CEVA - Earnings Call - Q3 2016

Transcript

Speaker 0

Hello and welcome to the CEVA Third Quarter twenty sixteen Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President, Market Intelligence, Investor and Public Relations.

Please go ahead, Mr. Kingston.

Speaker 1

Thank you. Good morning, everyone, and welcome to CEVA's third quarter twenty sixteen earnings conference call. I'm joined today by Gideon Wertheiser, Chief Executive Officer of CEVA and Yaniv Arieli, Chief Financial Officer at CEVA. Gideon will cover the business aspects and the highlights from the quarter and general qualitative data. Yaniv will then cover the financial results for the third quarter and provide guidance for the 2016 and the full year.

I will start with the forward looking statements. Today's conference call contains forward looking statements that involve risks and uncertainties as well as assumptions that if they materialize or prove incorrect could cause the results of Ziva to differ materially from those expressed or implied by such forward looking statements and assumptions. Forward looking statements include our financial guidance for the 2016 and the entire year future revenues to be generated from the executed portfolio license agreement and optimism about extending such a licensing model to other customers optimism about the licensing pipeline and customer ramp up schedule our ability to capitalize on emerging market opportunities, including cellular IoT, machine learning, non baseband, LTE and five gs and resolution of our accounts receivable balance issued by year end. The risks, uncertainties and assumptions include the ability of the CEVA signal process in IPs for smarter connected devices to continue to be strong growth drivers for our success in penetrating new markets, specifically non baseband markets and maintaining our market share in existing markets the ability of new products incorporating our technology to achieve market acceptance the speed and extent of the expansion of the three gs LTE and five gs networks, Bluetooth five and the IoT space customers' ramp up schedule and the impact on royalty revenue and the effect of intense industry competition and consolidation, global chip market trends and general market conditions and other risks relating to our business, including, but not limited to, those that are described from time to time in our SEC filings.

FIFA assumes no obligation to update any forward looking statements or information, which speak as of their respective dates. With that said, I would now like to turn the call over to Guilherme.

Speaker 2

Thank you, Richard, and welcome, everyone. We are pleased to report a very successful third quarter with record high revenue, strong execution in licensing and continued positive royalty trajectory, which led to our highest non GAAP quarterly EPS in more than four years. In addition, we will enrich our technology leadership, announced two new DSP based platform targeting the fast growing spaces of machine learning and IoT. Total revenue came at a record high $17,800,000 up 10% year over year. Licensing and licensing related revenue came at $7,500,000 with 13 licensing deals signed including comprehensive technology portfolio agreement, the first of its kind in Civa history.

Of the agreements signed, four were for Civa DSP cores and platform, eight were for connectivity products and one was the portfolio agreement that I just mentioned. 10 of the agreements were for non handset baseband application and six were with first time CEVA customers. Geographically, four of the deals signed were in The U. S, seven in the APAC region and two in Europe. We ended the quarter with record high booking, primarily due to two large agreements with market leaders, which I will elaborate on shortly.

Net revenue came in a record high $10,400,000 up 36% year over year and 8% sequentially, driven by new rollout of handset baseband units and growing shipments of non handsets by our customer, which reached an all record high of 59,000,000 units. The third quarter licensing dynamics highlight the strength of our diversified portfolio and the strategic benefit it offers to our customer roadmap. Let me take the next few minutes to discuss three deals signed during the quarter in more detail. The first deal is with a Tier one handset OEM with in house baseband design capabilities. It is our first licensee for five gs mobile broadband to be deployed in next generation smartphone, connected car, small cells and more.

While mass deployment of five gs is about two years out, leading operators such as Verizon, AT and T and Korea Telecom are pushing their ecosystem to expedite solution despite the lack of phone consensus on the five gs standard. Our customer is targeting the twenty eighteen Winter Olympics in Korea for this product, which will be the first large scale event where five gs will be widely used. Our CEVA XC DSP software defined radio platform benefits our customer both in terms of shorter time to market and the flexibility to convert to the full five gs standard once it is verified, resulting in to respin a costly chip design. On our last earnings call, we commented that we have a stronger than normal pipeline with a number of customers looking for comprehensive engagement to take advantage of our technology portfolio and unique expertise. In this respect, we are happy to announce that we have concluded two such agreements during the quarter.

The first is a portfolio license agreement, the first of its kind for us with a very large semiconductor company amounting to a few million dollars over the next few years. Under the agreement, the customer has a predetermined annual spending account that can be utilized for chip designs enabled by our off the shelf portfolio of baseband, vision, audio and connectivity IPs. Revenues will be recognized on an annual basis or once the customer's actual spending exceeds its yearly amount. We are extremely proud that these key customers have decided to adopt our portfolio of IP and believe that this business model can be extended to other Tier one customers who are looking for a one stop shop for technologies that are at the center of every smart and connected devices. The second important agreement that we signed is with a large reputable OEM for hearing instrument, a space that is expected to grow with aging population.

As part of the agreement, we will announce our Bluetooth technology to support stereo audio streaming from a smartphone or smart TV into hearing devices. Revenue recognition of this deal will be tied to the progress of the design work performed by FEVON. The potential of high quality stereo audio over Bluetooth extends far beyond the hearing instrument market. Apple's airport that was recently announced, addressed a similar use case in underlying technology, within its in house W1 chip. We believe that Apple initiative to displace the traditional cordless earbuds with the wireless one will drive other smartphone vendors to follow suit, which creates significant market opportunity for us to capitalize on our innovation in this space.

On the technology leadership front, we recently announced two new DSP based platforms that address the performance, cost and low power needs for next generation machine learning and cellular IoT applications. The CEVA XM6 is our fifth generation imaging and vision technology addressing the performance and power requirement of this network and advanced camera processing for next generation smartphone, automotive ADAS surveillance and more. Powered by our new Civa XMCs, a combo vector and SCALAD DSP engines, The platform includes an array of value added technologies, including special purpose coprocessors to boost the performance of this network and image working processing, along with comprehensive computer vision software and our highly acclaimed neural network software framework CDNM2, which streamlines the development required to add deep learning capability to any embedded device. The CEVA XM6 platform offers 8x higher performance versus its predecessor, the CEVAX and CORE and up to 25x better power efficiency for deep learning workloads than NVIDIA JET SOME TX1 GPU. The second product we announced is a lightweight DSP for cellular IoT, a market forecasted to add more than 1,000,000,000 new connections by 2021 according to the latest edition of the Ericsson Mobility Report with products and services such as smart homes, smart utilities, asset tracking, wearable health and environmental monitoring and more.

The CEVA S1 DSP is optimized for the stringent low power and low cost modem requirements of the three gs PT IoT standards such as LTE CAT M1 and narrowband IoT as well as the upcoming five gs standard. It also functions as a processing hub for other IoT related standards such as Wi Fi, Bluetooth, ZigBee, voice, positioning and sensing workloads. Its unique architecture consolidates DSP and CPU instruction suite architecture, allowing for single core to handle both the modem and the protocol steps with save cost of adding separate CPU core. We believe that cellular IoT and machine learning technologies enable unparalleled efficiencies for consumer and industrial spaces. It will therefore be a key driver for many new products and usage model for mass deployment.

We are highly optimistic of the value proposition that the FiVA XM6 and the FiVA X1 platform offer and we work diligently with our customers to leverage those opportunities. Moving to royalties. Our royalty revenue growth trajectory continued in Q3 with increase of 8% sequentially and an impressive 36% year over year. This was driven by growing shipments of smartphones powered by our DSP and a record non baseband unit shipment. In respect to non baseband segment, we are also experiencing a good progress with new customer design and production ramps.

The following is a short update on new customer products. Rockchip, a leading Chinese fabless semiconductor recently introduced two chips

Speaker 0

19 The quarter second was

Speaker 2

expected to go into production with Tier 21 smartphone OEMs shorting. The RK-eleven oh eight is a SoC targeting machine vision application for a range of markets including three sixty degree Action Cam, Cara DVR, surveillance and drone. Both of these ships become available just nine months after licensing our C Vyle SIM4, illustrating the maturity of our IP and our experience in supporting customers. Silverstream network started production of its Gen5 platform, which is based on our CVAX CDSP with volume gradually building up into 2017. This production ramp is at the back of significant supply contracts with major U.

S. And U. K. Utility companies. Action Semiconductor of China launched recently the ATJ2167 SoC, high end audio chip enabled by our DSP.

It enables power efficient solutions for lossless audio decoding, thus providing immersive audio experience for the mass market of wireless speakers. Fujifilm has announced that it will release the Fujifilm X2 T2 mirrorless camera. It uses our Vision DSP for color reproduction in steel for steel and video and with high hydro and low noise. HMicro, a California based company targeting high volume clinical and industrial IoT application recently announced together with ST Microelectronics, the industry third single chip solution for clinical grade single use disposable smart patches and biosensor. The product WidePoint aims to displace about 5,000,000,000 wired sensors that use in hospital for vital sign monitoring annually with an advanced wireless disposable sensor base on our Zero Waste WiFi IP.

Which Micro is about to enter high volume production with leading medical component suppliers shortly. China's process system and supplier of Bluetooth and WiFi chips have announced the ESP32, a low cost Bluetooth and Wi Fi combo chip. The chip is powered by our Bluetooth dual mode technology and targets a wide range of IoT use case. So in summary, we have delivered robust results with record high revenue, our highest monthly quarterly EPS in more than four years and new strategic engagement including our first portfolio of units. Our broad product portfolio operating connectivity vision and audio IP appears to many customers looking to be part of smart and connected work and our CEVA XM6 and CEVA X1 put us at the forefront of emerging machine learning and LTE IoT spaces.

On wireless, we continue to expand in the baseband space and are encouraged by the progress in the non handset baseband stores both with regard to ongoing shipments and production lines. With that said, I will turn the call over to Yaron for third quarter financial and full year guidance. Thank you, Dylan. I'll start by reviewing the results of our operations for the 2016. Revenue for the third quarter was $17,800,000 our third consecutive quarterly all time record high achievement.

This was 10% higher on an annual basis and 4% higher sequentially. The revenue breakdown was as follows: Licensing and related revenue was $7,500,000 reflecting 42% of total revenues, 13% lower as compared to the comparable quarter in 2015, but in line with our plans and expectations. Revenue was 10,400,000 reflecting 58% of our total revenue, an impressive increase of 36% on a year over year basis and the seventh successive quarter that we delivered year over year quarterly royalty growth. Operating margins were 92% both on U. GAAP and non GAAP basis.

The non GAAP quarterly gross margin excluded approximately $65,000 of equity based compensation expenses. Total operating expenses for the quarter were lower than expected and also lower compared to the first two quarters of the year, mainly due to the magnitude and timing of the research and development grant payment that we received from the Office of the Chief Scientist of Israel. Overall, we recorded OpEx of $12,600,000 at the lower range of our guidance. OpEx also included an aggregated equity based compensation expense of $1,500,000 and $300,000 for the amortization of acquired intangibles of AZ Airways. The total operating expenses for the third quarter excluding these two items were $10,800,000 below the mid range of our guidance and the lowest quarterly OpEx for the year.

Taxes for the quarter, GAAP and non GAAP were around $1,000,000 a bit higher than the norm due to a onetime tax expense relating to a tax called ruling associated with an uncertain tax position relating to prior years. U. S. GAAP net income for the quarter was $3,400,000 quite similar to last year's comparable quarter of 3,300,000.0 Diluted net EPS was $0.15 for the third quarter this year and $0.16 for the same quarter last year. Non GAAP net income and diluted EPS for the third quarter of twenty sixteen increased 109% year over year to $5,200,000 and $0.24 per share respectively.

Non GAAP net income and diluted EPS for the 2015 were $4,700,000 and $0.22 respectively. These figures for the 2016 and 2015 excluded TCE based compensation expenses net of taxes of 1,500,000.0 and $1,200,000 respectively and the impact of amortization of acquired intangibles of The U. Net of taxes of 300,000.0 and $200,000 for the quarter on both years. Other related data. Shipped units by CEVA licensees during the 2016 were $278,000,000, up 23% from last

Speaker 1

year.

Speaker 2

Of the two seventy eight million units sold, two eighteen million units or 79% were for baseband ships, reflecting a sequential increase of 14% from 192,000,000 units of baseband shipped and 22% increase from 179,000,000 units shipped a year ago. During the quarter, two customers started mass production of handset baseband. One is incorporated in a premium smartphone and the second came to a mid low end type smartphone at a significant volume. The latter has our content is more limited and as such, there's lower ASPs compared to our normal base. In the non baseband volume shipments increased dramatically, 76% sequentially and 29% year over year.

The increase is due to record high quarterly Bluetooth shipments in Q2 and the continued ramp up of our audio, voice products powered by DSPs. The quarterly handset base value royalty ASP declined 8% sequentially, but increased 15% on a year over year basis. This is due to a higher volume of smartphones as compared to feature phones. Our overall corporate blended royalty ASP declined 12% sequentially, but increased 10% year over year due to a product mix. As for the balance sheet items, as of the September, our cash, cash equivalent balances, marketable securities and bank deposits were approximately $145,000,000 Our accounts receivable balance in quarter end was unusually high, approximately $17,000,000 due to one of our large customers internal changes of the financial and legal entity, which affected the timing of payments to us.

We expect this issue to resolve itself by the end of the year. During the third quarter, we generated $3,300,000 net cash from operations. Depreciation was 400,000 and purchase of fixed assets were $1,300,000 mainly for platform tools for our DSPs. At the September, our headcount was two eighty one people, of which two twenty three were engineers. Now to the bank.

According to a new report from research firm Strategy Analytics, smartphone unit shipments increased by 6% in Q3 twenty sixteen compared to the respective quarter in 2015. Based on preliminary royalty reports from our smartphone customers for the third quarter shipments, we expect to significantly surpass the market, anticipating more than 100 growth in comparison to the third quarter of this year to last year and with regards to Unit one. This momentum, along with the continued progress in non vape pen shipments, are set to deliver another record high in royalty revenue, up more than 40% from Q3 of last year and more than 40% overall annual royalty increase for 2015 over 2016 over 2015. On licensing, as Videon noted, we are benefiting from having a broad portfolio of IPs to license and our customers' appreciation of these technologies and expect fourth quarter licensing activity to be in line with recent quarters. Our guidance for the 2016.

Revenue for the fourth quarter is expected to be in the range of $18,500,000 to $19,500,000 This is again the highest quarterly revenue guidance in the company's history. Gross margin is expected to be approximately 92% on both GAAP and non GAAP basis. Overall expenses should be a bit higher than prior quarters, but on an annual basis within the range of OpEx guidance we set at the beginning of the year. U. S.

GAAP operating expenses are expected to be in the range of $13,000,000 to $14,000,000 Of our expected operating expenses for the fourth quarter, dollars 1,500,000.0 is expected to be attributed to activity based compensation and $300,000 to the amortization of acquired intangibles. Net of these two devices items, non GAAP OpEx is expected to be in the range of $11,100,000 to $12,100,000 Net interest income is expected to be approximately $500,000 for the quarter. Tax rates on a non GAAP basis, 13% and on a GAAP basis, 18%. Share count for the fourth quarter approximately 22,400,000.0 shares. And on an annual basis approximately 22,000,000 shares.

U. S. GAAP fully diluted earnings per share is expected to be in the range of $0.15 to $0.17 And non GAAP EPS forecasted excluding equity based compensation and the amortization of intangibles net of taxes is expected to be in the range of $0.24 to $0.26 per share. Overall, for 2016, we are forecasting revenue growth of approximately 18%, which will contribute significantly to our earnings. Both non GAAP net income and fully diluted EPS are forecasted to grow north of 60% on an annual basis year over year.

Our strong cash position will continue to assist our efforts in diversity of our technology offering and market reach. Ed, you could now open the session for Q and A. Ed, operator?

Speaker 0

Thank you. We will now begin the question and answer session. And our first question comes from Gary Mobley of Benchmark. Please go ahead.

Speaker 3

Hi guys. Congratulations to a strong finish to the year or what is expected to be. Think housekeeping question to start out with. What were the four gs royalty units in the third quarter?

Speaker 2

Third quarter, we had a 62,000,000 units, which will in line with we said in the earlier conference call last quarter. The surprise comes for the fourth quarter. We anticipate around eight-zero million LTE units next quarter.

Speaker 3

Okay. And on that note, I'm assuming that any sort of disruption in what has traditionally been your top customer with respect to battery issues and whatnot is going to be more than offset by new avenues of growth such as another high end smartphone, am I summarizing that correctly?

Speaker 2

It's all of the above. As you can see from the guidance, things are going well in our side.

Speaker 3

Okay. All right. With respect to the revenue recognition for this new portfolio agreement, the way it was described, it sounds as if there's going to be one quarter out of each year in which there will be a significant amount of revenue recognized. Is that going to create in the future a lumpy fourth quarter as that licensee either does or does not exceed some predetermined threshold for revenue recognition?

Speaker 2

So the annual basis is not calendar basis. This is a deal that we signed during the third quarter. So as we said, the revenue recognition will be annually that means that the second quarter of next year either by then you recognize a part of that revenue or maybe earlier if that customer reaches its annual spending account and maybe we could recognize that earlier than the one year wait. So the one year is the maximum for the next couple of years. And if they take these different technologies that Julian talked about, then we could potentially recognize it a bit earlier.

So I'm not sure if you're looking to for a lumpy third quarter or second quarter in the next couple of years, but for sure that adds nice backlog color to the second quarter in the next few years or hopefully a bit earlier.

Speaker 3

Okay. I noticed the deferred revenue almost doubled sequentially. Was that a function of the recently launched CEVA X1 and XM6 before they're generally available? Or is it a function of some of these new portfolio like license agreements?

Speaker 2

No, the later. This is exactly a good example of those deals that we signed. We got paid for some of them or partially paid and we haven't yet recognized revenue because of the different rules. This one, the portfolio license that we talked about, the other big ones that Gideon talked about is more of a service oriented and we haven't recognized the big portion of that as well, although we had an initial upfront payment like most of these licensing activities. So that over the next couple of quarters will be used as part of our revenue recognition.

Speaker 3

Okay. Last question for me relates to five gs market share. You've been humming along here for a couple of years at a mid-thirty percent baseband market share. It sounds as if as it relates to five gs, you're dominant in baseband processing in base stations. It sounds as if you're growing your footprint on the mobile handset side with respect to five gs with some of these portfolio agreements and whatnot.

At this point in time, would you expect your overall baseband share to increase in the future as we transition to five gs? And maybe any additional detail with respect to a 40% threshold, a 50% threshold commentary would be helpful.

Speaker 2

Gary, again, I'll give you a about five gs, you said right, the five gs footprint that we have so far until this deal that we announced today is in the base station. And this was the first five mobile broadband, which take us to the handsets and automotive and all the things that five gs is targeted for when it comes to high bandwidth. I'm not talking about IoT. Now the standard of five gs is not yet rectified. So people are and there are not that many companies, but those that have strong technology base are rushing to come to the market with a pre standard five gs and our customer is rushing on this one.

Going forward in terms of going below our market share current market share is 36% now. And going forward, we have about 2,400,000,000 chips going to handset in a year. And we are at about 900,000,000 this year. So we are expecting going forward because of the emergence of five gs and because of the movement in the mid range and low end where we are strong to increase our market share.

Speaker 3

Okay. Thank you, guys. That's it for me. Thanks.

Speaker 2

Thanks, Greg.

Speaker 0

Our next question comes from Josh Wolfe of Barclays. Please go ahead.

Speaker 4

Name change thrown in there. Good morning, guys. I have a question on the if you look at the non Bluetooth unit count that you gave, when you look into that number and the growth there, and I think you mentioned audio is and voice, do you see specific areas is that an eclectic group in that number right now? I know it's a smaller number. Or are there is there anything in that that could potentially be a large blockbuster product which is in early stages and we should see a big ramp up in 2017 with what you're already selling?

Speaker 2

No. I think it's a combination of products. Right now out of the 60,000,000 by the way next quarter we are looking at the new record high of probably about $70,000,000 So annualizing that we're just shy of $300,000,000 run rate for now. The big drivers in the last two years were Bluetooth. This was the more mature product and the first product out from the early.

The second wave comes from different markets. Obviously, we're seeing a lot of interest around and pickup around all the always on type of functionalities with speakers and things like that. We have few WiFi deals that should be ramping up next year. And I think the most exciting one is a newcomer is the vision platform. And William mentioned quite a few new names like Rockchip, like others that are now the Fujifilm guys in cameras in different vision applications.

And I think this is the highest pay of speed in average for these non baseband type of devices that we'll have on our hand. And it's a brand new market opportunity of things picking up. So I think just these are the three elements other than Bluetooth, we're the most interesting and exciting opportunity around the vision.

Speaker 4

Okay. And then a second question. The if you look at the handset market, the baseband market, there used to be specific seasonality where the fourth quarter year was the strongest, so you saw that in your first quarter, then it kind of shifted because of customer mixes back to the third quarter. So your fourth quarter was the strongest. The fourth quarter guidance is for significant growth.

Where do you think we are given your new customers? You talked about the large premium customer. Where do you think the seasonality for the handset market is right now? Should we expect a fall off in the first quarter? Or is there a growth in the first quarter?

Speaker 2

It's hard to say because today in the handset market, we don't have really seasonality in terms of calendar year pre Christmas, post Christmas. Each company has its own time line for introducing new models. Some of them are taking even tactical approaches. And to make this even more complicated, we are in a market share gain. We are entering into an LTE.

We are entering into a we're expanding in the smartphone market. And so we cannot fully associate it with seasonality. The trend and that's what we focus, the trend is clear. We are expanding in the baseband where we want to expand and this is the smartphone.

Speaker 4

All right. Thank you very much.

Speaker 2

Thanks, Joseph.

Speaker 0

Next question comes from Matt Ramsay of Canaccord Genuity. Please go ahead.

Speaker 5

Good afternoon, guys. Thank you for taking my questions. Gideon, there's obviously a lot in the press and a lot going on at Samsung, which is obviously one of your key partners for four gs and it sounds like for five gs going forward. Looking into next year, maybe you could talk about some of the dynamics from a royalty perspective of what you can what you think could be driven out of Samsung's LSI semiconductor division. I mean you have obviously new mid tier products potentially, some brand disruption and product disruption at the high tier and some new opportunities with them longer term, but MediaTek winning a couple of sockets there for the first time.

So there's a lot of moving parts there and it's a question I get a lot from investors. So any commentary you might have on outlook for that particular customer next year would be really helpful. Thank you.

Speaker 2

In general, we cannot comment on 2017. It's too early. But the trend that we expect next year is to grow our smartphone unit. This is the baseband side. And of course, in the non handset baseband, we see the trend and we see the trajectory in the last quarter.

We expect this to continue next year and even next year.

Speaker 5

Fair enough. It's early days. I understand that. You made some good commentary I think in the prepared remarks about progress with Rockchip. And I think I'd be really interested to hear about a little bit more about progress on launches of devices that collect royalties from other chipset vendors in China.

I know there's been Leadcore has been a partner in the past, and I believe Leadcore is licensing some of its modem technology to some other semiconductor groups with smartphone vendors in Asia. So I think folks obviously focus on Intel's spread from Samsung, but I know there's some other dynamics in play in China. And if you could give us an update on the progress there, that would be helpful.

Speaker 2

Yes. Matt, it's a good question what you are asking. I think what we are encouraged to see in the vision side is the smartphone evolution. Smartphone is kind of behind in adapting vision. But if you take iPhone seven for example, the glass version where they have a dual camera to get a better focus in Zoom capabilities, you need a vision processor for this kind of workload.

There are people speaking at the conference of three sixty degree cameras in smartphone and that's something that you need a vision processor like we offer. So Rockchip is one example. What they do is basically a chip that will do a companion chip to the big SoC whoever did a Qualcomm, MediaTek and this will be a core processor dedicated for the camera. So, what you could want and we mentioned Fujifilm, we have a few other customers going into all sorts of innovation regarding the camera. On top of this, we mentioned on the connectivity company that people may not be familiar because they are not active in The U.

S, but they are in China quite knowledgeable and pushing all sorts of consumer products, whether it's wireless speakers. There's a lot of innovation about just think about the Amazon Echo. There are in China tons of companies now doing similar products. Think about wearable devices. So all these things, the good thing about us is that our technology that is generic enough and agnostic enough to get all those own products and this is where we see the design wins and the production wins.

Speaker 5

That's helpful. And then just last one for me and I'll jump back in the queue. Yaniv, you guys have talked about for a while a target of non baseband royalty units out to 2018. I believe 800,000,000 was that number at the midpoint. And obviously, that guidance was given a couple of years ago and things are moving around.

It's good to see that number inflecting higher in terms of the units in the quarter and in the guidance, but a progress report towards that number would be great. Thanks, guys.

Speaker 2

Sure. So, if we start ramping up the year, it's a bit early, but at least from a royalty perspective and the unit perspective, what we excluded maybe 2% or 3% in that interesting indicator. First of all, from a volume perspective and baseband, we're probably around 14%, 15% higher than last year. But with a very, very interesting chunk of smartphones, probably closer to 5,000,000 devices compared to $300,000,000 last year. So that's a big increase in the smartphones compared to the feature phones.

And in the non baseband units that you asked about, if you were about $167,000,000 last year, we're looking at $20,000,000 a 20% growth for this year for industrial just north of $200,000,000 If I look at the fourth quarter and annualize it, the number is much better than $200,000,000 If you annualize $70,000,000 this is more or less the number that we are forecasting for the next quarter and we annualize that $280,000,000 puts us in a run rate or starting run rate for next year. We started to close the gap towards the $800,000,000 So as we spoke correctly, when we put this out, it was twenty fifteen, three years out, we haven't touched the target. But I think there are very, very interesting things happening to us in both of them. And even more important on the dollar royalty contribution in 2019, when we will have also the base station royalties kick in. So we're slowly closing the gap.

We're not yet 100% sure, as William mentioned, about next year volumes and dollars. We'll talk about it and do our homework towards the next earnings call as usual. But from a unit progression, I think we are doing quite well this year both in non baseband and in the baseband itself.

Speaker 5

Thank you very much.

Speaker 2

Great. Thank you.

Speaker 0

Our next question comes from Suji Desilva of Roth Capital. Please go ahead.

Speaker 1

Hi, Gideon. Hi, Gideon. On the strong results here. Can you talk about where we are in the emerging markets upgrade cycle for LTE smartphones China, India? And just some indication of the expectations in the 2017?

I know you're can't talk much about 2017, but some thoughts there would be helpful.

Speaker 2

Yes. This is a good question. The interesting point is China is completely healthy country. We don't see too many three gs going there. India, what we understand that all the majority of the phones going there, even though they don't have the network, are LTE phones.

And we see companies in China trying to build more low cost LTE than today. But in general, that's a good trend for us because whenever we go to a smartphone and whenever it's an LTE, it drives our ASPs higher.

Speaker 1

Okay. Great. And then on the overall blended ASP for the company, should we still think of Bluetooth units dominating and the mix impact the next several years? Or will that stabilize?

Speaker 2

Well, never like to the ASP as a target or as a working tool. It's really consequence of the volumes in the different products. So I don't think we have a goal for ASP. We do have a goal for volume. We do have a goal for different markets.

And if they all work out and each one has a different blend of ASP whatever comes in average for the company, this is what we could report. I don't think we have a model that takes it out. So this is a target market for us. It's just more of the outcome of the difference. And I think we talked about the different volumes in these different markets and the progress that we are seeing this year.

Of course, without the e commerce, particularly much stronger this year more than 3x volume from last year, we had a very, very positive momentum from the ASP perspective. And we had vision and we had some of those other elements that we talked about in the call, it all gives us different flavors, but it should increase the royalty and it's a positive effect for us.

Speaker 1

Great. And my last question really. These portfolio licenses you've achieved, can you just review for us the significance of them just so it's clear for us?

Speaker 2

Not sure I understood the last question. Sorry?

Speaker 1

Oh, I'm sorry. The portfolio licenses, if you could just speak of the significance of achieving

Speaker 2

The portfolio licenses. Yes. So to expand the net or the idea how this is working out?

Speaker 1

Yes. What the customers are seeing that drove them to take the whole portfolio?

Speaker 2

Okay. I think this year a company that knows us, we did not use the variety of our IPs and we look for ways to simplify the uses of IP. So instead of negotiating each deal separately and instead of having a lot of infrastructure and a lot of legal teams and accounting teams and business teams deal with us, we tied a much bigger portfolio licenses to then expand with all the different technologies based on vision, audio, connectivity, Wi Fi Bluetooth, you have it and it's sort of prepaid by the corporate. An institution that needs an IP could take it off the shelf in a very, very simple activation code. And that's the narrative behind it.

We are trying to build an easier access and cleaner access to our technology. If it does work out for us over the next couple of years, hopefully, we have more products, more chips and more markets that these large companies could utilize our technology and generate new royalty streams for us. I would add to this one. This is more a strategic DSP this from a strategic standpoint because other than I need the process for now, I need the DSP for this specific project and that's it. It's more like a futuristic where you take a few years ahead and say I don't know exactly what I want to do, but I want this product to be available for me so I can use it for my next generation and next next generation product.

So it's more like a few years horizon for collaboration with the customer.

Speaker 1

Thanks guys. Thank you.

Speaker 0

Our next question comes from Matt Robinson of Wunderlich. Please go ahead.

Speaker 4

Thanks for taking my question. I just wanted to ask you about you mentioned two, I think if I heard you right, you mentioned two new mass market products, one being low end. Is that low end product an LTE product?

Speaker 2

We mentioned two this is Igor. We mentioned two handset or baseband product. Both are in high volume. One is a premium handset maker. Another one is high volume company in the mid low range product.

So these are the two new royalty payers and volume productions.

Speaker 4

Yes. Just asking if that the second one, the high volume lower end if it's LTE?

Speaker 2

It's an LTE phone, but our content there is as we mentioned in the prepared remarks is lower, meaning that we are dealing with legacy part and not necessarily with LTE.

Speaker 4

Thanks.

Speaker 2

Thank you.

Speaker 0

And our last question comes from David O'Connor of Exane BNP Paribas. Please go ahead.

Speaker 1

Yes, good morning gentlemen. Thanks for taking my question. Maybe the first one, Jan, for you on the portfolio licensing deal. What's your expectation when you look across your range of customers at the moment for those type of deals reoccurring? I mean should we be thinking kind of more on an annual basis?

Or is it going to be a lot? Is it more on the kind of every two, three years that those type of deals come along? That's my first question. Second question, maybe going back to you spoke, Gideon, on the Vision coprocessor for cameras. It's going to be implemented as a kind of a coprocessor chip in the first generation.

I'm just wondering when you look at that over time, is that going to be something that's going to be integrated into the ISP longer term? Or is it going to sit there as a coprocessor in the next couple of years? That's my second question. And then maybe if I could get in one more. A lot of talk at the moment around the vision systems in ADAS and into automotive.

I'm just wondering how are your discussions trending with kind of auto OEMs or any auto suppliers at the moment? Thanks.

Speaker 2

The problem is when we ask too many questions we it's got like a few. So we forget the first question. I remember. I remember. Yes.

It's like food. When you smell and see it, you get the appetite. Okay. That's fine. I remember now with regard to the portfolio exogenous.

I think the way to look on the portfolio agreement is not on the licensing line. The licensing line is pro determined and well defined on balance and the amount and the revenue recognition. The benefit is that the other customer can go to U. Or claim to use that in many with many of our a lot of our products. And the way to look into this one is the potential for royalties coming from this transaction going forward.

And this is the benefit regarding the portfolio. I think the question was do we want to will this repeat itself once a year, once a few years? Of course, I mentioned, with the food comes the appetite, we think it could be a great opportunity, especially with large companies. It doesn't work for the start up. It doesn't work with a first time image design win, because they don't know yet how many chips they're going to have or how successful that product is.

So there's much limited with consolidation in the space. There is more limited type of companies. But for sure this is something we'll try out with others in the world. Hard for us right now to commit if this is a one year or one or the couple of years, but there's no doubt that the sales people are aware of this deal. We are aware of such a deal.

And as we mentioned in part about the lens today, we see a lot of advantages for that. So we'll try to copy it. We can't promise at least today that this is something that we'll have for sure next year as well. Let me now because we are almost out of time, I want to respond to the Vision question because these are important question. As you commented out, currently, it's a coprocessor that are stay in between the ISP chip and the SoC, whether it's a Qualcomm media testing, don't know exactly.

Going forward, this technology could be ever could be either in the SoC, integrated in the SoC and in terms of customer choice could be integrated into the transfer chip or could be coco sensor, a chip kind of in between all these things. Mean, are agnostic in regards to all the different locations there. And for us at this stage is what encouraged us is the use cases that customers are coming out of how to use Vision Processor and deployment to improve vision, improve the camera performance, the camera sensing.

Speaker 0

Mr. Connor, did you have any more questions?

Speaker 1

Yes. Just my follow on question on the ADAS, the vision systems into ADAS and auto. That was my third question. What kind of discussions are you having with auto OEMs or suppliers? And how is that trending?

Thanks.

Speaker 2

Yes. That's sorry for getting this question. This is also an important question. When it comes to ADAS, automotive, autonomous cars, we are we this is a different market than the consumer that we are in. The time lines are different and the acceptance criteria is different.

But it is very dynamic area. We are we have a plan that we are following in trying to engage in customer. There are a few companies. One of them started to ship this quarter. It's in aftermarket and in OEM market, but it is a ship number.

We are optimistic about because we see the fleet.

Speaker 0

And this does conclude our question and answer session. I would like to turn the conference back over to Richard Kingston for any closing remarks.

Speaker 1

Thank you everyone for joining us today and for your continued interest and support of CEVA. We will be attending the following upcoming conferences and invite you to join us there for an update. The Bernstein Technology Innovation Summit on November 7 in New York, the second Annual ROTH Technology Corporate Access Day on November 16 in New York and Barclays Global Technology Conference on December 7 in San Francisco. For further information on the events and other events that we're hosting, please visit our Investors section of our CEVA website. Thank you and goodbye.

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.