Q4 2023 Earnings Summary
- Robust Growth in Audio AI DSP and Cellular IoT Royalties: In 2023, CEVA's Audio AI royalties more than doubled, with units shipped increasing by 56% year-over-year. Similarly, Cellular IoT units grew by 64%, and royalty revenues rose by 47%. Executives expect these strong trends to continue in 2024, signaling sustained growth in high-margin royalty revenues.
- Expansion in WiFi 6 Market Driving Higher Revenues: Despite a decrease in WiFi unit shipments due to the transition to WiFi 6, CEVA's WiFi royalty revenues increased by 40% in 2023, benefiting from higher average selling prices associated with WiFi 6 technology. The company anticipates that WiFi penetration and the shift to WiFi 6, with its higher ASPs and volume increases, will be significant growth drivers in 2024.
- Strategic Focus on Edge AI and Automotive ADAS Markets: CEVA is intensifying its efforts in Edge AI, aiming to deliver its NPU and AI portfolio to smart edge market segments, including automotive, industrial, and consumer IoT. With customers actively evaluating their technology, CEVA expects to secure new deals in 2024. Additionally, the company foresees the initial ramp-up of automotive ADAS royalties in the second half of 2024, contributing to revenue growth.
- Mobile market consolidation and limited growth prospects may hinder CEVA's revenue in this segment. The mobile market has significantly consolidated, with only a handful of players remaining. Yaniv Arieli, CEVA's CFO, stated that "handsets haven't been that exciting of a market or a use case in recent years." He also mentioned that mobile is "not one of our growth drivers" and it's uncertain if the mobile segment will recover to previous levels in the next 2-3 years.
- Weakness in the 5G base station market is expected to continue, impacting CEVA's royalty revenues. The 5G base station market was "very muted and lower in 2023," and it's "probably going to be muted also in 2024," according to Yaniv Arieli. This ongoing softness in the market could adversely affect CEVA's royalty income from this segment.
- Licensing revenue volatility introduces uncertainty in CEVA's financial performance. Licensing is described as a "lumpy type of business," with quarterly revenues being "harder to guess upfront," especially due to the impact of ASC 606 on royalty recognition. This unpredictability may pose challenges for revenue forecasting and financial stability.
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Revenue Growth and Guidance
Q: What are your revenue growth expectations for 2024?
A: We expect 4% to 8% annual revenue growth in 2024, with a milder first half and improvement in the second half. Both licensing and royalties are projected to grow, despite lumpiness in licensing and seasonality in royalties. New products like WiFi 7 and AI solutions are in significant evaluation with customers, which should enhance licensing revenue. -
Operating Margin Targets
Q: How will you achieve your 20% operating margin target?
A: We ended 2023 with about 4% non-GAAP operating margin, improving to 7%-8% in Q3 and Q4. In 2024, we're planning to at least double this margin. We'll reach our long-term 20% target through continuous revenue growth, expense management, and increased royalties, which have high gross margins. -
Licensing Trends and Delays
Q: Are customer programs delayed or canceled?
A: In 2023, customers took longer to launch new products due to inventory corrections, causing some delays. However, in Q4, we signed 17 deals, with at least one in each product category. We see strong customer engagement and expect larger deals in the second half of 2024 to drive growth. -
Mobile Market Outlook
Q: Will mobile recover to 2021 levels?
A: The mobile market has consolidated with few key players, and its recovery is uncertain. While we have strong penetration in low-cost feature phones, handsets haven't been exciting lately. Growth is more likely in other 5G and connectivity segments, like private RAN, rather than traditional mobile handsets. -
Edge AI Licensing Opportunities
Q: Is a wave of Edge AI licensing ahead?
A: Yes, Edge AI is a focus for us in 2024. We're delivering our NPU and AI portfolio into Smart Edge markets, including automotive, industrial, and consumer IoT. Several customers are in deep evaluation of our technology, and we expect to close deals in 2024, contributing to revenue growth. -
China Licensing Opportunities
Q: How are China's licensing opportunities?
A: China remains an important market with ongoing innovation. Existing customers are returning for new technologies like Bluetooth and WiFi. Interestingly, the U.S. was stronger than usual in Q4, with a strategic deal with an MCU player positively impacting our revenue mix. -
Revenue Outlook by Segment
Q: Which segment will show stronger growth: consumer or industrial IoT?
A: Both segments are expected to grow in 2024. In 2023, audio AI royalties doubled, and cellular IoT revenues increased by 47%. Industrial IoT accounted for 23% of total revenue and is significant going forward. Our technologies are increasingly embedded in MCU ecosystems, enhancing growth prospects in industrial IoT. -
Auto ADAS Wins
Q: Tell us about the auto ADAS win.
A: We secured an ADAS win with an existing customer who added our software capabilities to their programmable chip, enabling flexible AI use cases. Additionally, we signed 4 AI deals this quarter: 3 in vision AI and ADAS, and 1 in audio AI, showcasing our broad engagement across automotive products. -
Impact of Intrinsix Divestment
Q: Does revenue guidance include Intrinsix?
A: No, our revenue guidance is based on continuing operations, excluding Intrinsix. Last year's net revenue was $97.4 million, which serves as the basis for our growth percentages.