Eli Ayalon, chairman and CEO of DSP Group (Nasdaq:DSPG)

(DSPG) - Get Report

likes to look at things in the long run, not to myopically focus on the immediate term. So he told TheMarker, as the company smartly sprang past forecasts for the second quarter.

He almost sounds apologetic. But the first Israeli company to publish its financial statements for the second quarter did well, with revenues soaring 45% from the sequential quarter to $36.5 million. Its revenue result was 8% above analyst forecasts.

Told of the impression he makes, Ayalon responds: "I simply refuse to get excited. There are good times and times that aren't that good."

The point, he says, is the long term. "I am firmly opposed the crazy, idiotic rush to 'what's happening in this quarter or 'what'll happen in the next quarter'.

"Companies should be examined over five years, to see how many warnings they put out, how credible they were, how profitable and so on. Market value is not the main thing either, it's just for spice.

"On the other hand, I know these are the rules of the game, even though I would much prefer not to publish results on a quarterly basis," he adds.

Looked at from a quarterly viewpoint anyway, the company has no cause to hang its head. Second-quarter revenues of $36.5 million were 45% above the prior quarter, well above forecasts. The company had guided toward revenues of $27 million to $29 million.

DSPG predicts that for the third quarter, its products department will generate $36 million to $38 million revenues, compared with $31.9 million in the second quarter. Licensing should bring in $4.7 million to $6.7 million.

The company's backlog of orders is at a record-breaking height, Ayalon says. No precise figures were provided, but its inventory rose to $9.7 million in the second quarter, which indicates something about its backlog.

CIBC technology analyst Shaul Eyal predicted that the company would break through forecasts for the second quarter, but DSPG managed to surprise him nonetheless. The company is playing great music, he noted, but nobody's listening.

Somebody must have been its stock gained 4.3% on Nasdaq on Wednesday.

The company ahs two main strong points, Ayalon argues. One is massive investment in R&D over four years, climbing from $8.4 million in 1997 to $26.1 million in 2001. "Our efforts resulted in new products that turned into our growth engines," Ayalon says, "despite the harsh business environment.

"The second thing is the fact that our products target the consumer goods market, which has by nature been less injured than the telecommunications infrastructure market, or IT. But that element alone doesn't explain our success."

Its R&D investments led to two product launches during the second quarter, which are already contributing income. Others are in the pipeline, including one based on blue-tooth technology. That is expected to start generating income in the second half of 2003.

The first product, Xpert Teak, is a silicon platform that combines signal processing technology with a range of peripheral devices. It is being offered via a user-licensing model. The product significantly reduces development time of silicon chips, and also reduces the risk inherent in chip development.

The second product is DSPG's multi-handset, operating at a frequency of 2.4 GHz. The chip can support up to 8 handsets connected to a single base unit. It enables direct communications outside the home between mobile phones (2-way radios).

Stocks of the multi-handset ran out right after its launch, the company says proudly.

The hi-tech market is fantastically dynamic, Ayalon points out: a company has to keep spending on R&D. DSPG has the wherewithal to do so: it ended the second quarter with $254 million cash, including long-term investment and bank deposits. Of that, $40 million are registered as cash designated for its new subsidiary, to be created from the merger of its Ceva unit with Irish company Parthus Technologies.

Over five years, Ayalon calculates, the company has generated more than $105 million cash, about the same as its net profit. That, he does get excited about.

What will it do with the money? Direct some to its next merger?

"We're working with several investment banks, which received clear guidance from us on mergers and acquisitions," he says.

Only consumer-oriented companies will do, he says, that would complement it in the area of video, or wireless LAN. Also, the company must have income. It can be losing money, but must prove that it has a market. Thirdly, Ayalon says, is a geographical factor: DSPG is looking primarily at companies in Israel, with second priority going to Silicon Valley, and third priority Britain.

DSPG's market cap today is $500 million. At its peak, it was about $1.6 billion. But the company today is better than it was then, Ayalon says. It sells more, it earns more and it's about to split up, enabling its two parts to develop faster.

"I don't know if our market value was inflated then and correct today, or the contrary, but I'm sure it isn't the right criterion to judge," he says. "The only test is the long term."

Moreover: "I can only say that all the talk about Israeli hi-tech disintegrating is nonsense babble. Israeli hi-tech is strong. In fact, in 2001, Israeli hi-tech generated 42% of the State of Israel's total production, which shows how strong it is."