CEVA Inc (CEVA) 2002 Q4 法說會逐字稿

Good morning and good afternoon, ladies and gentlemen. Welcome to today's ParthusCeva conference call. I would now like to hand you over to Barry Loanan (ph), head of corporate communications and investor relations. Please go ahead sir, and I'll be standing by for questions.

Thank you Stephen (ph), and good morning and good afternoon everybody, thank you for joining the ParthusCeva Q4 and 2002 conference call. I have three participants today. First is Kevin - Kevin Fielding, CEO of ParthusCeva, and Kevin will be discussing three topics - the external market environments, Q4 highlights, and the technology, strategy and focus for ParthusCeva. Elaine Coughlan, CFO, will then join us to discuss Q4 financials - the financial position for ParthusCeva, and also Elaine will be giving guidance and finally Brian Long, vice chairman of ParthusCeva and founder of Parthus technologies will be joining for Q&A.

Before we commence, I need to say this conference contains forward-looking statements, which are subject to certain risks and uncertainties that should cause - that could cause actual results to differ materially from those stated. Any statements that are not statements of historical fact, including without limitation, statements to the effect of the company or its management believe, expect, anticipates plans and similar expressions should be considered forward-looking statement.

Important factors that could cause actual results to differ from those indicated by such forward-looking statement include uncertainties relating to the management to successfully integrate the operations of Parthus and Ceva, uncertainties relating to the acceptance of ideas of semiconductors intellectual property offering, continuing or weakness in our markets and those of our customers for variations in our results and other uncertainties that are discussed in the registration statements on the form S-1 and the most recent quarterly report on Form 10-Q of ParthusCeva, on file with the U.S. securities and exchange commission. With that, I'd like to hand it over to Kevin.

Thank you. Okay. Good morning and good afternoon to everyone and thanks for joining us, and I want to focus in on three different topics before handing it over to Elaine. First of all, talking about the external markets and the specific impact on ParthusCeva. Secondly, talk a little bit about our quarter four results and then thirdly, looking forward to 2003 in terms of our technology strategy and plans.

When we start talking about the market environment, our views on the semiconductor operation environment is that we are heading now into our third year semiconductor downturn. And the macroenvironments remain quite weak and still very limited visibility. R&D spending specifically in the semiconductor area remains very tight and there is little or no speculative investment in R&D, and the primary impact of all this is a significant year and year reduction in the number of new product design starts in the industry and exacerbating this then is the prolonged contract signoff process. We also have a situation of depressed volume shipments in the industry, especially in the cellular market which is significantly reduced royalty revenues.

Now, looking ahead through 2003, consensus industry forecasts are projecting a single-digit growth in the semiconductor shipments, and most of that is actually coming in the second half of the year. So the consequence, you know, as we previously indicated, we are taking a conservative outlook for 2003, which we believe is prudent in light of the terms of limited visibility in the sector, and we want to reiterate, that, we are comfortable with the guidance that we gave last quarter for 2003 financial results for the company.

There is some positive indications for 2003 and for better outlook for this year, and that gives us some confidence in our own prospects. First of all, DSP shipments showed very good growth, especially in the latter half of 2002, for concepts, for example, forecasting over 20 percent growth in DSP shipments now for 2003. Secondly, Bluetooth shipments continue to run very strongly. According to Instat (ph), we had an estimated 35 million Bluetooth devices shipped in 2002 and that represents about 3-X growth over the continuous year and looking to continue that into this year. Thirdly (ph), in the area of GPS (ph) and demand that's been quite rebuff (ph) there, driven really by two different end markets: one is location of requirements or cell phone, and secondly there is a quite a significant storage (ph) in applications regarding security and defense type applications.

Let me talk for a couple minutes on quarter four. As we announced on the 6th of January, in the last couple of weeks of the quarter, two commerce deferred licensing decisions on significant multimillion dollar deals with ParthusCeva for reasons external to ourselves. Both of these design wins are in the cellular area, and both deals are still in the negotiations with the respective customers.

There were some strong positives from the quarter. We closed the merger, obviously, in November and simultaneously lost trading on both Nasdaq and on London and we continued our activities to rationalize and integrate the two businesses. We aided (ph) from business where we couldn't provide, in our opinion, significant differentiation where our products or technology didn't fit with our strategy going forward, and the results of all this was the greatest strategic focus of higher differentiation and we believe higher earning potential. It also gives us confidence in our underlying cost and profit guidance for the year ahead.

In the quarter, we signed a long-term multimillion dollar contract for our latest DSP products, what we call expertise (ph). This is with the leading cellular handset company and the new customer of ParthusCeva. This is a significant design win for us. It first of all validates the strength of our technology in the cellular market. The deal is also illustrative, we believe, in the industry trend is away from relying on proprietary processor designs and mirrors what has already happened in the embedded risk market. This particular handset company chose ParthusCeva, primarily because of our advantage of our DSP architecture, secondly because it enabled them to designed their own differentiated solution, rather than relying and industry standard ship (ph), and thirdly, it provides them with advantages of being able to access a very low cost foundry (ph) model. So we exited the quarter with quite a strong sales pipeline, stronger certainly than coming into Q4. That's giving us some conscious that we can achieve the 2003 revenue objectives that we talked about earlier.

First, let me address our technology strategy for 2003. Our primary strategy is to exploit our position as the leading licensor or DSP technology and platform level IP in two different ways. First we continue to develop and release new generation of performance improved DSP cores (ph) and support tools around those cores (ph). And secondly, we continue to focus on building platform IPs around profit or cords for wireless and wire line applications. In other words, to look to offer more of the required solutions.

First of all, just on the cores development and we should point out, in the second half of the year, we have been doing an early release to some of our latest generation core receiver (ph) to some of our early adopter customers, our teacher customers. Here (ph) and it's something we are very excited about is a significant development on our DSP core roadmap, and it offers customers some significant advantages. A couple of them, which I just mentioned is the architectural scalable, meaning a consistent architecture and, therefore, means consistent software and compatible software both going from low-end, low-cost products to the high performance application. It's also extendable, meaning that our customers or licensees can extend by adding their own instructions or proprietary hardware. This enables them to further differentiate their solutions in the market place. That's on the core side.

On the platform side, we're going to seek to exploit what we believe is a very unique capability of ParthusCeva to offer integrated application solutions built around profits or cores. Now, increasing system complexities are driving demand beyond the streetblocks (ph) of IT towards companies who can supply complete solutions of fully a integrated, proven in silicon and based on industry standard architecture. We believe we have a unique capability in this area. Our first new product in the merger will be application solutions built around expertise (ph) subsystem that we talked about earlier. The first such application solution expected to be released in Q1 will target a range of digital audio applications for cellular application processing.

The second release coming after that will target video processing, again for a range of portable devices, including cell phones but also including digital fill (ph) cameras and many more. Finally, partnerships are essential platform for strategy. During the quarter, we announced as many of you will see, announcements with arm (ph) holdings, the release of a common development environment for high bridge (ph) risk plus DSP system chips. So these multiprocessor solution, which are becoming very, very common in the industry today, are key to many digital devices, such as cell phones, digital cameras and a range of multimedia devices. The development environment enables designers, customers of ours to combine and ParthusCeva's CSP core, and Arms risk (ph) core, of course these are the two leading license processor cores in the industry.

In multi-core chips in a way that significantly reduces the development complexity, the verification time and the overall development costs for these kind of systems chip design. Today we also announced a technology license and development partnership with Cirrus logic. As you know, they are probably one of the leading fabless (ph) companies in the area of home entertainment and digital multimedia products. Now, we are leveraging our infostream (ph) 2000 processor subsystems to deliver one of the most advanced and integrated single chip solutions, which targets the market for home entertainment systems.

The relationship here between ParthusCeva and in terms of bring our expertise in SLC designs together with the expertise of port and windows (ph) and Linux, top of Cirrus's capability in terms of analog and technology and chips. So with that, let me hand over to Elaine, who will go through more detail the financial results with you.

Thanks, Kevin. Good morning and good afternoon to you all. Thanks for joining us on our conference call today. I would like today to discuss the results for the fourth quarter and the financial position of the company and guidance going forward. Before I start, for clarity, I should point out in accordance with the U.S. GAAP, ParthusCeva has accounted for the merger of the two companies, plus the acquisition of Parthus by Ceva effective November one. So accordingly, the U.S. GAAP results that I will discuss for the fourth quarter include the results of the Ceva business for the fourth quarter and the Parthus for the final two month of year, i.e. the results for November and December for Parthus.

So on this basis, total revenues for the fourth quarter of 2002 were $5.7 million. Licensing and royalty revenues represented 68 percent of total revenues, with five new licensing agreements signed in the quarter and 12 per unit royalty customers shipping products, which total 13.1 million units in the quarter, which increased slightly by about one and half percent from Q3 unit shipments which amounted to 12.9 million units. Royalties are booked in quarters and rears (ph). So 13.1 million units represents shipments by our customers in Q3. In addition, we have a further seven licensees in prepaid shipment volumes, that is not paying us per unit royalty.

On a pro forma combined basis, total revenues for the full quarter for both companies would have been $6.6 million for the fourth quarter and 51.2 million for the year 2002. The Q4 performances obviously impacted by the delay of signing a number of significant licensing deals, which Kevin spoke about earlier. Gross margins in the fourth quarter were 78 percent, again impacted by the lower licensing and royalty mix. Licensing and royalties were 68 percent of revenues, compared with 85 percent of revenues on a pro forma basis in Q3. Operating expenses in the fourth quarter were 28.5 million on the U.S. GAAP basis, which include it is one-time non-cash write-off of unprofitable (ph) R&D expenses, which arose on the merger and they amount to $15.8 million and a one-time restructuring charge of 6.4 million in association with the restructuring of the business, which we undertook in mid November, which I looked at (ph) later.

Excluding these one-time charges, operating expenses were 6.4 million, which includes Parthus for only two months. The pro forma costs base for the full quarter would have been $8.9 million. The reported US net GAAP net loss of 24.4 million includes these one-time charges amounting to $22 million, which I just discussed. It also include it is non-cash amortization of intangibles that arose on the merger and they amount to approximately $225,000. Finally, unrealized exchange losses of $484,000, and this was as a result of the depreciation of the euro against the dollar at the end of the year. So, the US GAAP loss, excluding the one time charges and the amortization of the intangibles would have amounted to $1.9 million. Basic and diluted net loss per share was $1.80, including the one-time charges of $22.2 million which I just spoke about.

Looking now at the balance sheet, and the head count, the principal area note of cash, we have cash on hand of just under $74 million at the end of the year, which is ahead of previous guidance, which was for year end cash balance of approximately $70 million. There are two key points of note here. There are cash out flows associated with the restructuring and the merger expenses, which we would incur in Q1 as for cash perspective, and these would amount to approximately $4.5 million. So reflecting these items in the year end cash, year in cash would have been in line with previous guidance in or around $70 million. Head count at the end of the year amounted to 243, which is down 20 - 23 percent in the start of the Q4 quarter. 76 percent of business, engineering and R&D, based in three geographies - Ireland, the U.K. and Israel.

Finally, we'll talk about the financial health of the company and guidance going forward. Not withstanding the Q4 performance, we believe that the company entered in 2003 in a strong position both financially and strategically. Financially, we have a far reduced cost base in place for '03. On a pro forma combined basis, our operating expenses in Q3, for instance, were $11.2 million. We undertook the restructuring midway through the fourth quarter, so our combined pro forma cost base, which I previously mentioned, was $8.9 million. This is higher than what we expect in Q, and we expect our Q1 operating expenses to be in the region of approximately $7.9 million. That excludes intangibles, including intangible amortization, operating expenses will be approximately $8.2 million. This translates into a 27 percent reduction in the cost base which has implemented and will be realized in Q1.

As Kevin said, the backdrop to the Q1 guidance is continued weakness and a lack of visibility in the supply sector. However the pipeline of deals in progress right now is good so we anticipate the first (ph) quarter of 2003 revenues will be between eight and $9 million with gross margins in the region of 80 to 82 percent. Based on this revenue guidance and operating expense guidance, we expect to report a net loss of Q1 of between 1.4 and $600,000. On a positive note, we expect in Q1 to begin seeing the full benefits of the rationalization of the refocusing efforts that we initiated in Q4 and with that, I'd like to hand over to Kevin to wrap up.

Thank you, Elaine. Just to wrap up, strategically, I believe we entered 2003 in a very strong position. The recent restructuring, I believe, has sharpened our strategic focus on the product, that we believe delivers the greatest differentiation, the greater growth opportunity and greatest earnings quality. This year, our R&D programs will deliver our new generation seeder (ph) core plus the first new platform of the products resulting from the combined R&D capabilities of the company following the merger. We plan to consolidate our position as the number one licensor of DSP cores on the market and we believe we have the customer franchise and the sales force in flies market our new cores and solutions.

We market our products to a quality customer base. As of the year end, we have 170 customers in total, which includes all of the top ten semiconductor companies who are on today's quest (ph), and have over 140 licensing and royalty contracts in place at this stage. We reiterate our guidance for 2003, still anticipating revenues will be between 40 and 46 million for the year. Gross margins are approximately 85 percent and underlying operating profit of between 10 and 15 percent for the company.

So in summary, I believe ParthusCeva is in a very strong financial and strategic position in the industry, and I also anticipate strong and profitable growth when the semiconductor industry does eventually recover. So with that, operator, we'd like to open up the con call for Q&A.

Thank you sir, ladies and gentlemen we will now pause for questions. If you wish to ask a question, please press the number one on your telephone touch pad. And it's the hash or pound sign to cancel your request. Once again, the number one and the hash or pound sign to cancel the request. Please standby while Parthus register it is questions. Thank you our first question comes from Barry Dixon (ph). Please go ahead and announce your company name.

Hi, Barry Dixon (ph) from Davies Stock Brokers (ph). Good afternoon. Just a couple of questions. First of all, Kevin, perhaps you could give us some indication in terms of the - of the pipeline by platform application, particularly you might talk about innate (ph) stream and say what the pipeline is like there. Secondly, you might just touch on the competitive environment for the DSP sector, particularly, and particularly how you think TI (ph) operating out there in the market. Finally, Elaine, just a quick question, you might explain the increase in the good will figure in the balance sheet.

Okay. Let me address the topic. First of all, you asked about pipeline. As I mentioned during the call there, we have actually a stronger pipeline coming into Q1 than certainly we did going into Q4, which is giving us some confidence that, you know, business is and still pretty good for us. And we see, in particular, a very strong pipeline around our cores and continues to do very well. GPS continues to be a strong business for us. And you asked specifically about the asal (ph) 2011 (ph) market. That continues to be a very hot market with a considerable amount of companies out there shopping for potential solutions.

The biggest concern right now in the marketplace revolves around the interoperability concerns in much the same way as it did in the early days of Bluetooth and so we believe we have a very superior solution and an answer to those compatibility issues, but, you know, the early days in the asal (ph) 2011 (ph) market but, you know, overall, I would say pipeline, I'm a lot more comfortable in now as we enter 2003 than I was certainly in the beginning of the Q4 quarter.

Secondly, from a competitive point of view within the cores area, we believe we have, you know, very competitive and probably the leading technology when it comes to DSP cores in the industry for licensing. Across from, you know, many metrics, whether you consider performance alone, if you look across, you know, industry-accepted standards like the BDT (ph) benchmarks, we considerably outstrip our peers in terms of performance, in terms of completeness of solutions. I think our development tools are far superior to any of the smaller DSP licensors that are on there. And remember, of course, we have almost a 70 percent share of the DSP licensing market. Our nearest competitors have, you know, the biggest have well less than that, 10 percent market shares so we have a very strong also position and viability in the market place.

Now, you mentioned specifically TI. We don't, of course, compete with TI. But many of our customers licensed from us in order to give them the capability and the technology to employ in their chips that allows them to go head-to-head with TI, especially in markets like cellular and so on. And those -at that stage, the competitive decision become as lot more of the additional features - obviously DSP performance itself is important, but the additional features, access to foundry and pricing and relationships with the handsets, all of those actually come into play and it's not just down to the performance of our DSP core versus the TI core.

Okay. Elaine?

Yes Barry, just finally on the increase in goodwill, it's principally a result of the purchase price allocation. So the net asset value of Parthus how we accounted for the exit costs of some of the restructuring that we did in November was actually reflected back in the net asset value profits at the time of the transaction. So as of November 1, for instance, because we had exited from principally from the U.S. from the associated costs, we had as a result of exits from those businesses was reflected on the balance sheet, the acquired balance sheet of Parthus. So what that meant was the acquired balance sheet of Parthus decreased by that amount and goodwill went up by that amount. So no real difference, I guess, instead of having a bigger restructuring charge, some of the impact went actually to the net of Parthus. I hope that explains it.

Okay. Thanks.

Thank you, our next question comes from Sean Murphy (ph). Please go ahead and announce your company name.

Hello there. Sean Murphy (ph) from Nomera (ph). Just wondering if you have comments on the actual level of revenues in Q4 which seem quite a bit below where the pro forma level might have been based on revenues in the earlier part of the year. Have you had any comments from customers, let's say, confused about the strategy or maybe loss of potential customers concerned about the platform direction of what was an independent core supplier?

Okay. Sean, that's a very valid question. There may certainly have been an impact, you know, as we went through the merger, post merger rationalization, looking at refocusing the company, we spent a lot of our time, obviously, looking at creating the strategy of the company and then developing the implementation plan around that. So possibly though some elements have taken our eye off the ball in terms of the sales, but, no, there is no customers that I would say that are confused about what we're doing.

There is certainly no customers that have left ParthusCeva and the probably biggest impact we fear is that we have two deals, both which were multi-million dollar deals, that we were quite confident of closing as we entered the quarter. We had been working on them for quite a few months, and as it turned out, we didn't manage to get them closed within the quarter, and that was the thing that torqued (ph) our performance more than anything else.

Okay. Thank you.

Thank you. Our next question comes from Matt Robinson (ph)

I'm Matt Robinson, Ferris Baker Watts (ph). Can you talk about, first of all, your serious announcement, how that differs from the existing relationship you had. Also, I'd like on the expert application teak (ph) coming out this quarter, for digital audio, is that for voice processing primarily or does that extend into multimedia? Also, I'd like to know if Elaine's comments regarding OpEx (ph) included cost of goods sold. I'm curious to know if you will generate enough cash in the current quarter to keep it above $70 million exiting the quarter? And lastly, housekeeping would like to know, what the stock compensation was in December stub.

Okay. Matt, let me start and I'll talk about the deal with Cirrus that we announced. This was a deal that has been underway, first of all for most of 2002, and - but we were only able to announce the product - the relationship and this week. The device has (ph) paid out. So there have been many months of engineering effort have gone into it. Basically what this deal was about was a combination first of all, of a significant license deal where Cirrus Logic licensed our asal (ph) three (ph) 2000 platform. This is a risk processor based subsystem with memory and peripherals integrated in it and with the ports of Windows C (ph) and Linux, already completed and full verification, head (ph) to silicon prototypes already available.

The combination of that with some proprietary IP and that Cirrus Logic brought to the table as well as some very differentiated mixed signal and analog capability that they have specifically addressed in the audio space. So the resulting product is a single chip, system on chip and a device and includes a multitude of different interfaces for home entertainment and plug-ins so it plugs in IDE, plus into ethernet and includes a co-processor for audio applications that significantly speeds up the number of different audio applications after the central rift (ph) processor. And overall, I think Cirrus are excited about the prospects of this particular device.

We were involved in two ways, first of all, obviously as the licensor of the industry platform; and secondly, we had a design team working in conjunction with Cirrus in terms of putting the entire system on the chip and integrating their IP with our own and bringing the device to the point where Cirrus was able to bring to production. Okay.

The second question you had, Matt, was around expertise (ph). And, specifically, the audio platform IP that we refer to in the call - you asked specifically if this is address void (ph) processing or application processing or both, and the answer is both. When we talk about it in more detail, obviously, we can get into a lot more of what is covered, but it includes audio decode and capability for various digital media and type formats like WMA and MP3, et cetera, et cetera, as well as the voice code (ph) for cellular. Okay. Elaine.

Okay. Matt a couple questions there for me you had. On operating expenses, that's purely operating expenses, the guidance gave of $7.9 million for the quarter with 8.2 million for the quarter, including amortization of intangibles. We, you know, I expect gross margins to be between 80 and 82 percent. So the cost of course (ph) would sit on top of that at 1.4 million. So combined in total, I guess total cost base for the quarter would be approximately 8.2 plus 1.4, approximately 9.6 or 9.7.

In terms of generating enough cash, I think in Q1 you already touched on the items that I discussed in terms of having cash out flow still to be encouraged associated with the restructuring and the merger expenses by 4.5 million. I think the second impact in Q1 will be the weak Q4 performance will impact cash in Q1, but some hangover as a result of that into Q1. And the difficult thing to know is the timing of when deals are going to close in Q1 in terms of cash inflow, whether that will be able to cover that deficit. Now I think if I was conservative, I would not expect that to happen and I would expect us not to generate - I would expect us to have a cash out flow at the operating line and in Q1.

And finally, then your question on the stock compensation, I believe there was very little stock compensation in the U.S. GAAP numbers, $22,000 I believe, which was just one month of stock comp and we don't have a significant stock comp charge going forward.

Do you have to close the two deals that slipped in order to achieve the revenue guidance range you've mentioned?

Well, Matt, when we do our revenue guidance, we don't do a, you know, we don't base it exclusively on the bottoms up analysis counting deal by deal. We believe that we can hit the range that we talked about today and, you know, whether one or both of those deals fall in the quarter or not.

Okay. Thank you.

Thank you. Once again, ladies and gentlemen, it's the number one if you have a question and the hash or pound sign. The next question comes from Rich Michelle (ph). Please go ahead and announce your company name.

Richard Michelle (ph), Senbest (ph), a couple things, you know, first off, you express confidence in again your 2003 forecast. Can you share with us, you know, what's behind that confidence given that, you know, given your Q4, given that you will lose money in Q1 in terms of, is there, you know, -- whether it's the pipeline or I see a royalty trend is still trending I guess downward that you are making less royalties on a quarterly basis ever quarter? I think you have done that for a while now. When does that reverse and become positive? Can you address that?

Okay. Let me try and hit some of the points, Richard. Obviously, this is a conglomerate of several different factors that allows us to give this guidance, and it depends on things like pipeline. First of all, we do track our pipeline out fourth quarters ahead of us on a rolling basis, and our pipeline is very strong, and it is probably more importantly, in terms of giving us confidences, that coming into Q1, the pipeline specifically of Q1 deals is very strong and has given us lot of deals and with the significant value attached to it that we believe and, you know, first of all all goes well for completing our Q1 number, secondly we think all goes well for the full year.

The second thing is the competitiveness of our DSP offering and we have won some significant deals, especially with the expertise (ph) in, you know, the very important areas of cellular. And we won those against all commerce. So that gives us a lot of confidence. Also we now have, as we've mentioned, some very significant additional product offerings that we can layer on top of these cores. We talked about the audio product just a minute ago with Matt, and we would have video technology layered on top of it and others that we have yet to announce. So the - that is going to further enhance our competitive differentiation of our product. Then, of course (cedric) follow on that as well. So, on the product side, I guess, you know, we are very confidence that we have a compelling product solution to offer.

The third thing is from more at the cost side of things, we believe we have gone through some very painful and very targeted (ph) restructuring within the company to make sure that we have the cost base, the engineering focus, and the sales and marketing and G&A base to deliver the kinds of number that we talked about. We went through that plan. We put a huge amount of effort in that and delivered it during Q4. Now we believe we are in a position to attack 2003 with a lot of confidence with a strong financial position.

The fourth thing I would say and final thing, is that we have a very strong customer base. And we mentioned during the call, all ten of the top-ten semiconductor companies in the industry are currently licensees of our technology and we tend to focus very much on these top tier players and we tend to get a lot of recurring deals with these companies. Companies like SP (ph) Mark Electronics, Texas instrument, Hitachi, and Samsung for example. They have come back time and again to license multiple different products.

The fact that we now have a much more expanded product offering that engulfs cores through to applications to surround cores, this is very good and, you know, if -- the final point I would make, just respect to customers, we are seeing this quarter the very first pull-through where we have a customer originally licensed on the processor cores, DSP core side and is now turning around and licensing our platforms from us.

So, therefore, those are the four factors that gives me a lot of confidence that the projections we make for '03 quarter is good.

Can you just address your royalty? When should that start to -- start to grow again, the quarterly royalties?

Okay. First of all, it's difficult to read too much into the quarter-on-quarter trends within royalties, because, although it does -- it would suggest that royalty should be, you know, relatively stable quarter-on-quarter. In fact, we do have a lot of lumpiness. We talked previously about our technologies in the X-box and video. And the way Invidia (ph) pays royalties is like some of other customers by hitting certain volume points so we can get no royalty from a particular quarter and I guess a significant payment in another quarter. The same thing happens for another big customers.

And we have three new starts of new customers in Q4 and they're all small volume, including technology like Bluetooth and we have seven customers that are now still in pre-production, in other words, they're in the prepaid mode and they are not delivering the per unit royalties yet. So, you know, over all, the most significant factor in terms of royalties is going to be the recovering in terms of shipments of units and most significant cellular space. We've got make sure that we are comfortable that we are getting the design wins that you know, sows the seeds for future royalty growth, and we are very confident on that site.

You specifically, you don't expect -- do you expect that trend to reverse in the middle of next -- in the middle of this year? I'm talking about the trend, not necessarily one quarter to the next. I am aware that the -- part of the major reason why is the units have come down, but you got these new deals kicking in. You should have some idea of when the, you know, the people might come out of prepaid or when -- when new licensees will start shipping, you know, it seems like a very, given the amount of licensees you've got, you mentioned like 140. Then you mentioned royalties of about 600,000 or so in the quarter. It just seems like a very low amount

Richard, as you know from probably talking to other companies in the IT area, predicting royalties is notoriously difficult because you have to try and layer in all the vagaries (ph) of products that can get canceled, markets that are not successful products and sales that are not successful. Right now, we've predicted fairly flat royalties throughout the year. And we believe that is a realistic assumption right now, but we also do not factor into that a recovering in the cellular industry or in the over all electronics industry as a whole. If there is a significant rebound in the cellular market, then we would expect to see our royalties follow on and grow probably within a quarter of two of that

Just one last question maybe for Elaine. The payables were up to around 19 million and accrued expenses. I'm sure some of that is these restructuring charges that have yet to be paid out. Where should that number come down to? It seems like a very high number that number is going to eventually turn into a cash out flow. How much of that should we looking to come out in addition to the 5.5 million for restructuring.

You are absolutely correct, it does include significant elements for the restructuring and the obviously the DSPs, the merger expenses, for starter is in there, so that is approximately about 4.25 million in there. It's probably over the life of two-to-three years in association with facilities to the extent we're not successful in subletting excess space we got. There's probably another three million I would say in cash outflow, which would flow out over the lifetime of those leases, which I would say is between two-to-three years.

And then, there is obviously, a normal recurring, accrual and trade liabilities we would accrue on a quarterly basis. For instance, if you look in Q1 or, sorry, Q3 for Parthus, it was approximately $15 million. So there is, I would say, about $8 million of that, which is non-recurring.

Okay. Good. Thank you.

Once again, ladies and gentlemen, the number one if you have a question and the hash or pound sign to cancel your request. Thank you we have a follow-up question from Sean Murphy (ph). Please go ahead

Hi, again. I'm asking if you look at the optic sector, there have been a drought of orders, but then you see the second order effect with the design team disbanded at the systems houses. Now, you are talking about a drought of orders right now, are they a drought of new product launches in the spaces you are aiming at. Are the design teams of the customers still holding together or are you looking at some niches where the design expertise is degrading pretty fast?

That's a reasonable question, Sean. I think, though, in fairness, the collapse of the head of optical space is far more severe than what we've seen in some of the end markets where we participate. And while the cellular handset shipments declined last year, they didn't decline significantly, they withdrawing significantly in terms of R&D. So overall, we are still seeing the major semiconductor companies and holding their design teams together. There certainly have been layoffs in many, in practically every company that we deal with in the semiconductor sector. But all of them have continuous developments going on.

The rate at which new designs are starting and has dropped off rapidly, though, since, you know, the height in 2000, that's had a very significant effect on IP companies because you know, developing new Asics (ph) and generators bringing in unique and differentiated new IP from outside and if new designs are not starting at the same rate it does not have an effect on the IP companies. It's not nearly as precipitous as in the optical sector.

Okay. And do any niche, nonetheless, let's say, look to be biasing towards buying in designs rotted and carrying out most of the work in house?

I would say that, you know, it's -- Sean, there are certainly, we have one deal recently where companies would previously probably have to looked develop the IP in house and they made a decision to actually withdraw their engineering from that particular area and decided instead to license in. One particular deal in minds in your that was exactly the case. In other instances, though, we have companies that are deciding that they would prefer to keep their own engineers busy working on something constructive and in that way avoid layoffs and they will try to redesign IP themselves rather than license so, you know, we've seen both effects through the industry over the past year.

Okay. Thank you.

Thank you,. Our next question comes from Howard Brooks. Please go ahead and announce your company name.

It's Howard Brooks with Credit Line (ph). Good morning or good afternoon depending on which side of the Atlantic you are. The question for Kevin relating to the depth of DSP software capability within the group and what you think the opportunity might be in that area.

Okay. And DSP, first of all, break it into two broad section, first of all, there is the development tools and development environment, which is very much a software-oriented capability. We have a significant investment we rely hugely on our own internal development team that put together the complete development environment, debuggers, etc.. It is a significant differentiator for our cores over our competitors. We continue to invest there. There is the development, for example, the compiler in many ways is as important as the hardware development, itself.

Now, the second area of -- another point I should make there, for example, is the announcement we made just a few weeks ago along with Arm (ph) where we put a huge effort jointly in putting together a hardware and software whole development system that allows APEC (ph) designers to develop multicore, system on chip designs, by multicore, I mean something that has a risk core along with ecore (ph). And a myriad of different applications and consistent with that kind of architecture today, cell phones, for example would have that. So that is one significant area of DSP software investment.

The second one is around application software. We tend to get a lot less involved in that area and we do put a significant amount of energy into deporting some of the key algorithms, and in many cases generating those key algorithms. So, for example, the announcements that you will see later on about our digital audio technology around expertise (ph) is acceleration capability that we have developed in-house ourselves.

However, in the main, we rely on third-party application software developers to write software targeting our cores. And we have a fairly active and group in the company whose focus is looking for interesting application software developers and courting them to make sure they develop on our cores and our architecture before anyone else. So I'm not sure if that answers your question, Howard

Yes, that's correct. Thank you very much.

We have a follow-up question from Barry Dixon (ph). Please go ahead.

Previously, you stated that you expected royalty revenues to be 10 percent of total revenues next year, are you still happy with that forecast?

Barry, Elaine here. Yes. I think so. I mean, as Kevin said, a couple of customers that actually started shipping in what would have been Q3, obviously we reported in Q4, and the numbers that we reported just under $700,000 for this quarter are the Q3 shipment numbers and we'd like to think that that's a stable number and doesn't count those new customers gathering up, you know, larger unit royalty shipments. Nor do the count of customers we have that we know are shipping sizable units but are still covered by prepaid. So I think we still feel comfortable in that range.

A question from Sean Murphy, please go ahead, sir.

Sorry, it must have been a mistake. I don't have a question open.

Then that concludes the questions, Mr. Fielding. I hand it back to you for further closing remarks

Thank you to everyone joining us today. We looked -- look forward to speak to you again next quarter.

Thank you. That concludes the conference. You may now disconnect your lines.