CEVA Inc (CEVA) 2003 Q3 法說會逐字稿

Thank you for standing by. Welcome to the ParthusCeva Q3 Results Conference Call. At this time all participants are in listen-only mode. There will be a presentation followed by a Question and Answer Session, at which time if you would like to ask a question, you will need to press star, one on your telephone keypad. I must advise you that this conference is being recorded today on Tuesday October 22, 2003. I would now like to hand the conference over to your speaker today, Barry Nolan. Please go ahead Mr. Nolan.

Thank you very much operator. A very good morning and good afternoon to everybody and thank you for joining our Q3 Earnings Conference Call. Joining us today on the call is Chet Silvestri, our CEO. Chet will be reviewing business highlights of the quarter and a strategy update. Also joining us today is Christine Russell, who we welcome as CFO of the company. Christine will again [indiscernible] the financial highlights and updating outlook. Joining us for Q&A is John Burke. John is the Vice President of Finance at [indiscernible].

Before we start, I must state that various remarks that we make about the company's future expectations, plans and prospect 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 and Form 10Q filed with the SEC on August 12, 2003.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our view as of any subsequent date. Although we may elect to update forward-looking statements at some point in the further, we specifically disclaim any obligation to do so, even if our estimates change. During this call, we will present certain non-GAAP financial measures. These non-GAAP measures were not prepared in accordance with US generally accepted accounting principals but we believe will provide useful information on our operating results.

Our reconciliation of the non-GAAP financial measures and those directly comparable GAAP measures are available in the Investor Relations section of our website at www.parthusceva.com, under the heading 'Non-GAAP Financial Measures'. With that, I would like to hand the call over to Chet Silvestri.

Thank you Barry. Again, welcome to you all. So as Barry has indicated, I would like to spend the new few minutes in reviewing some of the highlights of our third quarter and to communicate some of the key changes to our strategy and investment priorities that we are undertaking.

For the quarter, in terms of the Q3 highlights, I am pleased to say that ParthusCeva has grown revenues, grown operating profitability and completed and announced licensing agreements with some of the world's leading semiconductor companies in the quarter.

We completed five licensing agreements in the quarter across the breadth of our technology and with some of the world's premiere semiconductor and technology companies. One of these agreements, for example, was for our newly launched Serial ATA Communications IP, high-speed serial IP.

We again achieved strong quarter-on-quarter growth in Royalty of nearly 40%. This growing Royalty stream is a validation of our IP licensing model and the strategy we are pursuing. As you know, our Royalty payments grow as our customers are ever more successful in achieving high volume shipment of our products, products which are powered by ParthusCeva's [core] and IP solutions.

Our goal is to further grow our position as the leading licenser of DSP. Announcement of agreements with the world's leaders in our sector is, I believe, a critical benchmark of our progress. In this quarter, we announced licensing agreements with STMicroelectronics, Renasas, Infineon and today we have announced with Via Telecom.

STMicro announced that they have licensed our TeakLite DSP Core to power their DSL chip solution. We expect ST, the No. 1 supplier of DSL to move to production volumes in the next couple of quarters.

In the quarter, we also announced that in April a joint venture between Hitachi and Mitsubishi and the third largest semiconductor company in the world have also licensed TeakLite for their 2.5G Wireless [indiscernible]. We are especially pleased as Renasas has secured some large Asia OEM design wins and are also expected to ship volume in the coming quarters.

We announced an extension of our partnership with Infineon for TeakLite DSP. Their adoption of the TeakLite Core is the latest milestone in our longstanding partnership with Infineon, as they were an early licensee of ParthusCeva's Oak Core and have integrated Oak into numerous 2G wireless and wireline communications products. TeakLite will be powering Infineon's 2.5G solution.

Today we have also announced that Via Telecom, one of Asia's leading wireless technology companies, has licensed TeakLite DSP to power their CDMA 2.5G and 3G solutions. Through this agreement, we have now entered into the important CDMA wireless segment. Our agreement with Via also extends to the area of Applications IP that build around this DSP core, enabling Via to rapidly and cost effectively get their next generation wireless and multimedia products to market.

These tier one licensees, all of whom we expect to ship in volume in the coming quarters, give us confidence and continued growth and Royalty revenues.

During the quarter we also extended our partnership with Arm, involving the development of a standard architecture specification for products integrating our company's respected risk and DSP processor cores. This partnership has been enthusiastically received by our mutual licensees, as it removes considerable complexity, cost and risk from combining Arm and ParthusCeva cores.

We estimate that over 70% of our customer deployment include [indiscernible] and this partnership builds on our earlier collaboration with them in the joint tools and development environment.

Now on the subject of our strategy, I would like to outline some of the changes in our strategy and our priority for investments. I have now been in the job for four months, and during these four months we have spent considerable time as a management team, reviewing our strategy and our business organization. From these discussions, it is clear that we have two towering strengths. One is our DSP Cores, particularly the upcoming Cedar architecture, which offers industry-leading performance, low power consumption and low price. This product roadmap combined with the IP licensing model, offer our customers an open architecture and an alternative to the DSPs that are offered by semiconductor manufacturers.

Along with that, our design services and platform IP allows us to offer a total solution to customers that want to develop system on chips for the upcoming generations of communications and digital entertainment devices. Combining these two strengths makes us unique and very competitive in this industry.

Now in order to achieve success in these areas, we will increase our R&D resources in the DSP Cores and the framework, aligned with application centric, DSP centric, IP. In this quarter we have began to reallocate our internal R&D resources towards supporting and accelerating our introduction into the marketplace of the Cedar architecture and we may further increase this investment in this product as it becomes more and more successful in the marketplace.

Also as part of this process we will continue to rationalize non-core technologies. Things such as our [Hard] IP business. In this quarter we took a restructuring charge relating to the closure of our business for [Hard] IP, for GPS prototyping. This business was non-core to our DSP centric strategy. We intend to fully end of life this business in the coming quarters.

So in summary I feel the company has a tremendous opportunity with our business model, the open IP licensing model and the architecture roadmap for our DSP Cores particularly surrounding Cedar and the related design services and applications IP that allow us to provide a total solution to the customers.

Finally, I would like to introduce two members of the Executive Management Team to you. As you know, we decided earlier in the year to transition most of our Senior Executive Management to San Jose headquarters and we are now completing this process. We announced the appointment of Derek Meyer as our VP of Strategic Marketing, located in San Jose. Derek has over 20 years experience in the IP state, many years at [MIT] and he will compliment our management team.

We have also welcome Christine Russell as our new CFO. Christine has a longstanding track record of CFO in a range of public technology companies and I am delighted that she decided to join our team. With that, I would like to hand the call over to Christine Russell, who will review our financial performance.

Thank you Chet. Before I discuss our third quarter results, I just want to say that I am delighted to be part of the ParthusCeva team. I joined because I see a company that is addressing an important market and a company that is uniquely positioned to become the industry standard of DSP. In addition, I am delighted to be working with Chet Silvestri who has an excellent reputation within the industry.

As an introduction my background includes over 20 years of technology company financial executive experience, including [indiscernible], Honeywell, Xerox, Sigma Solutions which was sold to Red Hat and most recently Persistent Software. I look forward personally to meeting with all of you in the coming weeks and months on our various US and European Roadshows. I am making this a priority to meet our investors and analysts as soon as possible.

Looking at the third quarter results. Total revenues were $9.3m, a 2% increase over the second quarter revenues of $9.1m. Licensing and Royalty revenues at $7.7m, comprised 82% of the business and other revenues at $1.6m comprised the other 18%. In a further detailed breakout of revenues, Licensing revenues were up at $6.5, up 3% from the prior quarter. Royalty revenues were $1.2m, up by 37% from the prior quarter. So other revenues totaled $1.6m, down 3% from the prior quarter. Other revenues are comprised of items such as GPS, Hard IP and support and design services.

As Chet mentioned, we booked five new licensing agreements across the range of our DSP and Platform technologies. New license agreements generally yield not only current revenue but future revenues in the form of Royalties and Services.

Royalty growth was driven by increases in the underlying unit shipment of our customers, reflecting their commercial success, which becomes our success. Unit shipments of products by our licensees for the second quarter, which we report in arrears in this quarter, in the third quarter, amounted to 14.5 units which is up 39% from the 10.4m units shipped in Q1 and equates to an average premium at Royalty rate of $0.08.

We had a total of 24 customers shipping, 16 of which paid pre-unit Royalties, which is an increase of 2 over the previous quarter. The remaining 8 licensees were still shipping from their initial Royalty pre-paid volumes.

We expect a number of new licensees to ship in pay per unit Royalties over the next number of quarters. We will continue to prudently forecast Royalty revenues in the range of the past two quarters - that is between $800,000 and $1.2m going forward.

As Chet explained earlier, we intend to exit our Hard IP business as it is not strategic to our forward business model. This consolidation enables us to continue our strategy of focusing on key technologies that will drive ParthusCeva's long-term growth and value. We took a charge in connection with this re-organization in Q3.

Revenue by geography broke out at 38% North America, 37% Europe and 26% Asia. Growth margins in the second quarter were 85%, up 3 percentage points, reflecting the better performance in Royalties and Licensing.

Operating expenses including the restructuring charge of $1.4m amounted to $9.1m, compared to $7.3m in the second quarter 2003, which had no [indiscernible] and charge. Excluding the restructuring charge, operating expenses of $7.7m were up 5% on the second quarter, reflecting the increased levels of R&D investment over the third quarter.

Net loss for Q3 was $1.1m or $0.06 per share. That is compared to net income of $32,000 for our Q2, $0.02 per share. Net income for the third quarter, excluding restructuring charge of $1.4m was $258,000.

Now turning to the balance sheet. Cash on hand at the end of the quarter was $63.5m for the third quarter, compared to $65.3m for the prior quarter. Cash used was $1.7m and of the $1.7m, $1.1m was used for the restructuring charge [remade] over the capital expenditure.

DSO's fell from 94 days to 77 days, reflecting the strong cash collection in the quarter. Headcount at quarter end was 239, down marginally from the prior quarter of 245.

Looking ahead to the fourth quarter ending December 30. We continue to see the business of our semiconductor-licensing partners strengthening, both in terms of revenue and profitability. This up tick in their business prospects leads to their initiation of new development programs, which is the key to ParthusCeva's growth.

Nevertheless, our semiconductor partners and prospects remain cautious, which manifests itself in continued long sales cycles and uncertainties regarding the execution of contracts.

As Chet mentioned we are taking the strategic decision to invest in three key forces in the new Cedar products, which we believe is a defining technology that can help leverage the growth and strategy development of ParthusCeva. This investment includes additional R&D resources and expanded sales efforts and additional strategic marketing to achieve OEM design wins for the technology. As we transition to this higher value CedarDSP architecture deal and exit more mature but lower value technologies, we will experience some transitional impact on revenues.

Consequently, we anticipate the fourth quarter 2003 revenues will be flat approximately from the third quarter with growth margins also approximately the same as the third quarter. Expenses will be up slightly between approximately $8.2m and $8.7m. As a result we expect net income for the fourth quarter to result in a net loss.

In addition to the operating expense I just mentioned, we also expect to incur restructuring expenses through the end of this year, similar to those we booked in the third quarter. These restructuring expenses will result from a further consolidation of our focus on DSP products and will position the company for a reduced cost base in 2004.

Now with that, I would like to hand the call back to Chet to summarize.

Thank you Christine. So in summary, we will be focusing the company around our core value proposition, which is DSP Core licensing and design services and platforms solutions which build on a total solution around our DSP Cores and offer our customers the ability to create state of the art, [indiscernible] System on Chip components for the modern generation of digital devices.

With that, I would like to open it up for Q&A.

We will now begin the Question and Answer Session. If you would like to ask a question, please press star, one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press star, two. Your first question comes from Doug Whitman from Whitman Capital. Please go ahead.

Thank you. Chet, could you talk a little bit about the increase in R&D spending. You are spending a little bit over 60%, 55% or 60%, currently on R&D of revenues. I am kind of a little bit surprised to see you upping that as an increased percentage. I would expect over time that you would be able to take that percentage down?

Yes Doug. You are right. Over time, we will take the percentage down. It is not up that much. I mean we had been historically spending a very large percentage of our revenue on R&D and this is part of the nature of an IP company. What we are also doing in the short-term, short-term meaning over the next several quarters, is launching a new architecture revolutionary, industry-leading, and you have to maintain an investment to build a new architecture while not eliminating the old because our existing DSP Cores and particularly the Teak family have many years of life and strong customer demand, so we have to sustain that as well as building a new one. So there is a little bit of doubling up, if you will, for a short period of time that we have to expect.

Also on the DSO drop, was that due in part to linearity and what did the backlog look like coming out of this quarter?

Yes, this is Christine here. Yes it was due, in part, to linearity, but it was also due to a very strong corrections effort.

What did the backlog look like exiting the third quarter?

I do not know that we have the exact number here. We do not typically disclose that. I would say it is basically as usual. It is typical for the backlog that we have been seeing going into the last two quarters. If that answers the question which is why we are projecting that next quarter will be about the same.

Thank you.

Your next question comes from Matt Robison from Ferris, Baker, Watts. Please go ahead.

Good afternoon and good to work with you again Christine. Welcome aboard. Congratulations on taking the DSO down in the summer quarter. How much revenue was this Hard IP? Maybe you could define that a little bit. I do not know any other company that really calls a business Hard IP. I mean we have heard about what that is in the past, and it sounds a little bit you are doing some contract engineering and manufacturing for folks for that business. Can you maybe define what it is that you are disposing of here and how much revenue that was in the June quarter?

Also, if you could repeat your expense guidance for the current quarter?

Okay, this is Chet Matt. First let me talk about the Hard IP. We have historically referred to Hard IP as a number of things. As part of our design services business, sometimes we are obligated or we agree to ship a certain amount of prototype material to our customers so that they can de-bug their applications. So that has been part of it, but the Hard IP that we are specifically referring to here in terms of it being non-core to our business and we are in the process of closing it down, is a long-standing we have had through prior acquisition of the GPS Unit, in GPS boxes for particularly timing devices. These are boxes that could be as much as 10 years old in shipment to the industry, which have had a long life cycle for base station providers or other telecommunications companies that need timing instruments.

It is really is almost an instrument to business that we have had in generating about a half a million dollars a quarter, not a highly profitable business - at best a break-even business and not strategic to us. So that in particular is what we are talking about, closing out to a process of working with our customers to implement last time buys in the quarter. We expect to get last time buys agreed with our customers this quarter and our expect is we will take whatever time it takes to ship all of that product, probably through the first quarter. They will then have to build their own inventory going forward to support their customers.

So you are talking about flat revenue in, what would normally be seasonally a pretty strong period, despite the fact that you are having some last time buys for this business you are exiting. Are those buyers going to be considered discontinued operations or are you not including those in your revenue guidance?

No, I do not think we are including it right now. We do not know because we have not really completed these discussions. We do not know.

So are you based in a situation where the Cedar is creating obsolescence and if people are waiting, you are not going to close the deals for that reason. It does not make any sense really that you would have flat revenue after the summer quarter in your continuing business, can you just give a little more color on that?

I do not think there is any color in a sense. I have not been here long enough to see any seasonality, but in the last two quarters I have not seen any seasonality. Our backlog going into the quarter has been about constant, our new deals booked in the quarter and revenue in the quarter, incremental revenue to fill the gap in the quarter has been about constant. That has been true for the last two quarters and it looks like it is the same for the next quarter. It has nothing to do with seasonality or product obsolescence or anything. It is just that the IP business in particular takes a long time to close licensing deals, they are lumpy. The Royalty growth is very slow. There is not much upside in the business short of big design services contracts and that looks to be business as usual as well for the next quarter. It does not mean any of that. We will be probably neutral on the Hard IP revenue in the quarter, because we are going to continue to ship the products to our existing customers, but we are announcing that we are discontinuing next year.

Okay. The increase in expenses, what was your guidance there Christine?

What I said was that operating expenses for the fourth quarter would be up a little bit, between approximately $8.2m and $8.7m. I said that in addition to the operating expenses I just mentioned there, that we may very well also expect to incur restructuring expenses. The restructuring expenses would probably be similar to the ones that we incurred in this quarter that we just completed in the third quarter.

You are going to pick up [OPECs] by about 10% or 15% sequentially?

Yes.

What are you doing with that money?

It is Chet again. We are having to continue to invest strongly in Cedar so that we chip it, we deliver for the customers and we have already substantial interest in the product. We deliver and meet the customer expectation. At the same time, we cannot yet dramatically cut back on the other investments, like Teak for example, because there is still a lot of demand for it. Over the coming quarter, part of the restructuring and part of the re-prioritization will be to cut back on what I will call 'duplicate expense' and get back to a normal expense run rate for our business. This level will not continue. For the next quarter, we will have to - as we make the adjustments we are not going to see the benefit yet.

I guess your revenue guidance, you do not expect to close any Cedar deals in the fourth quarter either?

That is right.

Okay, so when do we expect to see some return on this?

On Cedar?

Yes.

In 2004.

Back half, front half? Shall we plan on having flat revenue for several quarters here?

Well we have not really gotten to the point where we know what the guidance is for 2004. We will see, I believe, some Cedar revenue in the first half of 2004. It will be early [adopters] and so it will not be a huge dramatic amount. We are going to be careful that we do not over-commit either and it will be much more dramatic in the second half of next year.

Okay. I will yield the floor.

Your next question comes from Simon Schafer from Goldman Sachs. Please go ahead.

Hi guys. I was just wondering what proportion, if any in fact, of this quarter's revenue were related to the five new deals that were signed in the quarter? If you could give a little bit more color whether the majority of that has been recognized in part in revenue or whether that has yet to come? Thank you.

Hi, it is John Burke here. The current quarter deals would probably be about 20% of the revenue in the quarter.

Okay. Any more color on whether the remainder was the [indiscernible] is going to come after?

Could you just maybe clarify Simon what the question is sorry?

If you have recognized 20% of those deals that were announced this quarter, the remaining 80%, was some of that recognized in part before or is that still to come?

It is Barry here. The blend of it will be recognized over Q4, the bulk of it I would say, but the majority of it will be recognized in Q4 and the balance in Q1. Some of the Platform deals specifically Platform deals recognized over a couple of quarters.

Okay, thank you.

Your next question comes from Brendan Quinn from Davy Stockbrokers. Please go ahead.

Hello Chet. I just have another question in relation to the Cedar Platform. I am just wondering what you see the key differences between the Cedar Platform and the Teak Platform?

Maybe Chet will answer that?

I will just give you a few of the highlights. The Teak Platform is more of what I will call a traditional DSP, it is a 16-bit DSP. It has 2 MAC and it is programmed as a conventional DSP, like everything else is today. What Cedar has allowed us to, we have taken a new approach where first of all, it is both a 16 or 32-bit DSP and it is highly configurable using the same software, the same programming model and running in the same applications as either the 16 or 32-bit or with 2 MAC, 4 MAC or 8 MAC. Cedar has a very high-level of granularity in adjusting how much performance you have, how much power consumption you have and what kind of tasks you optimize if for.

For example, in the equivalent configuration to a Teak, a Cedar would represent a four to five times more performance in exactly the same configuration. It is really a breakthrough architecture. It brings into account modern microprocessor style things, like DLIW, like single instruction multiple data and allows it to be much more compiler driven. It begins to look more like a general multi-purpose microprocessor from a programmer's point of view. Much simpler to design with, but you get all of the benefits of a very high performance DSP.

Okay. I have a second question as well. What do you see happening in the DSP markets at the moment in terms of the proprietary DSP vendors and what is happening in the SIP market, has there been any change in relation to market share?

Yes, I think in market share, it will move gradually over time. What I think we can say is that today there is a choice - our business differentiators, we offer the industry standard DSP as an open architecture, meaning the license of the DSP. Where you as an OEM or as a semiconductor manufacturer can license it, configure it any way you want and go to the market, either building it in your fabs, or if you are an OEM you can go to CSMC or any other foundry and have it. You can adjust the economics. You are not buying a proprietary solution. This is in sharp contrast to the vertically integrated parts that you can get from companies like the [indiscernible]. You can buy their DSP, configured at the way they do it, at their price, built in their fab. You just have that choice to make. That is what is fundamentally different.

The other thing that is going on in the industry is very clear. I have spent most of the last two months traveling and visiting many customers, trying to understand what they are looking for out of DSP in the future. I think the answer is simple - they are looking for more software programmability. They want the ability to have their DSP be much more software driven. This is what we have addressed, I think, very effectively with our upcoming architecture that nobody else has to that level.

Okay. Just one final question. Can you give any indication of a breakdown in Royalties as to what portion came from DSP and what portion came from applications?

This is Christine. We do not have that level of detail.

The bulk of it is DSP. The first GPS Royalties came out in this quarter.

Okay, thanks.

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

Hello. Regarding the numbers in R&D resources were closing out on the Hard IP end of the business, where do you expect headcount to be towards the end of year, in terms of just spinning out the model?

Towards the end of this year or just at the end of the fourth quarter?

Yes.

No major changes we do not expect in headcount.

So it would be fairly polite to say that.

Reallocation, but no major changes.

Okay and in terms of multi use and license deals, what sort of trends are we seeing there? The last quarter or so you were saying that, your predecessor Chet was saying that he was trying to get it better on that front. What do you see this quarter? What do you see going into Q4?

I have not seen any change in the breakdown between single use and multi use licensing.

Okay.

On a numbers basis [indiscernible] single use licenses.

How many deals done in this quarter, or you announced this quarter were multi use as opposed to single use?

The five deals that we announced do you mean?

Yes.

I think one in there was a multi use, but it was in the Platform area of technology. It was a mix of DSP and Platform deals, some of them at the higher end of our Platform range. I think a couple of the Platform deals were multi use.

Okay, thanks very much.

Your next question comes from Sean Murphy from Nomura International. Please go ahead.

Hi there, welcome Christine. A question on how you are going to structure what you call your people in the core competence of design and services and Platform IP? I mean you are lumping together two different business models there in one term. I am just wondering how you are going to bite the ability of customers to want more and more time of your skilled designers and how you end up charging for that? How do you manage the conflicts of interest there between Platform IP and higher driven design services model?

We have had a longstanding business in design services. It is running fine, it is a profitable business, it is growing. We have not really seen a conflict. I mean many times our customers want us to help them do their designs with our IP, that is certainly a synergistic business. Other times, because we have a skilled set of R&D resources and we have a defined team in place. Those people are sitting in mostly Ireland, that we can deploy to do custom projects for companies. We have a General Manager that has been running that business and continues to run that business. I do not see any conflict. It is a business that has been growing for us. We recognize that it is important to our future growth to leverage our IP, but also as a growing profitable part of our company and we are going to continue to invest in it.

I suppose I am reflecting the fact that you are increasing investment to launch a new architecture and if even the proportions stayed the same of design and services to Platform IP, it probably means hiring a lot more engineers. Maybe prior to seeing the revenues part Platform IP delivered?

No, I do not think it means that. I think we have invested over time in a lot of Platform IP, take example Bluetooth. We have made those investments. We have licensed those products and we do not have to increase those investments. In fact we might be able to move those people on to other things. We do not have to add new people or not redirect existing people. We can some of both.

Okay, thank you.

To remind you, if you would like to ask a question, please press star, one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press star, two. Your next question comes from Morgan Frank from Manchester Management. Please go ahead.

Hi guys. A couple of questions. First could you give us a breakdown of what the gross margins were by product area in the quarter?

That is not information that we have detail for. I would state that the gross margins, the forecast for our gross margins going forward would be approximately what they were for Q3. In that same range, we were at 85% gross margin.

Okay -

[inaudible] design services, Royalties and licensing. If you can imagine Royalty gross margin that is approximately 100%.

Sure. I was just trying to get a sense - it came out a little higher than I would have expected based on mix and I was just trying to figure out where there had been some gains.

You probably saw a strong growth on Royalties in the quarter, which is probably the key driver in pushing up the gross margins.

The other thing, Morgan its Chet, it also says our design services business has good gross margin and very profitable.

Fair enough. Now, on the NS 4000 GPS product, where is that tracking in terms of availability this quarter and when might we expect to see revenue contribution from it?

The current generation of GPS Platform that we are on now is NS 3000. NS 4000 is scheduled for launch in the first-half of next year and it remains on target. That is built around our DSP Core.

Okay. Do you have a sense whether it will be early in the quarter or late? When might that become a revenue contributor?

NS 4000 will not be in this quarter. It is really a first-half technology, probably somewhere in or around Q2 with pre-marketing commencing in Q1.

Got it. Then I guess I want to get back to the revenue guidance for next quarter. If Hard Cores are going to be roughly flat and I suspect that Royalties are going to trend up in any event because units are going up as I understand them. Does that imply that licensing is actually going to be down sequentially?

Our assumption is Royalties are flat. We are assuming everything is flat. We do not have the evidence right now to see that those things are going to go up, that Royalty revenues are going to increase.

We are seeing a glimmer of light in the semiconductor business. We are certainly not seeing our customers reporting expansive [indiscernible] results and that is what our Royalties are based on.

Okay. TI's numbers would seem to contradict that a bit. Their wireless just grew 22% sequentially did it not?

Yes, I mean historically we are always extremely prudent on forecasting Royalties. They are just really not in our control.

We do not have a long history of it yet.

Yes, exactly. We remain very prudent on Royalties and that is the budget assumptions going into Q4.

Got it. Thanks very much.

Your next question comes from Michael McCormick from [indiscernible]. Please go ahead.

Good morning. I am a little bit confused about some guidance as well. The $500,000 or so of cost that you had in the Hard IP business is going to be reallocated and then you are going to spend about 10% to 15% sequentially more in expenses as well? Is that correct?

No, $500,000 of revenue -

You said it was roughly a breakeven business?

Yes, correct.

So you had, I do not know what the gross margin on the Hard IP business was, but there is an expense attributed to that business?

Correct.

So that expense - how long will the expenses related to Hard IP go on?

It will have to continue certainly through the quarter because we have to deliver the product that we have committed to ship to our customers in the backlog today and any additional products that come in through the last-time buy. They cannot go away this quarter.

Right.

When they do go away, part of that will be part of the restructuring that I am forecasting.

Right, so then that should be eliminated as of Q1 going forward? The $8.2m to $8.7m in expenses that you had forecasted should really be a peak expenditure?

That is a forecast strictly the for the fourth quarter. We are not looking forward beyond that, but we certainly do intend to consolidate the business further.

Okay. That leads to the next question, which Chet said as these are not normal expenses, so I would like you to characterize what you consider to be normal expenses?

Normal expenses are the sales and marketing expenses that we have. I have said previously, as you know, that we are expanding our sales effort in Asia, so we have added some expenses to that. As well as the R&D expense to support our Platform IP and DSP Core. For a while we have to continue to invest in our current cores while we are investing to launch our new CedarCore, so there is a little bit higher expense for the next couple of quarters as we do both, but then we will begin to wind down to the normal R&D investment in DSP that we have been historically spending.

Okay.

What you have to remember is that the restructuring charges that we are forecasting, we will use those to bring down the going forward expenses in 2004.

Okay. Just to be clear, in the guidance for revenues, you are currently including the revenue base in your TPS Hard IP business?

Yes.

Okay, good. It was unclear to me before.

Yes, it is hard to talk about long-term strategy and short-term operations without gaining a [indiscernible]. It will go away next year, but for the next quarter or even two it will remain.

When do you forecast or not even forecasting, but your commitment to keep a balance towards profitability? Is there anything in the Royalty stream reported this quarter? I know some of your Royalty agreements are lump Royalty agreements versus unit-oriented agreements. That would suggest that there would be a decline or some offsetting affect if the semiconductor industry was doing better?

I believe all the Royalties in the quarter were unit based Royalties.

To the previous question - if business was getting better using TI as an example, it would be logical to assume that was very conservative guidance for flat in the Royalty business?

Yes.

All right. Thank you very much.

Thanks Mike.

Your next question comes from Robert Cap from Senvest. Please go ahead.

Good morning. I have a few questions. Firstly, I would like if you could give us a little more color on the GPS and Bluetooth Platform businesses, the number of licensees pertaining to revenues? Then I will as my other questions.

You faded out a little bit at the end, but for GPS and did you say Bluetooth?

Yes.

Yes, the breakdown I do not really have. Our GPS business right now has been, the revenue from it has been confined to - we announced the deal with the Department of Defense to provide GPS Modules and design services to them. We have this legacy GPS Box [Space] business and we have not yet launched our new DSP oriented GPS business as Barry described, that will happen with the NS 20 and NS 4000 architecture next year. The GPS revenues are quite low.

All the GPS revenues now are sort of the Hard IP type?

Correct.

Okay.

And design services. So it is Hard IP and Design Services.

Design Service? On the Bluetooth side, are there are any licensees of that yet?

We have many licensees of Bluetooth as standalone Bluetooth over the last year or so, but going forward we are really positioning Bluetooth as an attachment to our DSP Core. Bluetooth IP will be sold in conjunction with the DSP Core in future.

Okay. I just want to get a better sense for the [indiscernible] markets for, I guess, Cedar versus Teak. It sounds like Cedar goes after much broader markets than Teak can go after?

Yes that is a very good question. Teak has been very successful and will continue to be successful in the cellphone market. We today have about 20% market share worldwide of all cellphones with our DSPs. If you look to the future - what is going on? Digital entertainment is very big; digital T.V. is just around the corner; digital audio, mpeg, jpeg, video are very big. This takes more horsepower and these are the markets that Cedar is going to be ideally positioned with its performance and architecture to support.

Okay.

As well, I will call it, 3G or 4G phones. So 2.5G, our current architecture is just fine. When you look forward and you do all the multimedia and audio and video conferencing, H.264, this needs more horsepower and this is where Cedar can take us into market that up until now have really been more of custom and chip than that programmable DSP. We are going to change that.

Do you foresee yourself having to support two Platforms or will Cedar will just replace Teak?

We think that they have their natural cores. Eventually Cedar will replace Teak. Will it take one year or two years? I do not know.

I am looking at the pipeline of deals that you are working on. Can you sort of give more color on that? Just the number of license agreements you are trying to close or has the number of license agreements that you are working on grown, has it been a sort of steady pace the number of people looking at license agreements and those for multi use and single use licenses?

I am sorry, I did not hear the last part?

Both for multi use and single use licenses, looking forward to the pipeline and the number of people you are engaging in discussions?

What we are really saying is it looks to be about the same. The pipeline, the number of new deals, the single use versus multi use, it all looks at least over a quarter's visibility to be the same, which is why we are forecasting a flat quarter.

Thank you.

Your next question comes from Gary Motley from B Riley & Co. Please go ahead.

Hi. Could you give a breakdown of the five licensees by whether or not they are Platform level IP or DSPs?

One was a DSP and I believe the rest were Platforms and Applications.

Okay. In the quarter, were there any one-time benefits in terms of unit value recognition from Royalty audits etc?

No, not that I am aware of, no.

Okay. Can you help us understand the amortization before exchange loss, given that we saw some strength in the US dollar relative to the Euro, but yet we had a loss in the quarter? Given the strength in the dollar, when can you expect to see the benefit to your income statement?

The charge in the quarter, I think, was something like $10,000 and if you look at the exchange rates from the end of last quarter, the end of Q2 to the end of Q3, I think the Dollar/Euro rate was approximately $1.14 which is unchanged, hence the lack of a significant movement this quarter.

Okay. In your operating expense guidance, does that include goodwill and intangible amortization?

Yes it does.

Okay thank you.

Your next question comes from Jennifer Taylor from Morris Associates. Please go ahead.

Hi, good morning. Just in an effort to sort of beat this revenue [inaudible], I am a little bit curious if maybe we are not a little too optimistic on Cedar really starting to pick up sometime in 2004 and that it is somewhat of a jump in technology? Is the situation that you actually are finding that customers are waiting for it and that is why you are making a bigger more aggressive shift to try and get that product ready and hence they are holding Teak purchases now? Is that any part of it or is it really two separate customer groups?

This is Chet. We have been disclosing Cedar for the last several quarters to key strategic targets. There is interest and we are in negotiation already with companies to license Cedar. They are different companies that Teak customers. We are able to open and expand it in new markets as a result of Cedar. 3G Phones, [indiscernible] Entertainment. It is not cannibalized in Teak, in fact it is opening new markets for us, but we have seen that interest. Yet, you are exactly right, this is why we are willing to increase our investments because we already see the demand there from companies willing to license it.

Okay. I guess, it probably is not material either way, but on the Hard IP, is that a business or a product that could have just been sold rather than ramp down in the fashion that it is? If it is a timing device there has got to be other players that makes more sense to --?

Yes, you are right but also it is small so how much energy are you really going to put into that and what do you get back for it? It is possible though.

Okay, thank you.

To remind you, if you would like to ask a question, please press star, one on your telephone keypad and wait for your name to be announced. Your next question comes from Doug Whitman from Whitman Capital. Please go ahead.

Hi, sorry to ask for clarification again, but I am a little confused. I thought on one of the things you talked about headcount being flat as one of the answers, but you are talking about operating expenses --?

Doug, we cannot hear you - could you speak up?

I am sorry, can you hear me better now?

Barely.

Let me pick up a different phone, maybe that will help - hold on a second. Is that better Chet?

Much better.

If you could talk a little bit about you said that, I believe, that headcount would be flat sequentially but in response to another question talked about operating expenses being up over 10%. I am a little bit confused following that. Is that unusual one-time charges that is causing that? Are you guys getting a fleet of cars? I am just confused how that can be.

No, it is straightforward Doug. We have added some people in headcount in the third quarter, late in the quarter that are now coming in the fourth quarter as expenses. We hired some DPs that we talked about, we have made some incremental - we have hired a few engineers for Cedar and those did not show up because they were late in the quarter, but they are showing up in Q4.

So the headcount from Q2 to Q3 went up basically and you are just maintaining that headcount [indiscernible] late in the quarter?

That is right.

Thank you.

Your next question comes from Matt Robison from Ferris, Baker, Watts. Please go ahead.

Yes, it is the Doug and Matt show, one after another here. My records indicate you talked about 19 Royalty paying licensees last time we had one of these calls. You are talking about a smaller number now. I do not know if Barry, maybe you can provide some continuity here since you were involved in this discussion last quarter as well? What is the backdrop for that? Did you have some folks that are not paying Royalties anymore because they hit volume thresholds or, I think that has happened in the past?

I think three customers dropped off and those customers, as I understand it and I am going through the figures here, were either stamping in very small volumes i.e. they were under $10,000 contributing. They were small marginal customers. We had additional customers come in and ship in good volume, but the real growth came from existing leading licensees and their two and a half, three shipments ramping considerably.

Getting back to the cycle time on the Cedar and the disparity that seems like we are all trying to better understand between the buoyancy in the semiconductor market these days and your revenue guidance - when do you expect to nail down a Cedar licensee? At one point, I think back three months ago we were talking about maybe having something happen this year. Have you have had discussion that have resulted in slippage? It almost seems like that looks like it is a bigger project than you once thought it was?

Bigger projects means overall Cedar?

Yes.

Well I think it is a big project, but in fact yes we are, as I said, in contract negotiations with multiple companies right now to license Cedar.

Okay.

Our goal would remain [indiscernible] to assign one this year.

Okay, so have you had one slip?

No.

No, we are going to sign one. It may or may not represent any revenues this year.

Okay.

But then when in the quarter? When we ship? You know what I mean.

All right. Thanks.

Your next question comes from Michael McCormick from [indiscernible]. Please go ahead.

Could you give us an update on your [Innerseal] or [indiscernible]?

Sure, so there is no update yet. There is no change in the strategy, we still have an exclusive licensing agreement originally with [Innerseal] that has been transferred to Globespan. We are in communication with Globespan about, you know, how we go forward and can we improve this deal, can we do more things together, but right now it is business as usual still.

When do you expect to conclude the negotiations?

By the end of this quarter. They took over late end of September and really could not engage with us until after that. We started that and I think by the end of the quarter we will have it finished one way or another.

Can I just give some color? One of the agreements in the quarter was for an [indiscernible] 2011 Platform for all the flavors abated to that 11 with the leading Asian player.

Thank you.

To ask a question, press star, one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press star, two. Your next question comes from Gary Motley from B Riley & Co. Please go ahead.

Hi. Given the different customer potential for Cedar, does this equate to different deal sizes for Cedar versus Teak or previous DSP Cores on the licensing side?

Our licensing fees for Cedar, we expect them to be above Teak. The average size of the deal, single use and multi use should be bigger than Teak.

Okay. You recently resigned Infineon for a newer generation, bigger DSP Core. I would assume that is going to translate into much higher average revenue per unit on the Royalty side. Looking out a couple of quarters, what could your Royalty revenue per unit be on a blended basis?

What I have said all along is that for an IP licensing company, Royalties of a percent of total revenue should be the range of 20% to 25%. If you look at the dynamics and the life cycle of products and if you look at [indiscernible], that may not be a good example, they are dropping off but Arm and other licensing companies, you see this. That is, I think, a long-term trend. How quickly we grow to that level depends on a lot factors.

Okay. Can we then just assume we get some growth similar to your [indiscernible] markets in terms of unit volumes and then we can back into a per unit Royalty rate to get to the 20% mix? Is that how you are kind of looking at it right now?

[inaudible]. We are backing into it from the volumes and the growth in the -

Yes, say we get some reasonable normal growth in your addressable markets on the unit volume side, DSL and cellphones etc and then you mentioned a goal of a 20% mix. Can we then sort of back into a per unit rate from that?

Yes we could.

Is it fair to assume that the maximum potential on a per unit basis could be somewhere north of $0.10 per unit?

The maximum potential, I believe, is really best viewed as a percentage of the selling parts. There is a certain tax that it turns out that these companies are willing to bear and it tends to be about 2% to 3%.

We are at about $0.08 now on average Gary, but as in the previous couple of quarters from $0.04, [indiscernible] have had 13% of revenues this quarter. I think in Q1 or Q2 if I am not mistaken it has been around 4%, so it is trending in the right direction both in terms of value and in terms of total revenue.

Do you have Royalty Reports in hand right now for Q4?

No as we said that process normally kicks off in the middle of the fiscal quarter.

We have talked about on this call how TI's DSP business is growing 22% sequentially. Arm yesterday on the call is forecasting 5% sequential growth. I do not understand why you guys could not be growing sequentially?

In terms of Royalties or licensing?

In terms of unit volumes.

As I said, we always remain and our policy has been just to be very prudent in terms of Royalties because we just do not have the ability. In this quarter, I think it was something like 39% in volume terms, which is an excellent performance and we just want to remain prudent in our forecasting.

Great, thanks.

There are no further questions at this time. Please continue.

With that, I would like to wrap up our conference call for today. Thank you all for joining us.

Just to conclude, Christine, myself and Chet will be visiting, Christine especially, will be visiting shareholders and analysts over the next coming weeks and months. We look forward to seeing you there.

Thank you very much.

That does conclude our conference for today. Thank you for participating. You may all disconnect.