CEVA Inc (CEVA) 2007 Q1 法說會逐字稿

Welcome everyone to the CEVA, Inc. first quarter conference call. (Operator Instructions). It is now my pleasure to turn the floor over to your hose, Yaniv Arieli, Chief Financial Officer of CEVA. Sir, you may begin your conference call.

Good morning everyone and welcome to CEVA's 2007 first quarter conference call. Today's conference call contains forward-looking statements that involve risks and uncertainties as well as assumptions that if materialized or proven 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 including financial guidance for the second quarter of 2007 and fiscal year, optimism about continuous royalty revenue growth in 2007, the ability of our design wins for Nokia and to offset the shortfall resulting from the BenQ Siemens shutdown, CEVA's ability to capitalize on the various new technologies it develops and the emerging markets for such declines, and potential additional royalty revenue associated with new product launches by CEVA's customers.

The risks, uncertainties and assumptions including availability of the multimedia line and TeakLite III product line to be strong growth drivers for the Company, intense competition within the challenging period of growth expected by the industry in which the Company competes, the Company's reliances on deferring the rights from a limited number of licensees and other risks relating 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 31st, 2006. CEVA assumes no obligation to update any forward-looking statements or information, which speak of their representative dates.

This conference call will be conducted by Gideon Wertheizer, Chief Executive Officer of CEVA and myself, Yaniv Arieli, Chief Financial Officer. Gideon will cover the business aspects while I will cover the financial results of the first quarter of '07 as well as the financial guidance for the second quarter and fiscal of 2007. With that said, I would now like to turn the call over to Gideon. Gideon, please.

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 first quarter of 2007. Total revenue for the first quarter was $7.7 million. We signed 9 license agreements during the quarter. Six were for CEVA DSP cores and platforms and 3 for CEVA set-top technology. Target applications for our customers are next generation 3G cellular phones, smart phones, personal video recorders, voice over IP and networking equipment.

Geographically we signed 4 license agreements in the U.S., 2 in Europe and 3 in the Asia Pacific region. During the first quarter of 2007 royalty revenue was $2 million, an increase of 8% over the first quarter of 2006 and 18% sequentially higher than the first quarter of 2006 in which the royalty revenue was $1.7 million. This increase represents two quarters of double digit sequentially growth since the third quarter of 2006. The increase was mainly due to substantial production ramps, ramp up by one of our customers in the consumer electronics market. Q1 revenue was at the lower range of our guidance due to a delay in the execution of one license agreement that we now anticipate will be executed in the second quarter of 2007.

I would now like to highlight certain key business aspects of the first quarter results. During the quarter we signed a strategic agreement with one of the largest fabless companies in Asia who decided to base all its next generation consumer electronic chips on our newest TeakLite III DSP core. This major design win marks our expansion beyond the cellular and the mobile market into the very large home entertainment audio market that includes DVD, set-top boxes, digital TV, IPTV, game consoles and the emerging HDDVD or blue wave DVDs. The TeakLite III core offers the performance core software and ecosystem benefits aimed to replace currently deployed DSP that are mainly proprietary and has limited performance.

On the VoIP front we are continuing our growth momentum with the adoption of our VoIP platform into the GPON and EPON markets with a new license agreement with a leading company in this segment. The license agreement represents our third design win with a key player in the PON market since the introduction of our solution in the third quarter of 2006. The PON market has witnessed consistent growth, specifically in the U.S., Japan and Korea, with the VoIP as the inherent feature. The deployment of voice over IP platform will be followed by future needs for video in the form of video conferencing and IPTV for which we can offer our multimedia solutions.

On the cellular phone we signed a new major license agreement with one of the largest cellular manufacturers in China who is planning to develop a 2G, 3G multi mode chip for its own cell phone business as well as to offer these chip sets off the shelf in China. As part of their engagement with this key customer we are cooperating with a known U.S. based publicly traded IP company who plans to use our DSP to enable full mode 2G, 3G based and IP platform that will be licensed to new and existing players in the handset market.

We also signed 3 agreements in the U.S. and Asia for our set-top solution. One of our new customers plans to use this set-top technology to enable digital video recording onto hard disk in home entertainment equipment such as digital TV, DVD, set-top boxes and more. As we stated above, the home entertainment market is on of the CEVA growth markets where we also positioned the TeakLite III as the audio solution and the CEVA-X base platform as the video solution.

In summary, we participate in the world's largest cellular event, the 3GSM in Barcelona, Spain. At the show we presented to key customers the latest evolutions in our platform products. We demonstrated silicon solutions for DVD quality video coding and decoding fully in software as well as mobile audio and VoIP solutions. To our knowledge none of our competitors in the IP space was able to demonstrate similar performance and level of maturity as we did with our multimedia and VoIP platforms. Moreover, other than Texas Instruments, who used substantially more expensive and power intensive platforms, no other chip vendor demonstrated similar multimedia solutions. This, in fact, attracted the attention of major companies willing to migrate to higher resolution in software based solutions.

As we indicated in the recent past our royalty revenue is continuously growing. Current royalty growth reflects a substantial production vamp by one of our customers in the consumer market and another customers that has consumed its prepay unit during the quarter and started paying royalties. Early in the quarter Nokia and Infinium announced that Nokia decided to use Infinium's ULC (inaudible) chip enabled our TeakLite DSP in Nokia selected low cost models. This is a key milestone for both Infinium and CEVA as it marks the incorporation of open cores into products of the world's largest cellular manufacturer. Nokia previously used Texas Instruments' propriety DSP. This major design win, as well as other key design wins Infinium recently won, may eventually offset the shortfall in shipments resulting from BenQ Siemens shutdown.

Another important worth mentioning item is associated with our large European customer who has designed us in his next generation 3G platforms. This customer has finally notified us that it started its initial production ramp in later part of Q1. This is a very important milestone for CEVA, which will have major positive amplification in our future royalty revenue.

Recently we witnessed a number of new CEVA power products being introduced into the market by our customers including LG Electronics commenced shipment of two more handsets, powered by Infinium's MP-E edge platform that incorporates the CEVA TeakLite DSP. The LG brought attachment for KE850 and the LG (inaudible) for [KEL70]. Our award winning high-end multimedia phones, which are primarily aimed at the Korean and European markets. LG reported this week that they are expecting to sell 5 million units of the Shine phone this year.

Leading Chinese electronic manufacturer, Lenovo, launched a new mobile phone in Q1, 2007. Based on the broad [consularity] mobile platform this incorporates the CEVA TeakLite DSP. The P7680 multimedia handset is targeted at the Chinese domestic market. In Q1 2007 also (inaudible) Electronic launched a high offensive for the Chinese and the U.S. market using CEVA TeakLite power basement processor from [spreadroom] communication. Of particular note are the M300 and M3 multimedia models, which were ranked number one and number three respectively for the domestic brand sales in China.

Finally, Taiwan (inaudible) networks introduced a new WiFi handset targeting the growing voice over WiFi market. The SI638H is based on an Atmel VoIP chip set that incorporates the CEVA Teak DSP core. I will now turn to Yaniv Arieli to review the first quarter results and provide guidance for the second quarter and the fiscal also 2007.

I will now review the results of the operations for the first quarter of 2007. Revenue for the first quarter was $7.7 million, 5% lower than total revenues of $8.1 million in the first quarter of 2006. Revenue breakdown was as follows; licensing revenue was $4.6 million reflecting 60% of total revenues. Royalty revenue was $2.0 million reflecting 25% of total revenue. Service revenue was $1.1 million reflecting 15% of total revenue. Gross margin for the quarter was 87%. Research and development costs were $4.7 million for the quarter, including $200,000 of equity based compensation expense. Sales and marketing costs were $1.6 million including $100,000 of equity based compensation and G&A costs were $1.2 million including $200,000 of equity based compensation expenses.

The total operating expenses for the quarter were $7.5 million, which included $0.5 million associated with equity based compensation. There were no tax expenses for the quarter. net income for the quarter was zero or fully diluted EPS of zero cents per share. Pro forma non-GAAP net income and net income per share for the first quarter of '07, excluding the 123R expense, was %0.5 million and $0.02 respectively. Pro forma non-GAAP net loss per share for the first quarter of '06 excluding 123R expense was $200,000 loss or $0.01 per share loss. Please see the current report on Form 8-K that we filed with the S.E.C. this morning for a reconciliation between the pro forma presentation to the GAAP presentation.

Now I will talk about some other related data. I will start with royalties and repeat what Gideon stated earlier. The increasing royalty revenue for the first quarter reflects two quarters of double digit sequential growth since the third quarter of 2006. Shipped units by CEVA licensees in the first quarter of '07 were 40.6 million, 16.5% lower than 48.7 million units shipped in the first quarter of 2006 and 18.6% lower than 49.9 million units shipped in the fourth quarter of 2006. The reduction in units shipped is related to specific customers under prepaid arrangements and is mainly associated with their increased shipments in Q3 '06 that was followed by lesser shipments in Q4 '06. This effect was reflected in our lower Q1 prepaid shipment units, not dollars but units.

On the royalty revenue basis the first quarter of '07 was 8% higher compared to the first quarter of '06 and 18% higher than the fourth quarter of 2006. These increases reflect a significant ramp up of a new product line by one customer in the consumer electronics market. Our first quarter '07 royalty revenue reflects units shipped by our customers in the fourth quarter of last year. Of the 40.6 million units shipped 18.9 were attributed to licensees currently paying royalties and 21.7 million were units shipped by licensees who were on under prepaid arrangements. This compared to 49.9 million units shipped during the fourth quarter of '06 of 19.9 million were attributed to payer unit royalties and 30.8 million were attributed to the prepaid arrangement.

During the first quarter we had 25 shipping licensees. Of the 25 28 are paying per unit royalties and 7 are on the prepaid arrangement. For the fourth quarter of last year we had only 24 shipping licensees and out of the 24 16 were paying royalties and 8 were under prepaid arrangements. One new Asian customer was added in the first quarter of '07 who started to pay quarterly per unit royalties for products in the mobile space utilizing for the first time production in the video technology. Another customer has consumed its prepaid unit quota during the quarter and started paying royalties.

Interest and other income during the first quarter was 824,000 as compared to 728,000 for the fourth quarter of last year, mainly because of fluctuation in market value of our bond investments as well as some slightly higher overall averages.

As for the balance sheet items, during the quarter we generated positive cash flow of about $200,000. At the end of March 2007 our cash balance and marketable securities was $64.4 million. Our DSOs for the first quarter stand at 102 days, higher than the 96 days at the end of '06 due to longer payment terms provided in our CEVA TeakLite III licensing, our license agreement, for a specific service oriented project we started in late 2007.

Now I would like to discuss our guidance for the full year '07 and the second quarter of 2007. As we discussed in recent conference calls we are optimistic about the continuous growth of our royalty revenue. This optimism is based on discussions we have with our customers on an ongoing basis. Q1 royalty income was partly reflected potential growth with two customers that we mentioned earlier. As we also stated, our large 3G customers has just started to ship its CEVA X based chips and we expect initial royalty payments in the second quarter of 2007 but still to be minimal.

As this customer will go into production with our technology for the first time it is hard to predict the exact pace of the production ramp up. In either of the above we are focusing modest growth in the Q2 from these specific customer. In addition, royalty model factors in addition--in addition our royalty model factor in the interpretations of inventory glut that impacted some of our customers in the cellular market and the typical seasonality nature of Q1 shipments versus the Q4 shipments. As we all know, Q1 is lower in the cellular phone market in consumer electronic sales compared to the Q4 Christmas season. With that said and as we do not have all the royalty reports from our customer yet for Q2, we are forecasting second quarter royalties to be significantly higher than Q2 of last year. The royalties were there $1.4 million but just slightly lower than Q1 royalties of $2 million, which we just reported. We are expecting to regain growth in royalty revenues in Q3.

Total 2007 annual revenue guidance has not changed from our Q4 '06 earnings call and it still is in the range of $34 million to $36 million, gross margins unchanged in the range of 87 to 89%, operating expenses including equity based compensation expenses in the range of $30.8 million to $31.4 million and interest income net is expected to be around 2.8 million. Annual operating expenses excluding equity based compensation will be in the range of $29 million to $29.6 million. Tax rate for the year is expected to be around or slightly lower than 10%. Share count for the year is expected to be about 20.2 million shares.

Now for the guidance for the second quarter of 2007, revenue is anticipated to be in the range of $7.7 million to $8.7 million. Gross margin is expected to be in the range of 87 to 89%. Operating expenses including equity based compensation will be in the range of $7.4 million to $7.9 million and will include approximately $0.5 million attributed to equity based compensation expense. Interest income is expected to be approximately $650,000, tax rate around 10% or slightly lower. Share count for the quarter, for the second quarter, is expected to be approximately 19.7 million shares.

Now I will be glad to open the floor for questions.

(Operator Instructions). Your first question is from Matt Robinson of Ferris, Baker Watts.

What was the head count?

[190] employees.

Okay so down 6?

Yes.

Why was sales and marketing expense up when revenue was down sequentially?

If you recall and as Gideon just mentioned in Q1 February time frame we have participated in the largest cellular show in the world. This is the 3GSM in Barcelona so usually our Q1 has more expenses associated with this show.

Okay and the license level, you had one slip so does that mean we should expect that for the run rate for licensing should be a little bit higher than it was in the first quarter?

As you know, in the licensing business it's quite hard to predict when a licensing deal will be signed and until it's not signed it's not-- there's no deal. With that said, I like the chip business that you have lead time and you have (inaudible) lead time and you know exactly what is in front of you an upcoming two to three months. So because of that, we're still prudent in our G2. We did not add that specific deal that we believe will be signed in the second quarter to grow our licenses revenues but we talked about and we issued a few press releases in this last quarter about new technology like the video Lite technologies and this thing has been quite successful both with the TeakLite III and the voice over IP platforms, which are newer technologies so we have a pretty good interest and a pipeline of companies at this point of time.

You mentioned in your opening comments BenQ and that basically shutting down as a source of demand for Infinium chips and those royalties. Is that-- what period did you see BenQ really go to zero or near zero or is that something we can look forward to and how do you see things offsetting it? I know clearly Infinium has quite a bit of other customers and they seem to be recovering somewhat but can you just explain the backdrop for mentioning that at this juncture?

Well, it's hard to say exactly the pace of when it completely shut down but this is definitely the trend but in general Infinium was managing the last few quarters to get significant design wins with key customers and we are looking in the relative reports. We are not disclosed the bottom and Q2 report, which we got already, shows that they are now going up with their shipments. But at Q1 of '06 Infinium had significantly higher revenues and royalties than the Q1 of '07 so I think it's happened sometime throughout the later part of 2006 and, as Gideon said, hopefully to reach the rock bottom in the first quarter of this year. I mean this is worth mentioning so Q1 royalty went up significantly because of these two customers, which we spoke about and this was despite the fact that Infinium went down significantly relative versus Q1 '06.

All right. Thanks a lot for that color.

Doug Whitman of Whitman Capital.

Going back to the receivable days, Yaniv, could you talk a little about what's a reasonable expectation for receivable days going forward? You mentioned some of your new contracts. It seems like the days are going to be stretching out.

As you know we have started to license at the end of last year, in Q4 of last year, the TeakLite III because this is still new technology. We still have different designs and customizations that we are doing for specific licensees with this core and we are getting input from different customers what they would like to see this next generation with the core. It seems to be very successful and seems to be attracting a lot of attention and as soon as we believe that we have all the information that we need and all the market demands from these initial licensees, then we do what we usually do with our other older cores, whether it's the Teak, the TeakLite II, the CEVA X, we pretty much come to a version, shut it down and say this is going to be the type of an off the shelf DSP core like we've always done so we are going to say that we're still doing some work. This is why for those specific agreements that are a little bit more service oriented the off the shelf DSP cores like all other DSP solutions that we have today and for these specific deals there are extended payment servers that are associated and in line with the work that we are doing. I hope that within a quarter two we will be able to put the stamp, the wax stamp on the TeakLite III and it will become an off the shelf type of product and then the payment terms will be much better than the other payment terms, which is mainly upon the effective date and we'll not have longer payoff.

So is it reasonable to expect the next two quarters your DSO days are going to drift up and then start drifting down?

I don't think it's going to drift up. I think it should remain at these levels plus minus. If I exclude those two specific deals that are a little bit more service oriented that I just talked about, I came in with 89 days in my calculation, which is more reasonable and this is more in line with what we have seen in recent quarters. And so we still don't have any collection issues or problems and the fact that it's been high for the last two quarters is more associated with these work related or service related deals that we have signed in Q4 and in Q1.

So in short, depending on the timing your DSOs should trend down in the fourth quarter or the first quarter of next year, somewhere around there?

Yes most likely, maybe a little bit before but that would be reasonable yes.

Can you talk a little bit or, Yaniv, a little bit about the home entertainment audio license that you signed? Can you give us a little idea of what, a little more details on what is the revenue opportunity there over what period of years? What-- you mentioned the agreement is signed for absolutely everything and they were major manufacturers so I have to assume there's a pretty good revenue opportunity but it would be helpful to put some brackets around it.

The home entertainment market is one of the markets that we decided strategically to approach. In the past we weren't in this market. We-- most of our sales are in the basement, the cellular market and also in the mobile space with our video and the uniqueness in this market first of all is big. In every set-top box you have a Dolby type of DSP doing audio. Now in every DVD you're going to have audio high definition or high-end audio and, of course, every DVD will have a DVD record so it's a huge market for us. Now up to now most of the companies that supply chips into this market used proprietary DSP because there wasn't any DSP, the true business, the DSP that use for cellular does not fit well into the home entertainment audio so for this purpose we defined this TeakLite III architecture, TeakLite III DSP cores with the objective to get into this market and get basically incremental business toward we are a selling today what we are licensing today. Now the customer that we license this technology last quarter is one of the largest and one of the dominant players in the DVD markets. Going into China, and you know China is a huge market for DVD and we are glad that this customers picked the TeakLite III for this purpose so it is huge market opportunity there with companies that use today proprietary DSP things that they develop in house and they don't know how to take it to the next level and, of course, royalties because it's a big market.

Well, you're giving me really no-- it would be helpful to have some idea of how long this agreement is likely to run for, what kind of revenues might we reasonably expect, even a conservative expectations and other than it's a big market. I'm aware of that.

Well, you know you mean expectation?

Yes I'm trying to get some expectation.

The market, I'm telling you. The market of DVDs plus all the things is it's about 200 million units per year. Doug, I think I understand your question but we really use-- when we sign the deal other than looking at the market segment and anticipating how successful (inaudible) license fees can be we don't really come up with a ballpark figure and say this agreement at the end of the day could contribute so and so million dollars in it's sixth year or next three to six years or next five years. And we could give you some idea of magnitude licensing deal again in the high end, which is the TeakLite III and the past the CEVA X, this newer and stronger type of core usually are type of a multimillion dollar deal in the licensing front because these are the best of read that we have and the latest in news. Royalties are for newer products are higher than the average of the Company and they gradually go down on higher quantities and volumes, which is also typical for these agreements. At the end of the day when you talk about and what Gideon is emphasizing here is the size of this Company and the fact that it's already a player in the market. It's not a start up that is trying to get into a market, get the market share and then it will be successful we'll be happy. This is a company that is going to take them probably a year or so to develop the product and then as soon as they are in the product line then the opportunity for us is immediate royalties and very large number of royalties.

Okay so this is a second quarter of next year we'll start to see the royalty revenue from this reasonably?

This specific customer yes.

That's helpful. Thank you for putting some brackets around it.

(Operator Instructions). [Rob Carras] of Sunvest.

I have a question about the licenses that you've signed this quarter. How many of those have a prepaid element to them? If you look back at Q4 over the last few quarters, how many of your licensees have prepaid elements?

Essentially most or almost all our deals, new deals, are the licensee which is out front licensee and as soon as the licensee gets to production, then it pays the pretty huge royalties so we don't-- this is the typical way we do the business and I believe this is the way we have done it both it in Q1 or Q4 of last year with regard to the new licensing deals signed. This is the voice over IP. This is the CEVA X type that will be there, the different type of deal that we signed. As soon as our licensee gets into the production, then he pays us the royalties.

Looking back in time when did you start making that change from having a prepaid element to just signing a license revenue and then getting royalties as soon as things went into production? Was that a year ago, two years ago?

Well, it's not something that we can-- we have started. It really depends on the way we understand the customer business. The prepaid arrangement that we have in the past will on the spot things that customer expressed show about questions that he has in this market and we are dealing with it. It's on a case by case.

And next end years do you think more of your revenue growth will be coming from royalty growth in the second half and if you keep up your, you meet your guidance or do you think you have increasing licensing revenue in the second (inaudible) or both?

We put a lot of attention on the royalty growth because this shows the sustainability of our business, the fact that we license and bring customers to production so we are expecting royalty growth and (inaudible-highly accented language). You know it's a trend. We see customers shipping product in volume. We see new customers getting into production. Now when it comes to license revenue here, the visibility that we are getting is that we have been generally is something that it's hard to predict but we are, because we have more product, because we have new products we are focusing on some growth in the license line but licensing is something that happened in Q1. From time to time you can lose some timing here or you can lose a deal and that's you get nowhere. Rob, I would add to that that and we talked about this earlier in the call that even in the typical seasonality of our Q2 royalty revenues, which are composed of Q1 shipments which are usually lower in the industry than in Q4, we are almost able to offset this year the sequential decline. And last year, for example, we had 21% decline in royalties in Q2 over Q1, a lot of it because seasonality. This year we are almost able to completely almost offset that decline because of these new introductions of product and if you start ramping up the 3G opportunity, which will have much more significant numbers in shipments in Q2, which will be represented in our Q3 royalty revenues, and add the new products there and the licensee that we went out of prepaid arrangement and we know that these guys are-- have been selling few millions of units in the last couple of quarters and now they're under-- our of the prepaid for the full quarter in 2007 in the second quarter meaning again Q3 reports, we are very, very optimistic that the royalty figures should be substantially higher than what they were in the past.

Excellent and one final question, what are you seeing in terms of just a general market out there in terms of the design activity? Are you seeing a pullback at all or are you seeing more people coming to market with new designs or increased design activity?

Well, we see a lot of activities first of all in Asia, meaning China, Taiwan, Korea and also in Japan, a lot of design activity around the video, around the DSP for applications like personal multimedia player, of course, cell phones, IPTV, set-top boxes, digital TV so we see many companies. Some of them are big companies. Some of them are more new emerging companies. In the U.S. we see activities in the voice over IP and we mentioned the PON, the Passive Optical Network market and we see the U.S. mainly and Japan.

Doug Whitman of Whitman Capital.

Going back to the home entertainment systems, can you talk a little about the significance of this win as far as winning other potentially home entertainment products? Is this a unique one only with this customer or is it something about their use the way they deploy technology or would you expect that this would be a good start to getting other customers signed up?

Well, the TeakLite III was initially aimed, designed for this specific market segment because it's big, because you need the DSP, because there is an opportunity there because all the-- most of the deployments out there are not outdated DSPs so we don't say we are expecting that these significant win will be followed by other and, in fact, we are in advance engagements with customers about this-- you know for this market for long builds.

You talked a little bit also turning back to Infinium about Nokia in your Press Release. Could you also talk a little about Apple Infinium with your part is in there so what's the expectations reasonably on when you can get royalties from the iPhone?

As you know, we cannot comment on things that we are not officially announced.

There are no further questions. I would like to hand the floor back to Yaniv Arieli for any closing remarks.

Thank you again for joining us today and for your continued interest in CEVA. I wish to invite you all to join us at upcoming AEA MicroCap Financial Conference held in Monterey, California on May 7th of next week. At the AEA we will be presenting few newer products including the mobile media 2000 demo, some new 3G handsets that were recently introduced and some interesting products, other products, with our technologies. Thank you again and goodbye.

This concludes today's CEVA conference call. You may now disconnect.