CEVA Inc (CEVA) 2004 Q4 法說會逐字稿

Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. After the presentation we will conduct a question and answer session. To ask a question please press star, then one. Today’s conference is being recorded. If you have any objections you may disconnect at this time.

Now, I will turn the meeting over to your speakers. And first, [Michael Polyfin] [ph], please go ahead.

Thank you. And good morning for those of you who are in the U.S., and good afternoon for those of you in the U.K. Welcome to the CEVA 2004 Fourth Quarter and Yearend Conference Call. If anyone has not received a copy of the last evening’s or this morning’s press release please call our offices at 212-850-5600, and a copy will be faxed or e-mailed to you, or please visit the Company’s web site at www.ceva-dsp.com.

And currently there’s a presentation available on the web site which reviews the 2004 performance, as well as the guidance for 2005. Please visit the site and download the presentation.

As is always the case, I need to remind you of the Safe Harbor Regulations. In the course of today’s conference call Management will make forward-looking statements and projections that involve risks and uncertainties including without limitation statements that include words such as ‘expect, anticipate, will, et cetera.’ These forward-looking statements involve risks and uncertainties as well as assumptions that if ever materialize or prove incorrect could cause the results of CEVA to differ materially from those expressed or implied by such forward-looking statements [by the Company] [ph]. All 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 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 SEC reports, including but not limited to the Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and reports filed after the Form 10-K.

CEVA assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. In addition, this call is being recorded on behalf of CEVA and is copyrighted material. It cannot be recorded or rebroadcast without the Company’s express provision, and your participation today implies that as consent.

With that, I would like to turn the call over to Barry Nolan, SVP of Strategy, Marketing, and Communications. Barry.

Thank you, Mike. Good morning and good afternoon to everybody. As Mike said, there’s an extensive presentation off our web site, www.ceva.-dsp.com which goes into great detail about the year and the quarter just past. So, Chet is going to be speaking this morning briefly on the key highlights of the year and the quarter. After that, we will open up the call to questions. And joining us, obviously, is Christine Russell, our CFO, and [John Burkhardt] [ph], VP of Finance who will be familiar to those of you dialing in from Europe.

So with that, I’ll hand it over to Chet for some highlights of the quarter and the year just past.

Thank you, Barry. And thank you all for joining us here today.

So, first, I’d like to begin by briefly reviewing what our goals were for the year 2004, and then we’ll go on to discuss Q4 and the full year results in that context.

As we finished our major restructuring in 2003 we entered 2004 with the goal to be a DSP centric IP licensing company and to be profitable in every quarter. And for our DSP centric strategy our focus is on high volume applications, such as cellular handsets and consumer multimedia devices.

So, I’m pleased to say that we made substantial progress against those goals. In 2004 we had four quarters of sequential growth in revenue, profits, and unit volume shipments by our licensees. We signed 24 licensing agreements in the year, and achieved 64 percent revenue growth in the DSP portion of our business YOY. Our licensees shipped a record 106m units in the year, and we also exited the year with a substantially increased backlog YOY.

So, the outlook for 2005 is for continued strong revenue growth in DSP and increased market share, as our licensees are evermore successful with their products which incorporate our technology.

Now, on to specific Q4 highlights. We achieved $10m in quarterly revenue. Of the $10m, $6.7m was from licensing, $2m from royalties, and $1.3m in services. We also signed a record seven licenses. Of the seven, two were CEVA-X licenses, and one of these was multi-use, two were Teak licenses, two SATA licenses, and one PLL license. In addition to the seven licenses, two existing prepaid licensees extended their volume thresholds as their shipment volumes exceeded expectations.

So, with the strong licensing performance in Q4, as I mentioned earlier, we are exiting the year with a substantially increased order backlog YOY. In the quarter our net income was up 17 percent sequentially to $653,000. We were cash flow positive, generating $1.9m of cash in the quarter. Also in the quarter we had record unit shipments of 33m units, resulting in a 31 percent increase in our royalty revenue compared to Q3. And importantly, royalties accounted for 20 percent of our total revenues in the quarter, a trend we see continuing in the future.

Now, with the 33m shipped in the fourth quarter, 12.8m were shipped by customers who pay royalties on a quarterly basis. This is an increase of 45 percent in shipments by customers paying quarterly royalties. 20m chips were shipped by customers who are using up their prepaid royalties. The average royalty paid by the customers on the quarterly payment plan was 16 cents per unit for the 12.8m units shipped in the quarter.

So, looking at more Q4 metrics, our gross margins rose to 90 percent, primarily due to the increase in royalties. OpEx rose by 500k because we’ve added engineers to ramp our multimedia software products and we also opened a direct Taiwan office. These multimedia products which we launched in the quarter as the CEVA Mobile-Media solution are complete audio and video multimedia processing solutions powered by our DSP core. The solution exploits our unique and patented [media magic] [ph] acceleration technology, allowing us to achieve performance levels with a pure software solution that others can only achieve with custom, non-programmable hardware solutions.

Our fully software programmable solutions allow our customers to target a wide range of multimedia standards, resolutions, and frame rates with a single DSP core. They can also quickly enter the market supporting new standards as they emerge.

And last, but not least, our DSOs improved in the quarter to 99 days, down from 108 last quarter. We expect continued reduction in DSOs throughout 2005 as we have substantially tightened our payment terms on new deals.

Now, moving on to some full year highlights. As I said, at the beginning of the year our objective was to become more DSP centric in our licensing activities. We feel good about the progress we’ve made against this goal. For the year we’ve signed five new licenses for our flagship CEVA-X DSP and eight licenses for Teak [and CEVA] [ph] Lite. Our licensing and royalty revenue for the DSP segment of our business, as I said, rose 64 percent YOY. This more than replaced the revenue reduction from the businesses that we exited at the end of 2003.

So, to further summarize our 2004 results, as we compare with 2003 as a starting point. In 2003 we undertook a major restructuring to focus on DSP and profitability. We achieved 36.8m in revenue, 84 percent gross margins, OpEx was $42.5m, and we had a loss of $12m.

Now, for 2004 we’ve successfully made the DSP centric transition, and the comparable results are 38.5m in revenue, 87 percent gross margins, 31.3m OpEx, and positive net income of $2.1m. And we really believe that we’re well positioned to continue this progress in 2005.

So, if we look at 2005 and beyond in the way of forward-looking guidance, for 2005 we see revenues in the range of $44m to $46m, gross margins in the range of 88 percent to 90 percent, OpEx in the range of $36m to $37m, and net income in the range of $3.5m to $4.5m.

If we look longer term, and this means for us in the two-year horizon, we see the structure of the business as follows. Looking at what we did in quarter four ’04 on a percentage basis our revenue breakdown was 67 percent licensing, 20 percent royalties, and 13 percent services. And we had net income of approximately 5 percent of revenue.

For 2005 we see this mix moving to 65 percent licensees, 23 percent royalty, and 12 percent service. We also see net income in the range of 10 percent of revenue.

Now, in the 24-month timeframe we see licensing at 60 percent of revenue, royalties at 30 percent of revenue, and service at 10 percent. And we see net income increasing to around 20 to 25 percent.

So, more specifically, for quarter one, Q1 ’05, we are targeting revenues in the range of $10m to $11m. Gross margin in the range of 88 to 90 percent. OpEx in the range of $8.5m to $9m, and net income in the range of $500,000 to $750,000.

So, with that brief overview of the quarter, the year, and beyond, I’d like to open it for questions.

Operator?

[Caller instructions.]

Our first question comes from [Doug Whitland] [ph]. Please go ahead

Congratulations, and thanks on a good quarter, guys.

Thank you, Doug.

Perhaps maybe starting with the accounts receivable, could you maybe touch on, Christine, if that was just an example of incredible financial management by the Chief Financial Officer or if we had greater linearity on the quarter which made the task a little bit easier?

Doug, actually we’ve really focused very keenly on lowering the DSOs. Not only have we paid a lot of attention to our accounts receivable, a lot of credit to the Finance Department there, but we’ve also put in place programs with the sales group that affect their compensation, that give them a strong incentive to bring in the payment terms, to not give extended payment terms. And the affect of those two things has really been quite nice. And we’re targeting to continue to see those DSOs go down.

And the linearity, then I just assume is roughly the same as prior quarters?

Yes, it was.

Okay. So, the continued reduction, so Chet talked about the continued reductions, and it sounds like you did a pretty good job of closing [some of that] [ph],now, is that going to be built upon increased linearity or some change in your business?

Well, we’re always going to look to make linearity better, but, you know barring that we will continue to focus very strongly on making sure the payment terms are relatively short.

Okay. And then, also, looking at, my next question is on the first quarter you’ve, obviously, taken up guidance nicely for the year, both on revenues and profits. But could you touch a little bit on the current Street consensus, this 9.5m, and I assume that’s a number you’re comfortable with, but should we expect given the seasonality that the first quarter will be down something sequentially or flat, or?

Chet, just repeat the guidance that we gave.

Yes, so we increased -- our guidance is 10m to 11m for the quarter.

Okay. I’m sorry I had missed that. Okay. Great. Well, thank you.

Thank you, Doug.

And your next question comes from Mr. Matt Robison. Please go ahead.

[Nothing] [ph] could be more flattering than Doug on the quarter, but I’ll just tell you, I’ll just say great job getting it done.

Thanks, Matt.

Let me get the breakdown, the seven licenses, what type they are? I couldn’t write fast enough to keep up.

Oh, sorry. I got a little too excited there. We did…

Two CEVA-X, two SATA, two Teak, one PLL.

And one PLL.

Yeah.

So, two CEVA-X license, then we said one of them was multi-use. Two SATA licenses. Two Teak licenses. And one PLL.

Okay. They’re all [ATA] [ph]?

Yes.

Now, for Christine, those threshold extension deals, they go, they kind of, they flip over from royalties in effect from royalties over the license revenue, right?

The way the – yeah, the way the prepaids works is we have customers who are currently in for some kind of [been] [ph] in the prepaid mode. They pay for their royalties up front for a period of time and the number of units. And we have discouraged any new prepaids, and I think that’s evidenced by the fact that we have eight customers in the prepaid royalty mode right now, and that’s been the same number for some period of time.

And the royalty, what’s the number for royalty paying licensees now?

Let’s see…

We have 23 customers in royalty payment.

Royalty, in quarterly royalty payments mode.

So, licensees shifting now to 31, is that right?

23 total, right.

23 total.

Minus eight. So it’s 15 paying, eight prepaid.

Yes.

Is the breakdown now.

Okay. Did, on the royalty expansion you saw in the quarter, should we attribute some of that to the timing and the consumer seasonality in the September quarter, and the fact that you see it a quarter later? Or is it more just the secular affect of the way you’re pricing? And I guess what I want to get to from that, you kind of answered with your guidance but I wanted to get a little more specifics on it. The current quarter, are you going to be, are you going to see royalties go up on an absolute basis?

Current quarter meaning Q1?

March quarter, yes.

Yeah, we see royalties continuing to step-up.

Okay. So, presumably, the unit volumes will, of the number of chips that ship with your cores, will go down versus on a seasonal basis, do you think, and it’s just the pricing, and the guys kicking into paying royalties will offset that? Or is there just enough designing activity that you’ll actually see more aggregate units shipping?

I’m not sure I’m following all of the question. But I mean, let me say this, we said that the average per unit royalty we’re getting from the guys that are paying the 16 cents, so it’s a big number and it’s quite a bit higher than the prepaid guys who are in much higher volumes. So, the shift, as their – as the per unit quarterly royalty payers increase it adds up very quickly.

Yeah, I was – it was kind of a multifaceted question. And the 16 cents compares to what sequentially?

18.

Yes, sir. 18.

It went from 18 to 16?

Yes.

Okay. I get, the question, the [purpose] [ph] of the question is do you think there will be more chips shipping with your cores in them in the first quarter than there were in the fourth quarter?

So, in other words…

Do you know…

That’s hard to say because you’re right, Q1 is seasonally weak for unit shipments. I mean or Q4 let’s say, which is what Q1 is going to get reported on. It may not go up.

Right. Now, the other question, can you talk a little bit about how many of your customers are designing single chip solutions for cell phones based on your cores? And if there’s breakdown between multi Teak designs versus CEVA-X designs for that application?

So, in cellular handsets I think, you know, just roughly I see about equal penetration for CEVA-X and follow-on Teak designs. And it depends on how they’re partitioning their applications, all right? A lot of the guys are just, you know, putting a slightly more powerful Teak in the phone and preserving all their software investments. Some of them who want to move to, you know, fully integrated 3G multi-mode or combining application processing with [base stand] [ph] and moving to CEVA-X so they get, you know, they have to step forward and they’re going to have to rewrite their code anyway to do an integrated application.

It’s about equally divided right now. And as you saw, we continue to sign a lot of Teak licenses in the handset space. It’s just, if anything, I would say Teak tends to be more prevalent in Asia in the adoption, whereas the European and U.S. based chipset makers, handset chipset makers, are looking harder at CEVA-X. But I think, you know, in general it’s about the same, equal.

Well, how about I figure [from there] [ph] the number that are doing single chip cell phones? The recent TI announcement?

How many have we announced doing that?

No, just how many are doing it? I mean if you happen to know?

There’s several.

Fair enough. I’ll let somebody else ask questions. Congratulations.

Thank you.

And our next question comes from Gary Mobley. Please go ahead.

Good morning.

Hi, Gary.

I was hoping that you can give us some color on the backlog covered. You mentioned backlog was up substantially YOY, but what about sequentially, and as you head into Q1 ’05 based on the midpoint of the revenue guidance of 10.5m how does your backlog coverage shape up on a sequential basis?

Yeah, I’ll take that one. We only talk about backlog in a qualitative manner, we don’t disclose the number. It’s not a balance sheet number, it’s not a financial number. But we did feel the backlog was strong enough and it had increased enough that it was worth mentioning on the call. We’re – in fact, it’s the strongest that it has ever been in a long time.

And Gary, it’s Chet. I mean it is up quarter over quarter, as well. But I think, you know, we’re not prepared to get into a, you know, a big analysis and discussion. It’s not all that relevant for us to do that, but it is important metric that we wanted to call your attention to.

Okay. Fair enough. Christine, share count estimate for FY ’05?

We were estimating for the total year about 21m shares by the end of the year, and for the first quarter approximately 19.5m.

Okay. And if you can give us some color on the royalty unit breakdown by applications? If not, you know, by every application maybe just a base?

I actually don’t have that with me.

It hasn’t changed substantially throughout the year. Wireless is still, you know, the bulk of it, over 50 percent. The growth this year has been in consumer multimedia.

Okay. And for the net income guidance you gave for FY ’05, I’m assuming that’s a pro forma number?

You mean excluding stock option expense?

Yes.

Yes, we have not taken into account any possible expensing of stock options or probable expense of stock options.

We’re working on that.

Okay. And you closed five CEVA-X deals in ’04, and if I recall correctly there was one closed in Q4 of ’03, so six total, is that correct?

That’s correct.

Okay. All right. Great. I’ll open it back up. Thanks.

Thank you.

And our next question comes from Gerry Hennigan. Please go ahead.

Good evening. First off, in terms of your royalty revenues, and obviously one of the key things in terms of royalty up side here is the fact that you’re getting a higher price for per unit royalties, as opposed to prepaid royalties. Do you see that figure going further down from 16 over the next couple of quarters? 16 cents?

Oh, it’s going to scale down as our customers ramp-up and go through the volume thresholds. We have a volume price discount threshold, and as our customers become more mature shippers, yes, the prices are going to go down. But we see that long-term leveling off at about l0 cents per chip.

And that would compare with the average of our prepaid guide in the 5 to 8 cent range, so it’s going to stay higher. And we don’t see any dramatic shift. It’s going from 18 cents last quarter to 16 cents this quarter. And, you know, a few pennies every quarter is reasonable.

And the [paid] [ph] line, there’s 45 percent growth sequentially. That explains why that number has gone down. It went from about 9m to 13m in the quarter in units. And that would explain why, you know, it went from 18 to 16.

Okay. When do you think you’ll see the 10 cents? What’s the timeframe we’re talking about here?

It would be 18 to 24 months.

Yeah, and the [inaudible].

Yeah, I understand. And just aside from that in terms of your license revenues, obviously, it’s been, you know, fairly flat on an absolute basis, but you seem to have reasonable confidence given the guidance you have over the 2005. What’s the factors behind that?

Well, the licensing revenue is driven by design starts, whereas royalty revenue is driven by unit shipments. So, the [design] [ph] is slightly different, right? And we saw, you know, in Q3 we said there was a little bit of a Summer slowdown in design starts. We weren’t sure if that was a trend or Summer slowdown, and now I think we believe it was just a Summer slowdown and we’re back to, you know, we signed more licenses in Q4 and multi-use licenses are back. So, we see that picking up.

And that’s one of the factors for your confidence in terms of, you know, your [inaudible], is it?

That’s correct.

Okay. Just one other question, if I can? In terms of the other income line should we expect that to be fairly stable going forward from here? And what is the margin on that revenue line itself?

I’ll take that one, Gerry. Obviously, our other income line increased this quarter, we’re getting higher yields on our investments, we moved about half of our cash balances into CDs and Treasury. So, we would expect that line to continue in and around that level through 2005 as we grow our cash balances.

Just in terms of margin, that business, you know, it fluctuates, what should we model in here?

[Increment] [ph] services, or are you talking about I&E?

The services mainly?

Services, okay. The services line.

Services at [inaudible], yeah, we’ll continue at that level, should grow slightly as we add new customers.

And the…

In maintenance. Margins on that, we don’t normally break-out on the margins on that, but they’re not going to decline, we don’t think.

Okay. Thanks very much.

Thanks. And our next question comes from [Gary Suminain] [ph]. Please go ahead.

Thanks. Chet, you mentioned I think that long-term operating margin targets are in the 20 to 25 percent range. Can you tell us what kind of quarterly revenue you think you need to see in order to do that?

Yeah, so our modeling is, you know, we’re looking at sort of 12.5m per quarter, upwards, 12.5m to 16m per quarter.

Okay. And is that revenue growth driven, or I guess that operating margin growth driven primarily by growth in royalty, or is both license and royalty?

It’s both because it’s a licensing, you know, percentage will decrease as we said, you know, to around 60 percent of the total, from 67 percent today. But it’s still a big number, and it will grow, as well.

Okay. You mentioned 23, I think, customers that are currently shipping. How many license agreements are there? I guess there were 24 in 2004. How many were there in 2003? I’m trying to get a sense of how many royalty contributors we could see, you know, one or two years out from now?

Well, in terms of total license customers today we have about 120 plus.

Yeah. And in 2003 we ended the year with 165 licenses totally done, and a very nice up tick here. We ended 2004 with 190.

So, you know, you’ve been signing in the 25 per year range?

It was 25 in ’03, 24 in last year.

Okay. Good, good. And what has been the hit rate in terms of design going into production? And then production designs going into volume?

Yeah, I mean we think it’s just, you know, a generalized view. We see about, you know, half, 50 to 60 percent of the licensees getting into some sort of production. And another half again that’s getting some significant volume production.

Okay. That’s about what I’d expect. And you also mentioned there was one multi-user license? I guess out of the 190 or so licensees, how many of those are multi-use versus per use?

Yeah, I don’t – I can’t actually tell you off the top of my head.

Okay. but it sounds like most of them are per use?

Most are per use.

Which means that they’re candidates to come back and re-license?

Which they do.

Yeah, a lot of our licenses are terms licenses that they have it for three to four years, so, you know, it’s an…

And they’re going beyond that. So, most of them are per use and that’s why we get quite a high quarterly recurring license revenue from existing customers. But as Barry pointed out, even our multi-use licenses are time limited. We generally – it’s not a forever. It’s generally a number of uses over, you know, three or four years maximum.

Okay. Terrific. Thanks a lot.

And our next question comes from [Michael McCormick] [ph]. Please go ahead.

Good morning, everyone.

Good morning.

Did you say that there were two prepaid arrangements that were extended in that current quarter?

Yes.

The revenue that was recognized on those extension of prepaids, was that putting the 2m recorded for royalty?

No.

It was not?

No, it’s in the license line. It always has been.

Any time we recognize any kind of prepaid royalties it goes into the license line. That’s just the historical nature of how the Company has recorded the revenue.

Right.

Okay. Fine. Thank you. The – and with regard to that you had eight customers still in prepaid mode. Do you expect any further prepaid extension agreements to be signed in ‘05?

We don’t, but, you know, based on the projections that our customers are giving us and what we, you know, believe – but here, again, I mean in Q4 there were some extensions because they exceeded their expectations. It could happen.

It could happen?

Yeah, but it’s a lower likelihood, let’s say.

Of the royalty units that you bear today, you have roughly 40 percent now, are in revenue generating or royalty generating units. What would you expect that percentage to be by the end of ’05?

We would – we have been saying that when we do our forecasting for royalty payers and those in prepaid that by the end of 2005 we believe the prepaids will be used up. They could fool us, but right now that’s our forecast.

Terrific. When you look at the number of deals you signed and then the actual revenue that was generated from the licenses, the average deal price was the lowest it was in all of ’04. Can you kind of comment on that?

Yeah. No, you can’t – because, you know, some of it, some of it involves multiple products or deliverables, and time phasing, and becomes a combination of licensing revenue and backlog.

Is it a function of the tax rates, as well?

The tax rate?

Well, applications relative to cores?

No, I mean…

No. The biggest reason for the math that you’re seeing there is of the seven deals we did there was at least one and a little bit of another one that ended up in our backlog.

Yeah, I mean – exactly the point. I mean of the seven not all of them, 100 percent of that revenue didn’t get recognized. You have some backlog, we said it’s an increased backlog going into ’05.

Okay.

So, you can’t add – you can’t do it that way. We don’t know the backlog number.

Fine. So, that was the deals that were signed, but not necessarily recognized.

Exactly.

Not all recognized, that’s right.

I understand. There’s been some fluctuation with your tax rate, and it appears that your tax rate was, you know, 28 percent in the fourth quarter. My understanding was it really should have never been over 22. Can you give us some clarification on what your estimate is for taxes in ’05, and where it should normalize out?

I’ll take that. We would expect our tax rate to normalize out in around the low 20’s in 2005.

Low 20’s meaning what, 22 percent?

21, 22 percent.

So, can you comment why the tax rate was 23 in the third quarter and 28 in the fourth?

I mean not to delve too much into it, our tax structure is quite complex and it’s a function of where the deal is signed, in which tax jurisdiction. You know, we pay tax in Israel, in Ireland, and in the U.S., so depending on where deals fall in the quarter, the tax rate can fluctuate slightly.

Okay. And then can you make a comment about in the fourth quarter your OpEx, your operating costs, in particular R&D has been kind of absorbing the incremental operating income that you would normally get with the leverage model that you have.

So, you’re forecasting a 5m odd increase in operating costs this year, and I’m – could you comment on the quarter with incremental leverage? And then kind of why with the royalties growing as a percentage why you don’t believe you shouldn’t have maybe even higher operating leverage than what you were talking about?

Yeah, Mike. This is Chet. So, in the fourth quarter, you know, we said we were going to, you know, invest throughout 2004, and we had some final pieces of that. We had – we opened a direct office in Taiwan. We looked at it for awhile, used reps, and just the business there was so strong. So, we had to invest in that. We’ve also had to, we wanted to accelerate the time to market. We launched our Mobile-Media solution, all of our multimedia software to huge customer interest, and so we’re trying to accelerate some of the phasing of those products into the earlier part of 2005 from the later. So, we added some extra R&D engineers in multimedia software development.

So, throughout, is there up side in 2005 for more leverage? Absolutely. But at this point we’re going to be cautious, we’re going to make sure we get our product out on time. We want to continue to broaden our product portfolio, particularly the multimedia area, and particularly in the 3G handset area. So, I think that’s what we’re saying right now.

I guess my point is that even if you took the high end of your guidance it’s 20 odd percent type of revenue growth on the top line, but you’re also forecasting close to, you know, from 31m up to 36m in operating expenses, 5m on 30m, you know, it’s surprising considering you’re going to generate a lot more royalty business. Maybe you could go through where the investments are going to be?

Well, we tried to give a remedy. It could be, you know, the fact is it’s going to be at the high – is everything going to be pegged as the high for everything, or the low on revenue and high? These are ranges at this point.

Well, I’m really trying to think about where you’re thinking about spending those dollars?

Nothing new. I mean we might have to, you know, we might have to open an office in Shanghai, for example, because China is kind of coming around. And we might have to, you know, do more multimedia and 3G platform work in the year as our customers, it depends on where we see the real momentum and the traction.

Chet is absolutely right. One of our biggest investments is in R&D for multimedia engineers, with substantially adding to the skill set and headcount there. And we believe that that’s a really smart investment to make, to bring that capability in-house. But, you know, I think you can note that our, you know, our net income is going to almost double based on our guidance in 2005 and our target. So, it’s…

I wasn’t – I was just talking about incremental leverage. I understand.

Right.

Yeah.

And then the other question I have – I’m sorry, Chet, I didn’t mean to cut you off.

I mean I think, you know, are we conservative on, you know, operating expenses? Yes.

Okay. With the change in the compensation plan to the sales force on the receivables what should we be thinking about as a kind of range on DSOs?

No, we’re going to continue to…

There’s dead silence!

We’re going to continue to drive them down, Mike, and, you know, I don’t have – can’t get into a number.

It’s hard because the math the way it works, I mean we’ve got to look at the, you know, the payments we have in process, the way the new ones come in. It’s hard to say how quickly they’re going to go down. They’re going to keep going down. I think that’s what we’re…

Yeah. And since – not that I want to bring up backlog again, but since we do have a healthy backlog we do have deals that were done sometime ago, so we do have a heritage of more extended payment terms that we’re working through. When we are beyond those I think you’re going to be able to see much more dramatic improvements in DSO.

Okay. And my last question and then I’ll follow-up with you guys offline, is you’ve run about 25, 24 licenses per year for the last couple of years. What, when you gave us your guidance what’s your anticipation on the number of licenses you think you will ship in ’05?

We don’t see any dramatic change in that for ’05. So, in the 25 range again.

Okay. Thank you.

But remember, we’ve tended toward larger license deals. I mean we haven’t, we said we’ve stayed out of tight competition in China at very low prices, we don’t take that business.

So, if you had a kind of, and I know I can’t do it on a quarterly basis then, an average deal size of let’s say 1.2m which would be in that average deal size, then which would go to what level if you’re not going to have more licenses?

Well, so, you know, I think that the deal size is trending up. It’s been trending up from 1m to 1.5m and beyond. And what we said, I think in the last call, and we’ve been talking about multimedia software. So, it isn’t an additional licensing deal, right, because they license of DSP, you know, for $1m let’s say. But then they’ll also add a half a million to three-quarters of a million of multimedia software to the license. Or another half a million for our expert SOC platform. So, you take $1m DSP license and make it a $2m transaction.

Right.

That’s what’s happening.

Speaking to that, and then, I’m sorry, I did say it was my last question. But could you break out the number of core licenses you sold versus the number of, you know, additional applications that were tied to those cores?

We can do that offline. I don’t have the detail here.

Yeah, we’d have to go add it all up, I think.

That would be great. Thank you very much, guys.

Okay, Mike.

Thank you. Our next question from Mr. [Robert Katz] [ph]. Please go ahead.

Hi, guys. Nice quarter guidance. I have a question about which applications you need to add to your product portfolio?

Could you speak a little louder? It’s just a little weak here.

Sure. I have a question on which applications you need to add to your product portfolio, and how that will impact your average price per unit going forward? I mean stuff like FE3 or what other type of multimedia applications?

Yeah, it’s primarily in the video area, so we’ve, you know, we’ve introduced our first version of [MPEG4 decode] [ph] and now adding end code capability. We’re going to be launching h.264 at multiple resolutions, you know, VGA, D1, 30 frames a second going to full 60 frames a second, HD, high definition performance. So, this is where it is. And there are a lot of different, you know, there’s end coding, decoding, standard definition, high definition, all of these pieces.

And this is going into which end markets?

It’s going into the same, you know, cellular handsets, and that’s going to be at the lower resolutions obviously.

Right.

For these technologies. It’s going into consumer multimedia, and that’s kind of the midrange resolution. And it’s going into home entertainment, high definition TV, HD, DVD, HD Tivo, these kinds of things. And we’re, and we think we’re well positioned in all of those markets.

Okay. In the cellular market, do you have an MP3 for, or?

Yeah, we have, you know, today, you know, what we have is the full squeeze, you know, targeting really at the mobile world of MP3 AAC, go down an MPEG4. It’s just that a lot of the R&D programs which are pretty set for ’05 are targeting in the mobile world having that as H264, and that’s where the big push is.

Right.

And towards the backend of the year we’ll be releasing IP for boom multimedia which is even higher resolution, again, primarily in H264. But MP3 [inaudible].

Yeah, we’re all, we’re completely covered already with all the audio stuff.

Sure. And on the cellular side is that being designed into some of these application chips? Or into the base band, or both?

A lot of our design activity last year was application processing.

Yes.

Do you have any base band companies that use your cores?

Oh, yeah, tons. I mean it’s just about historical base, so we have of the top seven guys, five of them are using us in the base band.

All right.

Only Nokia and Motorola don’t.

So, how…

But half of all of our shipments are in wireless, so that’s primarily based on today.

Okay. Excellent. Thanks.

Sure.

Thank you. Our next question comes from Matt Robison. Please go ahead.

Just the tax rate for this year, Christine?

For ’05 or ’04?

’05?

Oh, for ’05? I believe John commented before that he thought it would be in the low 20 percent, maybe 20 to 22 percent.

Great. Thanks.

Thank you. Our next question comes from Gary Mobley. Please go ahead.

Yeah, a question to a previous question I had earlier. Just trying to reconcile the guidance here. I would assume the net income guidance which the midpoint is 4m for FY ’05 excludes amortization and goodwill? It is based on the midpoints of all the ranges you gave, I’m coming up with 3.4m in net income versus the midpoint of ’04, right?

Yeah, it includes amortization, so I’d have to work down through the numbers, but I mean if you worked down, taking the mid revenue 90 percent margin, and again, you know, where you had your OpEx for 36 or 37m, you should come down to a net income in around the 4m mark.

Okay. So, roughly 44.5m is the midpoint of the revenue guidance?

45m.

45m right, 44 to 46m.

Okay. 45m by 90 percent margin.

Okay.

Yeah, I mean we can take it offline.

All right. Very good. And Christine, could you go through the cash reconciliation for the quarter?

Of the 1.9m cash generated from operations we had – just a second, I’m checking it…

Yeah, I’ll take it. I mean we collected about 1.5m from operations. You know, we had CapEx of about half a million. We still have a tale from our old restructuring charges last year where we had a couple 100k going out. And then the balance was to do with our FX impact on our cash Euro balances held at the end of the year, where the dollar weakened significantly against the Euro so we have some FX gains on there. So, that’s the make-up of the move.

Great. Thanks. Thanks, again.

Thanks you, Gary.

[Caller instructions.]

Our next question comes from Sean Murphy. Please go ahead.

Good evening, Sean.

Sean Murphy, your line is open.

Hi, good morning over there in California.

Good evening, Sean.

A question, looking at the spread of the license deals during 2004, and if we look outside the sort of normal mobile and consumer areas. And there’s one or two storage names which aren’t the premiere brands anymore, I suppose, and you’ve also got a foundry deal. So to what degree should we be looking at those as kind of non-core or to what degree are they leading indicators for future diversification of the Company?

Well, the foundry program is really just to, you know, ease the costs and speed the time to market for a lot of fabless organizations. Say, for example, are using UMC or TSMC. So, we pre-hardened and pre-verify our cores in that. And they’ve actually reduced significantly their cost of entry. So, that’s really just about, you know, spreading or proliferating CEVA architecture.

Storage and SATA, I think the new slope that you’re referring to in the backend does not reflect the pedigree of all the licensees we’ve had in SATA. There’s some really top names have signed with us. As you know, SATA is an extremely high volume market from the core, over 500m units. And it’s a significant portion of our sales pipeline.

Chet, do you want to add anything?

Yeah, I think Barry has got it. I mean disk drives are, you know, a huge market of the same order of magnitude as cellular handsets. They are all going from parallel interfaces to serial interfaces for cost efficiency. And a lot of the form factor, because you see these little mini disk drives that are, you know, going into the iPODS of the world or even soon in cellular handsets, they have no option to do a parallel interface, so it must be a serial interface. So, everybody is adopting this technology now. And we have, you know, kind of a leading industry IP for this. So, that is very strategic for us in the coming year.

Okay. So just on the foundries, which foundries have licensed the products from you, again?

We’ve announced [inaudible] last year. We do quite a lot of work with TSMC in the Company, and just recently formalized an arrangement. Again, I don’t think we’ve formally announced the program yet.

Yeah, those are the three primarily.

Yes.

Okay. Thank you.

At this time, there are no further questions. I’d like to hand the call back to Management for any closing remarks.

So, I guess if there are no more questions, I’d again like to thank you all for joining us here today. And we’ll continue to keep you updated throughout the year as we progress. Thank you.

Thank you, Operator.

That does conclude today’s conference call. You may disconnect at this time.