CEVA - Q4 2023

Transcript

Operator (participant)

Good day and Welcome to the Ceva, Inc. Fourth Quarter and Year-End 2023 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Richard Kingston, Vice President of Market Intelligence, Investor and Public Relations. Please go ahead.

Richard Kingston (VP of Market Intelligence, Investor and Public Relations)

Thank you. Good morning, everyone, and welcome to Ceva's fourth quarter and full year 2023 earnings conference call. Joining me today are Amir Panush, Chief Executive Officer, and Yaniv Arieli, Chief Financial Officer of Ceva. Before handing the call over to Amir, I would like to remind everyone that today's discussion 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 statements regarding our market positioning, strategy, and growth opportunities, including expectations for expansion into new markets and use cases, as well as expectations regarding our customers' production of products using our IP, market trends and dynamics, demand for and benefits of our technologies, and our expectations and financial goals and guidance regarding future performance.

Ceva assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. In addition, following the divestment of the Intrinsix business to Cadence, financial results from Intrinsix were transitioned to a discontinued operation beginning in the third quarter of 2023, and all prior period financial results have been recast accordingly. We will also be discussing certain non-GAAP financial measures, which we believe provide a more meaningful analysis of our core operating results and comparison of quarterly results. A reconciliation of non-GAAP financial measures is included in the earnings release we issued this morning and in the SEC filing section of our investor relations website. With that said, I'd now like to turn the call over to Amir, who will review our business performance for the quarter, review the year, and provide some insight into our ongoing business. Amir?

Amir Panush (CEO)

Thank you, Richard, and good morning, everyone, and thank you for joining us today. 2023 was the beginning of a transformational journey for Ceva, and I'm very pleased with the progress we made in my first year with the company. Following the recent in-depth strategic review, to really understand our strengths and technology leadership, we have positioned Ceva as a trusted partner for semiconductor companies and OEMs who need our IP to enable three fundamental use cases for smart edge devices: the abilities to connect, sense, and infer data more reliably and efficiently. We have realigned our business to focus our investments and R&D efforts around these use cases and on mega-end markets where we see very strong growth opportunities: consumer, automotive, industrial, and infrastructure.

Even against a difficult business backdrop in 2023 that continues to affect the semiconductor industry and its end markets, we are already seeing evidence that our updated strategy is producing results. Our customer engagements are deeper across the value chain, across our entire technology portfolio, and expanding into new end markets and strategic opportunities. I will provide a review of the year shortly, but before that, I will review the fourth quarter. For the fourth quarter, our total revenues were in line with our expectations. I'm proud of how we have and continue to manage through the challenges in the markets we serve and significantly improve our profitability and earnings power through our focus on operating efficiency. In licensing, while the total licensing revenue recognized in the quarter was lower than usual, the interest in our diversified portfolio and potential new customer opportunities remained solid.

We saw good progress on a number of fronts, including a strategic license deal with a U.S.-based MCU leader for our Wi-Fi 6 IP and a licensing deal with one of our major automotive customers to integrate our AI software compiler into their ADAS chips. In royalties, we saw a return to a year-over-year growth for the first time since Q3 2022, with a rebound in mobile and across consumer IoT and industrial IoT, where we have a large and diversified customer base. Both mobile and IoT markets produced their strongest royalty revenues of the year. Units volume in the quarter were up 21% from the fourth quarter 2022 level.

Overall, in licensing, we signed 17 deals in the quarter, 11 of which were for our IPs enabling connect use cases, where we continue to leverage our broad portfolio of long and short-range wireless IPs to build our leadership position and market share in connectivity for smart edge devices. This is evidenced by agreements spanning Bluetooth, Wi-Fi, UWB, Cellular IoT, and 5G RedCap signed in the quarter, as more and more chip designs integrate connectivity as a mandatory requirement. As I mentioned a few months ago, one of the deals was a leading U.S. MCU company for our Wi-Fi 6 IP. This company licensed our Wi-Fi 6 IP to augment their internal wireless connectivity development efforts and ensure they have a leading solution for their customers.

This is a trend that we are seeing more and more recently, where established companies with internal R&D teams and major investments around wireless connectivity need help to advance their product roadmaps and stay competitive. Ceva is constantly at the leading edge with the latest standards developed in the same time frame as the market leaders. As these technologies become more complex and the demands on the customers to consistently be in the market with the latest features, we are viewed as a trusted partner who can help these companies reach their product development goals while reducing the risk and time to market. This is why we are increasingly being recognized as the de facto choice for wireless connectivity IP globally, which forms the backbone of our smart edge strategy.

We also had a good quarter in licensing for our hardware and software IPs for sensing and inference, with six deals signed highlighted by a licensing deal with one of our major automotive customers to integrate our AI software compiler into their ADAS chips. This customer had already licensed and deployed our AI engine to add high compute performance in their automotive systems on a chip product family targeting ADAS and autonomous driving. These SoCs are now in production and are expected to be deployed in mass-market vehicles by the end of 2024. The licensing deal we completed this quarter with this customer enabled automotive tier-one suppliers and OEMs direct access to our AI engine in the SoC to deploy their proprietary AI software algorithms and allow them to bring value-add functionality and differentiation to the performance of their production vehicle.

This is an important milestone for our customers and for Ceva, as the automotive industry is constantly looking for open ADAS architectures as an alternative to closed, vertical solutions that don't allow for differentiation. We anticipate that we will generate meaningful royalty revenues from automotive SoCs, with initial royalties contributing to our growth in 2024 and continuing to grow in 2025 and beyond. Other deals in the quarter under this category include customers for our audio AI and Sensor Fusion AI DSPs and our voice processing software. At Ceva, when we speak about Edge AI and smart edge devices, we are not just focusing on the inference workload that most people associate with these devices. Every one of these devices needs to be connected in order to get data off the device and connect via the internet.

Every one of these devices needs to be able to sense its environment using vision, sound, and motion, and generate data. Every one of these devices will increasingly need some inference capabilities to interpret and act upon this data. This is what the smart edge is, and we are the only IP company capable of delivering the technology required to address all three use cases. Turning now to royalties for the quarter, we saw a strong recovery in mobile, driven by restocking demand for Android smartphones in emerging markets. In consumer IoT and the broad industrial IoT markets, demonstrating our diversified offering and customer base, we recorded our best quarter of the year, with notable strengths for our connectivity customers. This was our third consecutive quarter of royalty growth as we built momentum throughout the year.

More significantly, this was the first quarter to surpass $12 million in royalty since Q4 2021 and serves as a strong proof point for our royalty business potential going forward. For the full year 2023, we reported total revenue of $97.4 million, 19% lower than 2022, primarily due to a return to a more normal licensing environment following a couple of years in which we were able to capitalize on a surge in design activity driven by exceptional consumer end markets demand resulting from post-COVID spending and the shift to work from home. Licensing and related revenue was $57.6 million, down 23%. We signed 53 licensing agreements across our extensive IP portfolio. 10 of those deals were with OEMs who are integrating our IPs into their end products.

In terms of end markets, 29 of these deals target consumer and 23 for industrial IoT, including seven for automotive and one for other markets. This deal breakdown serves as another indicator of our focus on the end markets with the largest licensing base and the greatest projected growth potential. In full year royalties, despite a slow start to the year and the soft end market throughout 2023, royalty grew sequentially each quarter throughout the year to reach $39.8 million, down 12% year-over-year. The decline is mainly attributed to mobile and 5G RAN-related royalties, which combined to be down 22% year-over-year.

On the positive side, and in line with the strengths of our connectivity products, royalty revenues related to our Bluetooth, Wi-Fi, and cellular IoT business lines combined to grow 5% year-over-year, mainly due to the higher royalty rate contribution from our new Wi-Fi 6 customers. In terms of end markets, consumer IoT was 41% of royalties, followed by mobile at 36%, and the growing industrial IoT end markets at 23%. Looking ahead to 2024, we are excited by the royalty growth potential of our Wi-Fi 6 royalties, the continuing momentum in our Bluetooth and cellular IoT customer base across consumer and industrial markets, and the expected initial ramp of automotive ADAS royalties in the second half of the year. Looking back on the year in terms of achievements and milestones, there are a few that I would like to elaborate on.

As I mentioned earlier, we started the year with a strategic review of the business and decided to focus all our efforts on being a pure IP player. This led to the decision to divest the Intrinsix aerospace and defense design services business. In line with this strategy, in April, we acquired VisiSonics, a small spatial audio software business, which bolstered our software business and enabled us to address the high-volume headsets and earbuds space with value-add software. This culminated with our first spatial audio deal with boAt, India's number-one wearables and hearables OEM and number-two worldwide behind only Apple. The strategic review also led to the decision to give the company a brand refresh to better reflect our position as the trusted partner for transformative IP for the smart edge.

Collectively, these efforts have enabled us to align our investments and focus, and were implemented in tandem with a stringent plan to control expenses and ensure we create operating leverage for the betterment of our shareholders. All of this culminated in our investors' and analysts' day in December, where we shared our vision and strategy for the company.

Operator (participant)

Pardon me, it seems like we've lost connection with our speaker. Please wait while we reconnect. Pardon me, ladies and gentlemen, we've reconnected with our speaker line.

Amir Panush (CEO)

Well, let me continue from where I think we stopped hearing us. So in terms of new product launches, we had multiple achievements. For connectivity, we launched our most powerful DSP architecture to date, addressing 5G advanced use cases for infrastructure, industrial, mobile, and new use cases like 5G satellite communications and 5G vehicle-to-everything, our UWB radar platform for automotive child presence detection, and our Bluetooth solution for electronic shelf labels in emerging high-volume markets. For sensing, we launched our channel-sounding Bluetooth solution, enabling high accuracy, secure positioning for automotive, industrial, and the IoT. For inference, we launched our scalable NPU AI architecture capable of running generative AI in smart edge devices with industry-leading efficiency. All of these product introductions demonstrate our commitment to the smart edge and our diversified IP portfolio position and have been very well received by our customer base.

Moreover, these products will serve our licensing business in 2024, along with recent product introductions like our Wi-Fi 7 IP. Overall, looking across our corporate, product, customer, and end markets milestones in 2023, I'm extremely proud of what we have achieved and am excited about what's ahead for 2024 and beyond. None of this would have been possible without the dedication, patience, and incredible efforts of our employees worldwide, and I would like to take this opportunity to thank them. Looking ahead into 2024 and our expectations, the Semiconductor Industry Association expects the global semiconductor industry to return to healthier growth following a weak 2023.

There still remains, however, some short-term challenging conditions in the industrial and automotive end markets, which are not expected to clear until the second half of the year, and possible inventory buildup that will need to be walked down in the first part of the year. Yaniv will provide quantitative guidance shortly. Finally, I want to sincerely wish you and your families a successful and peaceful 2024. I look forward to meeting many of you at conferences, trade shows, and other industry events throughout the year. Now I will turn the call over to Yaniv for the financials.

Yaniv Arieli (CFO)

Thank you, Amir. I will now start by reviewing the results of our operations for the fourth quarter of 2023. Revenue for the fourth quarter was $24.2 million as compared to $30.3 million for the same quarter last year. Revenue breakdown is as follows: licensing and related revenues were $11.8 million, reflecting 49% of our total revenue as compared to $19.4 million in the fourth quarter of 2022. Royalty revenue was $12.3 million, reflecting 51% of total revenues, up 13% from $10.9 million in the same quarter last year. This returned to year-over-year growth in royalties for the first time since Q3 of 2022. Quarterly gross margins came slightly better as expected on GAAP and in line with non-GAAP bases. Gross margins were 91% on GAAP and 92% on non-GAAP bases.

Our total operating expense for the fourth quarter was in line with the mid-range of our guidance at $24.7 million. Total non-GAAP operating expenses for the fourth quarter, excluding equity-based compensation expenses, amortizations, intangibles, and deal costs, were $20.3 million at the lower end of our guidance. GAAP operating loss for the fourth quarter was $2.8 million, down from GAAP operating profit of $1 million in the same quarter a year ago. Our GAAP taxes were $7.2 million and non-GAAP taxes were $1.4 million. GAAP tax expenses included $1.3 million charges as a result of completion of a tax audit for prior years and a $4.5 million tax charge including a one-time write-off of a deferred tax asset related to Section 174 of the U.S. Tax Code.

GAAP net loss for the fourth quarter of 2023 was $8.1 million and diluted loss per share was $0.34 as compared to net income of $4.5 million and diluted income per share of $0.19 for the fourth quarter of 2022. Non-GAAP net income and diluted EPS for the fourth quarter of 2023 were $2.4 million and $0.10 respectively as compared to $7.29 reported for the same quarter last year. With respect to other related data, shipped units by Ceva licensees during the fourth quarter of 2023 were 453 million units, up 21% from the fourth quarter of 2022. Of the 453 million units reported, 101 million units, or 22%, were attributed to mobile handset modems. 325 million units were for consumer IoT products, up from 286 million units in Q4 of 2022. 27 million units were for industrial IoT products, up from 21 million a year ago.

Bluetooth shipments were 244 million units in the quarter, up 11% year-over-year. Cellular IoT shipments were a quarterly record high with 45 million units, up 82% year-over-year. Wi-Fi shipments were 31 million units, down 17% year-over-year. However, Wi-Fi royalties were up 86% year-over-year, reflecting the higher per-unit royalty we get for Wi-Fi 6 shipments versus older generation of Wi-Fi standards. As for the year, our total unit shipped were 1.6 billion units in 2023, down slightly from 1.7 billion in 2022, which equates to approximately 50 Ceva Power devices sold every second in 2023. Annual mobile modem shipments were down 13% year-over-year to 286 million units, reflecting the soft smartphone market in 2023, particularly in the first part of the year. Annual consumer IoT-related shipments were 1.25 billion units, down just 4% year-over-year.

Our annual industrial IoT-related shipments were 84 million units, up 17% year-over-year. Cellular IoT and audio AI DSP shipments both experienced growth in 2023, up 64% and 56% respectively from 2022. In terms of royalty contribution highlights, cellular IoT royalty revenue were at all-time record high, up 47% year-over-year. Audio AI DSP royalties were up 111% year-over-year, and Wi-Fi royalty revenue were up 40% year-over-year. As for the balance sheet items, as of December 31st, 2023, Ceva's cash, cash equivalent balances, marketable securities, and bank deposits were $166 million. In 2023, we purchased approximately 279,000 shares for approximately $6.2 million, and as of today, we have around 700,000 shares that are available for repurchase under the repurchase program as expanded back in November of 2023.

Our DSOs for the fourth quarter of last year continued to be lower than the norm at 32 days, similar to the prior quarter. During the fourth quarter, we generated $5.5 million cash from operating activities. Our ongoing depreciation and amortizations were $1 million, and purchase of fixed assets was $0.8 million. At the end of the fourth quarter, our headcount was 424 people, of whom 350 were engineers. Now for the guidance. As we recently presented and shared in our December 2023 Analyst Day, Ceva's long-term vision is to achieve a four-year revenue growth of 8%-12% CAGR. This will enable and generate significant earnings power, operating leverage, and net income growth. Amir highlighted earlier our key 2023 achievements and our new focus on pure IP play, and we are executing this plan one step at a time to address these three pillars of connect, sense, and infer.

Our licensing-related revenue business will continue to expand into new markets and use cases in the industrial IoT and consumer IoT, offering connectivity platform AI solutions, including AI engines, NPUs, and software, audio AI, and more. On royalties, we expect our connectivity products to continue to show strength in 2024, with royalty revenue related to our Bluetooth, Wi-Fi, and cellular IoT business lines to grow. Smartphones have their seasonality, trends, and known headwinds. The consumer IoT and industrial IoT markets are large, diversified, and present us with solid platforms for long-term growth. On an annual basis, our revenue is expected to grow 4%-8% over 2023, with lower growth in the first half of the year and higher in the second half.

On the expense side, as we discussed, we implemented cost control measures to plan and keep our 2023 overall expenses, including both cost of revenues and OPEX, flattish at a range of $93 million-$96 million non-GAAP. On the non-GAAP overall, non-GAAP COGS expense is expected to decrease approximately $1.5 million year-over-year, and our non-GAAP OPEX is expected to increase of approximately $2 million year-over-year, specifically for the first quarter of 2024. With typical seasonality in shipments of consumer IoT and mobile products post the holiday season, we expect overall revenues to be 2%-6% lower sequentially and with a different mix of licensing and royalty revenues than from the quarter we just reported.

Gross margin is expected to be approximately 91% on GAAP basis and 92% on non-GAAP basis, excluding an aggregate $0.2 million of equity-based compensation expenses and $0.1 million of amortization of acquired intangibles. Our GAAP OpEx for the first quarter of 2024 is expected to be in the range of $24.5 million-$25.5 million of the anticipated total operating expenses for the first quarter. $4 million is expected to be attributed to equity-based compensation expenses, $0.2 million for amortization of acquired intangibles. Therefore, our non-GAAP OpEx is expected to be in the range of $20.3 million-$21.3 million. Net interest income is expected to be approximately $1.4 million. Taxes for the first quarter are expected to be approximately $1.2 million, and share count for the first quarter is expected to be approximately 25.3 million shares. We could now open the Q&A session, please. Let's see.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star and one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Suji Desilva with Roth MKM. Please go ahead.

Suji Desilva (Managing Director and Senior Research Analyst)

Hi, Amir, Yaniv. I'm going to go after the progress here. Maybe we could talk about the guidance and the first quarter and the full year. Curious what you talked about the different mix, Yaniv, and the decline two to six. Curious what the license royalty implications are there. And then for the quarter and the full year, what are the expectations for mobile, maybe even for the full year versus non-mobile? It would be helpful to understand some color there.

Yaniv Arieli (CFO)

Sure. Good morning. So overall, we're talking about 4%-8% annual revenue growth for 2023. We're looking at a similar start than we had in 2023, that the first half may be a bit more milder, and then things will pick up. Some of the products we are in and the consumer side also have that typical seasonality, and we have seen that in the past. So those are some of the assumptions that we have built in the model. Obviously, licensing is a lumpy type of business. When we look at it on an overall longer basis, that generates the revenues. Although in the last couple of years, we also added software solutions and capabilities, which have a limited licensing, if at all, upfront fee, but a much, much higher royalty contribution.

The immediate effect on an annual basis, for example, our audio and AI royalties grew more than double in dollars year-over-year, but they don't necessarily contribute to licensing. So when we look at the full mix, we're looking at growth in both of these segments, both licensing and royalties. On a quarterly basis, it's harder to guess upfront, and ASC 606 made our lives more difficult to know in advance how the royalties are going to look like. So our starting point is coming with the strongest quarter in royalties in 2023 and a gradual improvement from Q1 all the way to Q4. That would probably go down due to the typical seasonality in consumer and mobile that you asked about. And with that said, licensing should be higher Q1 over Q4, for sure. That is the plan.

A lot of moving pieces, but from the product portfolio and the revenue mix, these are sort of the high pieces in the puzzle.

Amir Panush (CEO)

Maybe I can add a little bit more colors here, Suji. First, good morning to everyone. On top of what Yaniv said, so if we look at royalty going to 2024, there are several things that we are very encouraged by and we see as a potential growth in 2024 versus last year. One that we talk about quite a bit is our Wi-Fi penetration and the transition from Wi-Fi 4 to Wi-Fi 6, and with that, higher average ASP and volume increase.

The other thing that will probably come more towards the end of the year is the automotive AI, some of those products going into production, as well as, I would say, overall, our customer base in the consumer IoT and industrial IoT, on average, are doing quite well, and we expect that to be a good tailwind and a strong force to grow the royalty moving forward. On the more so-called muted side, it's really the situation with the old 5G installed base. That's a market that probably in 2024, as far as what we see today, is not going to recover significantly, maybe more towards the second half, and then probably more in 2025 in terms of the overall mix.

In terms of licensing, we have several new products that will and should generate for us increased licensing in 2024: Wi-Fi 7 that we already start licensing, as well as the new AI products that right now are in significant evaluation across multiple potential customers, and we expect to be able to close some of those deals in 2024.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. Great. And then my other question is on the auto ADAS win. Congrats on that. I just want to understand the circumstances for that win. Was that a customer who had their own AI and they swapped it out for yours? What kind of TOPS? And you talked about seven auto wins. I'm curious if those are all ADAS AI or a variety of products.

Yaniv Arieli (CFO)

Let's start with the first. So the first is an existing customer. They licensed our technology, the hardware side of it, a while back and built their own chip. The nice part, the interesting part for them is that the chip is programmable. The deal that we closed now was to add software capabilities that also their customers could add different sources of AI use cases and program the final product to be much more flexible. So it's an existing customer that is going into production this year. They've added the software piece on top of the hardware solution that is ready now, and it was a very interesting and nice achievement that they are coming back and offering this type of solution in cars today this year. Overall, Amir, you want to talk about the overall?

Amir Panush (CEO)

Yeah. The other seven deals, they are not AI only. It's across our product portfolio. Overall, we signed, I believe, four AI deals this quarter, three of them related, let's call it, more to vision AI capabilities and ADAS, and one related to audio AI capabilities.

Suji Desilva (Managing Director and Senior Research Analyst)

Okay. Thanks, guys.

Yaniv Arieli (CFO)

You're welcome.

Amir Panush (CEO)

Thank you.

Operator (participant)

The next question comes from Kevin Cassidy with Rosenblatt Securities. Please go ahead.

Kevin Cassidy (Managing Director and Senior Research Analyst)

Hi. Congratulations on the good quarter. Can you let us know how's the trend for licensing? Are there customer programs that are getting delayed or even being canceled in this market? Are you seeing more deals or fewer deals, and what are the issues that your customers are saying?

Amir Panush (CEO)

Yeah, Kevin. A few things I would say. First, if we take a step back and look at 2023 overall, definitely that was a year that started with lots of inventory corrections that our customers need to go through, with that so-called more pressure on the business overall, and with that, generally speaking, the customers, on average, taking more time to go and launch new products and new programs in place. So that's definitely drove some of the delays in 2023. Specifically for Q4, we are actually very encouraged with the number of deals that we signed, 17 deals in the quarter. And more specifically, we had at least one deal for each of our product technology categories. So really, across our diversified product portfolio, very good engagement with customers with a good, significant number of deals.

Just the mix every quarter can change in terms of the type of deals and the size of deals. And definitely, as we go to 2024, from the first half to the second half, we expected also to see the larger or more meaningful deals also in that mix, which will drive overall with the rest of our deals the growth between 2023 and 2024. Overall, I would say if we look at the different market segments, automotive and industrials are a little bit weaker in the first half, and we expect inventory correction and overall interest to go back in second half. Consumer IoT and consumer overall is holding up very nicely for us, so that's what we expected to be. With some seasonality of typically the Q1 and with that specifically more in mobile, beyond that, we expect a good growth during the rest of the 2024.

Yaniv Arieli (CFO)

The last part of Amir's answer, though, was related to royalties, not necessarily to the licensing question that you had. So you've got both angles.

Kevin Cassidy (Managing Director and Senior Research Analyst)

Right. Okay. Great. And maybe just geographically, how is China's licensing opportunities?

Amir Panush (CEO)

Yeah. Go ahead.

Yaniv Arieli (CFO)

No, China is still an important and big geography for us. A lot of innovation and existing and repeating customers have come back for newer generations of different technologies, whether it's the Bluetooth or Wi-Fi or other connectivity solutions that we have today, because I think that we have a very strong portfolio around that. What was very interesting for us this quarter around is that the U.S. was stronger than usual for us and a very, very strategic deal with an MCU player that we mentioned earlier in Amir's prepared remark, and that was a positive change for our Q4 revenue mix. It wasn't just China, but here was an interesting development in the U.S.

Kevin Cassidy (Managing Director and Senior Research Analyst)

Great. Okay. Thank you.

Amir Panush (CEO)

Thank you.

Operator (participant)

The next question comes from Martin Yang with Oppenheimer. Please go ahead.

Martin Yang (Managing Director and Senior Analyst)

Thank you for taking my question. Can you first talk about the revenue outlook broken down by consumer IoT and industrial IoT in 2024? Which segment should we expect stronger relative strength comparing to your overall revenue growth outlook?

Yaniv Arieli (CFO)

Great question, Martin. Thanks for that. So let's repeat some of the highlights that we ended up 2023. It's not a simple year for us and more of a transition year. If we still look and do the analysis now at the end of the year, here is how it looks like. On the audio AI front, let's start with royalties, more than doubled for us. We showed growth both in units, 56%, I believe we said, and revenue was up more than 100%. Look at the cellular IoT, which is one of the top markets that we have continued to show separately from the modem and the Bluetooth and Wi-Fi. This was the third element that we started breaking down maybe a year or so or two years ago. Units were up 64%. Revenues were up 47%, almost 50%, in cellular IoT. So that has been working well.

Bluetooth, sort of flattest year-over-year, mainly because of the slower start of 2023. So we are flattest in revenues, which were about our units, which were about 1 billion units, if you recall last year. We're very close to that, but slightly lower. And Wi-Fi continues to be one of the strongest royalty contributors, both licensing and latter royalties. The units were down year-over-year because it was a transition year also to Wi-Fi 6, which is a newer technology and a new generation. But because of having a new product, new customers that got in, the ASP is much, much higher. And we reached 40% higher revenues for Wi-Fi royalties in 2023. So four or three very strong royalty contributors, that should continue in 2024. We don't know the pace.

We don't know when it's going to pick up and what, but we know that the industrial is very strong, and all of these different connectivity solutions are addressed to that as much as the consumer side. The lowlights, and Amir mentioned, is mainly the mobile, which started very low but ramped up and corrected itself. Yet to be seen how 2024 looks like on an annual basis. It's difficult to forecast, but for now, that's not one of our growth drivers. The base station market, which suffered not just Ceva, but overall, was very muted and lower in 2023 just because 5G didn't bring for the cellular networks any key or star use case that happened with deployment or increased deployment. That's probably going to be muted also in 2024.

The rest of the technologies and the markets that we target around Edge AI should work out well.

Amir Panush (CEO)

Maybe just other comment to that, Martin, related to the industrial IoT. I would say overall, we finished this year with 23% of our total revenue. So this is definitely a significant portion of our revenue also moving forward. We expect it to grow in 2024. And more specifically, if you look at the technology that we are offering, we are getting more and more embedded with the MCU ecosystems and specifically the industrial and automotive MCU ecosystems, starting with some of our connectivity offering extended to Wi-Fi more recently and now also to some audio capabilities. And in the future, we expect also Inpher. And that's where we see also the synergy of our technology into the smart edge and MCU ecosystem and specifically there for the industrial IoT market space.

Martin Yang (Managing Director and Senior Analyst)

Thank you very much. Next question for mobile. In the longer term, maybe two to three years time horizon, do you think mobile could recover back to that 2021 level, or what should we look at? How should we look at mobile in the longer term in terms of amount of contribution to your company?

Yaniv Arieli (CFO)

The mobile market, as everybody knows, has consolidated significantly over the last couple of years. There are a handful of players in that industry. The biggest and well-known ones are the Qualcomms and the MediaTeks. There are a few very successful for many years, lower-cost solutions like Unisoc and in recent years, ASR as well. There are still very big markets in the world, replacement and new markets for low-cost feature phones. Not everybody goes and buys a $1,000 high-end phone. In those markets, we have very strong penetration and solutions, so that could continue. The pace of all that is not that clear because handsets haven't been that exciting of a market or use case in recent years. There is one other OEM that may change its modem course, and maybe things will look different in two to three years. Yet to be seen.

No, I don't think anybody has the answer for that piece. The other use cases of 5G and connectivity have gone into other segments and other markets, and there we have seen licensing activity over the last two to three years. Royalties should also come from that, not the handset market per se, but private RAN and lots of other solutions that could use 5G. Hopefully, that helps to answer the question. Right now, the last three or four years, if we looked at the slide we presented also in the Analyst Day, you could see that the overall revenue of Ceva in the last five years doubled from just shy of $50 million to more than double, $100 million coming from edge AI devices versus the mobile devices. The mobile is still there, but the big growth has come from the newer markets that we've added on.

Amir Panush (CEO)

Yeah. And just more specifically on that, Martin, specifically on cellular IoT, that is an extension of the 5G in mobile. That's where we have seen already this year very significant growth, both in consumer industrial, consumer more in smartwatches and those type of things where 5G or other type of technologies, cellular technologies, is getting more and more embedded. And in the industrial space also for all the different type of logistic tracking, smart tracking, and other so-called Industry 4.0 use cases. And beyond, as we move towards this year and the next year, also for different type of satellite type of use cases where 5G, 5G Advanced will also propagate, and we believe it can create for us a nice growth trajectory moving forward.

Martin Yang (Managing Director and Senior Analyst)

Got it. Great color. Thank you. That's all from me.

Operator (participant)

The next question.

Amir Panush (CEO)

You're very welcome, Martin. Thanks. Good one.

Operator (participant)

The next question comes from Chris Reimer with Barclays. Please go ahead.

Chris Reimer (Equity Research Analyst)

Yeah. Hi. Thanks for taking my question and congratulations on the strong results. I wanted to ask about your long-term guidance around operating margin. I think at the conference recently, you gave a target of 20% operating margin. I'm just wondering. I realize it's a long-term target, but I'm just wondering what's the constellation? What's the makeup of actually getting there? Does that consist of expanding gross margins, or is that specifically no expense expansion whatsoever? I'm just wondering what the moving parts around that are till you get to that number.

Yaniv Arieli (CFO)

Deep magic. That's the way how we do it. It's one step at a time with much more focus, and this is what Amir undertook last year, and we have shared with you in the prepared remarks. If you look at the overall non-GAAP operating margin of the year, we ended up with about 4%. It was stronger in the second half, 7%-8% in Q3 and Q4. And when we look into 2024, based on the guidance that we gave, we are planning to probably double it, maybe slightly do even better than doubling it for 2024. So that's one milestone. If you reach the revenue levels that we talked about, if we execute our R&D plans and focus with the right expense levels that we have talked about, that's what that milestone will get you to.

If that continues over a few years, that's how we could, and with more royalties, which bear very high gross margins and fall to the pre-tax line, that could get us to the next milestone or few milestones. It's not going to happen overnight to taking that next stage to a 20% non-GAAP operating margin. So hopefully, that gave a little bit more color on the timeline.

Amir Panush (CEO)

Maybe just to add on that, just from the top level strategic view of that. So first, this year or sorry, last year, 2023, we came back to a PYP business model after the development of Intrinsix, and with that, we guided we will be 90% or above gross margin. So that's on the gross margin. On the operating margin, it's really twofold. One is continuous improvements and growth in our top line where the guidance is just given for this year, and from that, on the long-term model that we gave in the analyst day. And then on the OpEx side, it's really maintaining strong focus on where we see and where we believe we will see a long-term growth potential. And one example of that is also the acquisition that we did last year of VisiSonics for 3D spatial audio software capabilities.

Very quickly, we were able to convert it into licensing agreements and royalty-bearing with the customer, which overall has been very synergistic on the IP side and with that bringing a very good profitability moving forward to our business. Both organically and non-organically, we are heavily focusing on the bottom line of how we can drive that synergy as well as the operational margin leverage as we move forward.

Chris Reimer (Equity Research Analyst)

Got it. Thanks. That's great color. That's it for me.

Amir Panush (CEO)

Thank you.

Operator (participant)

The next question comes from Gus Richard with Northland. Please go ahead.

Gus Richard (Managing Director)

Yes. Good morning or afternoon. Thank you for taking the question. I just want to make sure I understand the revenue guidance for the full year. Does the comp include Intrinsix revenue, or is it just continuing ops in terms of the growth expectation?

Yaniv Arieli (CFO)

No, no. Continuing. It's just the Ceva IP part of it. Intrinsix, we took that out last quarter as discontinued operations. It's not in your top line. It's not in your expenses. It's just in the GAAP one line before the end there of discontinued operations. So it's not included in the numbers. The revenue, overall net revenue numbers for last year were $97.4 million, and that is the basis for the growth and the percentages that we gave.

Gus Richard (Managing Director)

That was the number I needed. Thank you so much.

Yaniv Arieli (CFO)

No problem. Sure.

Operator (participant)

The next question comes from David O'Connor with BNP Paribas. Please go ahead.

David O'Connor (Security Analyst)

Great. Good morning afternoon, gentlemen, and thanks for taking my questions. Just one or two from my side. Maybe, Amir firstly, one for you. Given the excitement that we're hearing around the AI PC and the AI smartphone, just wondering with your strong positioning at the edge and around IoT devices, do you think there is a wave of edge AI licensing that's in front of you that has yet to happen, and you just haven't kind of seen that yet? That's my first question. And then maybe for Yaniv, just on the model again for that 6% sales growth for 2024, can you rank for us kind of licensing versus royalties, which is higher or lower than that 6% just to get an idea of the trend there? And also, do you expect to grow revenues on a quarterly basis through 2024? Thanks, guys.

Amir Panush (CEO)

Sure, David. I'll take the first one. Good morning. Sorry, can you repeat the question, David? Sorry for that.

David O'Connor (Security Analyst)

Yeah, sure. So just with the excitement around the AI PC and AI smartphones.

Amir Panush (CEO)

Oh, yeah, yeah. Sorry. Yeah.

David O'Connor (Security Analyst)

Your positioning at the edge, I'm just thinking, is there a wave of licensing at the edge that has yet to happen? Because you talked in your opening comments that kind of licensing is a bit lumpy. I'm just trying to put that in context with all what we're hearing around AI.

Amir Panush (CEO)

Yeah. So yeah, definitely, David. So first, this is a focus area for us in 2024, basically delivering our NPU and overall AI portfolio into the smart edge market segments, including automotive, industrial, the consumer IoT, and later also into the infrastructure. We have already several customers that are evaluating our technology in very deep evaluation, and we expect to be able to close some of those deals during 2024. So that's definitely part of our targets and also part of our expectation in terms of the revenue growth in 2024.

Yaniv Arieli (CFO)

With regards to the model, we don't break out. We never did. Again, because we don't have that crystal ball in royalties and volumes between licensing and royalties on an annual basis, we believe both could grow year-over-year. So again, if you look at the numbers, excluding Intrinsix that we were just asked about, $57.6 million is the licensing and related revenue basis from 2023. We believe it should go higher and be higher in 2024. The $39.9 million of royalties, which suffered year-over-year mainly because of the base station market that we talked about earlier, should also be the basis for the growth. Not sure where it's going to end up. Both we have them growing.

Our model shows incremental growth on an overall quarter by quarter as the year progresses, with Q1 being the lowest because of the seasonality of the modem and consumer devices in royalties. Here, we have a little bit more insight because we have seen that trend in recent years. I hope I answered the question. That's high-level how we see the model for this year.

David O'Connor (Security Analyst)

Yeah. That's very clear. Thanks, guys.

Yaniv Arieli (CFO)

Thank you.

Operator (participant)

This concludes our question-and-answer session. I would like to turn the conference back over to Richard Kingston for any closing remarks.

Richard Kingston (VP of Market Intelligence, Investor and Public Relations)

Thank you, Betsy. Thank you, everyone, for joining us today and for your continued interest in Ceva. As a reminder, the prepared remarks for this conference call are filed as an exhibit to the current report on Form 8-K and accessible through the investor section of our website. With regards to upcoming events, we will be participating in the following conferences: Mobile World Congress from February 26th to 29th in Barcelona, Spain; the Loop Capital Markets Fifth Annual Investor Conference, March 12th in New York; the 36th Annual Roth Conference, March 18 and 19 in Dana Point, California; and the Mizuho Americas Israel Growth Conference, March 25th in New York. For further information on these events and all events we will be participating in, can be found on the investor section of our website. Thank you all, and goodbye.

Operator (participant)

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