CEVA Inc (CEVA) 2003 Q2 法說會逐字稿

Thank you for standing by and welcome to the Q2 results 2003 conference call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question and answer session if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, Wednesday, the 23rd of July, 2003. I would now like to turn the conference over to your speaker today, Mr. Barry Nolan, please go ahead.

Thank you, operator, good afternoon, everybody this is Barry Nolan welcome to your Q2 conference call. I'm joined today by Chet Silvestri our CEO, Elaine Coughlan our CFO and Brian Long our founder and deputy Chairman of ParthusCeva. Chet will addresses us first three key topics. He's going to outline his goals and visions of ParthusCeva. Highlights of Q2 and conclude with some new products and new technologies that we plan to bring out in the next couple of quarters. Elaine will go through the financials in Q2 and update for Q3 and full year and Bryan will join us for Q&A. Before we start I must say that various remarks that we may make about the company's future, expectations, plans and prospects constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in our quarterly report on Form 10-K filed with the S.E.C. on may 14 of 2003. In relation any forward-looking statements represent our views only as of today and shunted be relied upon as representing our views as of any subsequent date. Although we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. Even if our estimates change and, therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent of today. During this call we will be referring to non-GAAP measures. These non-GAAP measures are not prepared in accordance to US generally accepting accounting principles. Reconciliation of non-GAAP financial matters directly comparable GAAP measures is available in the Investor Relations section of our website, www.parthusCeva.com under heading of non-GAAP financial measures. With that I'd like to hand the call over to Chet.

Thank you, Barry, good morning and good afternoon to you all. A pleasure for me to address you for the first time as CEO of ParthusCeva and I look forward to meeting with you personally over the coming weeks and months. As Barry indicated, I would like to spend the next few minutes covering three topics, my vision and goals for the company, our Q2 business highlights and an update on new products, strategy. And afterward I'll turn it over to Elaine Coughlan, our CFO, to update you on our financial results.

First let me outline our vision and goals for the company. What attracted me to ParthusCeva is what I believe to be the enormous opportunity facing the company. ParthusCeva is uniquely positioned between three powerful industry trends and I believe with good execution we can emerge as the leading player in the world of digital signal processing technology, DSP's. The first trend is the industry's shift to Semiconductor intellectual property. With the advances in silicon technology, this chip design cost and complexities are rising exponentially. In response, the semiconductors and OEM's are increasingly turning to Semiconductor intellectual property to reduce costs, complexity and time the market for the next generation products. Even through this sustained industry downturn, the intellectual Semiconductor intellectual property industry has continued to grow. The second trend is the growth of the foundry model which enables OEM's to create their own differentiated silicon products sourced through state-of-the-art, low cost foundries. OEM's utilizing the foundry model inevitable base their products in open standard intellectual property processors and platform which gives them the flexibility to choose the manufacture of their choice. Third, is the growth of DSP itself, a technology that has and continues to outpace Semiconductor industry growth. DSP is fundamental to all digital products that contain communications or multimedia function. Virtually all devices in the wired world of today will need a DSP. As the most recent data request industry report for 2002, ParthusCeva is in the lead position to capitalize on these trends. The 2002 survey showed ParthusCeva as number one in DSP licensing with over two-thirds of the licensing market. Number two in platform level, IP licensing which is a key growth market and trend as well in Semiconductor intellectual property. And number three, overall in the industry in terms of licensing. ParthusCeva was ranked behind only Ohm and synopsis. I believe ParthusCeva positioning in opening the standard DSP with wireless and application platform solutions represents the winning strategy. Customers are more and more looking to deal with a total solution provider who has a solid track record of licensing.

Now if you look at our Q2 performance, I think this demonstrates the achievability of our vision and the opportunities that are open to us. Against a backdrop of a continued weak Semiconductor environment, I'm pleased that ParthusCeva has grown revenues Achieved operating profitability and positive net income and completed licensing agreements with some of the world leading wireless and Semiconductor companies. We have robust sales in Q2 with six new licensing agreements and three new customers. Of particular note our open standard DSP cores particularly the Teak and take light cores have been adopted by two major Semiconductor companies that are ranked in the top five worldwide who have now adopt their open standard dsp cores in the quarter. Today we announce one of those, ST (ph) micro electronics have licensed our peak light (ph) to power the next generation DSL solution. This is an excellent win for ParthusCeva as we're now designed to the number one supplier player of DSL components, one of the fastest industry growing technologies. One of the world's largest modular manufactures has licensed our cores this. Company is switching to the IP model so they can design their own differentiated silicon product for the reasons I have described earlier and have them manufactured in a low cost foundry rather than relying on conventional off the shelf devices that have been designed for generic wireless applications.

We also continue to gain traction in Asia. In the quarter a leading Asian manufacturer chose our open standard DSP's for their next generation wireless products which are primarily targeting the rapidly expanding Chinese market. Asia represents a market of enormous opportunity for ParthusCeva and in this area we intend to add sales and marketing resources. In the quarter we announced licensing agreements and deployments with Telphon and ENX (ph) two fabulous companies in that region. Also noted in the quarter we completed our first licensing in 802.11 lesson with a leading OEM. This OEM is integrating 802.11 into their next definition high definition television.

Now let me talk for a few moments about our new product strategy which will drive our business going forward. Our new product strategy targeted the strength in our position as the leading licenser of open standard DSP's and platform technology in three ways first, we'll continue to develop and release new generations of high performance open standard DSP cores. Our latest generation architecture Cedar remains on track for release later this year. We're very excited about the opportunity of this architecture, the result of three years of R&D and with the performance and future set it delivers for us and our licensing partners. Second we continue to develop the system on chip subsystem called export DSP that builds around our standard DSP processor. We have had tremendous impact and licensing success with expert DSP, especially with expert teak and teak light. It enables our licensee to dramatically reduce the time to market and development risk and ParthusCeva to capture more value in the system on chip. We'll be releasing our next generation expert DSP solution later this year and we have already deployed this to a number of customers including one of the worlds leading cellular brands. The third component of our product strategy exploits our unique capability to offer integrated platform solutions in wireless and wire line built around the DSP processor cores. Our DSP central approach to solutions offering this total solution that I previously indicated the OEM's are looking more and more to have. In the second half of this year we'll be announcing and releasing multiple new and upgraded elements in our platform technology area, including GPS, video multimedia, 802.11 and Bluetooth. As is our practice we're securing launch customers for each of these new platforms. Partners are also critical to establish our DSP architecture as the industry's licensed open standard. We're currently working with over 20 tool simulation design and software application partners to enhance and support our architecture. Industry growth forecast for some of our key technologies in particular our DSP cores and GPS remain strong and our market leadership in these key technologies should allow us to benefit greatly from this anticipated industry growth. With a sustained licensing momentum in July and a strong sales pipeline going into the quarter, we expect to maintain this momentum in Q3. In summary, ParthusCeva has is in a neat position to be the leading player in standard in DSP and platform technology. We have the licensing franchise, a growing community of software partners and the unique position of being able to offer integrated platform total solution built around our high performance DSP's. To our shareholders I believe we have the foundation for a very significant profitable growth in the medium and long-term. With that I'd like to turn hand over to Elaine Coughlan who will review our financial performance.

Thaw A, which Chet (ph). Good morning and good afternoon to you all. Thank you for joining us on our conference call. Today I will discuss results for Q2 the financial position of the company and guidance for Q3 and Q4, '03. First looking at the Q2 performance in a little bit more detail, total revenues for the first quarter of -- for the second quarter of '02 were 9.1 million. That's up 3% from Q1 and licensing and royalty revenues of 7.1 million represented 79% of total revenues in Q2. Licensing revenues were more or less flat, 6.3 million. But activity and the underlying deal flow performance was sequentially up, backlog group sequentially and we signed six new licensing agreements adding three new customers to ParthusCeva. Chet knows licensing our open standard DSP course is particularly strong. I think a note in Q2, we successfully closed up with multiple million dollar DSP core deals which was jutting standing at the end of the core of 2002 and ended our first 802 dot 11 deal.

Royalty also increased significantly at 41% sequentially at $860,000 from $606,000 in Q1 03. Revenues are paid one quarter in arrears so in other words our Q2 royalty revenues relate to Q1 shipments by our customers. The increase of 41% was driven by significant increases in the underlying unit shipments of principally the teak core in new two-and-a-half G cellular products and DVD servo products also. Both of which pay much higher royalty rates than those historically in the area of 2 G and this is born out in the average royalty rates which increased 67% from 4.9 cents per unit to 8.2 cents per unit in Q2. Unit shipments for -- for the quarter are at 10.5 million units which is down from $12.2 million shipped in Q1 2003. This is planned product life for 2 G's product which we spoke about last quarter. There were no 2 G shipments from this particular customer reported in the Q2 royalty numbers which accounts for the decline. So excluding this product from the analysis, the actual underlying unit shipments grew 48% sequentially. We had a total of 21 customers shipping, 14 of which per paid per unit royalties and further seven licenses shipping in royalty prepaid volumes, that is where the covered by existing previous, prepaid royalty programs as they walk through the volume sales they start to pay per unit royalties. During the quarter, one customer moved from prepaid royalties to per unit royalties. And while we expect the number of new licenses to ship and pay her unit royalties over the next few quarters, we continue to prudently forecast revenues in the existing range of the past two quarters which is between 6 and $800,000 going forward. Although revenues consisting of hard IP and design services remain relatively constant.

Almost one-third of the business signed in the quarter was generated in Asia, which we believe represents one of our strongest growth markets and this has doubled sequentially, a trend we hope to continue to build on with increased sales focus in the region up. Revenue by geography broke out of 46% in the U.S., 33% in Europe and 21% in Asia. Repeat business continues to show the retention inherent in our model of 89% of the revenue in the model coming from existing customers similar to Q1 and gross margins in the first quarter, 82%, that is up one percentage point really reflecting the better performance in royalties. Operating expenses amount to 27.3 million compared to 8.6 million in the first quarter of 2003, Q1 obviously included a restructuring charge of 1.4 million. Although cost control remains permanent. We continue to invest in R&D and new products in 2004 and it amounted to. So R&D resulted in 45% revenues in the quarter, similar to Q1 with SG&A constant also up to 16% of revenues each respectively. The underlying trend within the quarter was actually for reduced costs in Q2 but this is masked by the higher reported costs due to the U.S. dollar obviously weakening against the Euro in the quarter by 4% and that had two impacts on us during the quarter. The first exact of the weaker dollar was obviously to increase our Euro denominated cost base by approximately $200,000. But despite this, we actually had a good turn around. Operating income amounting to $216,000 for Q2 compared to operating loss of $21,000 in Q1 after excluding the 1.4 million restructuring charge in Q1. The second impact of the weakening dollar was in the translation of the Euro denomination payable at quarter end which results in an unrealized non-cash translation loss of $389,000 in the quarter and that compared with a loss of $199,000 in Q1. So that's an increase of almost $200,000 sequentially which obviously impact on the level of profitability in the quarter. So skip consequently, net income on a full GAAP basis for Q2 amounted to $32,000 compared to a net loss of 1.3 million for Q1 with net income per-share amounting to .002 compared to loss of .07 for Q1, 2003.

And looking now at the balance sheet and headcount, cash on hand at the end of the quarter was 65.3 million. Total cash outflow was 3.2 million which included 2.1 million of cash outflow related to restructuring and merger costs in Q4 and Q1. Cash outflow from operations in the quarter amounted to $500,000 so we reduced the cash outflow from operations excluding restructuring, by more than two-thirds to $500,000 from 1.8 million in Q1, '03 and we have continued to trend in Q1 to find multiuse long-term and obviously very significant in dollar terms deals and these do have extended payment terms and I think it is this factor more than any other factor that resulted in the continued cash outflow at the operating level, albeit at lower levels.

Trade receivable amount to 9.4 million and DSO fell slightly from 96 to 94 days. Headcount at quarter end amounted to 236, that is down only marginally from Q1. Looking forward now to Q3 and Q4, in the increased activity levels in Q2 and I mean -- it means that we started the third quarter well with a number of deals in an advanced stage and one or two already signed so short-term visibility is good. We anticipate that third quarter revenues will be between nine and $10 million with gross margins in the region of 81 to 82% and that operating expenses for the third quarter included amortization of intangibles will be between approximately 7.3 and 7.8 million. As a result, the net income earnings for Q3 will be a range of between break even and net income of $400,000. Medium term visibility remains poor, however, and I think we will take light of that in past Q3. However, at this stage we anticipate that Q4 revenues will be between ten and 11 million with gross margins again in the region of 81 to 83% and that operating expenses for the fourth quarter again including amortization of intangibles will be between approximately 7.6 and 8.6 million. As a result, the net income earnings for Q4 will range between 500,000 to $600,000. This would imply full year revenue of between 37 and $39 million gross margins again 81 to 83%. Operating expense is 29.5 to 31 million and performed earnings excluding restructuring costs of approximately 600,000 to $1.2 million. U.S. GAAP earnings including restructuring charges occurred earlier in the year would amount to a net loss for the full year between $200,000 and $900,000 for the full year of '03 and with that I'd like to hand back to Chet to wrap-up and to open the session for some Q&A.

Thank you, Elaine. So in summary, I'm pleased that the company has delivered a solid profitable quarter driven by robust licensing and royalty revenues combined with continued tight cost control. I believe that under pinned by good portfolio of our new products that we plan to launch in the coming quarters and following a good start to quarter three, we can sustain our business momentum and achieve our corporate goals of profitable growth and technology leadership. So with that, I'll open it up to question and answers.

We would like to begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please express star two. Your first question comes from Don Dikens from clipper capital. Please go ahead.

Hi, I would just like you to comment on the acquisition of inner syllabi globe span and how that may have an impact on your relationship with them.

Okay, should I you, Chet.

Hi, it's Chet here.

Hi, Chet.

As I mentioned in my statements, we signed, you know, our licensing agreements for 802.11 in 80802.11 in the quarter and continue to work with the enter sell team to work up new agreements, so in the short term it is selling as usual and we have a pretty good pipeline. Now, the ban verota (ph) acquisition is expected to close in the September time frame and at that time frame we'll have discussions with them about what makes sense going forward. Our contract continues to remain in place though.

Okay. Is doing business with ST micro and DSL chips a negative for that relationship going forward in any way?

We have got Bryan downtown for that.

No, we don't see that as a negative going forward. In fact, we just -- you may have seen a press release from the company today where we announced licensing of our Teak light technology into ST micro electronics or DSL and HSDSL chip set, central office chip set. That is a main product launch and you will have seen ST announce that they have won Alcatel, the number one customer in the industry so we see that as a huge win for us and we see continued licensing of our technology into that market. In fact, we see Globe sun (ph) as potential customers as well rather than a competitor.

Have you been in discussions already with globe extreme Peronto (ph).

We're not in a position to talk about that now. All we can talk about is the deals we have done. We are pleased we signed the number one DSL player in the industry and it's up-to-date.

Could we also just find out Chet's compensation, is he tied up with stock options and to what extent?

Well, I think we're due in the next month or so to find Chet's package and it is not materially different from the previous CEO package and he's incentive in options over the next four years.

Thank you.

Thank you, Don.

Your next question comes from Barry Dixon from Davy stockbrokers. Please go ahead.

Hi, good afternoon, guys. Just a question in terms of the ST micro deal. Can you give us some sense of the size of that deal and, I mean, I know it's just on the DSL product which is a very fast area for them. Is that likely to expand to other products within ST micro and then a follow-up question, in terms of your strategy of becoming the DSP standard, what other top five or top ten manufacturer's are you talking to at the moment or do you think you will be able to sign on for your DSP core designs?

Maybe Barry, Bryan will do the first one and Chet will take the second.

Okay, yes. The deal we announced with micro electronics is a multiuse license deal and that means that they will be using the technology in their family of central office ADSL and HDSL products and they do have an option then to expand that beyond that product range into other products which will include or involve additional licensees. We have from that deal gotten very significant royalty agreements with ST and we do believe that the -- you know, it is a fast growth market -- very fast growth market for ST. We're particularly pleased that they have the Alcatel sockets, the biggest customer in the industry and if the Alcatel will be shipping our DSP technology so we think it's a very good start in that marketplace with that customer deal. So it's expandable, an option to expand beyond our product range but we think our product range is very important and do you want to take the second part?

I'll take the second part. Chet. In terms of what other major manufactures we plan to engage in in terms of adopting our open DSP, we're -- you know, we're in active discussions and have closed some deals in fact that we can't disclose the names in particular, but major U.S. manufacturer's and major Asian manufacturer's are highly interested and we have active conversations going in both of those regions. A pretty good position in Europe with ST and others already, but I think in Asia and the U.S. you'll see more expansion in the near-term.

Okay, thank you.

Your next question comes from Matt Robinson, please go ahead.

Hi. I have a couple of questions. First of all, on housekeeping on the -- looks like you would have 27 licensees shipping now. Is that the right number?

I think it's actually -- within the quarter, Matt, it's actually 24, which four small per unit guides just didn't show up in the royalty report this quarter. They very well may next quarter but we didn't count them because we didn't -- you know, the royalty report was such a small volume we didn't include them.

Okay, were those core or platform?

Core, core. The ones shipping small volumes rapidly. Sampling I guess – preproduction.

The one that you added that was in Pre-royalty, was that a core?

Yes, yes. All core.

Okay. What should we be thinking about in terms of the mix of core versus platform in the current quarter? The number of licensees?

In terms of licenses it is probably about 50 -- it was three from the cores and three from the platform divisions so it's 50% in terms of number of deals, but you've got to remember we signed a very significant multiuse DSP deal, one of the deals that was outstanding obviously in dollar terms and it's probably more significant from the core's perspective.

Was that the unnamed large Semiconductor company?

Correct.

Okay. And the ST one is clearly not a multiuse, specifically DSL it sounds like?

Well, it is multiuse in they will ship multi-products in the HSDL range but if they want to use the technology beyond that product range, they'll be paying incremental licensing fees.

Do something in wireless, for instance?

exactly.

Okay. In the context of the guidance you provided, should -- do you have a target range for DSO you would like to see? I mean, where -- where should we see that going?

Well, I suppose in terms of it as a product area for the DSP, you know well, Matt, historically we were very strong in cellular and we spoke about moving from wireless into adjacent markets and I think DSL is a natural opportunity for us and this win with ST really winning the number one volume guy is obviously very significant. In terms of what is in the pipeline of DSP, DSL does feature very prominently.

That is good to know. My question was DSO and base sales outstanding.

Sorry. Sorry, Matt.

No problem.

Sorry. Target range, well I think the big question, Matt, is how many multiuse deals do you do because we have done one now each quarter this year and both of them have had payment terms that stretch over 12 months and that really does impact DSO and cash flow because it's included in the receivables but obviously it's not due for a couple of quarters. It's not overdo but you have to include it because you're invoicing it. So I would think that trend is going to continue and I would hopefully look to see DSO gradually improve and -- over, you know, a couple of quarters ideally if we had a reasonable proportion of multiuse somewhere around 75 days, I think, with -- with it. That is making assumptions out of -- about how much multiuse deals, how many multiuse deals you do.

Why is it that they get such nice terms for the multiuse deal?

They don't really get so much nice terms. They really are reflecting their own underlying business patterns. They're trying to match their cash outflows with their inflows, I guess, and we're fortunate in two respects. One, we're able to do it and, two, it really does lock the customer into us in terms of commitments going forward and follow-on deals so, you know, it's not that they get nice terms. I think it is the cash crunch that the industry has gone through in the last two years, this evolved during that period of time, you know, before then we would typically get at least 50% of the license deal up-front and when they're making big capital commitments like they do on multiuse, they like to spread those capital commitments.

Okay. I'll yield the floor. Thank you

Your next question comes from Gerry Hennigan from Goodbody Stockbrokers. Please go ahead.

Just in reference to the ST micro deal and multiuse licenses. You made a comment in the last quarter you're seeing a larger portion of single use license deals going through rather than the multiuse license deals. Is the ST micro more of a run off are you seeing a trend toward single use licenses?

Well, we --

Just to clarify that, we said there was a multiple use license deal this quarter. It was related to if you use ST.

I see.

ST is a restricted form of multiuse license because it's restricted to the DSL and SDHL product range, so we didn’t really count, but it is a multiple use license. I think what we said in the past over the last year I guess we saw a trend towards a single use licensing and that was really reflecting the industry condition that large capital expenditure was pretty tight with our customers and there were only -- they were choosing I guess a single use license deal to cut the capital expenditure. We're starting to see some move back to multiuse licensing as Elaine said we had our first deal in Q1, I guess two in Q2 and it is a good trend. It means that our customers are getting more locked in, they're making big expansions on our technology and committing to multiple products and higher royalties as a result.

In terms of (audio gap).

His line has disconnected. Would you like me to go on to the next person.

Yes, and we can come back to him later.

Your next question comes from Sean Murphy from Nomera.

The question I would like to hear the answer broadening out a bit. What degree should we expect royalty income to rise and I suppose one way of answering this would be in compare and contrast your revenue split with that of ARM (ph), in what ways should we think of your future revenue split if life runs well for you being different to their revenue split?

Well, okay. Sean, I'll make some of it and Chet if you would like to jump in. I think what you have seen in this quarter are two good trends in the underlying working numbers. Unit shipments of new product and I'm talking about 2.5 G and multimedia reading, multimedia and DVD's areas that we have not previously seen royalties from have started to feed through so that is significant. Units are up and also the second very significant factor is that those areas and those deals, which we've talked about in the past, are paying higher royalties so that is coming -- that is coming, feeding through. So we're now, you know, getting 8, nine cents as an average blend royalty compared with five cents historically on the 2 G product shipments. I think in terms of percentages, you know, eight to 10% of our revenues today is in royalties and, you know, I think Chet might have a view where that is probably going to go but ARM today is purchasing 33% and I think you can comment on that.

I will. I think if you look among a lot of the licensing companies not only ARM but others, royalties in the 20's to 25, even 30% are usual if it's a steady state -- what I'll say more of a mature business. We're, as you know, a DSL centric -- talking too much about DSL a DSP licensing company and DSP is in the growth curve of the application case and the volume ramp so our royalties for a while are going to lag the adoption because the number of licensers that we're acquiring, you know, are very great and they're just in the early stages of either, you know, pilot shipments or even the last stages of designing their product. So we're not going to see that in the coming quarters, you know, until we -- until we start to get more of these new products into the market. So over the next year our royalty percentages will grow but we're still at the early stages of the life cycle.

We have over 100 licensees that are signed today and Elaine has had about 24 starting to ship or shipping so we expect to see a lot more of those license deals come into production over the next quarters.

Okay, thank you.

Your next question comes from Doug Whitman from Whitman capital. Please go ahead.

Hi. If you guys could go over a little bit and perhaps it is the time of the morning, but when I listen to kind of -- I hear things like quarter off to a good start and then I also hear from Elaine things like decrease visibility. And then numbers there going out are kind of at the low end of the expectations of the revenue range. Could we get a little bit of clearance there kind of what is the environment look like and, you know, the current visibility at the start of this quarter?

Okay, the guidance takes -- I'll speak to that. I think in terms of visibility to be clear of what I said, in short -- in the short-term next quarter visibility is good. Q2 is good in terms of activity; Q3 has started well, deals are signed and a number of deals in advanced stage. Backlog, remember, I said is also up from Q2 going into Q3. So I think the short-term trends are very positive indeed. I think it's also fair to say that -- this was the same feature we had in Q1 going into Q2, visibility beyond the next quarter is poor and I think conditions are improving but they're still challenging and as a result we -- you know, we're cautious on the outlook at past Q3 purely because the visibility isn't as good and I'm -- you know, we're not saying it is negative; we're just saying if you don't have the visibility you're obviously more cautious. Chet, do you want to talk about the underlying conditions in terms of --

Sure. I mean, I think what Elaine said -- I mean, the business environment is still did so we have to, you know, we have to fight hard for the orders and capital spending is still, you know, under some pressure. But like Elaine said, we're going into the quarter, Q3 in a very strong position. The backlog is good, the pipeline is good. Asia is coming on very strong for us as I mentioned earlier. So we feel pretty good. But the -- you know, the length of the visibility is fairly short so Q4 we just -- you know, there is uncertainty and I think we're basically saying that we're going to be conservative. And until we see this continues trend, we're going to be cautious.

And so make sure I understand, the seasonality of Q3 should always be your toughest quarter in Q4 should typically be your easiest quarter? I understand you want to stay cautious but --

Well, we have given guidance for Q4 which is, you know, sequential growth in Q3 so we are reasonably optimistic that it is somewhat improved on previous quarters but we have been cautious. I think that is really the bottom line. We have heard from some of our customers and you may see some of the results, the second customer of TI announced yesterday and talked about positive trends and wireless and broadband markets and we heard from Infinite (ph) saying the market looks stronger so we're hearing from our customers.

It's Chet again. I have been on the job now 30 days and let me add, seasonality and history for the company, I don't have a good feel for it so I'm going to again be cautious.

Okay, thank you.

Your next question comes from Michael McCormick from Galodettgamam (ph).

Good morning or good afternoon everyone. Just a couple of housekeeping questions. In the royalty line item that was recorded, did you have any of the kind of catch-up payment from the end cube product line?

Hi, Mike, Elaine. I think you mean in the X-Box shipments?

Yes.

We did have royalties from the X-Box in the quarter.

Can you qualify that?

Unfortunately not. It is good royalty comparable with other quarters. They're obviously doing well and as a result the royalties from that product line are good.

Could you at least say without that you would have had sequential growth in the revenue?

But I mean if you look at the other areas I spoke about being that did have sequential growth, that 2.5 G and DVD circles, two new product areas for us were both at the dollar value of the shipments was up and the unit number -- number of units was up significantly.

And then could you possibly -- you are not expecting any X-Box royalties in Q3, I assume?

Well, you know, normally video is likely different structured deal but without getting too much into the specifics, it's based on hitting certain milestone units and, you know, as we said to you previously, it's difficult to have the visibility of when they're going to hit those. They have been doing very well over the past -- the course of the past four quarters so but normally we expect to get a royalty from them every six months or something like that.

And can you -- the operating expense guidance that you gave for Q3 and Q4, does that incorporate a new kind of Euro dollar cost structure in place, you know, because you mentioned the $200,000 of incremental cost have been put in place.

We basically assumed that the dollar would stay at its current levels and obviously it has started to strengthen against the Euro and that will obviously be a positive, but we're not factoring that in.

No, I understand. And that would be the primary -- I mean because it looks like you're seeing some creep in your operating expenses a little bit faster than I would have been assuming.

Probably not in the short-term but in terms of some of the things that Chet spoke about doing, increase focus, sale of marketing focus in Asia which is obviously beginning to though dividend in the amount of terms of business we signed in the quarter in Asia and in terms of some of the reallocations of people to different regions, we're number of just factoring in an incremental cost associated with that rather than any cost creep -- costs are actually on -- we're actually under budget in Q2.

You're anticipating to be cash flow positive in the third quarter?

Well, again, I think that and DSO is a factor of multiuse. I think we have a very good chance of being neutral and then depending on the flows, the budges, the multiuse deals, I would put a range of neutral to an outflow, really all depending on if we sign more multiuse deals.

Okay, finally, can you give us some parameters, you said you signed six deals. Can you give us, you know, the size parameters between the largest and the smallest deal?

Well, you want to probably go -- don't want to go into the specifics but multiuse deals which we signed two, one had restrictions but multiuse are a couple of million dollars and --

Would you have recorded all that revenue in the quarter even if it had a restriction in it?

Well, no, it didn't have a restriction so much. It was options to expand. It's not so much the deal -- when I say restricted multiuse I mean restricted in the sense, restrict to one product, one product line.

Would you just give us what the largest deal size in the quarter was that was recorded in revenue?

No, I think multiuse deals are obviously the largest and they're a couple of million dollars and there really wasn't any underlying change in the average deal size. We sign single use deals between half-a-million and $750,000 and multiuse are a couple of million so that is broadly where we're at.

Okay, thank you very much.

Thank you.

Your next question comes from Robert Lea from Evolution Beeson Gregory please go ahead.

Yeah, hi. I think the questions I was going to ask have already been asked but I'll try again. What percentage of overall licensing revenue did the multiuse comprise in the quarter? I know you're taking into account what you just said but you only recognized a portion of them this quarter?

Well, I think the important thing is that backlog is up and that visibility into Q3 is good as a result of those deals and other deals. You know, I don't want to be specific of what deal was recognized and in which quarter. I think the bottom line is, it's enabled us to grow backlog significantly and given us good short-term visibility into Q3. So obviously some of them recognized in the quarter and some of them have come into Q3.

Just as a rough estimate would it comprises a third of the licensing revenue?

I honestly couldn't say, Robert. You know, we're well-positioned now for Q3 and the guidance to do between nine and 10 million so, you know, a good portion of that is done and because of those deals.

Okay. And then going back to cash again, what is your guidance on break even on cash? You said you would hope to as a break-even or to be 1 million outflow in Q3 is that correct?

Yes.

You're looking to be a break-even or cash flow positive from Q3 forward?

Correct.

Another question just a housekeeping point, what was the depreciation charge in the quarter?

Just over 1 million, under 1 million. I think it was $900,000.

900,000. And then finally Chet joined the board, how are things going in terms of looking for a replacement for yourself, Elaine?

It's Chet. We're.

I was trying to word that delicately.

No delicates.

We're actively recruiting. We have a short list of qualified candidates in the U.S. and over the next 60 days or so I think, you know,.

We're going to meet and talk to a couple of people.

That's right. But we're progressing.

So in the ideal world you can resolve that issue in the third quarter is that a reasonable time frame.

At the end of?

Did you say Q3?

Yes.

Yes, I think we'll be in good shape.

Yes, yes. At the same time, you know, we're affecting some other changes as well. We're relocating some executives from Ireland to the U.S. so we'll have a full team, you know, U.S.-based team as well as Israel and Ireland based team in the next quarter is my expectation.

Can you update me on the GPS platform, where is it at the moment and how many license deals you have signed to date, how many are in the pipeline at the moment and give us some idea when you expect the first royalties to flow through.

Okay. Well, I don't have the numbers and I don't know how many to date but obviously a couple of significant deals I would say, the principal I suppose leading them would be Samsung and the department of defense and the recent past but, you, the pipeline for GPS is very good. There is five big opportunities, mainly in the cellular arena but the thing about GPS I think that has to be said is it is quite a long sales cycle. We found we have to win our customer's customer and we're in that process now so we're doing tests and trials at the operators and the semi-partners so I think it is a little slower than we would have thought and I think that is really a reflection of the industry, not necessarily the technology itself. But those discussions that I spoke about those needing partners are going very well and I would expect in Q3 and Q4 that we have, you know, at least one or two of those deals progressed to the point of signature.

And how is so legislation, particularly in the U.S., impacting on the demand for that product because I understand the 911 legislation was delayed initially. Where are we now with regards to that?

Well, yes, the legislation has been delayed but I think the manufactures are all targeting to have that capability. What Elaine said is important. GPS is a very intricate technology to get the design right and fully integrated. These are going to be hard-pressed to get the products with the original schedule. I think it has been a realistic timing relaxation to let everybody get enough time to incorporate the technology, but they're having to work pretty aggressively anyway to get there.

Yeah, okay. Thanks very much.

Once again if you would like to ask a question, please press star one on your telephone. Your next question comes from Gary Motley from B Riley & Company. Please go ahead.

Thank you, hi. Could you talk about your design win with Teleson (ph) how this goes to their interfaces and some of Telson (ph) OEM customers?

Well.

I have been at this too much. They have disclosed what products they're going to do. They're quite ambitious. They're targeting principally the Chinese market and their indications to us is they won a number of design sockets so it is really a 2004 opportunity.

Okay. And could you talk a little bit about ARM's acquisition, a portion of that allianty's position and how that may impact ParthusCeva?

This is Chet. Just from what we understand, I have not personally talked to ARM yet but we have on-going conversation with them regularly. They acquired, you know, basically a tools group and, you know, that will somehow assist them in their application acceleration around the processor. So not a programmable DSP technology per se.

They did specifically mention this will help them work with other parties in the DSP area and I would assume that would mean you?

We have quite a little bit of work on-going for ARM targeting for Q3 release, the architecture sort of lock our standards, the risk processor in a DSP processor and we're doing a lot of work around that including joint tools with ourselves and partners to support that architecture. I think yesterday's announcement, you know, as part of that overall system where they will supply a number of hardware accelerators for key technologies. They have done it in the past, particularly 3D technology, their new it can model for video. So I think this is just another step in providing a tools environment for that. It's a technology that is quite removed from programmable DSP.

Okay. And last question for Elaine. The 2.1 million restructuring and merger-related cash cost, could you walk through specifically what those were?

Well, we had a restructuring in Q4 and Q1. I mean, in Q4 as you know in November we really focused the business around DSP and GPS wireless and 802 so we had cash charges associated with that in the quarter. And we also then in Q1 as you're aware decided to focus on the U.S. market and the Asian market and move the executive team into the U.S. so it's really a combination of those two events.

Okay. And for the quarter, what was the capital exspinned true expenditure amount?

We had R&D CapEx of $600,000 which was principally in the areas of tools that we purchased instead of renting and, you know, again, there's significant good value, I guess, to be has had in the current environment, the EDA (ph) companies in terms of tools right now. So we made an investment in some tools that are critical to the role out of Cedar, with our customers in the back half of this year.

Interesting, all right. Thank you.

Your next question comes from Gerry Hennigan from Goodbody Stockbrokers. Go ahead.

Sorry I got cut off earlier on. The question was with regard to the quarter, you mentioned Elaine last time around -- normal as quarter you had before. How are they in this quarter and also in terms of activity levels in 802, what do you see there at the moment?

I think in terms of activity across the quarter it was actually very good because it was spread out at the start and the middle end of the quarter. It was not really back-end loaded. We signed significant deals well within the quarter. So I think that is obviously a good trend and I think Q3, you obviously never know but Q3 has started well. We signed one or two and we also have a couple of others advanced and it goes back I think to Q1 where we manage to get -- starting to get activity levels up so you're just working with a good populated pipeline, at different stages of the sales cycle so it really just takes out that lumpiness towards the end of the quarter and I think your second question in terms of 802, Chet, maybe you can take them in terms of how the pipeline in 802 looks like.

Sure. If -- as I mentioned earlier, you know, we're seeing a lot of interest in the 802.11 technology, in particularly the integrated on chip environment so we have a pretty good pipeline, a number of deals, you know, reasonably advanced stages as well. We're just going to continue through the quarter to grow that business.

Okay, thanks so much.

Your next question comes from David foundry from Hartland funds. Please go ahead.

Yes, good morning. This is probably an elementary question but could you kind of explain when you recognize license revenue and there is a prepaid royalty piece to it, does that get deferred from an accounting standpoint and recognized as they, I guess, Accrete their units?

Okay, David, Elaine here. It depend but usually so long as there is no restrictions and -- in terms of any drawback an once it's payable of cash within a short time frame, you can recognize it. If there is any kind of refund ability or anything like that, we don't recognize it. We wait until those obligations and post vendor specific obligations as they're called have past and then we recognize it. But typically our deals are pretty straightforward. Our customers decide that they would like to guarantee and pay an up-front proportion of the royalties because they're, you know, it differs from company to company. Some prefer that to having per unit royalties so, you know, there is -- we don't necessarily always understand what makes some companies decide to go for it. Once they then hit through the volume thresholds that are associated with that prepaid, they then start paying us per unit royalties. So from our perspective and, you know, if customers are happy and will to pay us prepaid, we take them. They guarantee for us the royalty stream and it's as simple as that.

So recognized all up-front then in those cases?

Yes, in those cases where there is no conditions and where it's all paid in cash also, up-front.

So in those cases, for example, as you mentioned before where you've deferred or provided some payment terms in the receivable to the extent that they are paying over 12 months, you would not recognize those into income?

Correct, on royalties. But just not to get confused, that's the royalty peace. On the licensing piece and again most licenses single use are paid in the quarter or two, you know, within the normal credit terms. They're between half-a-million and $750,000. Where we have expanded payment terms that I spoke about on the call are the multiuse deals which are typically multi-million dollars deals which the customer wants to spread the payment terms and in that case and again once there is no recoverability issue, north post vendor, specific obligations and no issue about recoverability, we recognize the revenue up-front if there is any concerns or any post-vendor obligations we Denver until those obligations are concluded.

Okay. And a little different vain. The third quarter you say looks reasonably good. Is that because some amount of your royalties are coming from applications that are strong in the consumer markets thus as the third quarter evolves demand for DVD's and things like that for the holiday season start shipping? Is there some seasonality in third quarter as a result of those?

I couldn't say any seasonality in particular due to the fact that it's consumer versus wireless. I mean, the products that are growing and are wanted -- in the last quarter one is a wireless 2.5 G cellular and the other is actually a consumer product. And, you know, the number of applications that are in now is growing and the end markets are also beginning to open up so I think you're beginning to see past licensing successes coming through in terms of in royalties today. That is the kind of growth driver.

Very good. Thank you.

Thank you.

If you would like to ask a question, please press star one on your telephone. Your next question comes from Robert Lea from Evolution Beeson Gregory go ahead.

Hi, again. Can you tell me what your plans are with the cash balance whether you would consider returning some of that to shareholders or distribution it in some way or is it worth keeping that for a rainy day? What are your plans on the M&A front? How are you going to use it?

Hi. So we have no plans to return it. You know, we always look for opportunities in M&A but have no particular plan so right now there is no particular use in mind for the cash, but we're keeping -- we'll keep it.

We're going to try to grow it, Robert.

And at some point would you consider paying a dividend on the -- on an on-going base?

I think as Chet said, there is always good opportunities out there to look for M&A possibilities. We have lot of areas of scope that we can consider growing our business in so I think that is really the long-term way we can flush out the value.

Can you give us some type of idea where you would see it fit at the moment or where would you look to expand your presence maybe just a broad or vague terms?

Well, it's Chet again. In broad or vague terms, there are many small, private companies who are providing niche pieces of platform property in some of the areas like wireless area, multimedia area where it could fit well with our expert DSP framework or total solution framework. That is always a possibility.

Okay, thanks very much.

Your next question comes from Don Dikens from clipper capital. Please go ahead.

Hi, just a quick follow-up. When you guys were down here in our office I think you said there were 11 deals in negotiation. I just want to know on a relative basis is that still the case, more deals, fewer deals as you've closed a couple in the past quarter?

And do you mean in terms of the underlying pipeline?

Negotiation -- I think you said -- correct me if I'm wrong -- you were in negotiation for potential deals, the number was somewhere around 11 I think woods was the number we are given.

It is strong, the pipeline and we're working on much more than those deals but -- than 11 obviously. There is --

I think those were described as maybe being later stage or something like that.

Late stage, yeah. That sound about right. That is typically, you know, last quarter we signed six deals and Q1 we signed six deals so, you know, it's not even so much the number of the deals that is important but the caliber of them. It was very important that we signed that outstanding deal and the multiuse deal and customers like ST so, you know, we have a good -- we have a good pipeline of deals in advance stage. I think which we referred to earlier and that is what gives us confidence in the short-term.

Is the size of these potential deals bigger, smaller or about the same as deals that have been signed recently?

No, it is pretty consistent with what we're working on. I don't think we have seen -- there hasn't been any negative or positive changes to the underlying I think business drivers.

Okay, thank you.

If you would like to ask a question, please press star one on your telephone.

Okay, operator. If there are no more questions we will close out the conference.

Thank you all.

Thank you all for attending. And I think we will be on the road in September, look forward to seeing some of you then.

That does conclude our conference for today. You may now disconnect and thank you for participating.