Q3 2024 Earnings Summary
- Strong and Growing Pipeline and Backlog: CEVA's pipeline is the highest it has been since early 2023, reflecting increased demand for their technologies in connect, sense, and infer domains targeting the smart edge market. They have a strong backlog for Q4 and have raised annual guidance, indicating confidence in their execution and future revenue growth.
- Strategic Deals in 5G Advanced Driving Higher Licensing and Royalties: Over the last two quarters, CEVA has signed three consecutive strategic deals in the 5G advanced space. These deals are expected to bring higher licensing fees and royalties, enhancing long-term economics and value per deal. Their integrated IP offerings, including customization for OEMs, are resonating well with customers, positioning CEVA as a preferred partner for advanced wireless connectivity solutions.
- Significant Growth Potential in Royalty Revenue from Wi-Fi: CEVA is experiencing strong growth in Wi-Fi shipments, with expectations for significant increases in Wi-Fi volume over the next few years (2025-2027). This growth is driven by customers reaching production and shipping on more platforms, leading to increased royalty revenue, similar to their previous success with Bluetooth technology. CEVA anticipates Wi-Fi to be a significant growth area, contributing to sustained royalty revenue growth.
- CEVA's gross margins have declined due to increased customization work for customers, particularly in the 5G advanced platform, which may continue to impact margins if such projects persist. Management acknowledged that gross margins fell to 87% compared to the usual 90%, attributing it to strategic customization efforts that allocate R&D costs to cost of revenue.
- The company is undertaking more customization and support work for customers, which could indicate a shift away from its traditional IP licensing model towards a more service-oriented approach. This may lead to sustained pressure on margins and increased operating expenses, as highlighted by analyst concerns about CEVA potentially becoming a design services company. Management insists this is not the case, but the increased customization could still impact profitability.
- Fewer licensing deals were signed in the quarter—10 deals compared to a typical run rate of around 50 deals annually—which could suggest a slowdown in business momentum or potential challenges in deal execution. Management downplayed the significance, but the decrease may raise concerns for future revenue growth.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue Growth | FY 2024 | Mid- to high end of 4% to 8% | 7% to 9% | raised |
Non-GAAP Operating Margins/Profit | FY 2024 | More than double over 2023 | Double over 2023 | lowered |
Non-GAAP Fully Diluted EPS | FY 2024 | Close to doubling over 2023 | Expected to double over 2023 | raised |
Total Revenue | Q4 2024 | no prior guidance | $26.5 million to $28.5 million | no prior guidance |
GAAP Gross Margin | Q4 2024 | no prior guidance | ~88% | no prior guidance |
Non-GAAP Gross Margin | Q4 2024 | no prior guidance | ~89% | no prior guidance |
GAAP Operating Expenses | Q4 2024 | no prior guidance | $25.2 million to $26.2 million | no prior guidance |
Non-GAAP Operating Expenses | Q4 2024 | no prior guidance | $21 million to $22 million | no prior guidance |
Net Interest Income | Q4 2024 | no prior guidance | $1.2 million | no prior guidance |
Taxes | Q4 2024 | no prior guidance | $1.4 million | no prior guidance |
Share Count | Q4 2024 | no prior guidance | 25.3 million | no prior guidance |
-
Gross Margin Impact of Custom Deals
Q: Is gross margin being affected by custom 5G modem work?
A: Management explained that gross margins dipped to 87% this quarter due to specific, strategic customization deals in the 5G modem space. These deals require additional R&D resources, causing a temporary shift in expenses from R&D to cost of revenues. However, they emphasized that this is not a change in their business model and expect margins to return to the usual 89%-90% levels annually. Such customization efforts are sporadic, affecting less than a handful of deals per year. -
Licensing Deals Volume and Pipeline
Q: Does lower number of licensing deals indicate a slowdown?
A: Management noted they announced 10 licensing deals this quarter, slightly lower than previous quarters. They explained that deal numbers can vary quarter-over-quarter, and they are more focused on the quality and strategic value of deals rather than quantity. The pipeline is the highest since the CEO joined in 2023, indicating strong demand and alignment with market needs. They also mentioned that the backlog for Q4 is strong, leading them to raise annual guidance. -
Wi-Fi Shipment Growth
Q: Is the strong Wi-Fi shipment growth sustainable?
A: Management reported a record quarter for shipments across Bluetooth, Wi-Fi, and cellular IoT, illustrating the success of their strategy. Specifically for Wi-Fi, they are early in the ramp, expecting significant growth in volume over the next few years as more customers reach production and ship more platforms. They believe the trend will continue, supported by market indications like inventory restocking and the strength of IoT reported by TSMC. -
M&A Opportunities and Use of Cash
Q: Are there plans to use cash for acquisitions?
A: Management highlighted their strong balance sheet and confirmed they are exploring M&A opportunities to expand their wireless connectivity portfolio. Last year, they acquired RISC-based technology, now ramping up with new customers. They expect to continue acquisitions into next year to build more momentum. Additionally, they've increased their buyback offering and will continue to use excess cash for that purpose.