CEVA Inc (CEVA) 2007 Q2 法說會逐字稿

Good morning. My name is Rich and I'll be your conference operator today. At this time I would like to welcome everyone to the CEVA second quarter earnings conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Mr. Yaniv Arieli, Chief Financial Officer. Sir, you may begin your conference.

Thank you. Good morning, everyone, and welcome to CEVA's second quarter 2007 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 third quarter of '07 and fiscal '07, optimism about our booking pipeline buildup, expansion in our customer base in China, expansion of spread room and continuous royalty growth in '07 and '08, CEVA's ability to capitalize on various new technologies developed and emerging markets for such technology and the potential additional royalty revenue associated with new product launches by CEVA's customers.

All these risks and uncertainties and assumptions include the ability of CEVA's TeakLite III DSP core to continue to be a strong growth driver for the company, the effects of the intense competition within our industry, the effect of the challenging period of growth expected by the industries in which we license our technology to, the possibility that the market for our technology may not develop as expected, the ability to timely and successfully develop and introduce new technologies, our reliance on revenue derived from a limited number of licensees, our ability to improve the royalty revenues in '07 and '08 and other risk factors related to our business, the pipeline of our companies interested in our technologies, including but not limited to those that are described from time to time in the company's Securities and Exchange Commission's filing.

CEVA assumes no obligation to update any forward-looking statements or information which speaks as their representative date.

We want to draw your attention to the revised Q2 '07 earnings release issued earlier. Kindly disregard the earlier version that contained a technical glitch in the P&L headings.

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 for the second quarter of '07, as well as the financial guidance for the third quarter and for fiscal year '07.

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

Thanks, Yaniv. 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 2007.

Total revenue for the second quarter was $8.5 million, closer to the higher range of our guidance and slightly higher than the $8.4 million for the second quarter of 2006.

We concluded eight new licensing agreements during the quarter. Six were for the CEVA DSP cores and platform, one for the CEVA SATA technology, and one for the CEVA Bluetooth 2.0+EDR technology. Target applications for our customers are digital TV, DVD and HD DVD, ultra-low-cost phones, 3G phones, smart phones and portable multimedia players. Geographically we signed three license agreements in the U.S., one in Europe and four in the Asia region.

In the second quarter of 2007, royalty revenue was $1.9 million, an increase of 33% to the $1.4 million for the second quarter of 2006 and slightly lower than the first quarter of 2007, in which the royalty revenue was $2 million. We should note here that the second quarter is traditionally weak within the context of royalty revenue, as it represents first quarter shipments by our customers, post the high Christmas shopping season.

As an example, last year royalty revenue for Q2 declined by 21% or approximately $400,000 versus the first quarter. This year we were able to almost offset the decline with only 2% decrease or only $40,000 in the second quarter royalties as compared to the first quarter of 2007.

The second quarter of 2007 was (inaudible) for all major aspects of our business, namely revenue growth, healthy booking, pipeline buildup and increasing royalty revenue we just described.

I'd like now to elaborate on the highlights of the second quarter results. The momentum in licensing of our newest generation DSP core technology, the TeakLite III, continues where we secured a strategic agreement with one of the largest branded consumer electronic vendors in Japan, who is about to deploy our TeakLite III technology in the next generation integrated digital TV. It is another major design win for us in the home entertainment segment, a market that we strategically target to expand beyond our dominance in the mobile market.

The TeakLite III officially launched-- launched during the quarter offers significant performance, power and cost advantages that enables high (inaudible) support for products such as DVD, HD DVD, digital TV set-top boxes, IP TV, as well as next generation smart phones and portable media players.

During the quarter we signed a multi-year agreement for our Teak DSP core with a leading European semiconductor company, planning to deploy our DSP technology across a broad range of highly integrated baseband chip for the ultra-low-cost segment of cellular market. This agreement is of significant importance for us as this customer is about to abandon its in-house DSPs for cellular baseband and migrate to our technology.

In China we continued expanding our customer base in the local mobile market with two new agreements, one for the (inaudible) part of our mobile media video platform and another agreement for our CEVA audio-only solution. This brings the total number of CEVA licensing deals in China to 14, out of which 10 were signed within the last 12 months.

China is a very dynamic market with a large number of emerging companies focusing on the local market with advanced products such as portable media players, multimedia-enabled cellular phones and smart phones. These types of products are evolving into a converged device with high resolution video, high-quality audio and Bluetooth connectivity to enable (inaudible) synchronization with your PC and for hooking to accessories such as wireless headsets. This market (inaudible) our mobile media, CEVA audio, and CEVA Bluetooth technology.

During the quarter we also were delighted by the successful IPO on NASDAQ of Spreadtrum Communication. Spreadtrum is our first licensee in China using our cores across multiple lines, including GSM, 2G, 2.5G and China's home-grown 3G standard, the TD-SCDMA. As can be seen from our prospectus, Spreadtrum is expecting a fast growth in China in the near term, which eventually may lead to higher royalty revenue for CEVA.

I would like now to share with you key developments with regard to the products of CEVA customers in the marketplace. During the quarter, Infineon announced that China's ZTE Corporation has selected the ULC2 platform containing the CEVA TeakLite DSP for its ultra-low-cost range of handsets. They plan to target not only the Chinese market but through a strategic agreement with Vodafone will also be sold in other growing markets, including Romania, Egypt and South Africa.

During the quarter, we also saw in the market the first CEVA (inaudible) powered handset designed by our major European-based customer, known to be one of the leaders in the 3G baseband processor market. This HSDPA phone that supports fast browsing of up to 3.6 megabits per second is manufactured and branded by one of the largest and most advanced Japanese manufacturers and is currently offered in Japan. To the best of our knowledge there is another 3G phone being rolled out in the European market, followed by more phones, more different brands later this year.

Finally, with the continuous introduction of new CEVA-powered devices into the market, we have added a section to our website highlighting these products. Many handsets and other devices from OEMs, including (inaudible) and Lenovo powered by CEVA IP are displayed there.

I will now turn to Yaniv Arieli to review the second quarter results and provide guidance for the third quarter and the fiscal year of 2007.

Thank you, Gideon. I will now review the results of operations for the second quarter of '07.

Revenue for the second quarter was $8.5 million, slightly higher than $8.4 million for the second quarter of 2006 and 10% higher sequentially from $7.7 million in the first quarter of 2007.

Revenue breakdown was as follows. Licensing revenue was $5.5 million, reflecting 65% of total revenue. Royalty revenue was $1.9 million, reflecting 23% of total revenue. Service revenue was $1.1 million, reflecting 12% of total revenue.

Gross margins for the quarter were 89%, at the higher level of our guidance.

R&D costs were $4.6 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 expense. G&A costs were $1.4 million, including $200,000 of equity-based-compensation expense. Total operating expenses for the quarter were $7.6 million, which included equity-based-compensation of $0.5 million.

Tax expenses were $150,000 for the quarter.

Net income for the quarter was $0.4 million or fully diluted EPS of $0.02 per share. Pro forma GAAP net income and net income per share for the second quarter of '07, excluding the equity-based-compensation expenses were $0.9 million and $0.05 per share, respectively. Pro forma non-GAAP net income and net income per share for the second quarter of 2006, excluding equity-based-compensation expenses and a gain of $100,000 reported in interest and other income related to the disposal of an investment, was $200,000 or $0.01 per share.

Please see our current report on Form 8-K, which we filed with the SEC this morning, for a reconciliation between the pro forma presentation and the U.S. GAAP presentation.

Other related data -- I'll start with the royalties and repeat what Gideon stated earlier. During the second quarter, total royalty revenues were $1.9 million, an increase of 33% compared to $1.4 million for the second quarter of 2006 and only a slight decrease of $40,000 compared to the first quarter, mainly due to the fact that revenue represents in the first quarter shipments by our customers post the high Christmas shipping.

Shipped units by CEVA licensees in the second quarter of 2007 were 45.5 million units, 12% higher than 40.6 million units shipped in the first quarter of '07 and 2% higher than the 44.6 million shipped in the second quarter of '06. Of the total 45.6 million units shipped, 24.3 were attributed to licensees that are currently paying per unit royalties and 21.3 units-- million units, were shipped by licensees are under prepaid arrangements. This compares to 40.6 million units shipped during the first quarter of '07, of which 18.9 million were attributed to per unit royalties and 21.7 million were attributed to arrangements under prepaid. This represents a sequential growth of 21-- 29% in paying royalty quantities and 21% increase year-over-year.

During the second quarter we had 26 shipping licensees, one higher than the previous quarter. Of the 26 customers, 19 are paying per unit royalties and seven are under prepaid arrangements. One new European customer was added in the second quarter, which started to pay royalty-- per unit royalties for products in the GPS mobile space utilizing our TeakLite-based GPS technology.

Interest and other income during the quarter was $626,000, as compared to $824,000 for the first quarter of '07. We expect the decrease to be temporarily in nature and it's mainly associated with the fluctuation in the market value of our bond investments, particularly one bond, which is principal guaranteed by Merrill Lynch.

As for the balance sheet items, during the quarter we generated positive cash flow of $0.5 million and at the end of June '07, even cash balances and marketable securities were at a level $64.9 million compared to $64.4 million at the end of the first quarter.

Our DSOs for the second quarter was 106 days, similar to the level of first quarter of '07 and mainly due to the longer payment terms provided in our CEVA TeakLite III license agreements for a few-- a few service-oriented projects, which started in late 2006. Excluding these effects, DSOs would have been 92 days.

Now I'll move to the full guidance of '07 and the third quarter of this year. We continue to be optimistic about the growth in our royalty revenue, although, as stated before, due to the substantial production ramp of new customers incorporating cutting-edge technologies, it is difficult to predict the exact pace of the production ramp-up by our customers.

Our total '07 annual revenue guidance is unchanged and expected to be in the range of $34 million to $36 million. Gross margin is expected to be in the range of 87% million to 89%. Operating expenses, including equity-based compensation, are expected to be in the range of $30.9 million to $31.7 million and interest income, net, is expected to be around $2.8 million. Annual operating expenses, excluding equity-based compensation are expected to be in the range of $29 million to $29.8 million.

Tax rate for the year, approximately 10%, and the share count for 2007 is expected to be approximately 20.2 million to 20.4 million shares.

Now for the guidance for the first-- for the third quarter of '07. Revenue is expected to be higher than previous quarters, in the range of $8.2 million to $9.2 million. Gross margin is expected to be slightly higher and in the range of 88% to 90%.

Operating expenses, including equity-based compensation, is expected to be in the range of $7.5 million to $8.1 million and of the total operating expenses, $0.5 million will be attributed to the equity-based-compensation expenses.

Interest income, net, is expected to be approximately $650,000 and the tax rate for the next quarter around 10%. Share count for the third quarter is expected to be 19.9 million to 20.1 million shares.

We will now open the floor for questions.

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

Hey, good morning. Nice quarter, except for the DSO, of course, but you see that staying up there at that level?

Good morning, Matt. First, thanks. Second, we expect that in the previous quarter and we gave some input about the TeakLite technology.

Yes.

The TeakLite III is really state-of-the-art technology, but it came out to the market before we finalized its full development. That's a not common practice at CEVA in recent years. That means the technology by itself was quite successful in companies or early adopters who were willing to take that technology before we actually signed and sealed the development.

That started because if you licensed a Teak or TeakLite or CEVA-X, this is an off-the-shelf type of product and the payment terms are almost immediate or upon signature of and transferring the technology. Because we all knew, both CEVA and the early adopters, that it will take us some more time to develop, we built these few last deals with a little bit of longer pay terms. As soon as the TeakLite III is an off-the-shelf product, probably later this year, we should be lower in our DSOs.

So we could see it come in, maybe, by the end of the year?

Hopefully a bit earlier than that, but worst case, yes.

Okay.

Let me just add a business aspect, because I think it's worth mentioning.

Okay.

Usually when we design or come out-- came out with a new product, we are looking for early adopters or lead customers to get more confident level on the definition and the market acceptance. The TeakLite III is a significant success for us, because in all the history of CEVA, we never managed to get more than one early adopter while we're designing. We've-- with the TeakLite III we have already three lead customers and one of those-- two out of the three are in a new segment for us and this is the home entertainment segment where usually we're in the mobile segment and now we are getting, with the technology, into the DVD area for audio and DTV, which is one of the deals-- the significant deals that we had this quarter was in this DTV area.

Is that because they're having to move to 32-bit for audio?

Right, one of the reasons, yes.

And are you seeing-- it sounds like you're seeing adoption by the actual consumer brands or at least in one case. Are you seeing the kind of companies that are making chipsets for high-end audio starting to move towards the TeakLite III instead of doing their own?

Yes, yes, definitely.

Now when you look at the guidance, what are we-- what's the range you think we should expect for royalties? I think you mentioned some of the activity was Infineon, but there's some other pretty high-profile Infineon customers that have recently launched products and have you-- have you started to see any signs that that is going to have an impact on your royalties?

Yes, of course. I mean, if you look at this latest quarter you could see the first time today that we were able to offset a 21% seasonality decline over last year. That-- this is the first step and this is the first sign we see.

Quantifying it for the next quarter is usually very difficult just because we don't have the forecast or the numbers by our customers a quarter in advance. As soon as they wrap up the quarter and finish it -- for example, now Q2 -- within a month and a half or so, we get those royalty awards for the quarter that they ended.

So we don't have too much visibility on the upcoming quarters. We do have visibility on the design wins, as you mentioned, very significant with Infineon, very significant with other consumer electronic products, 3G baseband adoptions and we will see how our customers ramp up. But for sure, the royalties should grow going on.

Yes, well, I guess I-- I understand your reporting. There's no change to that. It's been that way for years, but you must-- you talk to your customers, you must get a feel for how their business is going and you hear the popular press about phones selling out, these iPhones being pretty popular and the LG product being popular and, I guess with Ericsson mobile platforms you've got some activity with Sharp and the other Japanese 3G guys. But there must be-- you must get some feel for it and I think you gave us -- maybe I'm mistaken, but there was a flavor for the-- back when you reported in April, there was some flavor for how big you thought royalties would be in the June quarter, I recall.

I think last quarter we just said that we were confident that it will be above the '06 level, but slightly lower than the Q1 level. So we said $1.4 million to $1.9 million--

That's what I'm talking about, yes.

Now, so, again, our-- the best data that we can figure from what you said and from what we read and know the market segments and opportunities, royalties should grow. Hard to say if it's 10% or 15% or 20%. We just don't have the data, so we would rather not guess but see it as it happens and goes along.

So that range is kind of a sequential growth range, 10% to 20%? Is that what you meant to say?

I just had it to grow. We don't know exactly what--

Okay, I'm sorry to--

There are, no doubt, a lot of companies doing production ramps, start production ramps, but the pace is something that we want to see the production ramping up and then be happy to be more concrete.

Yes, sure. Well, it's great to see you guys having enough confidence to raise the guidance range a little bit and, obviously, to beat numbers and so forth. So congratulations and I'll yield the floor to the next person in queue.

Okay, thank you.

Thanks.

Doug Whitman, Whitman Capital.

Thank you. Maybe going back to some of Matt's questions, going back to the first one, accounts receivables, can you talk a little bit, Yaniv, about is the difference between receivable base between license and royalties, so if royalties go up next quarter, is it reasonable -- as a percentage of revenue -- that that would carry a lower DSO?

Yes, absolutely correct. Simple math. And, yes, the royalties are reported on a quarterly basis, paid, usually, within net 30 days and no collection issues whatsoever. So you're right about this formula that you come up with. Of course, if royalties will become 50% of our revenues, this will have a much bigger effect. If they're growing slowly as we go along, then it will have a little bit of a less effect in the next quarter, but for sure, in the next 12 months it will.

Can you give us a little idea what the receivable base is like on royalties versus license at this point? I realize license is artificially high, short term?

So, again, net 30 days. As the customers now finish its Q2 numbers, wrapped up its June numbers, they will send us those reports between 30 to 60 days to us. This is what they're obligated to. As soon as we get the reports, net 30 days, we get the payment.

Okay. And on that subject, even though you've never officially announced that you're in the iPhone, you can look at the product and see that you are. Could you talk a little bit-- have you seen any royalties from that? Or is that, once again, you won't see that until third quarter, assuming that you had the iPhone shipments?

So technically, as we said, we cannot formally if we are or we're not in the iPhone but, of course, we read the same articles in "EETimes" and other very respectable magazines which have torn down the iPhone and if what they say is true, we are supplying the baseband functionality there.

As soon as we get the royalty reports, we'll know exactly how much our customer was successful in that-- in that specific product line. I don't think we'll be too specific with you guys, but for sure we'll know the royalties and this is something that we should get now, in Q3 for Q2 shipments. So if the-- that specific or any specific product came out to the market and that ramp-up happened throughout Q2, that will be a Q3 royalty revenue for us.

Getting-- you've discussed another-- a number of major wins you had. Can you give us a little bit of timing, for example, on the Japanese TV? Is that an '08 revenue opportunity, kind of first half, second half? And some of the other stuff that you've talked about, maybe a little bit of timing on when you expect to see royalties from Nokia on the phones that you've won with Infineon.

Okay, let's make-- basically, that's two questions. First of all, regarding the design wins that we had this quarter with the branded Japanese company, the digital TV market is a huge opportunities for us and it's incremental to what we are doing today for cellular. All these LCD plasma TVs will have the electronics for the audio and the video in the TV itself and not in the set-top box like today. And the customer that we managed to license our technology is aggressive in their schedule because the market is growing and if you are, specifically, end of 2008, early 2009, we should things in the market.

Now about Nokia, we don't-- we don't have specific data, but its-- for lunching products and royalties to us, but it should-- it should be by the end of the year, early next year.

Got it. Congratulations on your wide diversity of wins. Very (inaudible)

Thank you, Doug.

Thanks.

Daniel Gelbtuch, CIBC.

Hello, guys. Congratulations on the fantastic quarter and excellent guidance. Just turning back to the DTV, I hope not to beat the horse here or the live horse, who is the TeakLite III replacing? I mean, what is it replacing? What's exactly happening in the TV that is-- we're starting to move over to DSP cores? Is this something that might be replacing a MIPS core? A little more color on that, please.

Yes. There are two things happening. First of all, it's next generation audio codecs. If you go to Dolby 7.1 technology where you have eight different speakers to do it, you need more advanced DSP processing to do it.

Now what are we replacing? There are customers that used to have internal DSP, old technologies that its time had come to replace it with more advanced DSP. Knowing the complexity of doing it, the investment of in-house development does not make sense for them. And we are-- in some cases, we're also replacing MIPS, although it's not-- it's opportunistic, but in-- there are cases that we are replacing MIPS because the MIPS cannot carry these complexities in the algorithm.

Now this is one thing happening, meaning migrating into a high-end DSP. The other thing which is significant, as well, is the move of the electronics from the set-top box into the next generation DTV. So all the audio processing and the video processing is going to be done on the TV itself and not in the set-top box.

Okay, so where- again, it's mostly-- it's mostly audio? This is not a video chip, really?

No, at this point it's only audio. The TeakLite III is aimed for audio.

Okay, so this-- and so I would assume that this-- that the Japanese OEM that we're talking about also has a semiconductor effort and is principally making its own DTV chip for audio?

Right. Yes.

Okay. Now coming back to, I guess, the handset market, the question I have is just on timing of that major product launch. If it was true that the iPhone is something that you're in, how do you-- how do your customer pay you? Again, if it's Infineon taking chips or shipping chips the whole quarter, second quarter, that means that your Q3 number is going to be big or is it a function of iPhone actually shipping into the market and that's how you recognize revenue, which'll mean that Q4 is when you start seeing the royalty ramp?

No, Daniel, this is true not for that specific customer only, but across all our customers. We get paid when they ship their chips out the door. So there is also a lead time before they ship the final product to the customer-- or, sorry, their OEM, their customer ships the final product to the customer. That has nothing to do with CEVA. We get paid as soon as they sell their own chips to a cell phone, to a DVD, to a set-top box or what-have-you.

Now, within the phone market, again, with regard to, let's say, fitting up an iPhone, a smart phone that is very multimedia rich. Right now you're limited or at least mostly your business is limited to baseband business. When should we expect to see application processor business? What's being currently used in these types of-- these types of-- the current crop of multimedia handsets and when should we expect to see the move towards (inaudible)?

In terms of licensing activities, we do have (inaudible) for the multimedia and we are already licensed. I just mentioned-- I just mentioned that in China, for example, we signed 14 license agreements. I should say all of them are with multimedia.

I got you. But my question is, when should we expect to see the royalties start for these products?

Yes. I don't have the exact timing, but I would say at the second part of-- I would say Q2 2008 we're going to see royalties coming from these design wins.

Okay. And you expect that throughout '08 we should start seeing application processor or multimedia functionality move from hard-coded ASICs to-- or hard-coded multimedia co-processors to DSP-based application processors?

In the-- in our context, yes. But if you look at DaVinci at what ATI is doing, it's all software-based and the recognition in the market that the next thing in video is to go somehow to software is already there.

Okay. Okay, thank you and congratulations, again.

Thank you.

(OPERATOR INSTRUCTIONS) Janardan Menon, Dresdner.

Yes, hi. Just a clarification on this announcement by you, which is that there is a strategic decision by one of the largest semiconductor companies to broadly use your technology over its internally developed DSP solution. I just want to clarify, is that them just taking it from the ultra-low-cost platform to the EDGE GPRS W-CDMA area? Or will they take it outside of the mobile phone to the TV solution, the automotive DSP products and stuff like that? I mean, because you used the word "broadly," so I was just wondering how broad it's going to be.

The contents of this specific deal is broad in the wireless area. So it's for the 2G, 3G, EDGE and 3G.

Okay. And just going back to the same question which was addressed earlier, which is, by when do you think this particular customer will be shipping baseband, say, in EDGE or GPRS which incorporates your DSP rather than their own DSP?

Well, here because the customer has just signed an agreement, there are a lot of things to happen. The rough number that we give to customers is 18 months from licensing to production.

Okay. And at that-- so if you look at 2009, one can assume that almost all their products will be moving over to your-- I mean, all their baseband products would be under you product by then?

Correct on the low end, 2G, 2.5G, type, EDGE.

Okay. The 3G-- the 3G will not be going to the-- your DSP?

The plan is, yes, to go to 3G, as well, but the focus now is on the ultra-low-cost segment and when it comes to the low cost, it goes up to EDGE.

Okay. Okay. Just-- just a slightly longer-term question, which is, if you look at the total revenue opportunities that you have ahead of you and compare wireless with the consumer electronics market, given that the average cost of a baseband or an application processor is going to be significantly higher than an audio chip in the TV, and given that the overall potential handset market is much bigger than the TV market and you seem to be penetrating at least two or three of the largest semiconductor companies supplying into handset, so would it be fair to say that in the broad scheme of things the consumer electronics royalty contribution in the years ahead will be quite small compared to the handset contribution? Or is that a wrong sort of analysis that I'm doing?

No, I think-- I think this is a correct analysis. I think that all the very interesting design wins that we're offering and talking about and sharing with you guys are handheld or cell phone based for 2008 and that would be the growth driver on the royalty side. I think that should change quite significantly for the consumer electronics, whether it's set-top boxes, DVDs, now with digital TV opportunities and other consumer-electronics-related devices for 2009. So I think that's-- that's part of the mix that we're also seeing in our forecast going forward.

Okay. Thank you very much.

Thank you.

Thank you. There appear to be no further questions at this time. I would now like to turn the floor back to Mr. Arieli for any closing remarks.

Thank you. Thanks for joining us today and for your continued interested in CEVA. We will be presenting at the upcoming RBC Capital Markets North American Technology Conference on August 9th and invite you to join us in San Francisco.

Also, to remind you, as Gideon mentioned earlier, there is a new section on our website to learn more about CEVA-powered devices. So I urge you to take a look and see what we are empowering.

Thanks a lot and have a nice day.

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