CEVA Inc (CEVA) 2004 Q2 法說會逐字稿

Thank you for holding, welcome to the CEVA second quarter 2004 conference call. I would like to remind all parties you'll be in a listen only mode until the question and answer segment of today's call. Also the call is being recorded, if you have any objections you may disconnect at this time. I would now like to turn the call over to Mr. Barry Nolan, the VP of Marketing and Corporation Communications. Thank you Mr. Nolan, you may begin.

Thank you Mia(ph), I'd love to be Barry Norman but I'm actually Barry Nolan today, head of marketing and corporate communications, that's fine. Joining us today on this call is Chet Silvestri, our president and CEO, Christine Russell, our CFO, and John Burke who's our VP of finance.

So we'll commence the call in just a moment, before that I must state that in the course of today's conference call we will be making forward looking statements and projections that involve risk and uncertainty including without limitation statements that include the words such as expect, anticipate, will, etcetera. These will include forward looking statements consider CEVA achieving it's corporate objectives and extending it's position as the number one licensor of DSP solutions to the semiconductor industry. These forward looking statements involves risks and uncertainties as well as assumptions that if they ever materialize or prove incorrect could cause the results of CEVA to differ materially from those expressed or implied by such forward looking statements and assumptions. Those statements other than statements of historical fact are statements that could be deemed forward looking statements. The risks, uncertainties and assumptions referred to above include macro economic and geopolitical trends and events, intense competition within our industry, that the market for the sale of our technology may not develop as expected, that we rely significantly on revenue derived from a limited number of licensees, the possible loss of key employees and/or senior management, the challenges of managing a geographically dispersed operation and other risks that are described from time to time in the company's Securities and Exchange Commission reports including but not limited to the annual report on form 10K for the fiscal year ended December 31st, 2003, on reports filed after the form 10K. CEVA assumes no obligation to update any forward looking statements or information which speak as of their respective dates. So with that I'll pass the call over to Chet.

Thanks to all of you for joining our call today. So let me begin by highlighting the major accomplishments in the quarter. First, we delivered solid Q2 revenue of $9.6m, driven by a strong quarter in licensing, including a major new agreement for our flagship CEVA-X DSP in the cellular handset market. Second, our unit volumes shipped by licensees showed strong growth with 23m units shipped. That's a 25% increase over our quarter one. We also continue to maintain our focus on cost management, and reported profitability of $494,000 in the quarter, or $0.03 per share.

Now to cover more specifically our Q2 licensing performance, in total we completed 6 licensing agreements in the quarter, one for our flagship CEVA-X DSP as I mentioned to the handset sector. We continue to grow our market share in the handset sector and we are the overwhelming leader among providers of IP in the handset sector. We also signed 4 additional agreements for our DSP in the wireless and portable multimedia markets. We signed another licensing agreement for our GPS solution, again in the handset sector, making a total of 6 GPS design wins in handsets to date. Today most major handset providers are planning to incorporate GPS into some of their models, and we are very well positioned to provide the technology to these providers.

Also importantly, 3 of the 6 agreements, 2 in DSP and 1 GPS were with new customers to CEVA. This demonstrates that customers continue to move toward the IP model and away from proprietary chip sets. A key component of our ongoing strategy is to offer services and system integration around CEVA IP. These services will leverage our unrivalled knowledge of DSP architecture, DSP solutions and serial communications to support our customers in the development and deployment of their wireless and multimedia products. Stay tuned in the coming quarters and we'll have more to say about our strategy. Going forward we believe that a significant proportion of our licensing agreements will include this design consulting from CEVA, adding to the revenue and profitability of the company.

Now turning the discussion to royalties, CEVA licensees continue to gain market share in the programmable DSP market. Their combined semiconductor unit shipments powered by CEVA technology increased 25% sequentially to 23m units in the quarter. Q2 shipments have doubled compared to the same quarter in 2003 last year. This demonstrates that our customers are successfully shipping IP based products and have made huge market share gains. Based on this you could conclude that our customer shipments of DSP based chips are growing faster than the overall market for DSP shipments.

For example, in the quarter we have seen the launch of new products such as DVD's from Samsung and Phillips, new phones and PDA's from Handspring, Siemens, China Ningo Bird and NTT DoCoMo all powered by CEVA technologies.

So year-to-date our licensees have shipped in excess of 42m units powered by CEVA technology, and we are confident that our forecast for over 80m CEVA powered units will be exceeded in the full year 2004.

Product breakout of these shipments is approximately 50% of the volume in handsets, 25% in consumer multimedia products and 25% in home entertainment products. Christine, our CFO, will break out in more detail our royalty performance later in the call.

Now to speak a little more about our overall industry position, as I mentioned earlier we continue to consolidate our leadership position in DSP licensing. Gartner Dataquest's latest annual survey of the IP market again confirms CEVA as the clear number one, with two thirds market share of DSP licensing. This is four times the nearest competitor and we are continuing to widen this gap.

Talk about our new products, in the quarter we extended our serial communications IP portfolio with the release of Xpert-Connect SGMII. So SGMII, a lot of letters, means serial gigabit media independent interface. And in this space we have an ultra low power and robust solution for connecting External Gigabit Ethernet PHY chips. This is in additional to our serial ATA solution that we have released, and just to note we have already signed another major license for serial ATA in quarter 3, the current quarter.

Now to say a little bit more about Q3, we will launch a number of strategic new technologies and solutions that we feel will be very significant to the growth of our DSP licensing revenues. The first of these will be our next generation portable multimedia solution. This is a complete audio and video multimedia processing platform powered by the CEVA-X core. This platform exploits our unique and patented multimedia acceleration technology which delivers very high performance at ultra low power and it is a software only solution. Visual multimedia is one of the fastest growing DSP markets and a key driver in the wireless and consumer electronics industry.

So in summary, during the first half of the year we've seen strong growth in DSP licensing, doubled our year-on-year royalty shipments and closed very strategic deals for our CEVA-X technology for some of the worlds leaders in the wireless handset industry. With that I'll hand over to Christine Russell, our CFO who will elaborate on our Q2 financials and the outlook for the remainder of the year. Christine.

Thank you Chet. For the second quarter we reported revenues of $9.6m and a profit of $494,000 or $0.03 per share, both figures in line with our guidance. Revenues for the prior quarter were $9.2m with a profit of $409,000 or $0.02 per share. Gross margins were 85%, up a point compared to gross margins in the prior quarter.

Looking at the balance sheet, we closed the quarter with $56.8m cash with $1.8m used in the quarter. The primary cash used was $1.6m for capital outlay for design tools. We've invested approximately $2m in refreshing our EVA tools in the first 2 quarters of 2004, and this should complete our tools needed for the foreseeable future. Operating cash use was $200,000. DSO's were a 101 days, this is a slight improvement from our DSO's of 105 days in the prior quarter and narrowly ahead of our 2003 average of 90 days.

Since the majority of our revenue is from licenses rather than royalties or services, we continue to see a majority of our revenue back end loaded in the quarter. We're focusing on reducing DSO's in the coming quarters through better sales linearity and being tougher on any possible extended payment terms. We will report our progress quarterly.

The revenue mix was $6.9m of licenses, $1.3m of royalties and $1.4m of services. The predominance of the licenses revenue is an indicator of future royalty payments as our licensees successfully come into production with our technology embedded in their products. Licensing revenue increased by 5% over the prior quarter and comprised 72% of the revenue mix. Royalties increased by 5% over the prior quarter reflecting a strong 23m unit ship by our licensees in the quarter. Of the 23m units shipped 5m units were shipped by licensees currently paying per unit royalties and 18m units were shipped by licensees who are burning through their prepaid license volumes. Once past these volumes these prepaid customers move to normal per unit royalty payments. We expect this to begin in early 2005.

In the second quarter our average paid royalty unit rate was $0.23 for the 5m units shipped in the quarter. For our customers shipping the 18m units in prepaid mode we estimate that the average royalty rates when they begin paying will be between $0.05 to $0.10 per unit because these customers have scaled through their price volume thresholds. Looking forward our latest survey of our customers indicates we can estimate that around 5 or 6 customers are expected to enter the royalty paying production phase over the next 4 quarters.

Services are 15% of our revenue and are comprised of support and maintenance and design services consulting. Operating expenses for the second quarter were $7.7m which is a 4% increase compared to the prior quarter, primarily reflecting increased R&D programs in audio and multimedia software.

Looking ahead we expect the third quarter to show modest growth in revenues. We continue to target profitability in the third quarter. We expect further top-line growth and profits in the fourth quarter as well. Operating expenses are expected to be between $7.7m to $8m per quarter. For the year 2004 we are targeting profitability with revenues around $40m. The ending share count for 2004 is expected to be approximately 20m shares. We will now be happy to take any questions.

Thank you. If you'd like to ask a question please press star and one on your touch tone phone. Please press star and one, if you would need to withdraw your question you can press star and two. And our first question comes from Matt Robison.

Hey, nice quarter. The royalties you talked about then are the royalties you're paid on, not the ones we can look forward to being paid on next quarter.

The royalties that we reported are the royalty payers who are not in any kind of a prepaid mode, who send us a check every quarter along with their royalty report, as what's reflected in our royalty revenues this quarter.

I guess I misspoke, I meant to say the units. Cause normally---

The units.

Because normally you receive payments on royalties for units a quarter after, right, so that---

Exactly.

So that 23m is what you got paid on, so those are what shipped last quarter or those are going to, what you're going to get paid on in the current quarter?

Yes, let me say this again cause I know it can be confusing. In the second quarter we had 18m units shipped in the prepaid mode and 5m units shipped in the payment mode.

That were shipped in the quarter.

Yes, exactly.

Shipped in Q1.

Yes, shipped in Q1, and for those that were paying, paid in Q2.

So this is Chet, I mean this is consistent with what we've always talked about. So these are units that were shipped in Q1 and we received the reports in the second quarter.

Okay, all right. So now when you, when we look at the current quarter, the third quarter do you expect to see any step functions in terms of price thresholds for your royalty paying customers such that we might see a percentage increase or a decrease that might be, result in your incurring a lumpy effect that, one way or the other?

Yes, so we don't see it right now, it's always something you try to anticipate and you can't always know for sure. But we don't see anybody near thresholds or anything dramatic changing. So it's sort of you know linear increase.

You've had some fairly high profile licensees with some products that have gotten a lot of press recognition, Sony, Ericsson, Siemens, Samsung, these types of companies. Do these companies, are they in a prepaid mode or are they contributing to the revenue this year?

They're not in a prepaid mode. The products, some of the products are not yet shipping, and/or not yet shipping in significant volumes. So we don't see a huge you know huge contribution to date from them. But they will come in in the normal course and they are not in prepaid.

Okay. And I guess that's the answer, you covered a lot of ground in your commentary, so I think I'll wait and circle back later and let somebody else ask a question.

Great. Thanks Matt.

Gary Mobley you may go ahead.

Good morning. Chet if you could to the best of your ability talk about you know what NTT is doing with one of your licensees and what they're doing with one of your competitors, TI, in their strategy for 3G? And how that split may impact you guys there with NTT?

Well it's hard to single out what one customer is doing. Today you know many handset manufacturers are buying some chips in some models. Low end models they might buy chips from a you know TI or Analog Devices or Gear or something like that. And in the 3G models or the higher end models it you know incorporate more multimedia and more system on chip technology, they look more toward the IP model. For NTT they've got a couple of models shipping with our technology in it. I can't off the top of my head I actually don't know who the semiconductor supplier is right, cause we're not shipping the chips. So it is the supplier of chips based on our IP that is shipping these chips to NTT. They're also buying chips from other companies, I'm not even sure who they buy it from overall. Local, mostly local Japanese proprietary solutions such as would come from an NEC or Toshiba or Fujitsu.

Sure.

But they're already, I think the good news here is you know even in the Japanese market they're looking at industry standard open solutions for their products.

Okay. And with respect to visibility could you talk about your dependence on [turns] business for the upcoming quarter relative to your guidance versus where it was maybe at the start of the June quarter?

We can hear you, if you're asking the question of guidance for Q3 or---

I didn't hear the question.

Gary's talking about you know based, going into Q3 as compared to going into Q2, what kind of visibility, what can we speak about the overall you know---

Visibility?

Yes.

Of our revenues?

Yes.

Yes, we have the, first of all as our royalties increase we do get a little bit more visibility because we can pretty well estimate what they're going to be. And of course from our deferred revenue we always know what our support and maintenance is going to be, and for any consulting people we know what that's going to be. So I would say that with the increase in royalties our visibility has increased and is a little bit better and as royalties continue to grow it's going to continue to improve.

And let me add Gary, on the licensing front, you know the good and the bad, I mean Q3 is a summer quarter, I mean there are vacations, Europe is you know is at a low level. So there's some challenges, but we, as I pointed out we've already concluded one major serial ATA license for the quarter, so we're, you know we're continuing to close these deals regularly through the quarter and we feel confident.

Okay. And if you can give a little bit of update on the CEVA-X roadmap?

Yes, so as you know we are currently shipping our, the first product in the CEVA-X family, the 1620. We have been under nondisclosure disclosing our product plans for additional CEVA-X products to our key licensees and key prospects. And I think in general we can say that we will start, we'll basically be launching one or more products, additional products in the CEVA-X roadmap in the next 4 quarters.

Why are you under NDAs with some of your major licensees for disclosure of your roadmap? Is it, I mean does this signal some sort of exclusivity?

It does not. The reason we're under NDA with them is we're giving a lot of details on specifications that we have not publicly announced in the marketplace. And so our announcement strategy will unfold over the next couple of quarters for our CEVA-X roadmap. It's just until then we just do it under NDA as a matter of policy.

Okay, all right, great, thanks a lot.

Okay

Harry Dickson [ph] you may go ahead with your question.

Thanks. Chet you, perhaps you could just give us a little bit more detail in terms of the product that you hope to launch in Q3 and then how the pipeline is looking for the GPS product?

Okay so I mentioned that I think the most significant product that we're going to be launching in Q3 is based all around our multimedia technology, and it will be CEVA-X driven multimedia platform that will be a particular you know competitive value and interest in the consumer multimedia market where you've got low power requirements, low cost requirements, but yet you really want to display more and more you know high performance multimedia such as incorporating you know the new H.264 standard for example in video conferencing, you know the things that we're beginning to see in cell phone feature sets. So this is going to be an important you know product category, we have some really leadership products here. And it will just further drive our market share for the CEVA-X DSP.

For GPS the pipeline is you know looks good. As I said that most of the handset manufacturers are looking to incorporate GPS in one or more of their models. The industry is really demanding this. And so we are a pretty good choice with our basically state-of-the-art IP solution that can be integrated into an SOC sort of implementation. They don't have to go buy a separate set of GPS chips to incorporate in the phone and you know you've got [form factor] problems, you've got power consumption problems and you have cost problems with that approach. And so most handset makers would really rather look at an integrated solution for these devices. In other areas for GPS you don't have that kind of criticality, so in automotive we don't have the same leverage that we do inside of our their handsets we think for GPS.

Okay, where is it [Inaudible] legislation in the US now?

It's progressing. I mean as Chet says, sorry Harry, it's Barry here, and it's you know E9 and 11 is increasing, will be sort of implemented toward the back end of next year. It is driving location design activity in cell phones. In fact we'll have the first license or if not licensees shipping CEVA powered or CEVA enabled GPS phones by the end of this year, and in some volume into next year. So the shipments are beginning to happen.

The other thing we see with these GPS enabled phones is really being driven by the operators wanting to basically sell location based services. So it's not driven by government mandate, it's really driven by economic interest that location based services are really the motivator for the operators to want handsets enabled with GPS, and I think this is a positive way to view you know why they will come into the market and why they will be a growth in the market.

Okay, thanks.

Matt Robison you may go ahead.

Some further questions, have you released your code converter yet for CEVA-X?

Yes we have.

Did that occur in the quarter or was that before?

Let's see, in the quarter.

Okay. The last call you commented about Xpert-GPS, Xpert-Media and Xpert-VoP, it sounded at that time like the VoP product was maybe a late quarter event and it sounds like Xpert-Media has kind of slipped into the current quarter. Can you give us an update on those product releases?

Yes, so we're making our official announcements of those products in this quarter, the Q3 quarter.

Including the voice over packet?

Yes. We've been pre-selling and under NDA disclosing all the details of these things as I mentioned earlier to key customers, during the second quarter.

Kind of a follow on to Gary's question about the CEVA roadmap, CEVA-X roadmap. Did you, did your comments, did you mean to say that the multiple Mac versions and multiple Word Width versions forthcoming, products are not ready for licensing now, or what's the gating factor on that, a license or a technology readiness?

Well I think they're one and the same. We are not licensing the other versions, the multiple Mac, the 32 bit Word, some of the other variations, we're licensing only the 1620 right now and focused on that. It's shipping in volume you know it's completely market ready. We won't typically license and/or be openly disclosing the future products until they're ready to be licensed, until we can actually you know accept revenue based orders for them.

Well last December you certainly announced all these products and the scalability of the capability.

Right, and we still, I mean you can still see our roadmaps published even in our ad, you know in our magazine advertisements. We've disclosed the roadmaps, we haven't disclosed availability, pricing and the detailed spec sheets for those products yet.

Have you licensed it to anyone for CEVA-X that's bought on to the product line from the 1620 up through the more complex higher performance products?

Well that's an interesting--I mean we haven't yet announced what we call any, what I'll call subscription licensees. Somebody that buy into the whole roadmap, we haven't yet announced those. As I've said earlier I think it is part of our strategy to do that.

Anything in the pipe in that regards? Any negotiations, that sort of thing, or is it still sort of [Inaudible]?

I think there's interest. If there weren't interest we'd probably change our strategy.

Oh I can appreciate that. Okay, thank you.

Okay.

As a reminder if you'd like to ask a question please press star and one on your touch tone phone. Star and one. Gary Mobley go ahead.

Hi, just a few follow ups if I may. Chet could you talk about the pricing environment for some of your lower end DSP cores like Teak and what the competitive make up may look like there right now?

So it's a good question. You know we are still actively licensing, we've had licenses in the quarter that we've discussed based on our older technology, our Teak and TeakLite products and the Xpert framework around them. Those continue to be attractive solutions in the low end product line for consumer multimedia and even very low end handsets. But you're right, there is competition there, right, from other companies. And so it isn't necessarily reflected in pricing pressure, we don't see major change in our licensing terms for those products, but we don't win every deal either down there. I mean for CEVA-X we're you know our position is there no match for it in the industry, there's nothing like it in the industry, and we are getting the major deals today.

Sure. Are you still holding firm on your pricing for CEVA-X?

Yes we are.

Okay. And is the sales cycle at all shortening from when you introduced the product late last year?

It is shortening. Yes it is.

Okay. Could you talk about you know what may be driving that? Just educating your customers or-

Yes I think it's just, I think it's overall market awareness, it's track record, you know it's the efficiency, our sales force is fully up to speed on selling it and you know and answering the customers questions. So it's just maturing in terms of it's credibility in the marketplace.

Okay, all right. Thanks a lot.

Okay.

Michael McCormick [ph] go ahead.

Hi. You gave some information breakout on the royalties that I don't believe you've done in the past which was the breakout of the number that are actually paying versus the number that were in prepaid. Can you give us what that, what those numbers were in the prior quarter?

Yes, that's nothing that we've broken out for the prior quarter, is, I think it's---

I don't think we just have the number at our fingertips.

Yes, we don't have it at our fingertips. But you know what we can do is that's something that we can talk about in the ongoing calls. What we are actually trying to do and I'm glad you noticed it Mike is we are trying to give our investors more visibility into what the royalties might look like for the future. Because this is, we are very early in the royalty revenue franchise, and this is going to become an increasing important part of our business. So we're looking for meaningful metrics and I think we've found some. Now we have not gone back and done the comparison to prior quarters and broken that out, but I think that's a good idea to do in future calls.

I'd appreciate it too. The, could you tell us how many customers were actually shipping the 23m units this quarter?

John Burke here, we've had 26 customers shipping those 23m units, same number as in the prior quarter.

Okay. And do you anticipate any new customers beginning shipping in the third quarter?

We normally may change one or two might drop out, one or two come in at low volumes, we don't see any significant change over the next quarter.

And you made comment about 5 to 6 customers you anticipate moving from prepaid to paying over the next 4 quarters. Those 5 or 6 customers do they represent what percentage of the 18m units?

Actually what I said Michael was that we anticipated 5 to 6 customers coming in to the royalty paying line over the next 4 quarters. So what we've done is we have gone back to our customers, our account managers have surveyed them, and we're looking at what their production volumes might be, when they might come into production. And so that's where we got that estimate from.

Right.

So it's a mixture, the 5 or 6 are a mixture of prepayments being used up and new customers starting production.

Oh and new customers starting production.

And new customers.

Okay. Do you anticipate, but do you anticipate any of the prepaids falling off let's say in the second half of this year?

I don't see anything right now.

Okay, thank you very much.

David Foneri [ph] go ahead.

Good morning.

Good morning

Just to follow up that question, did you say that it's a, well I guess the question, my question really is, are the new licensees typically not providing a prepaid royalty so that as they start producing chips with your technology that there will be immediate royalty payments?

Yes, we only have 8 prepaid deals that we have done out of those 26 customers. It's something we're moving away from and we've said that on the last few calls. You won't see a lot more prepaid deals. Occasionally we will do one to accommodate a customer who has a budget cycle in which he wants to capture some of the dollars in his current budget cycle. But it will, it will be purely for that reason for accommodation of the customers. Our typical deals now have royalties associated with them, paid royalties, no prepaids once the customers go into production, which is generally anywhere from you know 18 months to 24 months after we sell them a license.

Okay, that's what I thought and I just wanted to clarify that. Secondly, I believe Christine you said that as you go into 2005 you expect, I think there are 5m of the chips, 5m they were paying royalties and you expect 19m to fall into the payment, 19m to fall into the payment cycle starting in 2005?

No that's, no, that's not what we said.

No? Okay.

Yes, I know we threw out a lot of numbers there. No, what we had said was that first of all looking forward that we expected 5 or 6 customers to enter the royalty paying production phase over the next 4 quarters.

Okay.

What we also said, let me--- is that so let's step right to discussion between customers and units.

Right.

Right, so the units of the 23m units we said 5m of those units are currently, we're currently receiving royalties on and the other 18m we expect to receive royalties on by the, all of them by the end of next year.

By the end of next year.

Correct. So they will phase in over the next 6 quarters, all of them.

Okay. That's, that was a piece of information I did not understand.

Yes, and so, and the number of--- you know obviously some of our customers are, a few customers are going to make up the majority of that, there are a few customers shipping in very high volumes, some customers are shipping in low volumes and some will actually just drop off, right. And so it's important to think about the units because it's the units that we get paid on, not the number of customers.

And then also then it's fair to say that we can expect new customers to come in over the next 18 months to increase that number of unit shipments.

We can expect both the current customers to increase their unit shipments and new customers to add to it. Cause we have been seeing, as John Burke said, the current number of customers has been unchanged but our units went up 25%, so that the market share of these customers is growing, or their, just their overall unit volume.

Lastly if I could, can you give us some insight, it's probably a simple answer here, but I think you said the average royalty for the 5m units in the current quarter was $0.23 and that the average royalty for those in the prepaid mode were roughly in the area of $0.05 to $0.10. Why that discrepancy? Or difference in royalty rate?

Yes, it's an important point. So what we're not saying is that the royalty prepaids that are being used up today by these shippers of 18m units are currently being used up at a rate of $0.05 to $0.10 a unit, we're not saying that. What we're saying is that once they have used them up they will have, they will have worked their way through all of the volumes, all of the earlier volume points, starting at you know at $0.20 and going down. So when they come into the royalty paying stream they will be at the highest volume break point.

Got you.

And that will be $0.05 to $0.10.

So is it fair to say then that the $0.23 on that 5m units is typically not with prepaid accounts, rather they are accounts that signed on later? And are working through those lower volume, higher priced units and they may transition to lower volume, or lower priced units as they continue to increase their volumes?

That's right.

Okay.

And so I think you know why we're so interested in phasing away from the prepaids is we want to collect that $0.20 to $0.25 up front as they work their way through the volumes.

Great. One last question if I might, if you're paid on a trailing quarter do you have visibility today as to what your, the number of units that were shipped in Q2 that your customers will be paying you for in Q3? Or do you not get those reports into, later in the quarter?

Hi David, it's John Burke here, we would normally get customer reports up to 45 days into the quarter. So it's normally towards the end of a quarter when we would know the level of volume shipments.

So it really doesn't provide you the insight to estimate your quarter before you make your estimates throughout the quarter.

Correct, yes, we wouldn't really know until the ends of the quarter.

Very good, congratulations on a nice quarter.

Thank you.

Douglas Whitman [ph] go ahead.

Thank you, as well for the quarter guys. Could you maybe talk a little bit about as you're getting more recognition obviously as you're gaining some more significant customers here what's that doing to the sales lead times and ability to generate significant leads? Are you seeing it's getting easier or staying roughly the same?

I think we're getting more visibility, you know our pipe, our sales pipeline, the visibility is growing. So I think you know you can conclude the obvious, that it is growing, our pipeline is growing, our visibility, our time to close the deal as I said earlier is shrinking. So things are going in the right, in the right directions. And more and more as we talked about although we can't say the names as you know unfortunately.

You can, I would have no problem with that.

Very high profile customers who are moving away from the proprietary chip model.

Okay. You've announced some significant customers and one of their phones looks to be fairly hot are we going to, like it could be a fairly hot product. Are we going to continue to though have the, is there any, is there going to be quarterly royalties from most of these companies going forward or will they start paying royalty payments on monthly going forward?

Yes, only quarterly. We don't anticipate, it's not typical in the industry, [Inaudible] doesn't do it that way, no. So it's quarterly in arrears, and we don't expect any change to that policy.

Okay. And could you kind of comment, Christine you used the word modest growth, you know I apologize, I'm not quite sure if, sequentially, and then you gave a revenue, roughly revenue guidance of $40m which is a little bit above the street consensus for the calendar year. Can you give a little more color about what modest sequential growth means?

Well we had moderate or modest growth from Q1 to Q2. So I think you can take that as a metric.

Okay, and congratulations on getting the receivable days down.

Thank you.

Still some work to do.

Thank you Doug. Still a lot of work to do as Chet sits here glaring at me.

Chet would never glare at you. Okay.

Thanks.

Matt Robison go ahead.

Yes just to beat on this royalty issue a little bit more, as you move into next year and some of these existing shippers get into where they're paying royalties, what happen, how do you manage the customer if there's an upgrade opportunity there and they, the design transition, what happens typically in that kind of a scenario?

Just tell me a little more, what do you mean about an upgrade?

Well let's say if they're shipping a TeakLite and you know they want to use a 1620 or something like that? And then they, let's say they go on, they're still shipping the TeakLite and they hit revenue with, they start shipping the 1620 and it's low volume and they quit shipping the TeakLite which is in the high volume. You just kick in, it's just a complete start from scratch scenario?

Yes, so we don't accumulate unit volumes over product families.

Okay so they'll actually start with a higher unit price at that point?

Oh yes. And even if they're shipping concurrently, if they're shipping concurrently Teak units and CEVA-X units the royalty calculation is done individually on the units in those families, not mixed.

Okay, now does, do you run into scenarios where that gets to, that delays the negotiation process cause they see their economics change?

No.

Okay.

No, we haven't had any issue with that. Nor have we had any issue about giving upgrade credits, if they've already licensed Teak do they get any credit toward CEVA-X. None of that.

Okay. One other thing, your big CEVA license in the quarter, was that, that was one of your existing customers?

No.

No, new customer.

New customer, okay.

Gary Mobley go ahead.

Just sort of extrapolating out your definition of moderate growth expectations as defined from Q1 to Q2, heading into Q3 over Q2. That would imply roughly a 14% sequential ramp in Q4 to get to that $40m revenue projection you put out there. You know what would be the driver for that sort of sequential growth rate in Q4?

Well first of all the CEVA-X product is picking up speed and really getting traction in the market. And I think as other customers see that the number of fairly prestigious companies that have licensed CEVA-X I think we can expect to see those sales really gain some traction.

So I think the point Gary is that the, our average licensing dollars that we're taking in as the trend towards CEVA-X moves. You know CEVA-X is 2 to 4 times on average the licensing fee. So that trend's up. I talked about our increased emphasis on our IP based design services, so this we can expect to grow as well and get more value out of every license deal we've closed. And the royalties will continue, you know we still continue to see our licensees burning through their prepaids, and the existing guys paying, growing their unit volumes. So all 3 of these things add up.

Sure, okay. And back to the royalty issue again, if you assume that these 18m units that were prepaid you know burn out in the final you know quarter of '05 and you're sort of still running at this you know 23m unit run rate that would imply you know sort of a doubling of your royalty run rate per quarter. Is that a fair way to look at it?

I think it's a fair way to look at it.

Yes, and as we said earlier some of the prepays are going to start paying, or we expect them to, you can never predict it exactly but we expect them to start paying in the early part of 2005. And others to phase in during 2005.

Okay.

So we're feeling pretty good about the royalty revenues.

And you know DSP the other day, the DSP group the other day announced that, some delay in their video Bluetooth chip set and I would assume you guys were in, stood to collect quite a bit of royalties from that. Does that take any wind out of your sails as far as your royalty outlook goes?

It's Gary here Barry, or it's Barry here Gary. We didn't have them in our forecast, cause we didn't see the product shipping or due to ship at this point in time. So they weren't part of our forecast mix for this year.

Okay, all right. Thanks again.

Robert Catts [ph] go ahead.

Hi, nice quarter. I have a question about I guess the market share to that, the handsets that [Inaudible] are taking and where do you see that trending too over the next few years? And it sounds like that's a $0.05 to $0.10 per handset type opportunity for you, is that correct?

Yes. So the handsets that we're in, I think you know the customers that we have announced, you know companies like Sony, Ericsson, like Samsung and Siemens and others are those handset makers that are growing their market share. The good and the bad we don't, you know Nokia is not a customer but they have their own set of problems. Our licensees are growing their market share dramatically in the handset business, because they focus typically on higher feature content handsets which is really the rage these days, right. And as well our emphasis and the way our business model, the IP business model fits more the Asian scheme for manufacturing and designing and manufacturing their products. And those handset makers you know and the Chinese handset market and so forth are growing dramatically. So we think we're in the section of the handset market that's really growing very fast.

So on the high end handset you'll be getting $0.05 to $0.10, there's no way to increase your content or your---

No, you know here again $0.05 to $0.10 is what they would work their way ultimately down to as they ship many, many millions of handsets, many tens of millions of handsets. So even in the handset market we collect substantially more that up front in the early phases.

Is there a way to think about it in terms of an average royalty over X percent of market share?

Yes, I don't know.

I think you know if you look at say [Arms] who's the leader in the industry they're around $0.09 a share. I mean they're shipping about a billion chips a year, $0.09 per unit. So that's probably you know a reasonable benchmark in the industry.

Okay, thank you.

At this time there are no further questions. I'll turn the call back over to Mr. Silvestri.

Okay, thanks everyone for joining us today. We appreciate your support and we'll continue to keep you updated on our progress. Thanks very much.

This concludes the CEVA second quarter 2004 conference call. If you would like to listen to a replay of today's conference please dial for toll-free US 877-814-5621 or UK 44-20-7970-8460. Thank you.