CEVA Inc (CEVA) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Marquita, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the CEVA fourth quarter 2005 earnings conference call. All lines have been placed on mute to prevent any background noise. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, CFO Yaniv Arieli. Sir, you may begin your conference.

Thank you. Good morning, everyone, and welcome to the CEVA 2005 fourth quarter and annual conference call. Today's conference call contains forward-looking statements that involve risks and uncertainties as well as assumptions that, if materialize and prove incorrect, could cause the results of CEVA to differ materially from those expressed or implied by such forward statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. The risks, uncertainties and assumptions include the availability of the multimedia line of products to continue to be a strong growth driver for the Company, intense competition within our industry. The industries in which we license our technology have experienced a challenging period of growth, but the market for our technology may not develop as expected, especially in the case of newly introduced and planned-to-be-introduced technologies. Our ability to timely and successfully develop and introduce new technologies, our reliance on revenue drivers for a limited number of customers, and other risks related to our business including but not limited to those that are described from time to time in the Company’s Securities and Exchange Commission filings, including but not limited to the annual report on Form 10K for fiscal year ended December 31, 2004 and its quarterly reports filed after the form 10K. CEVA assumes no obligation to further update those forward-looking statement, which speak as of this representative date.

This conference will be conducted by Gideon Wertheizer, Chief Executive Officer of CEVA, and myself, Yaniv Arieli, Chief Financial Officer of CEVA. Gideon will cover the business aspects, while I’ll cover the financial results of the fourth quarter and year ended December 31, 2005 as well as the financial guidance for the first quarter and the full year of 2006.

With that, I would like to turn the call over to Gideon for your remarks. Gideon, please.

Thanks Yaniv. Good morning everyone. Thanks for joining us today. I hope you had a chance to read our press release containing the results of the fourth quarter of 2005. Our revenue for the third quarter was $7.7 million, which is about 4% below low end of our guidance. In the fourth quarter we signed ten new license agreements, which represent record high figure. Two were for the CEVA multimedia 2000 video and audio software; one for the CEVA audio platform; two for the CEVA-TeakLite DSP Core; three for the CEVA Bluetooth platform; one for the CEVA SATA platform; and one prepaid royalty arrangement with an existing customer shipping in high volume. In addition, a number of small new deals for GPS design services and PLL technology were completed.

Customer [standard] application was fairly low, personal, video and audio players and Bluetooth headsets. Geographically, eight license agreements were signed in the APAC region, two in the US, and one in Europe. In the fourth quarter our royalty income grew by 32% to $1.9 million compared to the third quarter. It was our highest quarterly royalty income in 2005. On an annual basis, royalty revenue increased 13% in 2005 compared to 2004. This was mainly due to increased shipments by our customers in the later part of 2005. As we stated previously, other than seasonality impact, we are anticipating continued growth in our royalty income as more customers enter into production or have fully consumed their prepaid amount.

I would like now to highlight key indicator regarding Q4 design-wins. For the MM2000 video platform, two significant customers in the APAC region decided to license the software portion of our MM2000 platform. These customers are existing licensees of our Teak-Lite DSP core and plan to use our MM2000 for video in 3G cell phones. As our video technology is still under development, a portion of our proceeds out of these two deals is accounted as backlog. The pipeline for MM2000 product is strong. However, we are still selecting our licensing activity due to the need to complete the development and specifically be able to demonstrate it in our own silicon, which we plan to do in the upcoming 3GSM show in Barcelona, Spain, which will be held in February 13 to 16, 2006.

For CEVA audio, this is our TeakLite-based audio-only solution for low-power, high-volume application. In Q4, we signed one significant license deal with a customer in the APAC region. In the quarter, we were notified that another leading Asian-based manufacturer decided to design in TeakLite for a very high volume audio application in cellular, which we are anticipating significant royalty income from. As more cell phones are coming out with MP3 playback functionality, the need for DSP for audio processing increases on top of its traditional use for [pays back].

For TeakLite DSP core, two new customers decided to adopt the TeakLite-II core for high-volume application. TeakLite-II is the successor of the TeakLite offering higher performance and full background compatibility. Other than existing TeakLite licensees who are continuing to use this very successful architecture, we see strong interest from new [comers] wanting to use the TeakLite-II for entry-level cell phones, magnetic disk drives, and audio players.

For Bluetooth. Three license agreements were signed for Bluetooth technology. We are encouraged by the adoption of our Bluetooth IP in the last two quarters. Our new licensees located in Asia region plan to use our technology for advanced product in Bluetooth-enabled headsets and cell phones.

For GPS. There were no new license agreements signed in Q4. although we see continued interest to add our GPS IP into [cell functions], there is still hesitation with customers to license GPS IP on a wider scale until more applications for GPS will exist in the operator network, which will then drive the use of GPS phones.

In the fourth quarter we announced a new platform solution for the VoIP market, the CEVA VoIP. VoIP use is growing fast and is expected to become an integral part in hi-fi fiber to the home DSL [wire max] and also in cellular. The CEVA VoP is a low-cost full hardware and software solution based on our TeakLite-II DSP core.

In the fourth quarter we had planned to demonstrate our MM2000 video technology on our silicon platform. But unexpected delays both in the foundry processing and in the chip assembly house caused the MM2000 silicon to arrive to our laboratory in early January 2006. As a result, a potential strategic customer who was at an advanced negotiation stage with us, deferred its final decision pending the arrival of our silicon platform. This was a major reason for the lower-than-expected revenue in Q4.

In the beginning of January 2006, we did receive from the foundry the MM2000 first silicon. The MM2000 is a very complex chip based on our latest CEVA-X that allows us to demonstrate our video and audio technologies in a real environment. We are happy to say that so far the silicon is fully functional and meets our expectation in terms of speed, power consumption, and other metrics. Our video and audio engineers are now working on integrating our video software to the chip and later on to demonstrate it to our existing and potential customers. We look forward to demonstrating publicly our achievement in the coming 3GSM show in Barcelona.

I will now turn to Yaniv to review the first quarter financials and provide future guidance for 2006.

Thank you Gideon. Before we are giving the results of operations for the fourth quarter ended December 31, 2005 and annual 2005, I would like to say that although the fourth quarter was very challenging on the revenue side and slightly below our earlier expectations, I believe we will manage to demonstrate quite a few operating and financial achievements and significant milestones, which I'll elaborate in the next couple of minutes.

Now for the fourth quarter numbers. Revenue for the quarter was 7.7 million and about 4% below the low end of our guidance. Revenue breakdown was as follows. Licensing revenue was 4.6 million reflecting 59% of total revenue. Royalty revenue was 1.9 million, reflecting 25% of total revenue. Service revenue was 1.2 million reflecting 15% of total revenue. Gross margin for the quarter was 90%. Research and development costs were 4.7 million for the quarter. The total operating expenses were 7.8 million. Net loss for the quarter was $147,000 or $0.01 per share respectively.

On an annual basis, revenue for 2005 was 35.6 million, 5% lower than 2004. The revenue breakdown on an annual basis was as follows. Licensing revenue was 24.0 million, reflecting 67% of total revenues, 9% lower than 2004. Royalty revenues were 6.8 million, reflecting 19% of total revenue and a 13% increase over 2004. Service revenue was 4.9 million, reflecting 14% of total revenues for both 2005 and 2004 and 10% lower than in 2004 on a dollar basis. Gross margins for 2005 were 88% compared to 86% in 2004. The total operating expenses for 2005, excluding reorganization, severance and asset impairment charges, was 33.2 million compared to 31.0 for last year. Per forma net loss and diluted loss per share for 2005, excluding reorganization charges, asset and impairment charges, and income from the disposal of investment were $56,000 or $0.00 cents per share compared to net income of $1.6 million or diluted EPS of $0.09 cents per share in 2004.

And now for other related data. Shipped units by CEVA licensees in 2005 were over 115 million, an 8% growth over 2004. In the fourth quarter, 31.5 million units were shipped, which is 15% higher than the 27.2 million units we had in the third quarter of last year. Our fourth quarter 2005 royalty revenue reflects licensee reported units from the third quarter of 2005. Of the total of 31.5 million units shipped in Q4, 19.5 units were attributed to licensees currently paying per unit royalties and 12 million units were shipped to licensees who are burning through their prepaid licensing volume. This compares to 27.2 million units shipped in the third quarter of 2005, of which only 12.8 million were attributed to per unit royalties and 14.4 were attributed to prepaid licensees. In the third and fourth quarters of 2005 we had a total of 23 shipping licensees. Out of the 23, 16 are paying per unit royalties and seven licensees are still under prepaid.

Interest and other income in the fourth quarter of '05 was 558,000, up 19% from 470,000 in the third quarter of 2005, excluding the gain from the disposal of investment. This increase reflects mainly the higher yield achieved on our cash balances compared to the third quarter of 2005.

Now for the balance sheet. As of December 31, 2005 cash and marketable securities were 61.6 million, up $1.2 million from the prior quarter and up $2 million from December 31, 2004. This was mainly due to improved debtor collection and higher investments in other income. The other principal drivers in the movement of cash balances were $3.3 million cash generated from operations including the restructuring payments of $300,000 and $1.8 million from the sale of shares issued under the employee stock purchase plan offset by capital expenditure of $1.1 million for the year 2005.

We have continued to achieve lower DSOs, decreasing from 80 days in the third quarter of 2005 to 73 days in the fourth quarter of the year. DSOs on an annual basis in 2004 were 105 days compared to 63 days for 2005. The working capital improved and increased by $3.2 million during 2005.

We think giving you formal guidance for 2006 is a very important tool for analysts and investors in the financial community. As Gideon mentioned earlier, we have finally received our multimedia CEVA-X silicon. We believe that this line of products should be important growth drivers for 2006. In addition, based on the design-wins we have achieved and licensed during 2005, we believe that there should be a gradual increase in royalty revenue, especially in the later part of 2006. In this upcoming forecast we are still quite cautious with regards to revenue contributions from our GPS line as well as from our SAPA platform. Consequently, for the full year of 2006, revenue guidance will be in the range of $35 to $37 million; gross margin in the range of 87% to 89%. Operating expenses, including option expense of 123R, will be in the range of 33.8 million to 36.3 million. Interest income net is planned to be around $2 million for the year. Operating expenses for '06, excluding option expenses of 123R, would be in the range of $31.1 million to $33.3 million. Share count for 2006 is expected to be at the range of 19.4 to 19.7 million shares. And the tax rate for 2006 as well as the first quarter should be at 10% range.

Now for the first quarter 2006 guidance. Revenue guidance will be in the range of $7.5 to $8.5 million. Gross margins are expected to stay in the 87% to 90% range with operating expenses, including 123R, in the range of $8.6 million to $9.2 million. Operating expenses, excluding 123R, would be at the range of $7.8 million to $8.4 million. Interest income net is planned to be approximately $500,000. And as I mentioned, the tax rate for the first quarter is also at 10%.

That concludes my portion. I will now open the phone for your questions.

(OPERATOR INSTRUCTIONS) Matt Robison of Ferris, Baker, Watts.

Hi Yaniv. It's nice to see you have put some cash on the balance sheet. Can we talk a little bit about revenues some more. The impressions I've got from Gideon's comments were that you had quite a few deals with – some of these multimedia deals, since they didn't include a core license, were perhaps a little smaller than they would have otherwise been. And then you had – it looks like you've got some backlog coming into this year with the slippage of the Multimedia2000 samples into January. Is that basically the whole story? Are there any other reasons why revenue was so low?

The key point is one significant deal that we planned for Q4, but the condition was for us to be able to demonstrate the video on our own chip. It's end of the year. The foundries and also the assembly house were fully booked in shipments to big guys. We as an IP Company is not one that should usually be in a priority. So the result, we just got our chip in early January – on January 8. Now we are in the process to fully test it and go back to the customer.

So this is essentially to give some more flavor. We are seeing quite a lot of interest already based on that silicon. We are going to demonstrate it for the first time publicly at the 3GSM show in Barcelona. We believe that we will get quite nice traction because this is very unique technology. We believe there is no other like it today in the market. Of course, from having that until signing a deal there is some gap that one needs to cross. We believe though, having the silicon in hand, which we did not have in the fourth quarter, and having this product line much more mature than we had in 2005, it should be one of the significant contributors in revenues in 2006. But we are a little bit cautious because we want to see first the deals happen. Then of course, we'll update you and hopefully the numbers as we go along.

Should we expect the design services revenue to continue at the current level or decline?

I think pretty much continue at a similar level. (multiple speakers) because this is quite complex technology both the multimedia as well as the cores themselves. Any new licensee usually needs – even if he doesn't know it – he really needs our support. It is based on an R&D level because it is integrating the IP into a chip into their chips in different applications. Our support is quite crucial for their success. We do want to also help them out and shorten the time-to-market for them to be successful with product. As you have seen, there are more – the companies that are shipping products today are using more and more our solution. We have gone up to more than 150 million units of shipment during the year using our technology.

Why were royalties lower in dollar value than they were a year ago?

They are higher – 6 million last year 6.8----

No, no, no. The quarter.

Last quarter. Last quarter, I believe that, if I recall correctly, there was a customer that moved from prepaid royalties to royalties – to per unit royalties. There was an up-side per the per unit amount. This quarter it didn't happen. [unintelligible] more product shipped that the volume was more significant than last year.

Okay, so you didn't give the year-ago volume on the quarter. You gave the sequential comparison. What was – refresh us on what the volume was in fourth quarter of '04.

I don't have it handy with me. I am going to try to get back to you with such a number.

Okay. Thanks. Talk to you later.

(OPERATOR INSTRUCTIONS). Sir, there appear to be no further questions.

Okay. Thank you for joining us today. Thank you for continued interest in CEVA. We look forward to meeting you in the upcoming 3GSA conference in Barcelona in February of this year and then other scheduled events during the quarter. Thank you and goodbye.

Thank you. This does conclude today's teleconference. You may now disconnect.