CEVA Inc (CEVA) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Sherita, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the CEVA, Inc. first quarter 2006 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, Mr. Yaniv Arieli. Sir, you may begin your conference.

Thank you. Good morning, everyone, and welcome to CEVA's 2006 first quarter's conference call. Today's conference call contains forward-looking statements that involve risks and uncertainties as well as assumptions that, if materialize or are proven 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 the statements of historical facts are statements that could be deemed forward-looking statements including financial guidance for the second quarter and full year 2006; production growth and revenue increases from the Company's MobileMedia2000 silicon solution; opportunities associated with the national 3G standard approved by the Chinese government; and potential gradual increase in royalty revenues in the later half of 2006. The risks, uncertainties and assumptions include the availability of CEVA's X line of products to continue to be a strong growth driver for the Company, intense competition within challenging [period] of growth expected by the industry in which the Company competes; the Company's reliance on revenue derived from a limited number of licensees; and other risks related to the Company's business including those that are described in the Company's annual report on Form 10K for the fiscal year ended December 31, 2005. CEVA assumes no obligation to update any forward-looking statement or information which speaks as of the representative dates.

This conference call 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 will cover the financial results of the first quarter of 2006 as well as the financial guidelines for the second quarter and for fiscal year 2006.

With that, I would like to turn the call to Gideon. 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 first quarter of 2006.

The first quarter of 2006 was a very encouraging quarter for CEVA in terms of licensing, the pipeline, and technology [based on] the chip. Total revenue for the first quarter was $8.1 million, which is just above the middle range of our guidance. We signed seven license agreements in the quarter. Three were for our DSP cores and derivatives, CEVA-X and Teak, two for our SATA technology, one for our PLL technology and in addition, there was a renewal of a prepaid arrangement with an existing customer. Our customers' target applications are for third generation cellular, disk drives control and SATA interface. Geographically, we signed five license agreements in the US and two in Europe.

In the first quarter of 2006 royalty revenue was $1.8 million, slightly down from $1.9 million for the first quarter of 2005 and 3% higher compared to the first quarter of 2005. Within our royalty revenue mix there was an increase in revenue using our DSP core technology offset by a decrease in other royalty billing technology reflecting phasing out of older product lines.

I would like now to expand on key aspects of the first quarter business and what we believe are the relevant market trends we see from the three GSN and CS shows held during the quarter.

[indiscernible] of our strategic customers have decided to expand their business with us and to adopt a newer generation of the DSP core. One customer based in Europe has chosen to use a new member of the CEVA-X architecture, the CEVA-X 1622. So it's next generation 3.5G platform. The other customer, based in the US, has chosen to use our TEAK DSP core as part of its expansion strategy for high-volume markets. These two major wins are a significant endorsement for our technology in a very fast-growing market. These new deals offer great potential for further licensing business and substantial royalties further down the line.

The most important wireless event, the 3GSM conference held in Barcelona in February was an important milestone for the company. At the conference CEVA demonstrated for the first time the MobileMedia2000 silicon running a full video solution. Our understanding is that CEVA was the only Company to date that has managed to demonstrate H.264 DVD-quality video and software on silicon. This attracted a lot of interest from potential customers who claim now to further evaluate this technology. In addition, two of our early-adopter customers are now demonstrating this technology to their customers targeting the mobile TV market.

Another customer of ours is currently in a design phase for a new generation of portable media player (PMP) running on our mobile media platform. These indicators together with the healthy state of the pipeline are quite encouraging as this technology is considered in the industry to be innovative and unique. We still anticipate a cautious approach of the adoption by our customers until products based on this technology are in mass production.

In January the Chinese Ministry of Information approved a national 3G standard, the TD-SCDMA. This creates a major opportunity for CEVA's products through our existing licensees in China. Among them is [Spreadwell] who is well-positioned in the local Chinese market. This trend on 3G also offer opportunities for CEVA to win new licensees with local Chinese IP companies who are expected to enter this fast-growing market.

In Korea, LG Electronics is starting to sell the first non-Qualcomm EVDO phone enabled by our TeakLite speaker. EVDO is a 3G standard driven by Qualcom as the next generation standard to its CDMA network. EVDO is expected to be widely deployed in the US, Korea, Japan, and also in China.

Q1 was also successful for our SATA business with two new license agreements. As previously indicated, the SATA market is highly competitive and as a result, price driven. However, CEVA has been able to offer value for those customers who are looking for differentiation in power consumption, cost, and flexibility.

As for the GPS technology. The consistent feedback that we gather from the recent CES and 3GSM conferences such as the adoption of GPS technology within the largest federal install base, the GSM market should begin to improve as early as this year. Despite these positive indicators, we are still encountering weakness in licensing activities. There appears certainly to be an interest, but also a concern on the cost of adding GPS functionality. We are closely monitoring customer viewpoints and also explore different alternatives in light of the slow GPS licensing activity.

I will now turn to Yaniv Arieli to review the first quarter financial and provide future guidance for the second quarter and fiscal year 2006.

Thank you Gideon. Now I'll review the results of operations for the first quarter of 2006. Revenues for the first quarter were $8.1 million, just above the mid range of our guidance. Revenue breakdown was as follows. Licensing revenues were $5.3 million reflecting 66% of total revenue. Royalty revenues were $1.8 million reflecting 22% of total revenue. Service revenues were $1.0 million reflecting 12% of our total revenue. Gross margins for the quarter were 89%. Research and development costs were $5 million for the quarter. Total operating expenses for the quarter were $8.5 million including 123R stock option based compensation, a charge of $645,000. Net loss for the quarter was $801,000 or $0.04 per share.

Non-GAAP operating results, excluding 123R option expenses would have been as follows. Gross margins for the quarter would be the same at 89%. Research and development costs would have been $4.8 million for the quarter. And the total operating expenses would have been 7.8 million, which was at the lower end of our guidance. Net loss for the quarter would have been $156,000 or $0.01 per share loss.

Other and related data. Shipped units by CEVA licensees for the first quarter of 2006 were 48.7 million, a 26% growth over the fourth quarter of 2005 when 38.8 million units were shipped and 57% higher than the 31 million shipped in the first quarter of 2005. Our first quarter 2006 royalty revenue reflects licensees reporting units shipped from the fourth quarter of last year. Of the total 48.7 million units shipped, 25.8 were attributed to licensees currently paying per unit royalties. Close to 23 million units were shipped by licensees who are burning through their prepaid license volume. This compares to 48.8 million units shipped for the fourth quarter of last year of which 19.5 were attributed to per unit royalties and 19.3 million were attributed to prepaid arrangements. In the first quarter of 2006 as well as in the fourth quarter of 2005, we had a total of 23 shipping licensees. Out of those 23, 16 are paying per-unit royalties and seven are under prepaid arrangements.

Interest and other income for the first quarter of '06 were for $541,000, quite similar to the $557,000 for the fourth quarter of 2005.

As for balance sheet items. As of March 31, 2006 cash and marketable securities were $60.1 million, down 1.5 million from yearend reflecting an increase in our trade receivables balance due to timing of collections, which came in shortly after quarter end. We've seen strong debtor collection in the first few weeks of April. Our cash and marketable securities balances currently exceed those that we had at yearend. To remind you, it was 61.6 million.

The principle drivers in the move in our quarterly cash balances were a $2.9 million increase in our trade receivable balance offset by $900,000 from sale of shares issued on the ESVP plan. Other movements were from capital.

Now I'll move to the guidance for the rest of 2006. [Consecutively] for the full year of 2006 revenue guidance will be as we previously guided in January in the range of $35 million to $37 million. Gross margin unchanged in the range of $87 million to $89 million. Operating expenses, excluding 123R non-cash stock compensation charges in the range of $31.2 million to $32.2 million and interest income net expected to be around $2 million. Operating expenses, including the equity-based compensation charge 123R will be in the range of $33.2 million to $34.7 million. Share count for '06 is expected to be in the range of 19.4 to 19.6 million shares.

Our Q2 '06 revenue guidance will be in the range of $8 million to $9 million. Gross margin should stay the same, 87 to 89% with operating expenses excluding 123R, in the range $7.6 million to $8.2 million. Operating expenses, including equity-based compensation will be in the range of $8.3 million to $8.9 million. Interest income is expected to stay in the range of $500,000 per quarter and the tax rate about 10% for the remainder of the year.

Now I will open the floor for questions.

(OPERATOR INSTRUCTIONS). Matt Robison.

Good morning. Congratulations on the revenue number. First, a point of clarification, you mentioned 48.7 million units shipped up 26% sequentially and 57% year-over-year. That's for the first quarter, you said?

Yes, correct----

So those units you haven't seen royalties yet?

Part of the growth, which is 10 million units from Q4 of last year to Q1of this year – and that derives the 26% sequential growth – comes to about – six million of them are under per-unit and actually paying royalties. If you look at overall paying of royalties, we see an increase in revenues. What offset that increase are two things. One, one customer has just gone down the step function of the per-unit royalties. And another one in an older product line in the com business that has faded out of an older product line. But the new products that came in and the higher shipment increased overall the revenues on a sequential basis.

I want to clarify. These are the royalties that have been – these are the units that have been reported to you by your customers. So these are units that you collected royalties on?

Collected royalties on, correct. These are chips and units that were sold in Q4 of last year. We always get the royalty report in a one quarter late time.

That's fine. I wanted to clarify. Now, your linearity obviously – given your collection scenario, it sounds like you had a relatively bad quarter-to-quarter. What was the percentage of revenue that was in the last month?

In this line of business, a big portion of it is signed in the last months of the quarter. It has been this case for as long as I know CEVA and the IP business. So nothing has changed there. We missed one large payment, which came in a little bit late after the quarter-end. That caused us to have a little bit lower cash balances and higher DSOs. We are back to normal and even higher, balances as of today or even a week or two ago.

You had 17% license growth, it looks like. How much of it was from the cores versus these less strategic product lines?

Revenue wise, quite large portion of our revenue this quarter came from DSP cores. As Gideon mentioned in the beginning, we had two very strategic accounts that decided to reuse the DSP cores and new product lines. I would say the bigger portion this quarter is associated with the traditional DSP technologies.

It is not reuse, it is an existing customer of ours that decided to extend the usage of our portfolio and basically license income.

Now that you've done the video technology out and sampling – and I guess it basically started sampling just before you reported the December quarter – what has the sales cycle been like? When should we expect you to be announcing license deals for that?

How to answer? Basically we are now starting to show to our customers technology that they can evaluate and so make a selection. Before – let's say before February of this year, when we didn't have the silicon, customers relied on our power-point presentations. Now they have the technology they can evaluate.

They didn't rely on it very much because they didn't give you a lot of licenses for it. When can we expect this to start to happen tangibly?

Tangibly I would put between two quarters –I mean, two quarter and third. This is where you see things consistently.

Alright. I'll let somebody else ask a question.

One more question about the linearity of the quarter, we never mentioned the number, but we can quantify the backlog at the end of this quarter to be slightly above what we were used to have in the last two or three quarters. So that is some indication of the business at the end of last quarter.

(OPERATOR INSTRUCTIONS) [Jennifer Taylor.]

Good morning. I want to follow-up on that last question regarding when we might start to see new licensing potentially from Mobile-Media. I think you – I just didn't understand the timing. I know customers are in the evaluation stage now that they have the silicon. Actually, there is no working demo out there. When – any – I just didn't understand the timing.

If you mean licensing revenues, or ----?

Correct, licensing deals essentially – when and if you would be able to announce something. I understand it's very early. What kind of timing might you be looking at, at this stage?

Here is how it works. We are now showing – providing the customers a tool that they can evaluate the technology. As I said, this is a technology that you don't see today in the market. You don't see companies offering video and software on a general purpose [offer set] like we are doing. We are providing the tool to the customer to evaluate. What I said – and in response to that question – that we will – we are supposed to see consistent licensing. Meaning that every quarter we are saying we signed one, two deals, etc., let's say, two quarters from now and onward. Because this is what we usually anticipate it takes customers to really make their mind and to do.

There is one more basic point from our standpoint. We have two customers that are now demonstrating to their customers. In my opinion, by the end of the year we'll see broad activity in the markets with this technology. This will also ease our customers to make a straight-forward decision.

Okay. So that is why essentially this year at this point, we are quarterly [raz] are about the run rate we're at. Maybe it will bump up a little bit. But none of this starts to happen, at the earliest, until '07. That is the starting point?

Yes, but we have a consistent [indiscernible] business with our DSP colleagues. Not that we are [waiting] for the video.

Please. I don't mean to understate that. I am just trying to understand in terms of the newest, most differentiated kind of opportunity for you that can add an additional layer to this business overall.

Saying that does not mean that we will not have in the next quarter or next two few quarters sporadic news of video technology. That may happen. But, as Gideon mentioned, on a routine basis and being as irregular as it is, be a core license deal, that we will probably be further down the line. That is more the intention.

Okay, great. Thank you.

Doug Whitman.

Thank you. A quick question. I appreciate the conservatism that you've given out on the longer-term guidance. You have a history of being conservative. I am trying to understand what is going right as we look at the second quarter. I would have expected from the verbal commentary, a more conservative number even than what you gave. So can we talk a little bit about what is making you feel the midpoint of that would be sequential growth. What are you seeing that is going right that is giving you the [pulse] for mild optimism?

There are several factors that make us believe that intensive growth. First of all, we've pointed out in the past, we do see – we do expect royalty growth in the second half of this year. We mentioned one P1 customer in Europe that uses our CEVA-X for a 3G platform. This customer has already [sampled of the cheaper] now and field testing. That is a significant contributor to our royalty revenues.

There is more. I mentioned also in my session, that there a – the TD-SCDMA, the 3G Chinese standard is now approved. There is at least one customer of ours with chips in phones for the TD-SCDMA. This is another factor. This is in the royalty front.

When it comes to licensing activity, first of all we have the CEVA-X. Now we have two cores to offer to the 3G market, the 1620 and 1622. We see customers interested in this one to use it for their new design call switching.

Then comes the video engine. So far it was a technology challenge. I think we met it, at least looking on the environment and the landscape in the 3GSM show. Then we'll show it to customers and let them decide. I anticipate that we'll see significant [bids] coming out of the video engine as well.

The other question is, CEVA has historically been very backend loaded. Is there any reason to – if any of these sales could be more upfront this quarter – expectation that it won't be – I realize that you will still maintain backend loading, but that it won't be as much as you've had in the last couple quarters and years?

I don't think we should see or anticipate any significant change in the business or environment. It is true for a lot of [ADA], other IP companies. We're looking at a bit higher revenues in Q2 and sequential growth over Q1. As I mentioned, I think we are starting [indiscernible] the core with a slightly higher backend that what we used to have. We need to reach a little bit higher ramp as well. I think it will, in principle, stay quite similar to what we had in the past.

Thank you.

[Steven Stopp]

Yes. Could you discuss when, towards the year and the beginning of next year when the Mobile-Media starts rolling out, how much more you might be able to receive on a per-chip basis. What would the cost of that chip be compared to the revenue you are receiving per chip currently on your older products?

You are talking about two things. If you are talking about the royalties from the new line of products, typical in our business, every time we launch a new type of technology, the CEVA-X versus the Teak whether it's been the Multi-Media applications versus the older generation, we charge higher royalties because we get more horsepower. We get more applications. So if you are talking about a purchase, a new [indiscernible] because the models are sliding scale, smaller volumes in the beginning, higher royalty rates and large volumes. Towards the end are lower royalty rates. That also helps get in the new customers at higher revenues and higher royalty revenues.

With regard to model, when you talk about the licensing aspect, what is interesting to point out is that the Multi-Media is not just a single core, but it is a platform of software technologies. We could also now open a gallery of new software the new revenue contributors coming from this business line. One customer could license the whole gallery. Some will be interested in [ampec2] or [ampec4] or H.264. We have ways to differentiate and to grow our potential revenue streams from this new line.

Let me add one thing, or emphasize one thing. When it comes to the Mobile-Media, which is basically hardware and software, the cycle is much shorter than we used to have with the hardware when you license this because you make use of it five years or six years. You don't rush to go the next generation. On the other hand, when it comes to software and specifically video, which is a very dynamic area, every – almost a year or nine months, you have a new standard or extension to the standard. If we take, for example, the video standard, you have ampec4 and H.264.You have ampec2 and you CEVA-X, in all these standards and also all the audios, one while you need audio standards. You need software solution because you can run up to the market and supply technology as time goes by, by not changing hardware, just by adding software. Two, customers coming back saying, okay now we want this WMA or VC1 that just became a standard now. Here we are, a one-stop shop the software technology to the customers.

So as these roll out, you'll have somewhat of a lead and be able to maintain the cost of the [inaudible], see that much erosion as it moves out and develops?

Yes, that's correct. Absolutely. And with that, we'll have the revenue coming royalties both from the new markets that we talked about whether it's Asia, China, and the European OEM as well as the new product offering, which will be more mature by that timeframe.

Very good. Thank you.

[Robert Morrison]

Traditionally one thing that has troubled me with regard to CEVA, that has struck me as making your task harder. There are quite a number of very big cell phone makers, in particular, which really want to do the kinds of things that you provide internally or just go with a different supplier. The three that would come to mind would be Nokia, Motorola, and Qualcom. I am not aware that CEVA has ever done any business with any of them. There has been some hope in the past that has been expressed that you might have some kind of a breakthrough. There was actually discussion on conference calls with regard to – or perhaps it was just in conversations I had with the Company. I don't recall. But with regard to Nokia, for instance.

I don't want to try to drag the conversation into matters relating to specific companies. Is there anything you can say with regard to efforts to break into areas that you've not been able to break into before because your technology is starting to get recognized as superior as to what's out there in terms of other licensors or in terms of internal efforts on the part of some of these companies.

Let me try to try to take it historically. A cell phone in the past was a phone, just a machine that you used to make voice calls. Inside there were chips that did what is called base band – just the communications part of the voice. The development of this kind of technology, the software development is a very unique specialization that Nokia has within house. Motorola has it – or used to have it – in-house until the spin-off of [Free Scale]. These are the two big.

As time – the landscape is changing from two angles. One is the 3G market. 3G is brand new so Nokia and Motorola have to redesign their chips completely because it is a different standard. Here comes the opportunity to our licensees. I don't want to be specific. But you know who we are working with. We are working with tier one customers. They are newer. They are just licensed for this purpose. So the 3G opens up other opportunities. I am not sure about Nokia in the telephone, but definitely Motorola and the other tier one customers.

The other thing is the Multi-Media. When it comes to Multi-Media, there is no [market] mechanism, meaning TI to Nokia or Free Scale to Motorola. All these companies, even Nokia and Motorola, are using different brands – different chip suppliers for the Multi-Media portion of it. This is where we have additional opportunity through our licensees. We are not licensing directly to Motorola and Nokia. But we are working with their suppliers or possible suppliers. One thing that I can assure you – that they have this ability to work with [inaudible].

Okay. Thank you.

Matt Robison.

Could you comment a little bit on what effect the decision to divest ZSP, LSI's decision to sell that ZSP operation, which has been a big competitor for you – or significant competitor.

I am also curious, what has happened – if you've made any headway in reducing your overhead. I know there has been some overhead that is not necessarily going through the income statement anymore because you've restructured it off the income statement. But it is still a factor in terms of your cash flow. Could you comment on those two items.

Let me comment on the ZSP. The rationale for putting ZSP for sale is what we all think for many years. It does not make any sense for semiconductor companies to license technology to competitors. I think LSI has new management. They decided that this is not their main strength. This is the reason that they are trying to – they are putting it on sale. This is when it comes to ZSP. Yaniv, so you want to comment on the other one?

Yes, I----

Gideon, have you seen any customers that have come your way? Have you had any opportunity to sell? You just said something that is philosophical. You didn't say anything with regard to whether it had any implications on your business.

The implication on our business, it's hard to know. Because the question is who will buy this business. If it will be another IP supplier, we'll see who is the supplier, and what other benefit this customer can offer to these people. Keep in mind one thing, ZSP is only a DSP core supplier. We are a one-stop shop supplier. We have the software. None of our competitors offer this. This is not [indiscernible]. This is not ZSP. So I don't anticipate short-term a significant change in the landscape.

So you haven't had any success taking any customers from ZSP?

We had success in taking customers out of ZSP even recently before the sale was announced. Of course, after the announcement things became a bit easier. I would put this as a temporary situation. Because someone may buy them.

Right, sure. Okay, thanks.

With regards to the cash that you mentioned, I think you were referring to some real estate assets that we have that are not fully utilized these days. We are negotiating, hope soon to get – to be able to [cut] the use of the cash for unused space. That will be quite significant on the overall cash flow for the business. We have [not yet], but are quite close to finalizing it.

Thank you. At this time, gentlemen, there appear to be no further questions.

Okay. Thank you for joining us today. Gideon and myself will be attending the AEA financial conference in Monterrey, California in the second week of May. That will be May 8&9. We will also be presenting there the Multi-Media solution and the D1 resolution that we talked about and show you some movie clips and some video clips both, for whoever can join us and see the technology for yourself as well.

Thank you for joining us today. Good-bye.

Thank you. This does conclude today's CEVA conference call. You may now disconnect.