CEVA Inc (CEVA) 2005 Q1 法說會逐字稿

Thank you for standing by. At this time all participants are in listen only mode. After the presentation we will conduct a question and answer session. [OPERATOR INSTRUCTION]. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I now would like to turn the meeting over to Mr. Peter Smith. Please go ahead sir. Thank you.

Thank you. Good morning everyone and welcome to the CEVA's 2005 first quarter conference call. If anyone has not received a copy of this morning's press release, please visit the company's website at www.ceva-dsp.com or call our office at 212-850-5600 and a copy will be faxed or e-mailed. Before management begins their formal remarks this morning, I would like to remind you that due to the extent the company statements or comments today are forward looking are privy to the risk factors and other cautionary factors in today's news release as well as the company's SEC filings. Today's conference call contains forward-looking statements that involve 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. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. The forward-looking statements in this conference call include statements concerning expected growth in sales from a number of technologies, including some recently introduced and expected to be introduced in the future, continued momentum of revenue growth and operating efficiencies, and CEVA's guidance with respect to its revenue, gross margins, total operating expenses and net income for 2005. The risks, uncertainties, and assumptions referred to above include macroeconomic and geopolitical trends and events; intense competition within our industry; the industries in which we license our technology have experienced a challenging period of slow growth; that the market for the sale of our technology may not develop as expected, especially in the case of newly introduced or planned to be introduced technologies; our ability to timely and successfully develop and introduce new technologies; that we rely significantly on revenue derived from a limited number of licensees; the possible loss of key employees and/or senior management; and the challenges of managing a geographically diversed operation and other risks that are described from time to time in the company Securities and Exchange Commission report, including but not limited to the annual report on form 10-K for the fiscal year ended December 31, 2004, and reports 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 company-owned material. It cannot be recorded or rebroadcast without the company's expressed permission and your participation implies agreement with this statement. With us this morning are Chet Silvestri, Chairman and Chief Executive Officer and Christine Russell, Chief Financial Officer with [John Burk] VP of Finance. Once Chet and Christine have conclude their formal remarks, we will be opening the floor for your questions. With that I would like to turn the call over to Chet.

Thank you. First, I would like to welcome you all. Thank you for joining CEVA's first quarter 2005 conference call. Let me start by saying that we had a solid first quarter and we are on track to achieve our 2005 target. In terms of first quarter highlights our revenue was up, DSO's were down dramatically, we had cash flow positive, and we realized significant licensing revenues across all of our product technologies. Specifically, our total Q1 revenue was $10 million compared to $9.2 million reported for the previous quarter, up approximately 9% from both the year ago quarter and the previous quarter. I want to note that of the $846,000 of deferred Q4 revenues that we recorded in the 10-K we filed in March, only $94,000 was included in Q1 revenues. The rest will be spread over each quarters. This quarter's licensing revenue totalled $7.1 million up 22% over the previous quarter and 7.5% over last year.

Our profitability has increased to $627,000 or 3 cents per share. Additionally, we generated over $700,000 of cash in the quarter. We now have over $60 million in cash on our balance sheets as of March 31, 2005. In this quarter we completed 7 new licensing agreements, including multi-use agreements for our DSP, serial ATA, and GPS 4000 technologies. During this quarter we also announced and demonstrated our latest multimedia and GPS technologies at the 3GSM show in Cannes. This is a very highly attended annual show focused on the latest trends in cellular technology, hence the name 3GSM. At the show we demonstrated our latest generation of indoor GPS technology, which we highlighted by outfitting remote control cars that we are able to guide in track while in the basement of the main conference center. We were very indoors, in the middle of a huge steel commercial building with no direct line to any GPS satellite. There was huge interest in this achievement and the demonstration booth was packed during the show. We are licensing this GPS technology today and as mentioned we signed one new licensee in the quarter.

The other important technology that we demonstrated was our upcoming H.264 multimedia solution, running on both our Teak and CEVA-X DSPs. Our technology is entirely software based and is unique in its capabilities. All of the competitive approaches require adding specialized hardware to a general purpose processor like an ARM or MIPS. This adds unnecessary cost and complexity which is a critical issue to address the low power, low cost constraints in cellular handsets and other battery operated consumer products. For these reasons, we received very strong interest among perspective licensees to evaluate this product. This software-based multimedia solution will ship in the second half of this year and will help drive our targeted second half growth.

Aside from the 3GSM show we also announced and began shipping our TeakLite-II DSP. This is a software compatible enhancement to our hugely popular TeakLite processor, and offers enhanced performance, functionality, and speed, again while maintaining backward software compatibility. As many of you may know TeakLite is our most licensed DSP core, and is currently shipping in its high volume applications, like 2G and 2.5G baseband cellular, portable audio players, camcorders, disk-drive controllers, and DSL chips. We see solid interest from our existing TeakLite customer base to license this products upgrade. In fact, we have shifted the product to our first upgrade licensee in the quarter. So, again with the solid first quarter our growing product portfolio and solid licensing outlook we remain on track to achieve our 2005 target. With that I will hand over to Christine Russell who will discuss more of our financials.

Thank you Chet. For the first quarter of 2005, we reported revenue of $10 million and a profit of $627,000 or 3 cents per share. Both figures were within our previous guidance. As Chet mentioned, I want to note that of the deferred revenue we recorded in the 10-K that we filed in March, only $94,000 was included in this number. Revenues for the prior quarter was $9.2 million with a profit of $187,000 or a penny per share. Gross margins were 87%, a decrease of 2 points compared to gross margins in the prior quarter of 81%. This is primarily due to cost of sales associated with customization work for our serial ATA product.

Of the $10 million total revenue, $7.1 million was licenses, $1.8 million was royalties, and $1.2 million was services. There were no new prepaid royalty extension in the $7.1 million licensing revenue this quarter, which is consistent with our outlook that prepaid royalty revenues as a percent of total revenues would decline in 2005 over 2004. Licensing revenues was up 22% over the prior quarter and comprised 70% of total first quarter revenues. Our first quarter royalty revenue was $1.8 million a decrease of 13% from the 2 million we reported last quarter. Shipped units by single licensees were approximately $30 million in the first quarter compared to $33 million shipped in the previous quarter. A drop in both royalty revenues and customer unit shipments in the first quarter compared to the fourth quarter reflects the seasonality of our consumer-oriented licensees. We recognized the royalty revenue quarterly in arrears only after we received confirmation from our customers of their end-product shipments. Therefore the royalty revenue we are reporting in this quarter reflects our customer shipments in the fourth quarter. Now traditionally our customers shipping the third quarter to meet holiday demand.

These shipments were reflected in our highest ever royalty revenue in the fourth quarter. The 13% decrease in first quarter royalty revenue compared to a similar 17% sequential decrease from the fourth quarter 2003 to first quarter 2004 and we continue to forecast increased royalty revenues year over year. If we compare on an annual basis, our first quarter royalty revenue is up 49% over the quarter a year ago and unit shipments numbers are 55% from the 19 million units shipped in the first quarter of 2004 reflecting the growing market adoption at CEVA Technology and customer success using our technology. We expect to see continued customer adoption throughout the rest of the 2005, as we upgrade next band of product portfolio. Of the total 30 million units shipped 12.5 million units were attributable to licensed fees currently paying through unit royalties and over 17 million units were shipped, the licensees were burning through their prepay license volumes. This compared to the 33 million units shipped in the fourth quarter of 2004, of which 12.8 million were paid and 20 million were prepaid. In the first quarter of 2005, our average paid royalty unit rate was just over 14 cents for the 12.5 million units shipped in the quarter. In the first quarter of 2005, we have a total of 22 shipping customers, 15 were paying per unit and 17 were in the prepaid status. Services are 12% of our revenue and are comprised of supporting maintenance and some design services consulting as well. Operating expenses for the first quarter were $8.3 million which is a 3% increase compared to the prior quarter, primarily reflecting the planned increase in hiring of multimedia and software engineers in the quarter. We continue to actively monitor all our operating cost to ensure to we remain the bottom line in that income.

Other income increased over 10% to $335,000 reflecting our higher yield achieved and our increasing cash balances. First quarter net income increased to $627,000 or 3 cents per share, compared with fourth quarter of 2004 net income of $187,000 or a penny per share. At March 31, 2005 cash was $60.3 million up $700,000 from the prior quarter. This is our third successive quarter of positive cash generation. As highlighted earlier DSOs have decreased significantly over the last two quarters from 108 days to 82 days. This reduction is due to our focus on sales and operational discipline and we plan to maintain this momentum going forward.

Looking ahead we expect total revenue for the second quarter to be between $10 million and $11 million. Gross margins are expected to stay in the 87% to 90% range with operating expenses expected to be approximately $8.5 million. We continue to target profitability for the second quarter. For the full year 2005, we maintain our full year guidance and our targeting revenues in the range of $44 million to $46 million . Gross margins are expected to be 88% to 90% operating extents is targeted in the range of $35 million to $37 million and net income in the range of $3.5 million to $4.5 million. As Chet mentioned, our new product announcements are expected to drive second half license revenue growth. The ending share count for 2005 is expected to be approximately 20 million shares. We will now be happy to take any questions.

+++q and a.

[OPERATOR INSTRUCTIONS] The first question comes from Mr. Matthew Robinson of Ferris, Baker, and Watts Inc. Please go ahead.

First I got several questions, where there any royalty buy-off in the quarter?

No there were no royalty preceding the prepaid.

No, the ones the people are rather than clicking open the royalties, they decide to re-up the license and give you a license deal.

There were none in the quarter.

What was the comparable royalty unit prices for fourth quarter and then in 1Q of 2004?

You mean, the unit shipment, the average unit price?

Yes is very comparable to 12.5 cents you quoted for this quarter.

12.5 million units shipped in the quarter by customers paying per unit royalty or average cents per unit apparently just over 14 cents per units this quarter compared to 15 cents last quarter, the slight decline reflecting some of the customers moving through volume thresholds.

What was it last year?

In Q1 of last year, I think it was something like 6 cents, there was one customer, shipping very high volumes that was at a very low rate of 5 cents per unit.

This might mean my records are wrong, but I have 23 shipping customers in the fourth quarter you said 22 just now, what happened to the other one?

One customer has been prepaid mode did not report for any shipments this quarter so we did not take him into account.

Great job on the DSO, do not let me forget to say that, but was that function of linearity or terms, or could you just comment on linearity and how it might be a little different than recent periods.

I think the linearity is not too much of function as linearity is the function if we are really focused on tightening up payment terms, really putting some disciplines in to the sales support process in terms of that commanding the better payment terms, so I think that is really what it is.

One of the companies in your broader peer group talked about royalty seasonality that is seen in the past for the second quarter, where they do not see a lot of shipments from their customers during the March quarter, so do you expect that or if in fact you anticipate a sequential increase in royalties per the June quarter?

We have not yet started seeing our customers report in the shipment unit yet, there has been only 30 to 45 days after the quarter ends. I believe we would expect similar volume shipments in Q2 as to Q1 and I am probably starting to reconnect growth in Q3 and Q4.

What is going to drive the top line then in the current quarter given that the royalties would be flattish, what products do you think again will be particularly popular?

In the current quarter meaning Q2, it looks the like we started seeing the same strength that we saw in Q1 across all the product technologies so serial SATA is very hot these days, everybody is moving from parallel interface to serial in the disk drive and our consumer products. GPS is very hot and DSP is strong including TeakLite, you know we had a lot of TeakLite customers shipping very high volumes, they can use the extra megahertz and the extra performance without any change in the software to achieve in a cellular handset for example, better resolution for cameras, better audio, better everything, so we see that it is the continued trend from the first quarter to the second quarter, then in the second half things would change a little more, where we introduced in our wiz-bang multimedia technology based on CEVA-X in particular to see that as a big drive in the second half.

[OPERATOR INSTRUCTIONS] Next question comes from Gary Mobley from B. Riley & Company.

Chet, you were very quick to point out last quarter, when your backlog was in a pretty high level. Could you give us an update on what it was at the end of the first quarter?

Basically flat. Backlog is good.

The [inaudible] $46,000 pulled out in Q4. You gave [inaudible] in Q1, thank you for that, but could you give us a little more color on when that contract will be recognized?

We reported $94,000 in the first quarter and the accounting revenue recognition treatment of the $846,000 dollars is that we will be recognizing the revenue as we use the engineering services that the same customer and service provider delivered to us. So, the revenue will be recognized ratably. My best estimate, since the engineering services are contracted, goes into the first 2 quarters of 2006, is we probably will not recognize anymore than $500,000 of it, somewhere in that range during 2005 and then the rest during the first 2 quarters of 2006.

[OPERATOR INSTRUCTIONS] Gary Mobley, just a moment sir. I will go back to the main room, in the meantime we do have a question coming from Mr. Sean Murphy from Nomura Securities - London. I will put this transmit through and then put the other gentleman. Mr. Sean Murphy please go ahead.

I wonder if you could comment on any potential extra dilution from the share options, I know the accounting treatments are likely to change over there, what is the latest play on share options.

Right now the SEC has delayed the extension of stock options until next year, so right now like many other companies we are evaluating the treatment, the accounting treatment that we are going to give our stock options. We are evaluating everything from possibly shortening the life of the stock options, going forward to looking at some of our way out of the money stock options and possibly doing something with them, all with an eye to reducing dramatically the amount of stock option extents that we will be reporting in 2006. We realize that our investors are going to be sensitive to this, and so we are consulting with some experts on this to drive down the amount of stock option extents that will be realized in 2006.

Okay.

Additional questions?

Next question is going to go from Gary Mobley. Mr. Mobley please go ahead.

Chet could you give us a little more color on what is going to be the catalyst with the second half growth on both the licensee and royalty front in the second half.

At this point, it looks like there is going to be very strong momentum in all 3 categories of our product technology going for it throughout the year, more and more companies are trying to integrate this kind of functionality into their chip solution. The technologies that I am specifically referring to are GPS, serial ATA, and/or DSP, particularly our CEVA-X, in most particularly multimedia applications. So, with the multimedia platforms that we are introducing around the CEVA-X, this will make it straightforward as the total solution for companies to use this technology, but the GPS and serial ATA are already you know well recognized as leadership technologies. We are just seeing every day more and more prospects coming to us in the sales organization, the pipeline just continues to grow for those products.

Okay. Any CEVA-X deals closed in the first quarter?

We did not have a CEVA-X deal closed in the first quarter with Teak and TeakLite deals.

The next question is coming from the line of Michael McCormack. Please go ahead sir.

Could you address your goals and objectives for operating margin, and your ability to leverage sales growth into [inaudible] operating margin.

The way that we are going to the really leverage our operating margin is by holding our operating expenses pretty flat. We have recently had some substantial additions to our R&D pool particularly multimedia engineers, the skill sets that we need to attack the really hot multimedia market, but the remainder of the expenses other than some sales representative ads that we will be doing in the variable commission should stay very flat to a very cost conscious in our operation expenditure. As far as cost of sales typically, as you know the royalties are 100% gross margins, licensees are typically about 95% gross margin or better, and services are about 50% gross margin. As I mentioned in my remarks, the serial ATA products when we do sell a number of those, they do require some customization, so that does decrement the gross margin slightly, but I think we can look forward to gross margins of about 90% and with [inaudible] held relatively flat, that should bring to the bottom line any revenue increases in the top line.

The operating expense guidance for the second quarter I think is up $300,000 sequentially, but the top line guidance is flat up a million, so that would be if you are at the high end of the range, that is 70% incremental margin on that number, but at the lower end of the range you would have negative margin. The operating expense has not been flat, it has been growing, particularly in the R&D side. Is there any type of target incremental margin you guys are thinking about?

Well, first of all we give a pretty wide range in our forecast to the second quarter, we said revenues would be between $10 and $11 million, gross margins of 87% to 90%. If the revenue mix in the second quarter tends more towards the DSP Cores and away from the SATA, maybe some CEVA-X, we probably will be tending to hit the 90% gross margin. Operating expenses I said would be about $8.5 million, it could be a little lower. I really do not expect it to be a lot higher. So, that actually would yield a profitability that is sequentially higher than the first quarter.

I will add to that Mike that it looks like, based on the pipeline, the demand we are seeing for Q2 that there is going to be a swing towards more DSP yields being done in the quarter, which will drive the gross margins up towards the maximum.

Thank you.

Thank you, the next question is coming from the line of Mr. [Charles Canning] from David Stockbrokers. Please go ahead.

A quick question on the royalty income in Q1 in terms of customer concentration, the 15 customers that run the per unit, could you give us a sense for whether 4-5 of those customers made up the majority of the income or was there a good spread and secondly what was the period in which those royalty income was sourced from, i.e., those licenses sold, are we going back towards 2002.

John Burk here. Just headed to address your second point first, I mean those are current customers paying for unit royalty they are coming in from licenses that we would have assigned probably 3 years ago or more, so they are going back quite a way and you would normally expect that they take 24 to 36 months or even longer in some cases before our customers come into significant units of volume shipments. Just on the first one concentration it is very similar to where it was last quarter where about 5 of those of customers account for approximately 70% of that revenue in the quarter, so no huge change quarter over quarter.

Quick question just from the operation environment, are there any significant change from where it was at the end of the year?

No. It looks the same, we saw a good demand in the fourth quarter. We saw a good demand in the first quarter, and we kind of see the same in the second quarter.

The next question is coming from the line of Matthew Robinson. Please go ahead sir.

Just going down a little bit more, can you Chet talk a little bit about some end-market catalyst and weigh back into what is going to drive these licenses that you talk about for SATA, GPS, and CEVA-X, also particularly elaborate on what has transformed the GPS because you guys have been have the GPS technology to license for a number of years now. Also curious to know what is it about serial ATA that hits your costs of goods sold in terms of why is that more involving more customer-specific developments than other technologies that you license. Finally I would like to get some input on whether you think these licenses particularly in the back half where you are talking about the H.264 multimedia, do you think that is going to be primarily [inaudible] installed base or if it is going to require planning up new customers.

Okay. A lot of questions in that. The first one in the demand space, the strongest demand in the frenzy continues to appear in the cellular handsets base. The companies are scrambling to produce the right kind of chips, the right kind of functionality for the ever increasing capabilities of these handsets, and so that is the biggest driver. Second to that, I mean the consumer multimedia, video, audio, and battery-operated devices are there, but the handsets are really driving a huge amount of demand. Now, what kind of thing is the interest level for, certainly from the DSP oriented for communication and multimedia, but GPS location based services are also getting very hot and very strong attention right now. And what we have with our current GPS 4000, which is different than the past in 1000 or the 3000 if you will is more or less stands low cost, more highly integrated solutions certainly, but also a standalone solution in the sense that the GPS 3000 was really a unique kind of capability that only worked in CDMA handsets, to be specific in a general sense. That is all you could need, an external timing source was not integrated enough and it only worked in CDMA handsets, so the market potential was very limited. The 4000 is much more highly integrated meaning much lower cost. It is easy to design into anything, GSM handsets or handheld devices or automobiles or anything. So, there is a just a lot more people willing to and capable of using this GPS in their products, and that is going to continue in the future. Because I can tell you on a roadmap we have the GPS 5000 that we have not formally announced yet, but this is what we refer to as software only GPS, which will require virtually no hardware and this will be another kind of like the approach we have taken with software only multimedia, which no one else has been able to do. We are on track to accomplish this software only GPS, which today no one has been to do, and that will yet bring another wave of companies that do not need any capability to really install this technology into their products. The last product category is SATA and that is just a general trend across the board for everything to go serial, from parallel ATA to serial ATA, from parallel SCSI to serial SCSI so the whole high speed serial communication area is just very strong and the market in itself and we are very well positioned there with our products. What it means in terms of you know higher cost good sold, serial communications requires not only the base band if you will but the 5, so the physical connection to run a 3 gigabit, 1.5 gigabit, or 3 gigabits or in the future 6 gigabits, this requires you know a 5 chip which has to be adapted to everybody's process technology if it is analog, if it is mixed signal technology in there. We have very strong capability as you probably know in mixed signal, we do these chips, so we have to tailor them a little bit for every customer so they can build in their [inaudible] and that adds the costs to the implementation. For multimedia in the second half, where it is coming from, we see a lot of new customer interests in multimedia companies, we have not addressed before because we have not really been in the multimedia states, so we will see new customers coming to, we already see them looking carefully at this technology and we expect to be successful at licensing to them in the future.

Suppose if there are new customers that make the barrier to the CEVA-X less of a challenge since you have to write new code regardless.

Actually this whole notion of going to complete the platform is addressing that issue that we are doing the bulk of the hard and software and the circuit design if you will around the CEVA-X so the companies do not have to start from scratch and write new H.264 code or audio codex or whatever, we are providing all of that. That is the general trend in the industry if you are going to be microprocessor going through some years ago, if you are going to be a player, you just cannot dump a raw piece of silicon into the market, it has to got a have a complete infrastructure around it and more and more customers want you to provide it, they do want to try to go some third party to get it, they want you to do it.

What is your customer concentration on the royalties?

What kind of categories was it in?

[inaudible] if there was any small, relatively small, or large number that contributed to the top 3 that dominated the royalty stream?

There are 5 customers that account for possibly 70% of the royalty dollars in the quarter and that is pretty much going in the similar trend over the past number of quarters.

Was Siemens one of them?

We do not disclose individual customers.

Well I guess the end customer obviously…

Who are using them you mean?

Well what comes to my impression the headlines that Siemens is talking about dealing something with their cellphones.

Siemens is not a direct customer of ours anyway. They buy their chips from Infineon and with different companies as well, spread around.

The next line is coming from [Robert Couch]. Please go ahead sir.

A few comments a bit of both the pipeline give a little more color on the design activity, you have had some momentum there, and in terms of these new product categories what will do that do to royalty per unit and do you think you can get greater market share for penetrations into the cellular market at least. I guess from the top down view how do you grow to top line, is it more dollars per phone or greater market penetration, somebody thinks that you have some new designs that he wants them before? What are your estimates going forth with that?

In the short term I mean I think our growth comes from continued deployment of you know what is today fresh technology and very good technology in DSP, in serial communications and GPS, but looking at a little longer term when we add more of this platform technology to multimedia software, so for example if you look in the Intel world, microprocessor world somebody sells the chips in this case Intel and somebody sells the software in that case Microsoft and you can add those 2 revenue bases and make it pretty good. In our world, in the embedded computing world, it is going more and more to one-stop shopping, so we are selling the chip design if you will, and we are selling the software. They carry separate fees in terms of upfront license fees. They also carry separate fees in terms of royalties. So, if somebody licensed our multimedia software, which is going to run on our DSP that is what it is coded to do, they are going to pay us a separate upfront license fee and they are going to pay us a separate royalty, so you can basically look at averaging the average royalty rate per unit because we track it against DSP unit is going to go up. It makes sense. The tax is going to be a little higher form, but they do not have to do all the R&D work, and they do not have to pay somebody else, which they were doing anyway to get the software, so it is going to drive us, and so the trends are going to be the average deal size should go up, because it is going to be more things they are going to have to license that one and the average royalty is going to go up.

Right now you have about 15% penetrations in the cellphone market roughly?

Yes.

Do you see that changing looking at your business a year to two years out.

You have to be careful how you look at it because our penetration today and we look at, we are in the base band, so the 15%, even if we maintain that market share, our revenue should go up dramatically because as you said, the deal size going up and the royalties is going up even with our current shipping rate, but at the same time we will get into new handsets which today, for example, Nokia, good example. Today their base band is a 100% TI and probably always will be 100% TI, for the base band in Nokia phones. Their application processing is open territory right now, as you know they are adding cameras, they are going to add GPS, they are adding multimedia software, they are doing all the things that everybody else is doing, and that is not locked in to anybody. Right now they are actually buying some of that stuff from multiple people.

That’s still up in the air as to whether TI comes out with an integrated chip.

TI already has application processing, their so-called OMAP, which has not taken the world by storm anywhere.

Would you port your software onto other platforms or is it only on your own DSP.

Today it is only on our own. Can it be ported to other DSPs or even a microprocessor and still achieve the kind of performance that we have, the answer is yes, we could do it. We have not done it today, but that’s the not state for a right business deal, we wouldn’t.

I guess other microprocessors run in ARM and ARM based systems, would that be an easier port, than if it was the TI system?

For us you mean?

Yes.

No, we could do it for either one.

[OPERATOR INSTRUCTIONS] The next question is coming from the line of [Ushal Holme]. Please go ahead.

I just want to check with you. You mentioned that you are having focused on continued reduction on DSO, if you have any targets like for the end of 2005 or something.

We look at some of the other comparable companies in our semiconductor IP industry and we see a fully mature SIP company like ARM DSOs say in the 30 to 40 days. We see MIPS at about the same range 30 to 40 days, so certainly that will be a target as increase our top line and continue to focus on the sales discipline and really bringing in the payment terms.

You have a pretty sizable increase in the cash balance, I suppose that was mostly due to the account receivables due you have an actual number for the operating cash flow.

We have been cash flow positive for the last three quarters, our operating cash flow this quarter was somewhere between $0.5 million and $1 million.

$0.5 million and $1 million. Okay. You mentioned in the last quarter that you have opened an office in Taiwan in terms of R&D engineers. Is this fully staffed by now or you are still empty?

The office we opened in Taiwan is the sales and application support office. We do not do fundamental R&D there. We do customer service and engineering there. We will continue to expand that effort there. It has been paying off quite well for us, our business had grown very well in Taiwan.

In the meantime, you are not substantially adding new people, I guess you have opened office in China, have the bulk of your people there, you are adding people as the business grows.

Correct.

[OPERATOR INSTRUCTIONS] The next question is coming from the line of Rick Faust. Please go ahead sir.

Can you just briefly review the competitive environment both against other DSP licensing companies, but also MIPS and ARM that are adding DSP extensions to their microprocessors?

Sure. In the DSP state, we are a semiconductor IP company, so for example we do not compete directly against the TI or an Analog Devices right? Our customers or our licensees would compete with them, so it is not even competition because if are looking at example like Broadcom is a licensee of ours. Now Broadcom is never going to be a TI customer, we are not competing in the same space. They are going to compete with TI, so they have to us for another licenser, so who are the other licensers that they could come to. The direct competition today of course that we see, the only ones we really see to any extent anywhere are two. One is a division of LSI Logic called the DSP, so they tend to have a lower, and it is more like our Teak and TeakLite processors. They are focused on consumer end audio, this kind of this thing, so we see them down at the lower end competing with our Teak and TeakLite processors from time to time. We think we do quite well against them, but we see them. At the high end, which would compete with our CEVA-X DSP family, we see this consortium between Motorola or Freescale and Infineon called [Starcor]. They have been in the business for couple of years now, they have not announced any design wins but we see them a lot of places. They put a lot of energy into it. They are out trying to get people to adopt what is essentially a Motorola internal DSP, so they are our two competitors.

In terms of DSP, it is a hot area. It is becoming critical for all of the multi, everything is going digital right, whether it is multimedia, whether it is communications, TV, so you need DSP, that is what does this. Digital multimedia functionality, so it has not gone unnoticed, the companies like ARM and MIPS who have been trying and added over the last year, so called DSP extensions to their processor design. This was marketed very aggressively, they do have DSP extensions in their processors but if you look at the dynamics of where these products have been used, our business is 100% focused on high-volume consumer application, because being a licenser of product in the low volume market you can collect any royalties, you do not make any money. You have to go after the high-volume markets and what are those. Those are cellular handsets, those are consumer multimedia products, these kind of things. They are battery operated and in intense focus on cost and power consumption. Nobody will add one extra silicon transistor to a design they do not need to. DSPs have been uniquely optimized to do these kinds of functions and that is why they are used in these devices. To just simply say, I am going to take a general-purpose processor with all the other stuff in it, bolt it into this device, use it, and have to pay the power and the price for something they don’t need, it is not really going to be very successful, and I do not think we are seeing it done today. They are not being adopted in [inaudible]. It is a very competitive world and you have to be very specifically targeted at the function you need to provide, that is what we do, and that is what DSPs do for that stuff.

Great, I would appreciate that. One final question, there is a fairly substantial ramp in your operating expenses in the second half, it looks like the first half will be about 16.8 and the second half to get to the low end of your operating expense guidance of $36 million, you will be about 19.2 in the second half, you are up about $2.5 million, and then it could be more if it is in the higher end of that range. Why such a large ramp in the OpEx?

I think maybe you are seeing some conservatism in the guidance were given.

Thank you. The next question is coming from the line of [Doug Brittain]. Please go ahead sir.

Congratulation Christine on the receivables. The question was asked about receivables on a long-term basis. So is it reasonable to assume that the shorter term range is somewhere between [7800] or what do you expect to have as you exit this year, receivable base, roughly the range.

We are targeting probably through the second half of the year to be between maybe 60 and 70 days DSO. If we can do better than that we will, but as I mentioned earlier our long-term goal would be to be where our brethren MIPS and ARM are in the 80-40 days range, I think it is possible that when she goes up in accounts receivable and start to bring down some of the collections, it does take a little while. So, let us look at 60-70 for the second half.

So that is assuming [inaudible] not just terms improved, but you could earn [inaudible] start getting better [inaudible].

Well we always target that, but so far we have not achieved that yet, but that is certainly something that we are working on.

The question then becomes, you are talking about some of the things like say navigation from other areas, very large market opportunities, you guys are on a cash flow, positive basis, you have a positive operative earnings. So, one of the questions would be here is in the small cap stocks, generally a pretty bad evaluation yours obviously included, and you have approximately half your valuation in cash. So, maybe the question would be with the exception of you Christine, why are you working with such a bunch of [girl-ey men], why are not we doing some sort of buyback here, because the argument before used to be that we wanted to get positive cash flow and positive earnings.

Yes I will take that first, it is Chet, and then Christine can add to that. You are right. I mean the IP business does not consume a lot of cash, and we are cash flow positive, but we are not huge, we are getting better, but we have not throwing up huge amounts of cash here either. So, we are going to be conservative in the short term. There are other acquisition potentials that we continue to look at. So, we want to have a little flexibility in the short term. That being said, we continue to evaluate whether a stock repurchase makes sense, certainly at our current stock price. It is an ongoing discussion, but right now there is not any clear-cut answer.

I will just second to what Chet has said there. We want to keep our powder dry in case we come across an acquisition opportunity that can really add to our top line and hopefully the anti-dilutive as well. So, we want to have the cash to be able to consume that kind of a transaction, if that is what the target needs this cash. Once we find the target that we want to go after, and can determine whether it is stock or cash or all stock or all cash, at that point we can bring up the subject of stock buyback again. This is something that we continually discuss with our board of directors.

I would certainly urge you to re-discuss it because I can’t see a reason not to do it at this point.

It will certainly be on the agenda at the next board meeting, on every meeting we bring it up, we will talk about it.

Your next question is coming from the line of Mr. Matthew Robinson. Please go ahead.

Just housekeeping. What do you expect amortization and tax rate to be going forward.

Amortization will be pretty much steady state, about 200 to 250k per quarter and our tax rate [inaudible] in the low 20%, which is [inaudible] in Q1 and for the full year we expect it to come in somewhere between 20% to 25%, effective rate probably about 22%.

[inaudible] you are talking about 20 and a fraction of a percent to less than 20.5 for the third quarter.

Between 20% and 25%.

We expect the tax rate to be in the low 20s.

At this time, there are no further questions. I would like to hand the call back to the management team for any closing remarks.

Thank you again, and we will close it up now. Thank you for joining us today and for your continued interest in CEVA. We look forward to meeting with many of you in the near future. I would like to remind you that CEVA will be presenting at the Annual AEA Classic Financial Conference in Monterey, California on Monday, May 16, 2005. We hope to see some of you there.

Thank you for participating in today's conference call. You may disconnect at this time.