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DSP Group

(Nasdaq:DSPG) is one of the few technology companies not to warn of disappointing results for the first quarter. Merrill Lynch has updated its report, leaving its forecast of 19 cents earnings per share and Long-Term Buy recommendation unchanged.

But given the adverse market conditions, Merrill Lynch has sharply lowered its expectations for the year 2001.

Analysts Ilana Treston and Marc Lipacis explain that earlier forecasts had been made in better times, when a generally rally was expected in the second half of 2001. They now expect DSPG to report earnings of 90 cents per share, compared with their previous forecast of $1.1. WR Hambrecht is betting on EPS of 88 cents, down from its earlier prediction of $1.11.

DSPG's main problem lies in its integrative digital telephony activities, which are more affected than its other activities by short-term demand. On the other hand, DSPG has a 45% market share in IDT, which has been the company's main growth engine.

Lucent Technologies

(NYSE:LU) for example has a 20% market share.

Visibility for the IDT industry has diminished, as in so many other areas. Most customers have stopped buying and are using products stocked up in inventory. The development of more advanced products has halted until clearer signs are forthcoming that end-users will buy. The only trend clearly discernable these days is that prices are dropping, which is not good news for manufacturers.

Value for shareholders, in the long run

Even under these harsh conditions, the analysts write that to DSPG's credit, it will not be building up major inventories in its balance sheet, because it customarily sells its products to distributors without granting them the option of returning the goods.

More importantly, demand for DSPG's digital signal processing products is not slowing, Treston and Lipacis point out. For one thing, DSP products are typically ordered for long-term projects, around two years ahead, hence this arena is not affected by the current crisis.

Also, DSPG has been expanding from cellular into new areas, such as audio (3MP players), digital cameras, and voice over packet (xDSL modems and suchlike).

DSPG says it has a 25% of the total cellular DSP market, where the leader is

Texas Instruments

(NYSE:TXN) with a 60% market share.

Merrill Lynch appreciates DSPG's vision and believes its products for voice, data and real-time video transmission, incorporating bluetooth technology, have great potential, that will be hard to realize in today's market conditions but in the long run, the analysts see DSPG creating great value for investors.

Based on this assessment, and on the calculation that DSPG is trading at 17 times its anticipated 2001 earnings, Treston and Lipacis left their Long-Term Buy recommendation for the company unchanged.