filed with the Securities and Exchange Commission and which are available on DSP Group's Web site (www.dspg.com) under Investor Relations.


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


                                     Three Months Ended         Year Ended
                                          December 31,         December 31,
                                        2004      2003       2004       2003
    Product revenues and other       $ 28,555  $ 38,136  $ 157,511  $ 152,875
    Cost of product revenues
     and other                         14,191    19,451     80,368     83,077

    Gross profit                       14,364    18,685     77,143     69,798

    Operating expenses:
      Research and development          8,820     8,197     32,147     25,599
      Sales and marketing               2,278     3,361     11,292     11,977
      General and administrative        1,854     1,947      7,112      6,953
      Impairment of goodwill              --        --       4,304        --
      In-process research and
       development write-off            2,682       --       2,682      2,727
      Total operating expenses         15,634    13,505     57,537     47,256

    Operating income (loss)            (1,270)    5,180     19,606     22,542
    Other income:
      Interest and other income, net    2,169     2,002      8,522      7,947
      Capital gains                       --        --      44,448        241

    Income before provision
     for income taxes                     899     7,182     72,576     30,730
    Provision (benefit)
     for income taxes                    (330)    1,221     21,482      5,375

    Net income                        $ 1,229   $ 5,961   $ 51,094   $ 25,355

    Net earnings per share:
      Basic                           $  0.04   $  0.21   $   1.79   $   0.91
      Diluted                         $  0.04   $  0.20   $   1.70   $   0.86

    Weighted average number
     of shares of Common Stock
     used in the computation of:
      Basic                            27,959    28,615     28,574     27,912
      Diluted                          29,092    30,344     30,026     29,593


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


                                     Three Months Ended        Year Ended
                                         December 31,          December 31,
                                        2004      2003       2004       2003

    Product revenues and other       $ 28,555  $ 38,136  $ 157,511  $ 152,875
    Cost of product revenues
     and other                         14,191    19,451     80,368     83,077

    Gross profit                       14,364    18,685     77,143     69,798
    Operating expenses:
      Research and development          8,820     8,197     32,147     25,599
      Sales and marketing               2,278     3,361     11,292     11,977
      General and administrative        1,854     1,947      7,112      6,953

      Total operating expenses         12,952    13,505     50,551     44,529

    Operating income                    1,412     5,180     26,592     25,269
    Other income:
      Interest and other income, net    2,169     2,002      8,522      7,947

    Income before provision for
    income taxes                        3,581     7,182     35,114     33,216

    Provision for income taxes            609     1,221      5,971      5,647

    Net income                       $  2,972  $  5,961  $  29,143  $  27,569
    Net earnings per share:
      Basic                          $   0.11  $   0.21  $    1.02  $    0.99
      Diluted                        $   0.10  $   0.20  $    0.97  $    0.93

    Weighted average number of
     shares of Common Stock used
     in the computation of:
      Basic                            27,959    28,615     28,574     27,912
      Diluted                          29,092    30,344     30,026     29,593
    The above pro forma
     consolidated statements
     of income have been
     adjusted to exclude
     the following items to
     US GAAP reported net income:

    Reported net income per US GAAP  $  1,229  $  5,961  $  51,094  $  25,355
    Adjustments:
      Impairment of goodwill              --        --       4,304       --
      In-process research &
       development write- off           2,682       --       2,682      2,727
      Capital gains                       --        --     (44,448)      (272)
      Tax expenses (benefit)             (939)      --      15,511       (241)

    Pro forma net income             $  2,972  $  5,961  $  29,143  $  27,569


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


                                                    December 31, December 31,
                                                            2004       2003
    Assets
    Current assets:
      Cash and cash equivalents                          $ 72,102   $ 36,812
      Marketable securities and cash deposits              63,222     42,490
      Trade receivables, net                                5,976     15,844
      Inventories                                           9,469      8,466
      Other accounts receivable                             2,213      1,462
      Deferred income taxes                                 1,168      1,326

    Total current assets                                  154,150    106,400

    Property and equipment, net                             6,683      7,108
    Long term marketable securities                       195,671    197,071
    Investment in equity securities of traded companies      --       47,138
    Severance pay fund                                      3,437      2,360
    Long term pre-paid expenses and lease deposits            628        513
    Goodwill                                                1,500      5,804
    Deferred income taxes                                   1,410        --
    Other intangible assets                                 3,482      2,076

    Total assets                                         $366,961   $368,470

    Liabilities and Stockholders' Equity
    Current liabilities:
      Trade payable                                      $  7,830   $ 11,221
      Other current liabilities                            39,857     34,292

    Total current liabilities                              47,687     45,513
    Long term liabilities:
      Accrued severance pay                                 3,784      2,555
      Long term liability                                     --       1,429
      Deferred income taxes                                   --      14,592
    Total long term liabilities                             3,784     18,576

    Stockholders' equity:
      Common Stock                                             28         29
      Additional paid-in capital                          187,471    174,700
      Accumulated other comprehensive income                   65     23,045
      Retained earnings                                   157,723    107,799
    Less - Cost of treasury stock                         (29,797)    (1,192)
    Total stockholders' equity                            315,490    304,381

    Total liabilities and stockholders' equity           $366,961   $368,470


    CONTACT:
     Yaniv Arieli
     President of US Operations, Investor Relations
     DSP Group Inc
     +1-408-986-4423
     yarieli@dspg.com.

SOURCE DSP Group, Inc. -0- 01/25/2005 /CONTACT: Yaniv Arieli, President of US Operations, Investor Relations, of DSP Group Inc., +1-408-986-4423, or yarieli@dspg.com/ /Photo: http://www.newscom.com/cgi-bin/prnh/20020715/SFM118LOGO AP Archive: http://photoarchive.ap.org PRN Photo Desk, photodesk@prnewswire.com/ /Web site: http://www.dspg.com/ (DSPG)