CEVA - Earnings Call - Q3 2017

Transcript

Speaker 0

Good morning, and welcome to the CEVA Incorporated Third Quarter twenty seventeen Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like turn the conference over to Richard Kingston. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and welcome to CEVA's Third Quarter twenty seventeen Earnings Conference Call. I'm joined today by Gideon Wertheiser, Chief Executive Officer of CEVA and Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects and the highlights from the quarter and provide general qualitative data. Yaniv will then cover the financial highlights for the third quarter and provide the fourth quarter and full year guidance for 2017.

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 CEVA to differ materially from those expressed or implied by such forward looking statements and assumptions. These forward looking statements include our financial guidance for the fourth quarter and full year 2017 optimism about the licensing pipeline and our product portfolio anticipated licensing opportunities and potential royalty revenue in trends relating to five gs and LTE IoT projected customer ramp up schedules and optimism about the success of growth in the non handset space the risks, uncertainties and assumptions include the ability of the CEVA signal processing IPs for smarter connected devices to continue to be strong growth drivers for us our success in penetrating new markets, specifically non baseband markets and maintaining our market position in existing markets the ability of new products incorporating our technologies to achieve market acceptance the speed and extent of the expansion of the LTE and five gs networks, LTE IoT and IoT space generally our ability to execute more broad portfolio license agreements customer ramp up schedules and the impact on royalty revenues 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.

CEVA 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 Gideon.

Speaker 2

Thank you, Richard, and welcome, everyone. Our third quarter financial results dramatically exceeded our expectations, driven by record licensing revenue and activities. Across all our product lines, we are experiencing favorable licensing dynamics as customers are increasingly placing greater value in our platform based strategy, which offers a holistic solution to high entry barrier technologies, in particular five gs neural network and short range wireless. Selling for the third quarter came in at record high of $24,000,000 significantly higher than our guidance and up 35% year over year. Licensing and related revenue was also an all time record high at $14,000,000 up 88% year over year.

GAAP and non GAAP net income and non GAAP EPS also set company records. During the third quarter, we concluded eight deals, of which two were for our distinct Chorus and platform and for our connectivity IPs. All of the deals were for non handset baseband applications and were for first time customers. Customer target markets for the licenses completed in the quarter were five gs base stations, surveillance, industrial and consumer IoT. On royalties, revenue came in at $10,000,000 down 4% versus last year, reflecting saw seasonal weakness in the smartphone market.

This was, however, partially offset by by new shipments of our non handset baseband segment, primarily for base station chips and computer vision products within smartphone, action camera, and 360 degrees camera. Let me take the next few minutes to update you on recent market development, which we plan to capitalize on by leveraging our technology excellence and strong track record in cellular. Those developments present ongoing licensing opportunities and substantial royalty revenue potential as chips enabled our technology will reach mass production. Last March, the 3GPP, which is the body in charge of cellular standardization, decided to accelerate the milestone for finalizing the five gs new radio standard towards the 2017. This paves the way for five gs trials as early as 2018, following by commercial products in 2019, one year ahead of what was originally planned.

Five gs is a disruptive technology, a pivot for multiple new services and products, among which are high definition video streaming, unbeatable virtual reality, augmentation reality, autonomous driving, AI and more. Five g will also be the key enabler for Industry four point zero initiative for which machines and factory automation will be revolutionized by using AI algorithms available in the cloud that will be accessible through fast and reliable five g network. These substantial opportunities drive governments and wireless carriers to expedite investment and regulation for five g. In June, the Chinese government announced that it will invest over $400,000,000,000 in five g deployment over the next ten years. In The US, the FCC has been working to free up millimeter wave spectrum for carriers to enable faster five g network.

In this respect, Verizon and AT and T has announced five gs services with twenty eight and thirty nine gigahertz spectrum for the last mile delivery. It enabled a much cheaper alternative to run broadband Internet services compared to fiber routing. South Korea is spending a commercial five gs network in time for the twenty eighteen Winter Olympics. Last, the approval of the Department of Justice on the pending acquisition of Time Warner by AT and T and Verizon acquisitions of AOL and Yahoo set the stage for video streaming services over five g. Our new advanced DSP platform, the x c 12, is already been licensed to three out of the top five base station AMs who are intensively working on in house chip solution for five g.

We are also making progress with few other key players in the state, which we have not had business relationship with in the past. Furthermore, we have number of customers designing five g mobile broadband chip for smartphones and home router based on our CEVAX and XC platform. Five g is a technology breakthrough, requiring new expertise and product offering. We foresaw these needs and investing ahead of the market, enabling us to offer our customer a head start as the five gs market takes off. The additional recent market acceleration is LTE IoT, a provision of LTE standard specifically target for low power, low data rate for IoT applications.

According to recent report from GSMA, by 2026, as many as three zero eight billion LTE based IoT connections will be in operation for applications such as smart meter, smart cities, shared bike, agriculture and more. China Mobile is leading the pace, aiming to invest $6,000,000,000 in the next two years. The tension of the proliferation of LTE IoT based chips and applications, we have taken significant steps with our technologies to reduce the entry barrier for many semiconductor companies who have no prior experience in cellular and are looking to benefit from this sizable and diversified market. In this regard, we have recently expanded our partnership with Astrid OpenCone, a reputable RF and analog design service IT company, CMR now acts as a one stop shop for complete blocking Northern IoT solution. China, same chips, formerly known as VP Microelectronics, has already launched the Rose Scene 7,100, its first narrowband IoT chips based on our CivaX IoT processor.

This chip is expected to be in high volume production early next year. Moving to IoT. The third quarter IoT revenue reflects a soft smartphone market due to what appears to be a combination of transformation in the high growth Indian smartphone market where HD penetration is still small and the push out of of the top tier flagship handset. We, however, were encouraged by the growing shipment of base station, base bed, and vision product in smartphone and camera, which partially offset the decline in the handset quality revenue. To conclude, I'm very pleased with all time high licensing performance and profitability in the third quarter on the back of stellar first half of the year.

We are extremely excited about the recent licensing dynamics driven by lucrative opportunity in five gs, LTE IoT, Neural Network, Wi Fi, Bluetooth and voice. The impact of this licensing momentum goes far beyond the initial revenue from these deals. This momentum possess significant future royalty revenue potential for those extremely sizable markets. With that said, let me turn the call over to Yaniv for the financials and the guidance. Thank you, Guillaume.

I'll start by reviewing the results of our operations for the 2017. Revenue for the third quarter was at an all time record high of $24,000,000 up 35% on a yearly basis. The revenue breakdown is as follows: Licensing and related revenue was approximately $14,000,000 representing 58% of our total revenue, 88 percent higher as compared to the 2006, second sequential record high. Royalty revenue was $10,000,000 reflecting 42% of our total revenue and 4% lower on a year over year basis. Gross margins were 93% in both U.

S. GAAP and non GAAP basis. Our non GAAP quarterly gross margin excluded approximately $100,000 of equity based compensation expenses. Total operating expenses for the third quarter were just over the mid range of our guidance at $16,100,000 OpEx also included an aggregated equity based compensation expense of approximately $2,100,000 and $300,000 for the amortization of acquired intangibles of OVNO-eight. Total operating expenses for the third quarter, excluding these two items, were $13,700,000 just over the mid range of our guidance.

U. S. GAAP net income and diluted EPS for the quarter both increased dramatically by 73% to $5,800,000 and to $0.26 per share respectively. Third quarter of last year, U. S.

GAAP net income also reached an all time record high. Non GAAP net income and diluted EPS for the third quarter both reached an all time record high and increased 5950% year over year to $8,300,000 and $0.36 per share. Figures exclude an equity based compensation expenses net of tax of $2,100,000 and the impact of the motivation of acquired intangibles of EV Airways of $300,000 Other related data. Shipped units by CEVA's licensees during the 2017 were $250,000,000 down 710% sequentially and from the third quarter reported shipments for last year, respectively. Two fifty million units shipped, 189,000,000 or 76% were for handset base handsets, reflecting a seasonal decrease, a sequential increase of 15% from February units of handset baseband chips shipped during the 2017, a 15% decrease from 2,018 units shipped a year ago.

Non handset baseband, volume shipments continued to increase about 30% sequentially and 3% on a year over year basis. The sequential increase is due to higher quarterly Bluetooth, vision and basement shipments. From a revenue perspective, third quarter non baseband royalty revenue increased sequentially by strong double digits with volume increase and on a year over year basis approximately double, contributing approximately $2,000,000 of royalty revenues in the quarter. That's for the balance sheet items. As of September, Nextiva's cash, cash equivalents, balances, marketable securities, and bank deposits grew to shy of a $178,000,000.

Our DSOs for the third quarter were forty nine days compared to the prior quarter of forty six days. During the third quarter, we generated $7,100,000 net cash from operations. Depreciation was $05,000,000 and purchase of fixed assets were $1,100,000, mainly due to new software activations. September '17, our headcount was 306 people, of which 246 were engineers. How for our guidance?

Licensing has demonstrated throughout this year. We experienced good interest for our technologies. Also, we expect the acceleration in five g standardization and the proliferation of LTE IoT to create demand on our cellular solutions. As such, we are once again raising our annual licensing target the third time this year from approximately $32,000,000 last year to a new annual target of just $43,000,000 for 2017, representing over 35% annual growth. Royalty, after a soft third quarter in the handset space, we expect sequential increase in the fourth quarter in both the handset baseband and non handset based products.

Overall, this should enable us to record a new all time annual royalty revenue of over $43,000,000 or possibly 7 percent annual growth. Our guidance for the 2017 is as follows: Revenue for the fourth quarter is expected to be in the range of $20,500,000 to $21,500,000 Gross margin is expected to be approximately 90% on GAAP basis and 91% on non GAAP basis. This excludes an aggregate $100,000 of equity based compensation expense. Both gross margin plan for the quarter are a bit lower than the norm due to the cost of good expenses associated with our new partnership in the narrowband IoT space. Overall OpEx should be similar to the third quarter.

Q4 OpEx is expected to be in the range of $15,600,000 to $16,600,000 Of our anticipated total operating expenses for the fourth quarter, dollars 2,400,000.0 is expected to be attributed to equity based compensation expenses and $300,000 to the amortization of acquired intangibles. Therefore, our non GAAP operating expenses is expected to be slightly lower than the third quarter we just reported and in the range of $13,000,000 to $14,000,000 And interest income is expected to be about $750,000 Tax rate for the fourth quarter similar to the third quarter actual level on GAAP basis 17% and on non GAAP basis 13%. Share count for the fourth quarter is expected to be about 23,000,000 shares, and that will bring us to US GAAP fully diluted earnings per share is expected to be in the range of 12 to 14¢. In non GAAP, EPS is forecast excluding the equity based compensation expenses and amortization is expected to be in the range of $0.23 to $0.25 per share. For the full year, revenues are forecast to be in the highest level of the company's history and just shy of $87,000,000 and non GAAP fully diluted EPS of approximately 1.16 which represents over 20% year over year growth.

Operator, we could now open the Q and A session, please.

Speaker 0

Okay. We will now begin the question and answer session. Our first question comes from Gary Mobley with Benchmark. Please go ahead.

Speaker 3

Hey guys, congratulations on a strong third quarter licensing number. Yaniv, as a point of clarification, did you say base station SOC royalty dollars in the just reported quarter were 2,000,000?

Speaker 2

In not just the base station, but all the non handset Okay. Royalties were $2,000,000, which is double where we were a year ago.

Speaker 3

What what contribution are you now receiving seeing on the base station front, and is that from just one royalty contributor of the two so far?

Speaker 2

It's it's initial ramp ups, and I think we we said in the past that we are still sort of studying and learning as we go, the timing, the magnitude, the ramp up of of this, it's one customer for now. And it started, I think, like, two quarters ago, our first reports, and then and it's continuing. So we still don't know the full effect and the full growth opportunity, but there's no doubt that this is a very large market opportunity both for CBA and our customers, which they're gaining market share from free scale TIs of the world that have dominated the space. I'll you one more thing to add to what you need to say. The base the station started two quarters ago and last quarter we've seen another Q or another chip that went into production.

Speaker 3

Okay. What were the LTE royalty units in the quarter?

Speaker 2

Gary, you didn't hear the question?

Speaker 3

What were the LTE royalty units in the quarter?

Speaker 2

It's 66,000,000. One thing to remember, based back on the base station, we signed another deal with a new customer on the base station front this this last quarter. So that's a cautionary note you get, but another deal, this is the third in out of five big players that we could be enabling their solution. All these three base station goes out for five

Speaker 3

Okay. One last question I want to address related to the licensing front. So I'm curious to know what drove the average deal size up. Presumably, it was up substantially since you had only eight license deals versus 13 last quarter and obviously a big sequential increase in revenue. But yet your deferred revenue went up sequentially as the main source of backlog.

And so point of questions are what drove the average deal size increase and why are you expecting a low in licensing revenue on what has been pretty stellar fiscal year 2017?

Speaker 2

Good question, and I'll I'll try to help you out. We we always explain from time to time that it's not right to take the licensing revenue and divide it by the number of deals because not necessarily you're able to recognize all the deals that you signed within the quarter. We are reporting deals that were signed. It's not necessarily the deal that you recognize. And in the last two quarters, if you recall, we have increased our backlog.

Last quarter, we reached all time record high in backlog. And that backlog, we were able to pull it in into q three because of the the massive r and d investments that we had to deliver by the end of the quarter to to a significant customer, a big piece of piece of technology. And as soon as we have done that, we were able to release the the backlog. So the backlog is not necessarily in deferred revenue. It depends if they paid or not.

But more importantly, the the fact that in the last two quarters, we signed deals not necessarily recorded or recognized all of them. And two very large deals were delivered and fully executed from an r and d point of view, from a delivery point of view in q three, and that's what's pulled in revenues maybe from q four or for future quarters because we were able to get the the work done. K. Let me ask

Speaker 3

me ask a a follow-up to that. So then is the backlog down substantially on a sequential basis? And and how how would you care

Speaker 2

Wouldn't say that the backlog went down substantially. Let me give you the context of the of the say the back what what is referred to backlog. This is in connection to what I said about the five g. People are rushing to go into the five g and we will ask our customer deliver 30 in q four. We were asked to expedite deliberate and that's the reason we we recognize out of the gate.

The licenses and I think I said it in the third remark, looks very good, not just in the in the five g space, but it goes on our vision. In the case of, you know, product, new networks. So it's changing in this regard. We even that we have that backlog that large backlog some customization.

Speaker 0

K.

Speaker 2

With this, we could finish it and deliver it and the customer can go ahead and the the actual backlog at the end of the third quarter is lower, of course, than the second quarter because of that. But back to the the other part of your second question, the q four guidance for licensing were back to normal. I mean, this was a nice add on. Hopefully, we could add more like this in the future. But I think we're looking at the same level in as q one, the 9 to 10,000,000 that we started the year with, and we've seen quite a few achievements around that.

So there's a business, normal business. Nothing is wrong. We didn't take the licensing down for the next quarter because this q four was much higher than that. But on the contrary, we're back to the normal levels, although we had a very good quarter. This is the reason that we're taking the license the annual licensing revenue up from $40,000,000 if we were a few months ago to north of $43,000,000 That's the

Speaker 3

reason. Thanks, guys.

Speaker 0

The next question comes from Matt Ramsay with Canaccord Genuity.

Speaker 4

I guess the first question I would ask, and congratulations on adding the third base station player into the licensing mix. Videon, maybe you could talk a little bit about, in aggregate, what percentage of the, I guess, 4.95 gs base station rollout volumes you guys are anticipating being represented by CEVA based silicon in the base station modems from the aggregate of those three big players that you now have, just so we can get an idea of context as to what it means for your business as the five gs business rolls out?

Speaker 2

Thanks. I don't want to be specific on what would be the percentage, but let me say the following. Comes to five g, the landscape, I mean, the ranking of whom do first, second, and third is about to change because there are few companies that invested ahead and we have an advantage. And this new landscape favors us. LTE, we just started shipment two quarter ago.

Things are moving. I said that that I also said that we we are seeing another chip, another SKU that just came out into, you know, our order of many cheaper chip in this quarter. We are waiting for few more quarter to better see the trend and the and the Anthony Cole.

Speaker 4

Thanks, guys. Sorry. I think we're I'm having some audio issues on my end, but thank you for that, Gideon. And and follow-up there on the licensing side. Yaniv, maybe you could talk about expectations for for next year.

I know it's early, but but this this year was obviously great organic performance in the licensing business and had a couple of onetime big bumps. So like how should we think about licensing business in aggregate for 2018 and the run rate going forward? Thanks.

Speaker 2

Yes. No, what we've seen this year is that these new technologies, new markets really managed to open up much bigger opportunities for us to license our technology and to offer our technology multiple markets, multiple customers in each of these markets, and the licensing activity has paid off. Our R and D investments have paid off, and we've seen that in the licensing line. As you said, it's a bit early. In next quarter, in general, earnings call will give much more detailed guidance on licensing.

But I think we said already throughout the year that we would like to keep these types of, let's say, the 40 ish type of licensing revenue versus the thirtieth that we were for the last couple of years before 02/2017. So where exactly we end up and how we will guide and what will be the input. We need to do a little bit of research and talk with our customers and potential ones and new ones in each of these markets, and we'll try to prepare and get good answer in a few months. But there's no doubt that we are seeing more interest, and we will want to keep these higher numbers as part of our model going forward.

Speaker 4

Got it. Just let me squeeze one more in, Gideon. The three gs number in terms of baseband unit shipments in the royalty business has declined pretty sharply and I think the market's certainly moving to four gs quickly. But I guess a couple of quarters ago, Samsung brought in MediaTek as a supplier in that mid tier range and a few bumps in the road potentially for spread trim. So I just wanted to maybe you could talk us through a little bit about how that two gs, three gs combined base of your royalty business in terms of unit shipments with partners might go from here or potentially stabilize or just how those trends are in the mid tier?

I

Speaker 2

agree with you, Mohit, that about three gs is something like in between the sandwich between the two and the LTE. So the two g has still life, in particular, in India, and we mentioned the variant of the feature phone, which is in terms of growth today, you know, including flagship India and emerging markets, then in particular, I think the penetration is very, very low. It's a transition. That's the reason that we we had, we say, some softness in the second quarter, which, you know, we said that it's doesn't look like an industrial issue, market issue is more like a transition. We have to go towards the price point.

Still need to do some work in this price point. I think in in this respect, the spread only flourish, and the and potential is there. Now the question is the pace, how fast India will move to LTE, and they will move to LTE. And further back in all the emerging markets. There are two good billions of subscribers that's about to upgrade.

We will be there in big time.

Speaker 0

Thank you.

Speaker 2

Thank you.

Speaker 0

The next question comes from C. G. D. Silva with Roth Capital. Please go ahead.

Speaker 5

Hi, Gideon. Hi, Yunee. Congratulations on the strong licensing progress here. Thanks for breaking out the non baseband revenue. It's helpful.

Royalty revenue came in about 20% and grew nicely last few quarters. Maybe one or two years out, you could talk about what the expectation of mix would be? I know there's a lot of moving parts in the royalty with the baseband smartphone and the nonbaseband several segments. Could you handicap for us what you think the nonbaseband percent might be as we look out four to eight quarters or so?

Speaker 2

Sure. And, I mean, sure, it's not easy, but, you know, we've promised you guys that probably early next week, we'll update it out three yes. Next year, not next week. We'll update the same as three year, you know, four year expectation and volume and maybe even the dollars and royalties. This is what we had put in place back in 2015 when we started this diversification and looked at the four year from '15 to the '18 and wanted to see and pay and and print out how we see the the markets evolving for us.

Some numbers were hitting, some maybe not on the volume side, and some are doing very well, maybe a bit slower. But this is two years ago when we started, we were less than 40,000,000 units a year, and we're up to maybe 200,000,000 two and a half years after. And this is the run rate for the end of the more or less the end of this year. So we're seeing a lot of these markets start to build in. There's no doubt that if in the past, for many, many years, 90% of our royalties came from handsets, this last quarter was the first time that that 10% grew to 20%.

And, of course, we wanna see it. So we wanna be we wanna be in a position that the nonbasement is as big as the handset side, if not even potentially bigger with all these design wins that we are seeing in these licensing activities, and we will do flourish in three or four years down the road. So, again, I don't have the full picture of how that slide yet will look, but all our licensing activity now and all our customers are eager to get into production, are eager to sell their new chips into the new market. I'm not sure if we mentioned yet that in the prepared remarks, but even last quarter, we saw two consumer devices go into production for the first time with our with our solutions inside, one in the vision, one in the not in another consumer device. And the more we continue to see there, then we'll have a better picture of how the those royalties do.

It's not looks like for sure it's not gonna you don't want it to keep paying 10 or 20%, but much, much more. So, Jim, let me add my perspective. You know, the the non handset base the weaker non handset base base, people market and and and behave is different than the server. Cellular, we deal with mega customer and a certain and then we go from zero to few 100% there is a more gradual buildup. It's composition of any small companies that are getting and because we were, you know, the licensing activity was so intensive and we found so many of them are more or less getting the into less just you have mentioned just last quarter.

Two new royalty payers from the only non handset baseband started to ship. We to add to this one, the newest queue in the base station that again characteristic that we do. Every quarter, we're going to see how fast, how much we need to to get to a point that to the full swing point, and then we'll be able to to be more specific.

Speaker 0

Yes. Hello.

Speaker 5

Sorry. And then, on the, the licensing effort, you talked about some customers expediting you this past quarter. Can you talk about what end markets and products those customers were targeting? What where there's a rush to get into that you saw this quarter?

Speaker 2

The contribution of the license revenue in the quarter is basically two components. One is the licensing agreement that we signed and we signed. Along with the cooling of the delivery to a customer. I mentioned it earlier now that we see expedition and the cooling of five Russia. And we were asked to pool in and in our r and d front in the job in in expediting the Yeah.

Speaker 5

Okay. Thanks, guys.

Speaker 2

If you

Speaker 0

have a again, if you have a question, please press star then 1. At this time, this concludes our question and answer session. I'd like to turn the conference back over to Richard Kingston for any closing remarks.

Speaker 1

Thank you, and thank you all for joining us today and for your continued interest in and support of CEVA. We will be attending the following upcoming events and invite you to meet us there and get an update. The Roth Technology Corporate Access Day on November 15 in New York, Exane BNP Paribas MidCap Forum on November 29 in London, and Barclays Global Technology Media and Telecommunications Conference on December 6 in San Francisco. Please visit the Investors section of our website for further information on these events and other events we will be attending. Thank you all and goodbye.

Speaker 0

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