CEVA Inc (CEVA) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Tiara, and I will be your conference operator today. At this time, I would like to welcome everyone to the CEVA fourth quarter earnings conference call. [OPERATOR INSTRUCTIONS].

Thank you. It is now my pleasure to turn the floor over to your host, Mr. Yaniv Arieli, CFO of CEVA. Sir, you may begin your conference.

Thank you. Good morning, everyone, and welcome to CEVA's 2006 annual and fourth quarter conference call.

Today's conference call contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they 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 facts are statements that could be deemed forward-looking statements, including financial guidance for the first and full year of 2007, 2007 being a breakthrough year in revenue growth, fueled by higher royalty revenue; CEVA's ability to capitalize in various new technologies it developed, including DSP cores and platforms for WiMax, cellular and consumer electronics, the move to Media2000 technology, the TeakLite III core and the CEVA voice-over-IP platform; and emerging markets such as technology-- potential addition of royalty revenue associated with new product launches by CEVA's customers; and the strategic merit of Bluetooth license agreement. The risks, uncertainties and assumptions include the ability of the Multi-Media line of products to continue to be a strong growth driver for the Company; again, competition within the challenging period of growth expected by the industry in which the Company competes; the Company's ability to earn revenue derived from a limited number of licensees; the success of the Company's cost-saving measures and risks related to the Company's business, including those that are described in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2005 and quarterly reports filed thereafter. CEVA assumes no obligations to update any forward-looking statements or information which we speak of their representative dates.

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 will cover the financial results for the fourth quarter of 2006, as well as the financial guidance for the first quarter and fiscal 2007.

With that said, I would like to turn the call over 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 fourth quarter of 2006 and full year.

Total revenues for the fourth quarter were $8.1 million. We signed twelve new license agreements during the quarter, an all-time record high for CEVA. Eight were for CEVA DSP cores and platforms, one was for CEVA's SATA technology and three for CEVA Bluetooth technology. Target applications of our customers are next-generation cellular phones, smartphone, mobile TV, voice-over-IP for optical network and networking equipment. Geographically wise, of the twelve deals we signed, three license agreements were in the U.S., two in Europe and seven in Asia Pacific region.

In the fourth quarter 2006, royalty revenue was $1.7 million, 17% and 15% sequentially higher than the third and the second quarter of 2006, respectively, during which periods royalty revenue was flat at $1.4 million.

Q4 revenue mix is a good indicator of our focus on two main fundamentals of the licensing business. The first is sustained licensing arrangements with first-tier companies. The second fundamental is royalty growth as a result of successful deployment of our technologies. I would like now to elaborate on each of these fundamentals in the context of Q4 results.

Four licensing agreements signed in the quarter were with first-tier semiconductor companies. Out of the four agreements, three are existing customers that have expanded their relationship with us. As we discussed in our Q3 conference call, we signed in the early part of Q4 a strategic license agreement with a major U.S.-based fabless company, who became a lead customer for our newest TeakLite-III, a successor of our best of breed and successful TeakLite DSP architecture. The TeakLite-III offers substantially higher performance and feature set enhancement over its predecessors, the TeakLite-I and the TeakLite-II, while maintaining [inaudible].

Also in the quarter, we licensed our CEVA-X DSP cores and Mobile-Media2000 hardware platform to one of the largest semiconductor companies in Asia, who plans to use our technology across multiple lines of chips for cell phones and consumer electronic devices.

We also extended our cooperation with a key customer of ours in Europe, who decided to adopt a major announcement to our CEVA-X DSP, which will become available shortly.

Another strategic license agreement is for our voice-over-IP platform. The CEVA VoIP was licensed to a U.S.-based semiconductor company for the VoIP over passive optical network. It is our second design win into this growing market. The customer is a first-time licensee that used to work with our competitors prior to this new deal with us.

Our royalty revenue in Q4 increased compared to the second and the third quarters of 2006, reflecting new production ramps by two customers in Japan in the areas of cell phones and consumer electronics. In addition, in analyzing the volume shift by our licensees, in 2005 versus 2006, we can find 18 companies which increased their shipments in 2006 versus 2005. A few of these companies entered into production with new products and applications during 2006. There were only six companies that decreased volume shipments or kept flat levels of shipments, out of which one customer, we believe, will pick up in 2007 through its transition to a new product line.

Q4 was also successful for our Bluetooth business, with three new deals signed with high profile customers. Of the three, two are first-time licensee, and one is an existing licensee of ours for another application. All the new customers are located in China, reflecting a strong interest in integrating Bluetooth into mobile applications. In our view, the contribution of Bluetooth agreement goes beyond the specific engagements and has a major strategic merit in terms of customer relationship development, which paves the way for further business with this customer for our other DSP, Multi-Media and SATA technologies.

In addition to the above key licensing deals signed in Q4, we also signed two more Teak and Xpert-Teak license agreements with our existing customers in A-Pac. These customers decided to expand the use of our technologies to their next-generation products.

We also signed one SATA protocol deal with a new U.S.-based customer.

In the fourth quarter, we witnessed a number of new CEVA-powered products being introduced to the market by our customers. LG Electronics commenced shipment of a number of new handsets powered by Infineon MP-E baseband platform, which incorporates the CEVA TeakLite DSP processor. The KG330, KE820 and KE600 are high end, feature-rich phones which are primarily aimed at the European and Korean markets.

In December, a leading Chinese IC company, Spreadtrum Communications, was rewarded the best market performance award in the first China chip appraisal from the Chinese minister of information industry for their SC6600 GSM/GPRS baseband chip, incorporating the CEVA TeakLite DSP core. Palm announced the Treo 680 smartphone in October 2006, featuring the Broadcom BCM2133 baseband processor, enabled by CEVA TeakLite DSP. And last, but not least, Korea [inaudible] announced new video-over-IP phone products that are enabled by CEVA TeakLite DSP and designed by C&S, a Korean-based leading DMD and video phone fabless house.

So, to summarize Q4 and 2006 results, we would like to emphasize key milestones achieved in 2006. One, a non-GAAP operating profitability. This was the first objective we set for the Company one and a half years ago, which was achieved in both the third and the fourth quarter of 2006. Two, divestment of the GPS assets and product line, allowing further focus on our core business. Three, introduction, demonstration and design win for a new product line in Multi-Media, voice-over-IP and DSP cores. These products broaden our product offering and created strategic fits for our customer needs. Four, strategic agreements with lead customers for two new DSP cores, TeakLite-III, a successor product to the most successful and best of breed DSP core, and our CEVA-X1641, a new DSP core targeted for the WiMax/4G market. Five, significant progress to our production ramp-up and higher royalty revenues in 2007, as indicated by a new introduction of products and applications in the market and wider acceptance of our technology by tier-one companies.

I will now turn to Yaniv Arieli to review the fourth quarter and the whole-year financials and provide future guidance.

I will now review the results of operations for the fourth quarter of 2006 and annual 2006.

Revenue for the fourth quarter was $8.1 million, 5% higher than our total revenue of $7.7 million in the fourth quarter of 2005 and slightly sequentially higher than the $7.8 million in the third quarter of 2006. Revenue breakdown was as follows. Licensing revenue was $5.2 million, reflecting 65% of total revenues. Royalty revenues were $1.7 million, reflecting 21% of total revenues. Service revenue was $1.1 million, reflecting 14% of total revenue.

Gross margins for the quarter were 87%. Research and development costs were $4.6 million for the quarter, and the total operating expenses for the quarter were $7.5 million, which included equity-based compensation expense of $0.5 million. Tax income was $273,000, and U.S. GAAP net income for the quarter was $579,000, or a fully diluted EPS of $0.03 per share.

Non-GAAP operating results, excluding equity-based compensation expenses, would have been the following. Research and development costs would have been $4.5 million for the fourth quarter. The total operating expenses would have been $6.9 million for the quarter. And net income for the quarter would have been $1.1 million, or a fully diluted EPS of $0.06 per share. Refer to the reconciliation of the Company's reported GAAP results of operations to the non-GAAP numbers in the non-GAAP statements of operations attached to the Company's earnings release filed on Form 8-K with the Securities and Exchange Commission this morning.

2006 was a strong execution year for CEVA with regards to continued progress towards sustainable, positive operating margins, net income margins and fully diluted EPS in both GAAP and non-GAAP figures. U.S. GAAP diluted EPS was a loss of $0.04 and $0.01 for the first and second quarters 2006 and a gain of $0.02 and $0.03 for the third and fourth quarters of 2006.

On an annual basis, we also managed to achieve significant improvement. On the non-GAAP basis, we presented net income of $0.11 per share on a fully diluted basis compared to none for 2005.

All this was attributed to management's focus on profitability and successful execution of the Company's strategic plans as well as further investments in a few of our newer product lines and technologies Gideon mentioned earlier.

Now I'll discuss other related data. Shipped units by CEVA licensees in the fourth quarter of 2006 were 49.9 million, 29% higher than 38.8 million units shipped in the fourth quarter of 2005 and up approximately 3.4 million units, or 7%, from the third quarter of 2006. On the revenue basis, the fourth quarter was 17% higher than the third quarter's revenue royalty. This demonstrates a slight increase in per-unit royalties from the third quarter to the fourth quarter of last year, due to new introduction and continued ramp up of the newer product line using our technologies. Fourth quarter 2006 royalty revenue was lower than the fourth quarter of 2006 due to the phasing out of an older product line in the communication business, as we previously discussed in past conference calls.

Our fourth quarter 2006 royalty revenues reflect units shipped from third quarter of 2006 shipments reported by our licensees. Of the total 49.9 million units shipped, 19.1 million units were attributed to licensees currently paying per-unit royalties, and 30.9 million units were shipped by licensees who are under prepayment arrangements. This compares to 46.5 million units shipped in the third quarter of 2006, of which only 17.3 million were attributed to per-unit royalties and 29 million were attributed to prepaid licensees. In both the second and the third quarters of 2006, we had a total of 24 shipping licensees. Of the 24, 16 are paying per-unit royalties, and 8 are under prepaid arrangements.

Interest and other income for the fourth quarter of last year was $728,000, lower than the $778,000 for the third quarter of 2006, mainly because of fluctuation and market value of our bond investment, as well as slightly higher foreign exchange loss.

Now for the balance sheet items. During the year, we generated positive cash flow of $2.6 million as of December 31, 2006. CEVA's cash balances and marketable securities were at $64.2 million compared to $61.6 million at the end of 2005. Our DSOs for the fourth quarter of '06 stand at 96 days, higher than the 66 days for the end of 2005, mainly due to, one slower-paying customer, which already paid us during 2007.

Now I would like to discuss our guidance for the full year of 2007 and, following, for the first quarter of 2007.

I will start and explain the IP model opportunity. Revenue growth for many IP companies in the market is driven by royalties received from customers utilizing the IP products. This type of revenue bears 100% gross margin and contributes to improvement of operating margins as well as improved profitability. This was not the case for CEVA in the past. But, we do believe that 2007 is a breakthrough year for us in terms of revenue growth, fueled by higher royalty revenue.

2007 is planned to grow between 5% to 11% from 2006 and will be in the range of $34 to $36 million; gross margin in the range of 87% to 89%. Operating expenses, excluding 123R non-cash stock compensation expenses in the range of $29 million to $29.6 million, and interest income is expected to be around $2.4 million for the year. Operating expenses, including equity-based compensation expense, will be in the range of $30.5 million to $31.1 million. Tax rate for the year is expected to be between 10% to 12%. Share count for 2007 is expected to be approximately 20.2 million shares.

Now for the first quarter of 2007 guidance. Our Q1'07 revenue guidance will be in the range of $7.7 to $8.6 million. Gross margin is expected to be similar to the actual fourth quarter of 2006, which is in the range of 87% to 89%. Operating expenses, excluding 123R non-cash stock compensation expense, is expected to be in the range of $6.8 to $7.4 million. And operating expenses, including equity-based compensation, will be in the range of $7.2 to $7.8 million for the quarter. Interest income is expected to be around $600,000. Tax rate for the first quarter is expected to be similar to the annual rate of 10% to 12%. Share count for the first quarter is expected to be approximately 19.6 million shares.

Now I will open the floor for questions.

[OPERATOR INSTRUCTIONS]. Your first question is coming from Matt Robinson from Ferris, Baker Watts.

The first question for you, Yaniv, is-- what happened to give you the tax benefit in the fourth quarter?

We have an historical tax benefit on an annual basis due to some tax pattern back in the Parthus days before the merge. And, once a year-- we have that also for next year, but in a much smaller number-- we could release-- we were able to release about $200,000 because of the tax treatment that was done back a couple of years ago. So, that boosted the tax for this quarter. Probably half of that amount could happen again-- could-- it depends on the tax circumstances at the end of 2007.

Are you guys allowed to talk about the royalty trends you're seeing from Sony Ericsson?

Well, we don't want to be specific. But, there are phones coming that have all of our technology built in in Sony Ericsson phones. And, we see a growing volume.

You highlighted things going on in Japan that related to the Blu-Ray technology.

Yes.

But you didn't really mention Sony Ericsson. Were they not particularly important for royalties in the quarter?

Well, they're important to Philips, as you know. [Inaudible.]

I see. Right. Of course. Yes.

Just to remind everyone, Matt, CEVA is empowering Philips chips that are in high end Sony Ericsson phones, and we essentially operate all the audio and voice capabilities in phones like the P990, the 600. These are similar applications that we have also in the Palm Treos using a Broadcom chip.

Do you expect that to expand in the Sony Ericsson line here shortly with some other applications that will be employed?

First of all, the high end phones eventually will become a mid range phone. So, volume will go up through this one. Then, eventually, we'll see this technology being used in more models from Sony Ericsson.

Do you expect more in the digital communications side of that application - baseband?

Well, this could be of--

And, on Infineon, should we assume that wherever we see Infineon getting designed in that your cores will be included there?

Yes.

Okay. On the pricing-- the average price of your license, if you can do the arithmetic in a simple way, came down. Is that because of the Bluetooth licenses being lower priced than the core licenses?

The Bluetooth license fees are indeed lower than the core licenses. I want to pinpoint the benefit of this Bluetooth deal. It's not just the opportunity to license but also the relationship that we are developing with customers that more than once tell us that the next step will be other technologies that we are licensing [inaudible].

You didn't really talk about any Multi-Media2000 wins. Is that--? How should we view that video technology?

One of the key deals-- we mentioned four deals with first-tier companies. One of them is indeed Multi-Media.

Oh, I'm sorry.

It's not just the full software, but that's the next step. Customers-- the way they do it-- they say, okay, let's take the hardware because it takes us time to build the chip. Once the chip is available, we can always license the software.

Right. You guys averaged, I guess, about maybe-- just a little over $5 million-- about $5.5 million a quarter in licensing. Is that the kind of number we should assume you can achieve going forward, on average, or do you think we can expect a little growth there?

If one looks at the similar IP companies in the industry, as I mentioned earlier, most of the growth is coming from the royalty revenue and not from the licensing revenue. With that said, I think we've been quite successful in the last year to come up with a new set of products which is new cores and new applications. As we mentioned, voice-over-IP is the second deal-- this is new technology that came out in 2006. Q3 was the first deal; Q4 was the second deal. We're engaged in both-- two very important companies that are essentially enabling voice to your home or office over fiber. So, that could be a huge opportunity across the world with these types of new devices. So, what we have been fortunate in our company is to have new products to offer in the IP space. Of course, in some respects, you have price erosion. In some respects, you need to come up with new applications every year in order to fuel also the licensing revenues. So, I think it varies. It's difficult to quantify, because, as you all know, there's not a backlog in the licensing or in the software business. But, of course, we will try to do our best to continue with these types of numbers.

So, we should assume that all the growth you're talking about for '07 is royalty?

At least right now we want to put a lot of focus into those because we could finally see it happening, both in the high end phones-- as you mentioned, some of the OEMs and phones that are out there already. Some are going to be shipped out this first quarter. This is a baseband platform for 3G, which we should see royalties, hopefully, next quarter for the first time and some other communication and multimedia devices and home entertainment devices-- Right now, we have a pretty interesting portfolio of products that should kick in and generate royalties for us.

Okay. Thanks. I'll let somebody else ask a question.

Thank you. [OPERATOR INSTRUCTIONS]. Your next question is coming from [Kelly Pan] from Pantheon Capital.

Could you just repeat the numbers of revenue from prepaid royalties? I mean the number of units from prepaid and those from royalty paying.

Yes. Overall, in the fourth quarter, we had 50 million - 49.9 million units that were shipped in the quarter. Of them, 19 million generated royalties. These are actually customers that are shipping products every quarter and are paying us royalties on a quarterly basis. This compares to 38, for example, or 39 million a year ago. Out of the 39 million, about 17 million were paying royalties.

I see. So, the prepaids were 30.9 million?

That's correct for the last quarter.

And, can you talk about the shape of that ratio split over time?

Overall, we hop, and we see some signs already, especially with one Asian very large semiconductor company, that they should be able to get out of the prepaid and utilize the whole amount that they bought in advance within a quarter or so. So, hopefully, by the middle of the year, we should be seeing more royalties. That should be a strong and very important factor. Overall, we--

But, what if they want more prepaids?

Well, we need to work on a case-by-case basis. As we stated in the past, we believe that it's healthier for the business not to have these types of arrangements going forward. With that said, some of our customers are very, very old customers and have been working with us for many, many years. And the industries that they are working in have pretty severe ASP erosion. So, there are two options for CEVA. Either we continue to work with them and help them out and help ourselves out-- we minimize the risk of them making it to the market or competing with their customers, and we get up front-- an up-front payment. On the other hand, we continue to empower their products, and we'll continue to be in their next generations as well. So, there's a difficult decision that we need to take on a case-by-case basis. In any case, these are a relatively limited number of licensees that we are trying not to increase but, on the contrary, decrease.

I didn't understand that last sentence. You're trying to decrease what?

No. I'm saying that the overall number of companies that are under prepaid-- the concept-- our concept is to try not to increase these anymore but try to decrease, meaning if someone gets out of the prepaid mode, they will start paying royalties on a quarterly basis like most of our other licensees.

I understand that. That's why, when I look at the prepaids year over year, they went from 22 to 31.

29?

22 to 31.

On a yearly basis?

Yes.

This means adjusting our--

Yes. This means that just-- We're talking about big companies that are doing quite well in the market and shipping products. The more they ship, eventually, the quicker they could utilize their prepaid amounts. The prepaid deal is, in fact, on a specific number of units. It could be 10 million or 15 million units. So, the more they ship, the faster they could utilize that amount and move to a paying mode instead of under prepaid mode.

Okay. So, maybe I don't understand. Is the number of prepaid contracts--? Have they increased, or is it just the units under those programs - the pre-existing programs?

The units.

The units. It's the same number we said at the end of 2006 and at the end of 2005. We had 8 under prepaid out of 24 shipping customers. So, that same 8 are still under prepaid.

Okay. Then the number of such contracts has not increased.

That's correct. And we hope that at least one, in a relatively short period of time, could end its relationship under prepaid and start becoming a payer licensee.

Got you. Very good. Thank you.

Thank you. Your next question is coming from Douglas Whitman from Whitman Capital. Mr. Whitman, your line is live.

Can you talk a little bit about, going back to DSOs-- a quick question. You indicated that you had received a large payment. Is it reasonable to assume this quarter that DSO days will be down sequentially?

I hope so. This specific payment that we should have got at year end, because it was due before year end, would have got us to a much better overall number. There is a good chance that it will go down by the end of Q1, but until we get there, it's going to be quite difficult to predict. As you know, in our business, we haven't had any collection issues or any bed debt issues. So, we've managed to manage that quite well. I hope that's not going to change. I don't see a reason for that to change in the future.

If you could comment a little bit-- The Ferris, Baker Watts reports indicate that Infineon had a win at Nokia. And, if that's correct, when would you start to see the effects of that business showing up in your revenues and earnings?

That, you have to ask the Ferris, Baker Watts analyst, which is a very knowledgeable guy. In those days, it's quite--

And good looking too.

And, then ask him. He has a quite good knowledge of the market. Infineon, as we hear and read, are doing quite well. We have been working with them-- at least, I could talk about the history-- for many, many years. These are one of our earlier licensees, and they're using our technology across multiple product lines. We hope that, for any other customer of ours that is using us across many products, they'll be successful in their design wins. It could be with companies that you mentioned; it could be with other companies out there as well. That, of course, will help us gain more business.

So, to use another example, theoretically, if you were in a phone that came out in June or July, a music phone, when would the revenues start to be significant to you? When would you start to see some of the streams of the royalties?

We don't have that detailed visibility on production ramp by companies. But, one thing that I want to draw your attention - there was an article published today about the trend of Nokia, who go to use off-the-shelf cellular chips rather than work with TI on an ASIC model what is called. So, what you have and what Ferris, Baker has-- this is-- could be in line of the decision that Nokia takes too, which clearly is in favor of us.

These types of announcements could help us in both ways. One is, of course, more royalties. That's the simple part. The other part is that a few of these companies, when they go to higher end, when they need other or more features and applications, they could also come back and license newer generations of DSP cores. So, of course, any ongoing licensee, which licenses the technology, uses it and has benefit from it, has a good chance. We've seen that many, many times. They return and license other applications as well.

Okay. Thank you. I'm excited about 2008 already.

We are too. Thanks.

Thank you. There are no further questions at this time.

Okay. Thank you, again, for joining us and your continued interest at CEVA.

We wish to invite you to join us for the upcoming 3GSM wireless conference held in Barcelona, Spain on February 12 to 15. The 3GSM is among the biggest and the most important wireless conferences in the world, in which we will be presenting our newest product entrant, including the Mobile-Media2000 demo and voice-over-IP application. We'll show the newest 3G handsets and other interesting products that have recently started utilizing our technology.

Thank you, and good-bye.

Thank you. This concludes today's CEVA fourth quarter earnings conference call. You may now disconnect your lines at this time. And have a wonderful day.