CEVA Inc (CEVA) 2006 Q2 法說會逐字稿

Good morning. My name is Toni, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the CEVA, Inc. second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host, Yaniv Arieli, Chief Financial Officer. Sir, you may begin your conference.

Thank you. Good morning, everyone, and welcome to CEVA’s 2006 second quarter conference call.

Today’s conference call contains forward-looking statements that involve risks and uncertainties as well as assumptions that if 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, including financial guidance for the third and full year of 2006, potential achievement of profitability in the near future, success of CEVA’s cost control measures and potential savings associated with the divestment of CEVA GPS technology and product line, the potential growth of the mobile TV market, and CEVA’s ability to capitalize on the market through its Mobile-Media 2000 silicon solution, potential drivers of CEVA’s DSP licensing, beginning multimedia and storage solutions and GlobNav’s ability to capitalize on the GPS market. The risks, uncertainties and assumptions include the ability of the multimedia line of products to continue to be a strong growth driver for the Company, intense competition within the challenging period of growth expected by the industry, of which CEVA company competes, and the Company’s reliance on revenue derived from a limited number of licensees, the success of the Company’s cost control measures and other risks relating to the Company’s business, including those that are described in the Company’s annual reporting form 10-K for the fiscal year ended December 31, 2005. CEVA assumes no obligations to update any forward-looking statement or information which speak of their respective date.

This conference call will be conducted by Gideon Wertheizer, Chief Executive Officer of CEVA, and by myself, Yaniv Arieli, Chief Financial Officer. Gideon will start and cover the business aspects; then I’ll cover the financial results for the second quarter of 2006 as well as the financial guideline for the third and fiscal year 2006.

With that said, I would like to turn now the call to Gideon.

Good morning, everyone, and thanks for joining us today. I hope you took the time to read our press release containing the results of the second quarter of 2006. On this conference call, I would like to highlight two main achievements in Q2 results - one, the continuous progress in our financial performance both in revenues and profitability milestones set for 2006 and the divesture of the GPS technology and product line to a separate funded company.

Total revenues for the second quarter was $8.4 million, in line with the range of our guideline. We signed nine license agreements in the quarter. Seven were for the CEVA DSP cores and platform, one for CEVA’s SATA technology, and one for CEVA Bluetooth technology. In addition, there was a renewal of a prepaid arrangement with an existing customer and a few PLL technology deals. Our customer target application are cellular handsets, mobile TV, consumer electronic products and networking. Geographically, of the nine deals we signed, three were licensed in the U.S., five in Europe and one in Asia Pacific region.

In the second quarter of 2006, royalty revenue was $1.4 million, down from $1.8 million for the first quarter of 2006 and down from $1.6 million for the second quarter of 2005. The main reason for the lower royalty figure in Q2 compared to Q1 is the seasonality trend with our key royalty payors shipping products into cellular and consumer electronic market. Q2 2006 would be lower than Q2 2005 due to the phasing out of an older product line in the communication business, as we previously discussed in the last conference call.

On the profitability front, we continue to reduce the Company operating expenses; and, for the first time in five quarters, we have presented a pro forma net income of $200,000. The divesture of our GPS technology and product line combined with cost control management should allow us to achieve further profitability in the near future.

I would like now to elaborate on few key license agreements signed in the second quarter and important market trends. One key deal for our Mobile-Media 2000 was for mobile TV chip market. This is our fourth design win in this market segment. The customer is leveraging the fact that our solution includes a very powerful CEVA-X DSP to further differentiate its product by adding its own software in addition to our broad [video/radio offering]. This is a clear advantage of the Mobile-Media 2000 solution offering versus dedicated hardware-based video solution which would need an additional DSP to run customer’s software. The mobile TV market is tightly linked to mobile phones and personal media player. It is now in its initial update with approximately 16 countries with network increase with a variable phone such as Nokia N92. The expectation is that the real growth will be in the next five years, reaching 210 million units in [2011]. We would like to emphasize that our Mobile-Media 2000 technology is generic, and its addressable market also includes multimedia phone, personal multimedia player, IPTV set-top boxes, digital cameras and surveillance equipment.

During the quarter, we signed a strategic agreement with ASTRI, a Hong Kong-based company financially backed by the Chinese government with a business charter to develop consumer products such as personal multimedia players or IPTV set-top boxes. ASTRI will make use of our TeakLite DSP and our audio software to develop products for the Chinese market. CEVA will then license its technology with manufacturing rights to ASTRI customers in China.

A few weeks ago, LSI Logic announced that it had sold its ZSP technology and IP business to VeriSilicon, a China-based service chip design company. This is one of our competitor in the DSP core business, yet it lacks the technology base in video/audio storage as we offer. We believe that VeriSilicon being a design service semiconductor company will look to sell chips rather to license IP.

Now for the divesture of our GPS technology and product line to a fabless company. In previous conference call, we advised that the GPS chip market looks to be going mainly in two segments, the personal navigation devices and cellular [inaudible]. This growth has not been reflecting a licensing of GPS IP; and, in fact, for the last five quarters, we did not win any new license agreement for our GPS platform. In the last few months as part of the strategic review, and after a number of discussions with existing and potential customers, our feedback was that the customer preference is for a distinct GPS chip set rather than a number of technology platform consolidating all in one chip. The main reason for this is that prices of distinct GPS chip sets are going down substantially, which makes integration of GPS relatively expensive and quite risky. We have concluded from our finding that our IP portfolio business R&D investment needs to be focused on significant technology drivers of DSP multimedia storage solutions.

As we believe our GPS technology a substantial value in terms of die size and in performance capability, we explored various ways to leverage its potential going forward. We felt the best potential was to incorporate our GPS IP in a fabless model. As a result, during the second quarter, we divested our GPS technology and product line to a new fabless company, GloNav, in return for equity ownership of 19.9% on a fully diluted basis in GloNav. GloNav concurrently acquired the radio frequency (RF) technologies, assets and team of RFDomus, a U.S.-based private company. GloNav is financially backed by Atlantic Bridge, a European-based venture capital firm, who made the investment of $16.2 million into GloNav. With the capital infusion of Atlantic Bridge and the technology portfolio and customer relationships, CEVA’s GPS team and RFDomus, GloNav is well positioned to exploit future opportunity in the GPS chip set market.

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

I would like to review now the results of operations for the second quarter of 2006. Revenue for the second quarter was $8.4 million, within the range of our guidance. Revenue breakdown was as follows. Licensing revenue was $6 million, reflecting 72% of total revenue. Royalty revenue was $1.4 million, reflecting 17% of total revenue. Service revenue was $1 million, reflecting 11% of total revenue. Gross margins for the quarter were 87%.

Research and development costs were $4.9 million for the quarter, and the total operating expenses for the quarter were $8.1 million, including the 123R stock expense of $0.5 million. Tax expense was $30,000, and the net GAAP loss for the quarter was $217,000, or $0.01 per share.

Non-GAAP operating results, excluding 123R option expenses, would have been as follows. Research and development costs would have been $4.7 million for the quarter. Total operating expenses would have been $7.6 million for this quarter, and net income would have been $231,000, or $0.01 per share, respectively. As Gideon stated earlier, this non-GAAP net income is the first time we have managed to achieve that in the last five months, and this is an important milestone for CEVA. Refer to the reconciliation in the Company’s reporting results of operations to the non-GAAP numbers in the non-GAAP statement of operations attached to the Company’s earning release filed on form 8-K with the Securities and Exchange Commission this morning.

Other related data. Shipped units by CEVA licensees in the second quarter were 44.7 million units, 49% higher than 30 million units shipped in the second quarter of 2005 but down approximately 5.5 million units from the first quarter of 2006. This is due mainly to seasonality trends of our key royalty payors shipping products into the cellular and consumer electronic markets. To remind you, our second quarter 2006 royalty revenue reflects licensees reporting units shipped from the first quarter of 2006. Of the total 44.7 million units shipped in the quarter, 20.1 million units were attributed to licensees currently paying per-unit royalties, and 24.6 million units shipped by licensees who are burning through their prepaid license volume. This compares to 48.7 million units shipped in the first quarter of 2006, of which 25.8 million were attributed to per-unit royalties and 23 million were attributed to prepaid licensees.

In the second quarter of 2006, we had a total of 24 shipping licensees. Of the 24, 16 customers are paying per-unit royalties, and 8 customers are under prepaid arrangement, 1 higher compared to the first quarter of 2006. This new customer has started shipping a new product line in the telematics platform. In the first quarter of 2006, we had only 23 shippers, and of the 23, 16 were actually paying per-unit royalties, and 7 customers were under a prepaid arrangement.

Going forward, our interest and other income in the second quarter were $630,000, higher than the $541,000 in the first quarter of 2006.

Now for the balance sheet. As of June 30, 2006, cash and marketable securities were $63.6 million, up $3.6 million from the end of the first quarter, primarily reflecting strong [debiture] collection in the second quarter. Our DSOs in the second quarter now stand at a record low of 66 days.

I’ll now move to the guidance for the remainder of 2006. Taking into account the divestment of the GPS business and the original forecast annual revenues from the product line, we have updated our 2006 annual revenue guidance. It is planned to be in the range of $32.5 million to $33.5 million. Gross margins unchanged in the range of 87% to 89%. Operating expenses, excluding 123R non-cash compensation charges, in the range of $29 million to $29.8 million. And interest income is expected to be around $2 million for the year. Operating expenses, including equity-based compensation charge, will be in the range of $31 million to $32.3 million. Tax rate for the year is expected to be 10% to 20%. And the share count for 2006 is expected to be approximately 19.5 to 19.7 million shares.

Our Q3’06 revenue guidance would be the range of $7.7 million to $8.7 million. Gross margin is expected to be similar to the actual second quarter margins in the range of 86% to 88%. Operating expenses excluding 123R non-cash stock compensation charges are expected to be in the range of $6.7 to $7.3 million. And operating expenses including equity-based compensation will be in the range of $7.2 to $7.8 million. Interest income for the third quarter is approximately $500,000, and the tax rate for the third quarter is the same as annual, 10% to 20%. Share count for the third quarter of 2006 is expected to be approximately 19.4 to 19.6 million shares.

Now we’ll open the floor for questions.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question is coming from Matthew Robison of Ferris, Baker, Watts. Please go ahead.

Hi. Nice execution on the bottom line and the balance sheet there, guys. Yaniv, first housekeeping-- investments categories that you’re positioned in GloNav at $6 million?

Yes. $6 million is the cost basis. We’re going to use cost basis going forward. That represents the 19.9%, and that means that we will not show any losses or gains from this investment in the near future.

Okay. And, the deal-- the Mobile-Media 2000 deal with ASTRI - is that the same deal that you talked about in the quarter with the CEVA-X, or is it a separate deal?

No; it’s a separate deal.

How should we look at the pipeline for Mobile-Media 2000, and what should we expect to see in terms of the number of licensees over the next two quarters?

Here is the thing. Last quarter was the first quarter where we were able to demonstrate-- real demo with show how customers can measure the performance--

You mean by last quarter--? You mean the March quarter?

Right. Yes. In March quarter, we basically in the 3G essential, we demonstrated. Now, what I said in the last quarter conference call-- I suggest you take two quarters to get the customer be familiar with the technology because it’s a technology that people don’t see it in the market. The software customer wants to get [comfortable]. The deal this quarter is the mobile TV market, and we can elaborate a bit on this market. But the deal is for the customer that you know was convinced very early in the process that [inaudible]. But, I would expect Q3 to have some deals. But, starting the end of this year and next year, we should see more substantial design win.

So, it sounds like you’re-- If I can look at it at least from a positive perspective, it sounds like you’re getting-- the sales cycle is starting to move and with roughly six months behind you with test silicon and the ability to demo, we can expect to see an acceleration of your inner closure rate.

Yes. Yes.

I think it’s just hard to quantify a number of how many deals we’ll have each quarter. But, your summary is correct that we have more traction. We have backlog, and we have a pipeline of customers that are interested today in the different aspects of the multimedia. And we have just signed a fourth IPTV mobile TV deal, which means that we raised traction with this type of technology. That’s a very positive sign for us.

There is another encouraging sign. We have already signed, actually, six customers in this Mobile-Media 2000. A few of these customers are coming to us with a new request for further video codec. So, we see also a new way for business.

So, is that a design services activity, or is that an incremental license?

No. It’s incremental license. It’s additional codecs. We offer the H.264. People are asking now VC-1, which is the Microsoft product. It’s a new license for us.

Part of the special features that you bring is the ability to implement these multiple codecs on the same piece of silicon using basically a software-defined codec. Right?

Yes. That’s the clear advantage that we can offer. Customers that have hardware solution and needs to add the VC-1 Microsoft codec on top of H.264 has to redesign the chip completely. We just need to add software.

Now, if you look at these nine licensees that you had in the June quarter, the one with the Mobile-Media 2000 - was that the only CEVA-X-based core, or were there other CEVA-X cores as well?

There was another customer that just picked the CEVA-X for communication - for cell phone part.

Okay.

By the way, Matt, to answer another aspect of this question, it was a very interesting quarter in respect to the portfolio of deals that we had because out of the nine deals we had two TeakLite deals. We had a CEVA-X deal. We had on top of that the multimedia deal. We had the SATA deal. We had a Bluetooth deal, and we had another prepaid royalty from one of our current licensees. So, essentially, other than GPS that we have spun off, we have managed to license almost every piece of technology that we have in different markets, different geographies and in different applications. So, that was quite encouraging in the second quarter.

The previous record was ten licenses in the December quarter, but I recall that was a lot of small licenses for more commodity type stuff. Is that right?

Yes; that’s correct.

Now, these guys that are licensing this Mobile-Media 2000 and that are in the pipeline for licensing that technology - it sounds like you’re getting-- up to now, it sounds like you’re getting some new industry entrants. What are--? Are you getting any traction with some folks that we would consider to be brands, if you’re able to identify them?

We don’t want to disclose the names of our customers. But, one thing I can tell you-- the OEMs, the customers-- customers of customers-- are well known brands.

And that’s when you’re talking about these European and U.S. customers, I guess; you only had one in Asia this time.

Well, here is the thing when it comes to Asia. Actually, in terms of deals, we have two deals coming out of Asia, but formerly one out of the Asia deals was signed in the U.S. because management is there. But the activity-- the R&D activity-- the [inaudible]-- all these guys are based in China. They’re going to do the design there.

Okay. I’ll let somebody else ask some questions for a while now. Thanks.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is coming from Robert Morrison, a private investor. Please go ahead.

Hi. I know you’ve had quite a problem with much more office space leased in Ireland than you’ve needed. I guess I’m wondering if some of those savings that come from the GPS divestiture have to do with some of your office space going with the new company. Or, if not, if you can explain where the savings do come from and if there’s any progress or further progress in dealing with that leasing situation.

Sure, Robert. Let’s start with the cost savings. We were talking about in the earlier press release about the spinoff of the GPS assets of about $700,000 per quarter in operating expenses. This is mainly associated with the employees - the headcount and engineers that moved to the new company, all the design tools and software that they were using, and, of course, some of the facility that is associated and allocated with the new-- with the business of the GPS. That’s the major cost saving aspects.

With regards to the building, we did downsize our activity - the headcount - in Dublin because of this move. And we have moved to a new facility, which is a much smaller one and convenient one. I would say we’re in the final or close to the final stage of negotiation with the landlord of getting out and surrendering the building that we have in Dublin. Our estimates that this will be probably a rent of about $3 million, and then we will be able to surrender 16 more years, which have been signed by previous management of Parthus about ten years ago. That will save us about $1 million cash wise every year. So, we are close to getting out of it. Hopefully, we’ll have some good news somewhere some time in Q3.

Okay. The settling of that - is that apt to lead to some kind of a write off - something on a material scale?

No. It shouldn’t have any impact on the P&L. It should only have a cash impact of a one-time savings that we’ll be able to offset by much lower rents in the next two to three years.

Okay. And your other facilities in Ireland and perhaps also the facility in Northern Ireland - are you content with the amount of space utilization that you’re realizing right now?

Yes. We don’t have any issues with the rest of the sites, pretty much all across the globe. Now we have normal sizes as soon as we get rid and solve the larger issue that we have with this specific building in Dublin. In the last quarter, we also opened a sales office and application office in Sweden. We have now two guys there, just to be closer to some of the bigger cell phone manufacturers. I think that will give us some advantage being closer to them. And we are about to hire a third person for that specific office, which will be a field engineer and will help us with the technical issues. Other than that, real estate wise, I think we’re okay.

Okay.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is coming from Doug Whitman of Whitman Capital. Please go ahead.

Congratulations on a solid quarter, guys. The first question is on the receivables. Can you touch a little bit--? Was it absolutely brilliant CFO work? Was it you had better linearity in the quarter or a combination of the two above? Can you talk a little bit how you were able to get the DSOs down to the point that you’ve gotten them?

Yes; sure. Thanks for the compliment, first. I’ll take this. But, if you recall, we were-- we took the DSOs down the last couple of quarters to around the 70ish days. Last quarter, we were back in 102 days, and I stated that we just missed by pretty much a week a collection which moved the DSOs up to a higher level than what we have been used to. We’re back to normal. I think being around the 70ish days is something that we would want to continue going forward.

It comes from two aspects. One is just to make sure that when you sign the deal and you provided the technology, you get paid for it. That’s something that now we are making sure that that happens on a routine basis. The second is that the agreements that we sign today have payments that are less back-end loaded, like maybe in the past with 12 months’ or 18 months’ credit. They are much faster to be paid. As soon as we deliver the technology, within a quarter or two, our customers need to pay us the initial licensing fees. And, of course, the sooner they are successful hopefully will start also paying royalties. So, I think it’s a combination of both and just keeping a tight grip on how to run the business.

I’m assuming from that the linearity remaining relatively constant, unless you correct me. Then, the second question would be that it appears that you’re pretty poised for good growth as we exit this year. Can you talk a little bit--? You’ve done a lot of cost cutting over the last year. Should that growth emerge, as it appears likely to be, can you talk about what you need to add? Or, can you stay with kind of your headcount that you currently have?

First of all, the cost cuts that you were referring, we were very much [inaudible] in making the organization more efficient by cutting costs overhead, G&A and marketing people that are doing basically nothing. We didn’t cut. On the contrary, we are investing very heavily on R&D staff, especially in our video platforms. Going forward, we have openings that we are going to hire. But, we basically hold the stakes-- in our hands, two stakes. First, very much tied in terms of adding overhead. All of us are doing more work. All of us are hands-on people writing our own press releases and no outsourcing and no any other [inaudible]. On the other hand, we look carefully on the R&D, and we will invest based on, one, revenue growth and, two, on the need to do it.

To add some numbers to that, Doug, if you look at the second quarter of last year when we joined, the operating expenses non-GAAP over $8.9. If you round them up, this is an annualized-- this is about a $36 million OpEx a year. Based on our current guidance, we’re looking at closer to a mid range of about $7 million operating expenses per quarter, which is about $28 million a year. So, I think we’re pretty much where we wanted to be with regards to operating expenses, which we believe we could sustain and keep for the foreseeable future.

Hopefully now when we are very focused on the top line both coming from the multimedia that Gideon talked earlier and also to remind you all that we do believe and hope that towards the end of this year or beginning of 2007, we should be seeing some more stream of significant royalties coming in from two markets. One is the European with a big design win for 3G cell phones, a platform that we’ve already won. And our customers will start shipping products this Christmas. And, the other is a bunch of smaller and significant customers in the APAC region, whether it’s China or whether it’s Korea, that have designed and won design wins with our products. Some of them are already in the market; some are sampling now. We had numerous press releases in the February/March time frame with some of these names - EoNex, Spreadtrum, VMTS. All these are Asian companies that hopefully will be successful in the market. And we should be seeing royalties from those applications.

Well, I look forward to the period where revenue’s running so far ahead of the [inaudible] add sales and support count. Thank you.

Thank you. At this time, there appears to be no further questions. I would like to turn the floor back over to management for any further or closing remarks.

Thank you. I appreciate you joining us today and look forward to your continuous interest at CEVA and seeing and meeting you in the future. Thank you very much. Good-bye.

Thank you. This does conclude today’s CEVA, Inc. conference call. You may disconnect your lines at this time, and have a wonderful day.